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Hoegh LNG Partners LP (NYSE:HMLP)
Q1 2020 Earnings Call
May 28, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, everyone, and welcome to the Hoegh LNG Partners Q1 2020 Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]

At this time, I would like to turn the conference call over to Steffen Foreid, CEO and CFO. Sir, please go ahead.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Thank you, Jamie. Good morning, ladies and gentlemen, and welcome to Hoegh LNG Partners earnings call for the first quarter 2020. For your convenience, this webcast and presentation are available on our website. Before we start, please take a note of the forward-looking statements on Page 2 and a glossary on Page 3.

Turning to Page 4 and the highlights. I would like to start with some comments relating to the COVID-19 situation. As of today, the Partnership and the Hoegh LNG Group are experiencing limiting impact from the COVID-19 pandemic. The Group has taken steps to mitigate risks from the pandemic to ensure the health and safety of our crews and staff, which is our highest priority. We are continuously monitoring the situation, and are as prepared as possible to address any changes to the situation that might impact us.

As of today, the Group has experienced no known cases of COVID-19 infection among any of our crews or staff. The only direct effect on its operation has been delays in crew changes, which had limited financial impact. However, this situation is improving, and the Group has been able to conduct crew changes on several of its vessels in recent weeks, including one of the vessels for the Partnership. Additional crew changes are being prepared for the week ahead.

The technical availability of the Group's fleet has not been affected by the current pandemic. All charter parties remain in full force and revenues are being collected, in accordance with the contractual term.

Now to go into the financial, and thanks to the hard work of our crew and staff, I'm happy to report that all units in the Partnership's fleet had 100% availability in the quarter. This resulted in total revenues of $36.7 million, segment EBITDA of $36.1 million, and a coverage ratio of 1.2 times in the quarter. The Partnership distributed $0.44 per common unit for the quarter. Furthermore, during the quarter, the Partnership exercised the option to charter Hoegh Gallant to Hoegh LNG. The subsequent charter has now been signed with its five-year term expiring on July 31st, 2025. The charter rate is 90% of the previous charter rate for the year.

Turning to Page 5. We have put in more numbers to the quarter, which shows the stable underlying operating performance compared to the same quarter last year. Excluding unrealized losses on derivative instruments and foreign exchange, segment EBITDA was $36.1 million for both the first quarter of 2020 and 2019. Limited partners' interest in adjusted net income was $13.6 million in the quarter, up slightly from the first quarter of 2019. The improvement is mainly due to one more calendar day in the quarter due to the leap year, lower operating expenses and lower taxes, partly offset by higher net financial expense.

I'm happy to report despite the COVID-19 pandemic, the Partnership delivered strong operating performance and a strong distribution coverage from our long-term contracts in the quarter.

Turning to Page 6. We are showing the development of key measures over time. As you can see from these graphs, the consistency stands out underpinning the distribution made for the quarter. And with execution of the five-year option relating to Hoegh Gallant, we have further ensured the long-term stability of the Partnership's cash flow. And with approximately 9.2 years of average remaining duration of our contract portfolio, the Partnership is well positioned to continue providing predictable distribution.

Turning to Page 7, we are showing the income statement in more detail. Total revenues in the quarter is up from the same period last year, mainly due to the extra trading day in the quarter. Vessel operating expenses of $5.5 million in the quarter is down from the same period last year, mainly due to lower use of spare parts and external services in the quarter.

Equity in losses of joint ventures of $10 million in the quarter compares to equity in earning of $300,000 in the same quarter last year. Excluding unrealized losses on derivative instruments, the equity in earnings of joint ventures would have been $1.7 million in the quarter compared to $2.9 billion for the same quarter last year. The decrease primarily related to higher charter project costs in the quarter. The majority of which are expected to qualify for reimbursement from the charter in future period.

Total financial expense of $6.9 million in the quarter is up from the same quarter last year, mainly due to a gain on debt extinguishment in the first quarter last year. Interest expenses were down in the quarter compared to the same quarter last year. Taxes was $900,000 in the quarter, which is down from the same quarter last year, mainly due to a reduction of tax rate in Indonesia.

Turning to Page 8. The balance sheet has not changed much since year-end 2019. The total liabilities and equity standing at just below $1 billion at the end of the quarter. One thing worth mentioning is that in addition to the cash on the balance sheet, the Partnership had approximately $95 million in undrawn amounts under the two revolving credit facilities, taking total liquidity to approximately $123 million at the end of the quarter.

