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Hoegh LNG Partners LP (NYSE:HMLP)
Q3 2020 Earnings Call
Nov 19, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Hoegh LNG Partners Third Quarter 2020 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Sveinung Stohle. Please go ahead.

Sveinung J. S. Stohle -- Chief Executive Officer

Thank you, Emily, and good morning ladies and gentlemen and welcome to the Hoegh LNG Partners earnings call for the third quarter of 2020. For your convenience, this webcast and presentation is available on our website. With me today, I have Mr. Havard Furu, the CFO of the Partnership, who will be part of the presentation together with me.

So turning to Page 2 in the presentation, he will take you through the quarter, and -- I'm sorry, I will take you through the quarter and then hand over to Mr. Furu, who will take you through the financials. And I will present the market update and the summary. You will have the opportunity to ask questions to both of us at the end of the presentation.

So turning to Page 3. Please have a look at the forward-looking statements and also the glossary on Page 4. I would like to start with some comments relating to the COVID-19 pandemic. As of today, the partnership has not been materially impacted by the pandemic. The Hoegh Group has taken steps to mitigate risks from COVID-19 and ensure the health and safety of our crews and staff, which is our highest priority. This includes developing mitigating actions for crew rotations, and I'm happy to say that safe crew changes are now being done at acceptable frequency for both officers and ratings at all the vessels. Thanks to the hard work of our people onboard the vessel and onshore, the fleet is operating as expected, despite the pandemic. All charter parties remain in full force and the effect and revenues are being collected in accordance with contractual terms.

I am therefore happy to report that all units in the fleet had 100% availability in the quarter and this results in total revenues of $35.9 million and a segment EBITDA of $36.4 million in the quarter. Based on the distribution of $0.44 per common units, this results in a solid coverage ratio of 1.24 times in the quarter.

Turning to Page 6. We are showing the overview of the partnerships fleet of modern assets. Hoegh Gallant is contributing with it's third quarter of earnings from the charter and [Phonetic] in this quarter's results. The vessel is operating in LNG carrier mode under a seven months charter, while offered for long-term FSRU employment on several potential projects, managed by the parent.

With that, I would like to hand over to Mr. Furu, who will take us through the financials.

Havard Furu -- Chief Financial Officer

Thank you Sveinung, and good morning everyone. Turning then to Page 8. We have the key figures for the quarter which shows an operating performance in line with the same quarter last year. The segment EBITDA of $36.4 million in the quarter is the same as in the third quarter last year. The operating result led to a distributable cash flow of $18.6 million and as already mentioned by Sveinung, a strong coverage ratio in the quarter. We would like to thank all our seafarers and onshore staff enabling the partnership to deliver stable operations during these unprecedented times.

Turning over to Page 9. We are showing the development in key measures over time. And as you can see from the graphs, the consistency in operating performance stands out. The only exception is the second quarter last year, which was impacted by the drydocking and maintenance of the Hoegh Gallant. Hoegh Grace is the next vessel due for periodic survey, and this will take place toward the end of this year and in the beginning of 2021. However, this will be carried out afloat and is not expected to cause significant downtime for hire [Phonetic]. I would further like to highlight the stability in distributions from the partnership during the pandemic. The average remaining contract length stands at approximately 8.5 years at the end of the quarter, underpinning the stability in cash flows.

Moving on to Page 10. We are showing income statement in more detail. Total revenues of $35.9 million in the quarter was about $1 million less than in the same period last year, mainly due to reduced time [Technical Issues] for the Hoegh Gallant under its new charter. Vessel operating expenses of $6 million in the quarter is down by $0.7 million from the same period of last year. In the third quarter of last year, vessel operating expenses included maintenance expenses of approximately $0.9 million for the PGN FSRU Lampung and to the lesser degree the Hoegh Gallant. During the third quarter of this year, vessel operating expenses have been somewhat lower because of reduction in activities due to the corona virus which was partially offset by inclusion of property taxes for the PGN FSRU Lampung.

