Hoegh LNG Partners LP (HMLP) Q4 2020 Earnings Call Transcript

Image source: The Motley Fool.

Hoegh LNG Partners LP (HMLP)
Q4 2020 Earnings Call
Feb 26, 2021, 8:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Hoegh LNG Partners LP Fourth Quarter 2020 Conference Call. [Operator Instructions]

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

Sveinung J. S. Stohle -- Chief Executive Officer

Thank you, Emily. Good morning, ladies and gentlemen, and welcome to Hoegh LNG Partners' earnings call for the fourth quarter 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.

Turning to Page 2, in today's presentation, I will take you through the quarter and then hand over the word to Mr. Furu, who will take you through the financials. Then, I will present a market update and at the end 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. Before we start, please take note of the forward-looking statements on Page 3 and also the glossary on Page 4. Turning to Page 5 and the highlights. 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 LNG 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 -- have now being done -- and are being done at an acceptable frequency for both officers and ratings on 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 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 [Technical Issues] $34.9 million in the quarter. Based on a distribution of $0.44 per common unit, this resulted in a solid coverage ratio of 1.2 in the quarter.

Turning to Page 6, we are showing the overview of the Partnership's fleet of modern assets. Since the previous quarter, the parent has secured a new 12-month interim LNGC charter with Trafigura for Hoegh Gallant, which will commence when the current charter expires in March of this year. The Gallant is also offered for long-term FSRU employment on several potential projects.

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

Havard Furu -- Chief Financial Officer

Thank you, Sveinung, and good morning, everyone. Turning to Page 8, we have the key figures for the quarter, which are showing an operating performance in line with the same quarter of 2019, although with an improved distributable cash flow. The segment EBITDA of $34.9 million in the quarter was nearly the same as in the fourth quarter of 2019. The operating result led to a distributable cash flow of $18.1 million and as already mentioned by Sveinung, a solid coverage ratio in the quarter. I would like to thank all our seafarers and onshore staff, enabling the Partnership to deliver stable results and operations during these unprecedented times.

Turning to Page 9, we are showing the development of key measures over time. And as you can see from the graphs, the operating performance remained stable. The only exception is the second quarter of 2019, 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 during the first half of 2021. However, this will be carried out afloat and is not expected to cause any significant downtime or fire [Phonetic]. I would further like to highlight the stability in distributions from the Partnership through the pandemic. The average remaining contract length stands at approximately eight years at the end of the quarter, underpinning the stability in cash flows.

Turning to Page 10, we are showing the income statement in more detail. Total revenues of $36.1 million in the quarter was about $2.4 million less than in the same period in 2019, mainly due to a reduced time charter revenue for the Hoegh Gallant under its new charter, and that the revenues in the fourth quarter of 2019 included some elements of tax reimbursement for FSRU PGN Lampung. Vessel operating expenses of $6.8 million in the quarter is down by $2.4 million from the same period in 2019. In the fourth quarter of 2019, the operating expenses included a provision of $3 million for land and billing tax being imposed by Indonesian authorities for the years 2015 through 2019, which explains most of the variation. Equity in earnings of joint ventures for the quarter was $4.2 million, a decrease from $6.7 million for the same period in 2019. Unrealized gains on derivative instruments significantly impacted the equity in earnings of joint ventures for the fourth quarter of 2020 and 2019. Excluding these derivative items, the equity in earnings of joint ventures would have been $3 million this quarter, an increase from $2.5 million for the same period in 2019. Total financial expense of $5.7 million in the quarter is down by $1.7 million from the same quarter of 2019, mainly due to lower interest expense as debt is amortized and variation in foreign exchange gains and losses.

Turning to Page 11, the balance sheet has not changed much since year-end 2019, with total liabilities in equities standing at just below $1 billion at the end of the quarter. The commercial tranche of FSRU PGN Lampung's debt facility is maturing in the fourth quarter of 2021. Also, one of the debt facilities in the joint ventures matures the same quarter. The Partnership has commenced these refinancing processes and is in detailed discussions with its banks on the Lampung facility, while for the joint venture, the process is in the planning stage.