Turning to Page 9. We have shown the Partnership assets, all of which operated according to contract during the quarter as already mentioned. In regards to Hoegh Gallant, the subsequent charter is now enforced as mentioned, with the term running through July 31st, 2025. The charter rate is 90% of the previous charter rate, subject to certain adjustments for avoided or incremental costs.

As previously announced by Hoegh LNG, our parent has secured an interim contract for Hoegh Gallant in LNG Carrier mode for a period of around seven months from mid-2020. And in addition, the unit is considered for several of the potential long-term FSRU projects that Hoegh LNG is working on, which I will come back to later in the presentation.

In regards to Neptune and Cape Ann and the boil-off claim, the settlement agreement has now been signed and the first installment has been made with the remaining to be paid later this year. The indemnification payment from Hoegh LNG relating to the first settlement installment has further been settled.

Turning to Page 10. We are showing the overview of the business development activity at Hoegh LNG level. And I'm happy to report that this slide is becoming increasingly busy. During the quarter, Hoegh LNG was selected as the preferred bidder for two and shortlisted for one additional FSRU project. The box to the left shows the projects where Hoegh LNG has the preferred bidder status. We have previously announced the two projects in Australia, but now there are two additional projects on the list, both located in Latin America, with the schedule started in 2021 to 2023 time frame.

In terms of progress for the Australian project, AIE has now received approval for its application to modify existing development consent for Port Kembla terminal. And for AGL's project in Crib Point, the environmental permit process is ongoing and expected to be completed by the end of the year. The box in the middle is showing ongoing tenders, and for one of them, Hoegh LNG has been shortlisted during the quarter. Also, this is located in Latin America.

Finally, the bottom right is showing bilateral projects or projects that Hoegh LNG is developing itself. This includes a project on the European side of the Atlantic basin being developed by Hoegh LNG and one potential project in Cyprus. This development of the business development side shows that the activity in the FSRU market is high. And the way we see it, this is driven by the low price of LNG. This is triggering new LNG importers to move ahead with their plans to facilitate import of natural gas. And this high activity is ongoing, despite the COVID-19 pandemic.

Turning to Page 11, and the LNG market. In the first quarter of 2020, the LNG market grew by 13%. Europe continues to be the main driver of growth. However, demand from Asia also remained strong where India and South Korea were the main growth markets in the quarter. If you take India as an example, the import continues to increase, driven not only by the low price of LNG, but also by the country's need for a continued fuel switching to deal with the pollution. China was clearly [Phonetic] impacted by the COVID-19 pandemic in the first quarter. However, it is now showing signs of coming back and increasing its LNG import.

Turning to Page 12. We have a graph illustrating the expected development in the global LNG market. If you look at the graph to the left, this shows the forecasted LNG demand, both prior to and after the COVID-19 pandemic. And as you can see, demand growth is expected to continue despite the pandemic, but be less this year than estimated previously, before picking up again in 2021. After which, it is expected to be aligned with the prior quarter. Total demand is expected to be only marginally lower in the years ahead and reach approximately 430 million tonnes in 2024.

The graph to the right shows where the reduced demand growth is expected to result in reduced supply growth. And as you can see from this graph, U.S. export is expected to see most of it. And why is that? Well, simply because most U.S. export agreements are flexible, allowing buyers to reduce the offtake. U.S. exports are not tied to a particular gas reservoir. It's sourced from the whole upstream market, so it's easier for U.S. exporters to make adjustments. That is not the case elsewhere in the world, which is why we expected to see this picture.

Turning to Page 14 and the competitive situation. This picture looks more or less as presented over the last couple of years. We have not added any new building orders since the previous quarter, even though there has been reports of a new building order by MOL. However, we understand that this is conditional and have therefore not included it in the list. However, we have included two conversion units in the captive market, one relating to a project in the El Salvador and one for a project in Africa. However, for Hoegh LNG, this means that the competitive situation has not changed from the previous quarter in the markets where we are active.

And with that, I would like to turn to Page 14 [Phonetic] and a summary and open up for questions from the audience.

Questions and Answers:

Operator

[Operator Instructions] Our first question today comes from Ben Nolan from Stifel. Please go ahead with your question.

Ben Nolan -- Stifel Nicolaus and Company -- Analyst

Great. Thank you. Good morning. Good afternoon. I had a few questions, but the first relates to the commentary in the earnings release about the possibility or the need to refinance the Lampung next year? Just making sure that was more -- that the commentary and there was more of just an abundance of caution, rather than some foreseeing challenge with respect to the need to refinance that vessel, correct? It should be relatively easy to refinance, yes?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Hi, Ben. Yes, that has a long-term financing, involving ECAs from South Korea and a commercial tranche on top of that. And the commercial tranche is maturing next year. It's about $15 million or so. And it has always been part of the plan to refinance that in 2021. But the facility as such, including the ECA tranche, is not up for refinancing, it's the commercial tranche of the facility.