Equity in earnings of joint ventures for the quarter was $5.8 million, an increase of $5.2 million from $0.6 million for the same period last year. Unrealized gains and losses on derivative instruments significantly impacted the equity in earnings of joint ventures for the third quarter of this year [Technical Issues] respectively. Excluding these derivative items, the equity in earnings of joint ventures would have been $3.6 million this quarter, an increase of $0.8 million from $2.8 million for the same period last year. Total financial expense of $6.7 million in the quarter is down by $0.9 million from the same quarter last year, mainly due to lower expenses that is amortized.

Turning to Page 11. The balance sheet, which has not changed much since year end 2019. [Technical Issues] equity standing at just below $1 billion at the end of the quarter. One thing worth mentioning is that in addition to the $25 million of cash on the balance sheet, the partnership had approximately $88 million in undrawn amounts under it's two revolving credit facilities at the end of the quarter taking total liquidity to approximately $113 million.

I will now hand it back to Mr. Stohle to take us through the remaining sections of the presentation.

Sveinung J. S. Stohle -- Chief Executive Officer

Thank you Havard. So turning to Page 13 and the LNG market. Global LNG trade fell about 4.5% year-over-year in the third quarter mainly owing to the effects of the COVID-19 pandemic. However, overall, the demand is up 2.3% year-to-date in 2020. And after acting as the sync for the LNG spot market in the first half of 2020, European LNG imports declined by about 10% year-on-year in the third quarter. China, on the other hand, healthy 13% growth in LNG imports compared to the same quarter last year, and this is the second consecutive quarter with good growth in Chinese imports after the COVID-19 related import dropped in the first quarter of this year.

Turning to Page 14. We have a graph illustrating the expected development in the global LNG markets. As you can see global demand growth for LNG expected to continue for the long-term as shown for the next 30 years. This is driven both by the competitive LNG price and the environmental benefits from switching from oil and coal to natural gas. And clearly the Other Asia is the region with the largest expected demand growth. And this of course, includes both China and India as the main markets.

Turning to Page 15. We did some overview of the competitive situation in the FSRU market. This picture looks more or less as presented over the last couple of years actually. And since the last quarterly presentation, one change is going as conversion for [Indecipherable] has left the yard and we have added another conversion order from the KARMOL joint venture which you can see on the right side. However, for Hoegh LNG, this means that the competitive situation has not changed from the previous quarter.

Turning to Page 16, regarding our parent. All vessels in Hoegh LNGs fleet are on contract and business development activities for new long-term FSRU contracts are high. The pipeline of modern acquisition candidates with the parent remains the same as in the previous quarter.

Turning to Page 17. Showing an overview of the business development activities at the parent level. As can be seen, the parent is in advanced stages of negotiations on several potential projects, and if everything goes according to plan this will lead to growth opportunities for the partnership over the next year or so. To the left, shows the projects where Hoegh LNG is already selected as the FSRU provider. All these projects have been announced previously. In Australia, Squadron Energy, has become the sole owner of the AIE project and Hoegh LNG is currently in final [Technical Issues] negotiations for this project. The project has recently signed a lease for up to 25 years with the port, and that secures the site for the terminal. For AGL's Crib Point project in Melbourne, the environmental permit application is ongoing and expected to be completed during the first half 2021.

The box in the middle shows ongoing tenders, where among others Hoegh LNG is in the final tender for the First Gen project in the Philippines. Finally, the box to the right shows two bilateral projects that Hoegh LNG is developing itself, and this includes a project in the Atlantic basin and one potential project in Cyprus. As can be shown from the -- this slide, the business development activity is high and this of course is driven mainly by the very competitive price for LNG.

Now, I would also like to add the news from the parent, which was not ready when this went to press, namely that Hoegh LNG signed a 10-year contract with H-Energy in India, today or this morning. And this obviously is a very positive news and not the least, because the plant start-up for that project is in the first quarter of 2021.