I'll 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 view of the market. Global LNG trade rose with 1.5% year-on-year in 2020 despite the negative demand effects owing to the COVID-19 pandemic. This clearly shows the resilience in global LNG demand and underpins the role of LNG in the energy transition by replacing more polluting fuels such as coal and oil products. Asia was the only continent with noteworthy growth in LNG imports in 2020, and China accounted for around two-thirds of the aggregated Asian input growth despite a negative year-on-year development in the first quarter, of course by the COVID-19 pandemic. After acting as the sync for the LNG spot market in the first half of the year, European LNG imports declined in the second half of the year compared to 2019. And for the year, European imports ended slightly down compared to the year before.

Turning to Page 14, we have a graph illustrating the expected development in the global energy markets. As you can see global demand growth for LNG is expected to continue for the long-term even as a slight downward route [Phonetic] following the COVID-19 pandemic, and estimate the demand is still expected to grow by roughly 50% in the period 2020 to 2030. This again will drive demand for new regasification capacity, of which some will materialize in the form of FSRUs. The final investment decision made by Qatar Petroleum for the North Field East project shows that sophisticated market participants are continuing to invest to expand the LNG trade.

Turning to Page 15, which gives an overview of the competitive situation in the FSRU market. This picture looks more or less as presented over the last couple of years that since the last quarterly presentation, the FSRU Jawa Satu, which was built for a project in Indonesia has been delivered from the yard. In January this year, New Fortress announced the acquisition of Golar LNG Partners and Hygo Energy Transition. These transactions will make New Fortress Energy the new owner of seven out of the eight FSRUs owned by the Golar LNG Group. The FSRU LNG Croatia, which was previously named Golar Viking has now been sold from Golar to LNG Hrvatska in Croatia.

Turning to Page 16, regarding our parent. All vessels in Hoegh LNG's fleet are on contract and business development activities for new long-term FSRU contracts are high. Since the last quarterly presentation, this slide has been updated with the new long-term FSRU contract secured by the parents with H-energy in India, which will be served by the Hoegh Giant. The contract is for 10 years, with annual break options for the client after year five. The potential pipeline of modern acquisition candidates with the parent remains the same as in previous quarters. Also worth mentioning, Hoegh LNG Holding has initiated a new Clean Energy initiative with the goal of providing infrastructure solutions for the transportation, storage and distribution of green hydrogen and ammonia, as well as developing floating carbon capture and storage solutions. This will support that Hoegh LNG's leading industrial platform and high quality modern assets will continue to drive forward the energy transition well into the future.

Turning to Page 17, showing an overview of the business development activity at Hoegh LNG parent level. The parent is in advanced stages of negotiation with 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. The box to the left shows the projects where Hoegh LNG is selected as FSRU provider. All these projects have been announced previously. In Australia, AIE signed a memorandum of understanding to connect the Port Kembla Gas Terminal with the Eastern Gas Pipeline, part of the major gas transmission system in the State of New South Wales. Squadron Energy, the sole owner of AIE is also accelerating the associated development of an 800 megawatt dual fuel LNG-hydrogen power station in Port Kembla, which will be fueled by gas from the Port Kembla Gas Terminal.

Hoegh LNG is currently in final TCP negotiations with AIE. For AGL's project at Crib Point, the hearing stage of the environmental permit application process is completed, and the Victorian Minister for planning is expected to make the decision regarding the EES by the end of March of this year. The box in the middle is showing ongoing tenders, where Hoegh LNG is in the final tender round for the first-gen project in the Philippines, in competition with two other FSRU suppliers. Two potential new projects are added here since the last report. One, a long-term FSRU project in Africa and a short-term project in Brazil. The project in Brazil is for a duration of only three years, but this is because of regulatory conditions in Brazil. This is special for this project and does not represent a new norm in the FSRU market when it comes to contract duration, as shown by the most recent contract done by Hoegh LNG, which is for 10 years.