Ben Nolan -- Stifel Nicolaus and Company -- Analyst

Okay. And you wouldn't foresee any concern or wouldn't have any concern over the ability to refinance that, correct?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

No, I don't. This is a vessel with a long-term contract with a strong counterparty that has performed. So this is a good coverage -- contract coverage for that vessel, so I see no problem with that.

Ben Nolan -- Stifel Nicolaus and Company -- Analyst

Okay, perfect. And then, another thing I was going to ask that we've heard a little bit in this whole COVID environment and given the challenges of crew changes and so forth. There may be a little creep in the operating expenses, as crews might be -- existing crews that have overstayed their contracts might have to be paid a little bit more. Is that something that you might would expect in the second quarter, maybe the third quarter?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Yeah, it's -- we haven't really -- that's a risk. We haven't really seen that so far. But that is a risk or you could have overlapping crew sitting. But so far, that has not really been a problem. And we -- so, I wouldn't see that as a material risk, but potentially, there could eat some minor costs.

Ben Nolan -- Stifel Nicolaus and Company -- Analyst

Okay, perfect. And then lastly, just on -- from a macro perspective, you've -- in the latter slides there, you kind of walked through the projects and also the competitive landscape. And obviously, there has been a few project awards for conversion vessels. Although for you guys, you have the purpose-built vessels that -- where you're -- I guess the stocking horse in several Latin American projects. Has there been any change or switch at all in the cadence between the desire to maybe use a converted vessel -- maybe a little bit cheaper, lower and converted vessel versus something that is purpose-built with higher throughput and capacity. Anything you've noticed there?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

No, I would say -- I think there's room for both. I think what we see, as I said that, actually the activity in the business development side is high, and we see that there is more and more projects moving forward. And that's projects both for new built and conversions. So, I wouldn't say that there has been a shift in preference, but it's a market where there is room for both type of FSRUs, which we have seen.

Ben Nolan -- Stifel Nicolaus and Company -- Analyst

Perfect. All right. Great. I'll turn it over. Thank you.

Operator

Our next question comes from Chris Wetherbee from Citi. Please go ahead with your question.

Christian Wetherbee -- Citi -- Analyst

Hey, great. Thanks for taking the question. Yeah, maybe a conceptual one here, to a degree. So, lots of interesting activity that you highlight on Slide 10. If we were to see some incremental uptake activity at the parent level, what would it take for maybe the resumption of dropdown activity into your vehicle? What are sort of the circumstances that you would need to see to do that? Or is it something that could happen if you get a long-term contract signed with the parent that could happen sort of -- is there financing available? I guess I wanted to make sure I understood sort of the moving parts around kind of getting back into that type of direction for the Company.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Well, so the parent has assets that is available for the drop-down, and they just need to secure the long-term employment of them. And this slide shows that there is high activity in serving -- securing the long-term employment, so that's good. So that's kind of one trigger of growth. But another -- and another element we need to see is then the financing of such growth. Now if you look at the timing, most projects we are working on, they have -- or the parent is working on has a start-up of -- potentially start-up from end '21 through 2023. So, I would say that the timing of when we could expect to see a drop-down coming our way would be 2022.

And I think we will have to wait and considering the financing option at that point in time. We will have to see how the equity market is both for the common and preferred. And we will also see how much we have deleveraged by then, because we are deleveraging the partnership. And if the equity market should not be available, then potentially there could be room for the leveraging off, but that's an assessment we will have to make at that point in time. But anyway, the second [Phonetic] point is for the parent to secure the long-term employment of its assets, so that it has something to offer to us.

Christian Wetherbee -- Citi -- Analyst

Okay. And then financing will be the secondary component. That is helpful. On the topic of deleveraging, can you give us a sense that maybe what you feel like you can accomplish through 2020? And then maybe if we are talking about potentially a 2022 timeline and the question that we just talked about, what would be the potential opportunity to deleverage over the course of the next two years, so say 2020 [Phonetic] and 2021.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

So, I think it will be along the same lines as we have done previously. We have now secured the long-term stability of cash flow from all our assets, including Hoegh Gallant. So, we will allocate the cash flow to debt repayment and dividend distributions. And we have in the past seen a steady deleveraging, and we expect that trend to be continuing through 2020 and 2021.