With that, I would like to turn to Page 17 -- sorry 19 for the summary, where I would like to highlight the following: We see no material impact from COVID-19 to-date on the company. A very good operating record with 100% availability of the fleet and stable operating performance and a solid coverage ratio in the quarter. As mentioned, strong fundamentals in the LNG market and finally, very strong support from the parent.

This [Technical Issues] our presentation, we will now open up for questions from the audience. And would like to thank everyone for dialing in. So please if we can open up for questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Chris Wetherbee from Citi. Please go ahead.

Chris Wetherbee -- Citi -- Analyst

Hey, thanks, and thanks for taking the call. I guess, I wanted to talk a little bit about fleet development at the partnership level. So, you've highlighted some new opportunities here. And obviously there are assets at the parent level. I guess, can you give us a sense from your perspective, what maybe the timing or cadence of potentially getting back into growth mode is for you? Is it too early to be thinking about the potential of bringing new assets into the partnership? Or do you actually see a line of sight to that and I guess if the answer is yes, kind of what are the steps that you would expect to see happen to get to that point of growth again?

Sveinung J. S. Stohle -- Chief Executive Officer

Right. Thanks for that question. First, I mean we -- on Group level we've had the principle that we do not do any transactions until the asset in question is actually on the specific contract has been commissioned and put into operations. So we would -- anyway we would be talking in the next call it six to 12 months if that was to happen. Clearly, that is the intention. We do have a -- the parent as a commitment toward the MLP to offer any assets on a term contract of more than five years to the partnership and clearly that commitment stays in place. And we expect that to be done when there is a ready candidate with the contract in operation.

Chris Wetherbee -- Citi -- Analyst

Okay. Okay. So it sounds like we have some time from the five year contract duration, before we think about potential growth coming back to the MLP?

Sveinung J. S. Stohle -- Chief Executive Officer

Well, I mean that's the principle, call it arrangement. There might be some other ways of doing it, but I mean that's the principle arrangements.

Chris Wetherbee -- Citi -- Analyst

Okay. Okay, understood. Is there any appetite that -- you guys have done a nice job of rebuilding distribution coverage over the course of the last several quarters. Is there any appetite to consider uses of that cash, whether it be potentially very modest increase to the distribution or is -- should we just be focusing on paying down debt? And I guess I want to get a sense of sort of what you think about that as the distribution coverage ratio has moved up nicely over the last four or five quarters?

Sveinung J. S. Stohle -- Chief Executive Officer

Yes, I think, Havard would you like to answer that?

Havard Furu -- Chief Financial Officer

Yes, thank you. Hi, it's a good observation of course, and I would say for the time being, we think we want to prioritize deleveraging and keep distributions where it is. So it's good to have that cash flow to actually also be able to delever.

Chris Wetherbee -- Citi -- Analyst

Okay. Okay, well thanks very much for the time. I appreciate it.

Havard Furu -- Chief Financial Officer

Sure. You're welcome.

Operator

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

Ken Hoexter -- Bank of America Merrill Lynch -- Analyst

Hey, good morning. Sveinung, can you just kind of talk about the Hoegh Gallant, where is it positioned now obviously, its put to the parent. But you talked about a lot of active tenders. Is there opportunity to put the Gallant to one of those projects?

Sveinung J. S. Stohle -- Chief Executive Officer

Sure. So currently, it's trading as a carrier for one of the LNG majors. So it's obviously very important and it's actually a very active market as you know for the normal carrier market also. But that's obviously what we don't -- not what we want to do with these assets. So to that end, yes, of course the Gallant is on top of our list. Our FSRUs, they have more or less the same specifications, they are interchangeable to a large extent. And that means that we offer the Gallant on several of the projects I mentioned previously in the presentation. And if you look at that, the number of opportunities, negotiations, tenders, we are involved with exceeds by a large number, the number of FSRUs we have available. So I'm very hopeful that we will have several contracts lined up in the near future, including the one that we just completed in India. So, if you include that and the contracts we have in development in Australia where we in principle have allocated already to FSRUs, clearly there is some very good contract opportunities also for the Gallant coming up.