Finally, the box to the right is showing bilateral projects or projects that Hoegh LNG is developing itself. This includes one potential project in Cyprus, as the previously communicated project in the Atlantic Basin will not to be served by Hoegh LNG. The level of this business development activity is high, owing to the ongoing energy transition, where LNG replaces more polluted oil and coal products. This is triggering new LNG importers to move ahead with their plans to facilitate the import of natural gas.

With that, I would like to turn to Page 19 for the summary, where I would like to highlight the following. For the quarter, no material impact from the COVID-19 pandemic to date, 100% availability of the fleet resulting in stable operating performance, and a solid coverage ratio in the quarter, strong market fundamentals and finally, strong support from our parent.

We will now open for questions from the audience. With that, I would like to thank everybody for dialing in and taking part in the call. Thank you very much.

Questions and Answers:

Operator

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

Christian Wetherbee -- Citigroup -- Analyst

Hey, great. Hey, then, thanks for taking the question. Maybe we could start with the Gallant, and if you could give us an update on what the potential opportunities are for employment there? So, I think there is a couple of potential opportunities happening right now. Can you just give us a sense of kind of where we stand and maybe where that might go? And also, maybe with the timing is around potentially getting something locked in there?

Sveinung J. S. Stohle -- Chief Executive Officer

Right, right. Okay, thanks for that question. So, as we just mentioned, currently, the Gallant is on an LNGC entering charter and will continue on a new one with Trafigura starting from March. That's for 12 months. And then, for the FSRU projects that we are currently in either in a tender or in negotiations, the timing for these -- they actually all have a start-up except for H-Energy in 2022, so next year. Gallant is offered in on two of these projects at the moment. So, obviously, that's on top of our list. We do believe that we have a strong -- there is a strong pipeline of projects, since we have several more than we'll actually need. And obviously, the main focus now is also to secure the long-term contract for the Gallant, and that's the objective for the next few months.

Christian Wetherbee -- Citigroup -- Analyst

Okay. Okay, that's helpful. So something over the course of the next couple of months we might have some more clarity for the end of the traffic year deal?

Sveinung J. S. Stohle -- Chief Executive Officer

Yeah, correct.

Christian Wetherbee -- Citigroup -- Analyst

Okay. Okay, fantastic. All right, that's helpful. I appreciate it. And then, maybe one sort of conceptual question as you think about this pipeline of potential vessels with contracts, obviously we're kind of working through some of this tender process right now. What would be the environment that you would need to see to potentially think about a dropdown into the MLP? So, I don't know if it's sort of more attractive financing opportunity for something like that, but what are sort of the conditions that you would be looking for to kind of think about resuming the growth profile of the company?

Sveinung J. S. Stohle -- Chief Executive Officer

Well, I mean first, in terms of timing, obviously, the way we have done this and we'll continue to do this is that the drop-downs will happen when the asset is on contract and in operation, not before. And of course, also the second point, which is probably more important is, there needs to be the financial conditions available, both from the MLP side and the parent side in order to -- for the numbers to work, so to speak. And with the pipeline that we have, clearly we do see that the length of the contracts and also the expected revenues from the contracts, that's fundamental for doing a transaction. And that is something that we will evaluate very closely when the contracts have been completed and the assets have been confirmed on the contracts during the course of this year.

Christian Wetherbee -- Citigroup -- Analyst

Okay. I think, yeah, I was getting kind of toward that financial conditions was maybe sort of the heart of the questions. So, thinking about that, maybe a bit more specifically.

Sveinung J. S. Stohle -- Chief Executive Officer

Yeah, OK.