When we then do a drop-down, we should expect to see leveraging precisely because on a debt-to-EBITDA basis, the debt that follows with the asset when it is being dropped down from the parent is probably going to be higher. Same debt amount as it has been the case in previous drop-down, but probably lower EBITDA follows that vessel. So, it is an increase in the leverage in terms of debt-to-EBITDA upon the drop-down.

Christian Wetherbee -- Citi -- Analyst

Okay, but just assuming that the -- all the contracts perform as expected, how much cash flow above the distribution do you think you generate in 2020?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

So, it is not going to change from what we have seen in the past. It is going to be the same free cash flow that we can use for deleveraging purpose as we see on that -- in a quarter like this quarter and we have seen in the past. So, there won't be any changes to that compared to what have seen in the past.

Christian Wetherbee -- Citi -- Analyst

Okay. That is very helpful. Thank you very much for the time. I appreciate it.

Operator

Our next question comes from Ken Hoexter from Bank of America Merrill Lynch. Please go ahead with your question.

Ken Hoexter -- Bank of America -- Analyst

Hey, Steffen. I think -- good morning and good afternoon. Maybe just a wrap up on the prior one, I think Chris was just looking, can you give just a kind of, I don't know, debt-to-EBITDA level or what that reduction in the freak [Phonetic]? I know you keep saying it is going to be the same, but just maybe an absolute number of what you are looking in terms of debt reduction in the year ahead.

Operator

And ladies and gentlemen, the speaker line has dropped. Please remain patient, while we attempt to reconnect. Mr. Foreid, you can continue with the conference. We have Ken in the question queue.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Yes. Thank you. I'm sorry for dropping out here, something technically happened. Back to the question of deleverage. We have -- at the moment, the Partnership has a debt-to-EBITDA of -- on a proportionate basis of around 4.2 times. And I think we could expect to see deleveraging of around 0.5 times on an annual basis based on the cash flow that we are generating around that.

Ken Hoexter -- Bank of America -- Analyst

That's very helpful. That's great. I feel I'm on the line. You can hear me, right, Steffen?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Yes, I can.

Ken Hoexter -- Bank of America -- Analyst

Okay. Wonderful. So, thanks for that. So, just on the Gallant, I guess now -- I just want to understand what some of the new projects that you are talking about with Hoegh, is there any incentive for them to permanently place the Gallant in those projects? Is that -- or they would be looking solely at new builder conversion for those projects? Or could you look for an extension on the tie-up of the Gallant aside from just putting it to the parent?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

The parent has incentivized to make sure that the Partnership has long-term stability in its cash flows, and is offering Hoegh Gallant on several projects where that unit is best suited compared to -- is available and well suited. So, when the parent then secures long-term employment through a third-party for Hoegh Gallant, the plant will benefit from that through getting off the hook themselves and also through stabilizing or securing the long-term cash flow for the Partnership. So, I think they are pursuing both alternatives and securing assets or employment for new asset and for Hoegh Gallant in parallel.

Ken Hoexter -- Bank of America -- Analyst

And then, I guess, maybe just a follow up on that, right. In the charter -- in the release, you talked about the outlook. You mentioned 90% of the rate payable subject to adjustments for avoided or incremental costs, which can reduce revenues. Is there anything you can quantify there? Or is that just outside of the realm than the parent covers, but you're still -- I just want to understand what the exposure is by that kind of sentence?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

No, it's -- the formula is that when we then enter into new long-term FSRU contract to the extent that the sum of operating expenses and taxes relating to such contract exceeds $22,000 per day. That will result in an increase in the day rate that the parent is paying. During the period of time when the unit is operating in carrier mode, it will save taxes that you previously had in Egypt, equivalent to approximately $4,000 a day, and that will then reduce -- lead to a reduced hire for $4,000 during the period of time when the vessel is operating in carrier mode. So, that is the limit and $4,000 per carrier mode and then actually, as long as total costs exceed $22,000 in FSRU mode, it will lead to an increase in the day rate.

Ken Hoexter -- Bank of America -- Analyst

And just to confirm there, you said that the parent is incentivized for long-term stability, nothing other than just the stability of the -- of HMLP. Is there other incentivization that they have in guaranteeing your stability other than the dividends they receive and the continuation of that?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

No, they have the dividend and the IDRs and the stability of the Partnership's cash flow. That is their incentive for securing the employment.