Ken Hoexter -- Bank of America Merrill Lynch -- Analyst

Can you maybe just take a step back and I know you mentioned it briefly in the prepared remarks, but talk about the LNGC spot market as tracked over the last couple of months, what you're seeing now and talk about kind of where you see those rates going?

Sveinung J. S. Stohle -- Chief Executive Officer

In the short-term market, it's important of course to make the distinction between spot and term. Term being anything from six to 12 to much longer -- six to 12 months and much longer of course. I think spot rates today for these type of vessels is actually north of $100,000 a day. So they have really shot up over the last six, eight weeks in particular. For call it a nine to 12 month contract, the rates today would be in the mid 50s, thereabout, maybe up to $60 depending. For the two units we have in that market those rates are -- or three units actually they are anywhere in the high 40s to high 70s. So I think the market there is extremely dependent on when you actually fix, when the vessel becomes available.

I do believe that this market will continue the very strong seasonality going forward with rates in the summer and very high rates in the winter. I think 2021 will look more or less the same as 2020, taking out the COVID effect of course, but we follow this market very closely. We do not go into spot market, because we don't want to take the positioning and also the fuel risks. So, we're focused on getting term coverage. We'll see -- we will have some extensions to do over the next couple of months. But the interest is strong and I have no big concern about refixing whatever we need to refix depending on how the FSRU market also develops.

Ken Hoexter -- Bank of America Merrill Lynch -- Analyst

Just a quick clarification, you did mention, you expect no downtime in the fourth quarter, right, because you obviously had a strong 100% in the third quarter?

Sveinung J. S. Stohle -- Chief Executive Officer

Yes, We had no downtime in the fourth quarter.

Ken Hoexter -- Bank of America Merrill Lynch -- Analyst

Okay, and then just lastly. The growth opportunities you mentioned a couple of projects. Is the Australia one, the one that you see coming up quick. Is that the one we should keep an eye on in terms of seeing the next steps, or maybe just highlight what the next news flow we could see on kind of some of those announcements at the parent you mentioned?

Sveinung J. S. Stohle -- Chief Executive Officer

Yes, so at the parent, like I mentioned, I mean the activity is very, very high. There has been a real rebound in the FSRU market over the last few months, despite COVID and anything else that came with it, mainly driven by very competitive price for LNG, but also the energy transition and the move away from [Indecipherable]. As I mentioned earlier also, I mean the obligations from the parent is to offer any long-term contract and asset to the MLP as it comes -- becomes available, from the time when the asset will be on -- in FSRU operation and at that contract. So Australia clearly is a prime target for us and we have seen that the two clients we have there are making very good progress in completing the project. I think the first project that will start up is actually the one we announced this morning, in India, because the start-up date there is in the beginning of next year. So in the first quarter of next year. So we'll see. There will be a number of opportunities over the next 12 to 18 months. And the contracts are five years or more they will be offered to the partnership.

Ken Hoexter -- Bank of America Merrill Lynch -- Analyst

Thank you very much for the time Sveinung. I appreciate that.

Operator

Our next question comes from Ben Nolan from Stifel. Please go ahead.

Ben Nolan -- Stifel -- Analyst

Yes, good morning. And Sveinung congratulations on the H-Energy contract. That one has been high in the list for a while. I was hoping maybe if you could and I appreciate that there were not any financial terms disclosed, but, and I appreciate that there's probably sensitivities around that. But could you maybe compare it relative to or give some sense as to where the market is, maybe relative to where the parent is currently chartering the go on?