Christian Wetherbee -- Citigroup -- Analyst

Is the current environment something that would be supportive if the other pieces were to line up, is the current environment as you see it from a financing perspective attractive enough to be able to sort of execute on a deal? Do we need to see the stock price at a better place? I just want to kind of get a sense of maybe some of the parameters on the financial conditions that you'd need to see?

Sveinung J. S. Stohle -- Chief Executive Officer

Harvad, you want to answer it?

Havard Furu -- Chief Financial Officer

Yeah, I think fundamentally, the share price of the MLP would probably have to be at least at this level or preferably a touch higher than current. At the same time, of course, you need to have a depth of the market that is there to pick up a transaction like this. And of course, we haven't seen those transactions in the MLP market for quite a while. So, because there is a question mark to that when we get there. So, it's a little bit premature, but it's always something that is -- that we need to consider carefully when we sit [Phonetic].

Christian Wetherbee -- Citigroup -- Analyst

Okay. Yeah.

Havard Furu -- Chief Financial Officer

I mean, that we follow very closely of course. But we have the agreement between the parent and the MLP and that we fully stand behind on both sides. So, we'll deal with that when we get to that crossroad.

Christian Wetherbee -- Citigroup -- Analyst

Okay. Yeah, that's it given the fact that we haven't seen those types of transactions, but maybe a potentially sort of firming market, kind of curious to see about the timing, but that's super helpful. I appreciate your time. Thank you very much.

Sveinung J. S. Stohle -- Chief Executive Officer

Thank you.

Operator

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

Benjamin Nolan -- Stifel -- Analyst

Yeah, thanks. So, I have two questions. First, maybe just to sort of follow on to what Chris was just asking about. As you think about sort of, if let's say, the capital were available and what not. How do you think about the appropriate multiple of EBITDA to pay for a fixed contract asset like would you be looking at here relative to maybe how you thought of that in the past, any changes or differences there?

Sveinung J. S. Stohle -- Chief Executive Officer

It's again a little bit premature to have a firm view on that. I think we would be looking at the multiple stuff they've seen in the past as a starting point. and then also, of course, look into other valuation metrics for potential dropdown transactions. But, I think the historical multiples will be at least as to the starting point.

Benjamin Nolan -- Stifel -- Analyst

Okay. And then, well -- forgive me, I guess I have two, but sort of related, but there -- you've mentioned in the release that you're in the process of refinancing the Lampung later in the year. Is the idea there to simply refinance the existing balance? Or would you anticipate maybe being able to get a little cash out of that or conversely paying a little bit more principal onto it?

Sveinung J. S. Stohle -- Chief Executive Officer

Yes. So we -- as you pointed out, we are in discussions with the banks on this. It looks like we will be able to upsize the facility a bit. It's too early to get into the details of that. So now, that is our aim to do that. So, we will of course get back on the details as we proceed.

Benjamin Nolan -- Stifel -- Analyst

Right, OK. So, and then this sort of brings it full circle a little bit. The -- hopefully, or it will see, but if you are able to get some cash out of that and then you have the proceeds from the ATM that you -- sounds like you've been active with. Any sense as to sort of what is your available liquidity for things like potential dropdowns from an equity perspective? How much, because the question is how much firepower do you think you have without needing to access the capital market?

Sveinung J. S. Stohle -- Chief Executive Officer

Well, I think essentially we would need to finance the most part of the transaction price with addressing new equity.

Benjamin Nolan -- Stifel -- Analyst

Okay.

Sveinung J. S. Stohle -- Chief Executive Officer

Some might from the sources, but the lion's share will have to come from raising new equity.

Benjamin Nolan -- Stifel -- Analyst

Right, OK.

Havard Furu -- Chief Financial Officer

Yeah, I think to add to that. I think also as we've done before, Ben. I mean, we have normally split transaction at least in two, right? So, I think when we look at this, and clearly that is something that we would probably be looking to do for any future transaction also.