Ken Hoexter -- Bank of America -- Analyst

Okay. Thanks, Steffen. Great. I appreciate it. Congrats on the stability and good luck. Thank you.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Thank you.

Operator

Our next question comes from Liam Burke from B. Riley FBR. Please go ahead with your question.

Liam Burke -- B. Riley FBR -- Analyst

Thank you. Good afternoon, Steffen.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Good afternoon, Liam.

Liam Burke -- B. Riley FBR -- Analyst

Steffen, you mentioned in the press release, general risk in terms of the ability of the counterparties to be able to deliver. Is this COVID-19 related, or is this just a general caution about the overall FSRU market for the time being?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Yeah. I think it's a general statement we have had for some time. We have -- in relation to the COVID-19, all our assets have been put forward according to contract and all our clients have been delivering their obligations. And there has been no discussions around any change to the time charter. So, we see that our clients have performed their obligations. So, we don't see -- necessarily any material increase risk associated with the counterparty, but it is a general statement that we make in our documentation.

Liam Burke -- B. Riley FBR -- Analyst

Okay. And on the operating expense side, I know it wasn't a material change, but you did have lower year-over-year expenses. I know you highlighted the potential of COVID-19 increasing them, but what kept expenses so low in the first quarter?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

So, we had some -- we had lower spare parts and external services. And that were the two main components of driving the reduction.

Liam Burke -- B. Riley FBR -- Analyst

Thank you, Steffen.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

It's correct [Phonetic]. We have compared to the same quarter last year, we did see in fact a reduction in operating expenses, which is good.

Liam Burke -- B. Riley FBR -- Analyst

Thank you.

Operator

[Operator Instructions] Our next question comes from Craig Hannah from Palm Beach Capital. Please go ahead with your question.

Craig Hannah -- Palm Beach Capital -- Analyst

Hey, Steffen. It looks like a really good job in a very difficult environment. Looking at your cash flows, I see that you had -- your really only negative that I could find in the whole financials was this unrealized loss on derivatives. Is there anything else that you can tell us that might negatively impact cash flows and your ability to continue to pay the steady dividend for the next couple of quarters or so that maybe not jumping out at us?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Yeah. This quarter was a good quarter. Good operating performance and no extraordinary items. So in many ways, it was a very good quarter. I think we have highlighted the main risks as we see them. And in terms of the counterparty risk and impact from COVID-19, so far, we have not been materially impacted by COVID-19, but the situation is unfair and it can move -- change quickly.

We are doing as much as we can to prepare for adverse development and implement measures to mitigate that. But I think COVID-19 is a situation that is difficult for everyone, and we are putting a lot of time and resource in mitigating the risk associated with that. So, I think maybe that is the biggest risk element in the quarters ahead where we don't really know what the consequence of the pandemic and how that will pay off.

Craig Hannah -- Palm Beach Capital -- Analyst

And so, it looks like, other than this unrealized loss on derivatives, everything is pretty much the same. It just continues to go. You have got these nine-year contracts. So, it looks like a very steady business to stay invested in and to continue to grow the investment. I'm looking at your opportunities in Australia and Asia, which sounds like obviously everything takes a long time, but that looks pretty exciting. What is going on in Europe? You said that, that business is going quite well too. Are there some good growth opportunities there?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

We see that Europe has been a growth market for LNG, and they have actually been driving much of the demand over the last 12 months. That is very interesting. Europe has previously taken most of -- is taking most of its cash gas from pipeline, but the fact that LNG is going to Europe is interesting. So I think that is the -- there is lot of opportunities that follows that where there might be needed more points for importing LNG, so Europe is offering some opportunities. We mentioned this project in Cyprus. And we also have one bilateral project that we are working on, on the European side of where we are looking at bilaterally developing a project. So, Europe is a place where there are some opportunities available in the years ahead.

Craig Hannah -- Palm Beach Capital -- Analyst

Okay. Thanks, Steffen. Great job.

Operator

[Operator Instructions] And ladies and gentlemen, at this time, I'm showing no additional questions. I would like to turn the conference call over for any closing remarks.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Okay, thank you. I would just like to thank everyone for dialing in, and listening and for asking questions and thank you for the session today. Thank you.

Operator

[Operator Closing Remarks]

Duration: 38 minutes

Call participants:

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Ben Nolan -- Stifel Nicolaus and Company -- Analyst

Christian Wetherbee -- Citi -- Analyst

Ken Hoexter -- Bank of America -- Analyst

Liam Burke -- B. Riley FBR -- Analyst

Craig Hannah -- Palm Beach Capital -- Analyst

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