Sveinung J. S. Stohle -- Chief Executive Officer

Yes, so, of course, Ben a very good question. I think it's clearly fair to say that the market today is lower than what it was when that auction was entered into. So the deal with H-Energy is that what I would call current market rates. It's also important to note that the contract will start in the first quarter of next year, an early start-up, obviously has a high value when you look at the contract of that length up to 10 years. So I mean we have here a contract with a very good counterparty into a market, which strategically we believe we'll also have a number of additional import facilities and certainly some of them will also be FSRU contracts. So I think taking all of that into account and there is upside in the contract, also for doing small scale and additional -- and selling additional capacity. I apologize for not being able to give you a specific number, but it's a good [Technical Issues] in current market with what we believe a very important strategic angle to it.

Ben Nolan -- Stifel -- Analyst

Okay. No, I mean, I appreciate the color that you are able to give. The -- my next question relates to the refinancing of the Lampung which you mentioned in the releases, something for next year and that you've begun sort of discussion. I was curious, how you think about that with respect to either the need to just sort of refinance and continue on a similar amortization schedule, whether there might be cash that you might be able to pull out of that financing or inversely you might have to put a little bit extra in. Any thoughts on how that might play out relative to the current loan to value etc?

Havard Furu -- Chief Financial Officer

I can comment on that. And it's still a little bit of early days for that refinancing process. So we are considering the alternative. We could see some potential to increase the debt facility when we refinance and in that case we probably want to repay a little bit on the revolving credit facilities with that amount. So let's see how that develops going forward.

Ben Nolan -- Stifel -- Analyst

Okay, all right, perfect. Those are my two questions. Thanks guys.

Sveinung J. S. Stohle -- Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Our next question comes from Liam Burke from B. Riley FBR. Please go ahead.

Liam Burke -- B. Riley FBR -- Analyst

Thank you and good morning.

Sveinung J. S. Stohle -- Chief Executive Officer

Good morning.

Liam Burke -- B. Riley FBR -- Analyst

You highlighted on one of your slides, the order book and it's certainly coming more in line with current demand, but we're seeing the FSRU market rebounding pretty nicely. Would you anticipate that that order book get out of whack or what keeps that under control?

Sveinung J. S. Stohle -- Chief Executive Officer

Right. No, I think with the fact that the market has been long for an extended period of time, I would [Technical Issues] very much that you would see any speculative ordering into this market. I think that is also underscored by the fact that there has been no new entrants into this market segment for a long, long time. You do see [Phonetic] order for a specific project, where the project actually orders, but I think that the risk of a new order book of speculative FSRUs. I find that very, very remote.

Liam Burke -- B. Riley FBR -- Analyst

So we are looking at an environment where you're looking at capacity very tight and continued growth on the demand side. So it looks like over the next pick-up timeframe that you've got nice opportunity for growth there?

Sveinung J. S. Stohle -- Chief Executive Officer

I do [Technical Issues] and clearly, I think that we've seen the bottom of the cycle. I think that this market now has turned and hopefully and normally that also means that there will be some good growth opportunities going forward. And also a pick-up in the right levels.

Liam Burke -- B. Riley FBR -- Analyst

Great, thank you.

Operator

This concludes our question-and-answer session. I would now like to turn the conference over -- back over to Sveinung Stohle, please -- for closing remarks. Please go ahead.

Sveinung J. S. Stohle -- Chief Executive Officer

Thank you, Emily. So thanks everybody for calling in. Thanks for interesting and good questions. And we look forward to the next quarterly presentation. If anybody has any additional questions or subjects they would like to bring up, please do not hesitate to contact us directly through our IR representatives. Thank you very much for your time and goodbye.

Operator

[Operator Closing Remarks]

Duration: 33 minutes

Call participants:

Sveinung J. S. Stohle -- Chief Executive Officer

Havard Furu -- Chief Financial Officer

Chris Wetherbee -- Citi -- Analyst

Ken Hoexter -- Bank of America Merrill Lynch -- Analyst

Ben Nolan -- Stifel -- Analyst

Liam Burke -- B. Riley FBR -- Analyst

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