Benjamin Nolan -- Stifel -- Analyst

Right, and that was sort of my thinking as you don't have to do the whole thing, but if you -- you could even do a quarter of it or effectively just acquiring cash flows, right? So -- all right, well, that's very helpful. Thank you.

Sveinung J. S. Stohle -- Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Our next question comes from Ken Hoexter from Bank of America. Please go ahead.

Ken Hoexter -- Bank of America -- Analyst

Hey, Sveinung and Havard. Just -- you mentioned in the release and in your discussion the investments you're making in hydrogen and looking at ammonia potential. I presume that is not at the parent level, and you're waiting to see how that flows? Or is that going to be at the partner level?

Sveinung J. S. Stohle -- Chief Executive Officer

No, the initiative at the moment is at the parent level because it's basically at the moment business development and technical development, focusing on mainly two areas, green hydrogen and ammonia, and the infrastructure needed in order to bring that to market, where we also have a case where we are looking at using our existing FSRUs for that purpose, which would mean that we could store ammonia, convert it to hydrogen on the FSRU, and basically blend the hydrogen into the regasified gas stream and send it to shore with that.

This is something that is already being done. I mean, the mixing of hydrogen into existing pipeline networks is already being done in Europe on a very small scale, same in Australia. So, that of course would be when we have proved and tested that solution, that could be applied to all of our existing FSRUs. So, that's just one example. We have several other initiatives that goes with that. And clearly, we will be looking at applying that -- all those solutions across the fleet, which of course would also involve the Partnership.

Ken Hoexter -- Bank of America -- Analyst

And then, just follow-up would be, just -- your thoughts on in a rising interest rate period, which we seem to be entering. What are your thoughts? Is that something you have -- you feel the Partnership would have to counter with a rising distribution to sustain levels? Maybe just your general thoughts on rising interest rate environment? Thanks.

Sveinung J. S. Stohle -- Chief Executive Officer

So, I think first of all, on that point, when it comes to the -- managing the interest costs of the Partnership, what we are -- following the hedging policy to hedge interest rates at least till the end of the existing debt facilities, and we have locked-in interest rates for quite some period going forward. And we are looking to do that also when we refinance the Lampung facility this year. So on that side, we're trying to lock in the interest rate exposure on the cost side. Although when it comes to the distribution, there is no plan to make changes to that in response to changes in the interest rate environment.

Ken Hoexter -- Bank of America -- Analyst

Great. Appreciate the quick thoughts. Thanks, guys.

Sveinung J. S. Stohle -- Chief Executive Officer

Thank you.

Operator

Our next question comes from Ken Khan [Phonetic] from Cooperative Holding Corporation. Please go ahead.

Ken Khan -- Co-operative Holding Corporation -- Analyst

Thank you so much, gentlemen. Very simple question. Is there anything that you would believe will increase the distributions being made within the next year or two, in terms of distribution to the holders of the units?

Sveinung J. S. Stohle -- Chief Executive Officer

Havard, do you want to answer?

Havard Furu -- Chief Financial Officer

No, there's -- we don't see any reasons for changing -- whether that's up or down.

Ken Khan -- Co-operative Holding Corporation -- Analyst

All right, thank you.

Operator

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

Sveinung J. S. Stohle -- Chief Executive Officer

Yes. Thank you, Emily. So, thank you very much everybody for calling in. We appreciate your attention and we look forward to having you on the call again at the next quarter. Thank you very much and goodbye.

Operator

[Operator Closing Remarks]

Duration: minutes

Call participants:

Sveinung J. S. Stohle -- Chief Executive Officer

Havard Furu -- Chief Financial Officer

Christian Wetherbee -- Citigroup -- Analyst

Benjamin Nolan -- Stifel -- Analyst

Ken Hoexter -- Bank of America -- Analyst

Ken Khan -- Co-operative Holding Corporation -- Analyst

More HMLP analysis

All earnings call transcripts