Höegh LNG Partners LP (NYSE:HMLP) Q1 2019 Earnings Conference Call May 29, 2019 8:30 AM ET
Company Participants
Steffen Føreid – Chief Executive Officer and Chief Financial Officer
Conference Call Participants
James Monigan – Citigroup
Ben Nolan – Stifel
Liam Burke – B. Riley FBR
Operator
Good day and welcome to the Höegh LNG Partners First Quarter 2019 Earnings Presentation. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Steffen Føreid, CEO and CFO of the partnership. Please go ahead, sir.
Steffen Føreid
Thank you, Cole. Good morning, ladies and gentlemen and welcome to Höegh LNG Partners Earnings Conference Call 2019. For your convenience, this webcast and presentation are available on our website. Now before we start, please take a note of the forward-looking statements on Page 2 and a glossary on Page 3.
Now turning to Page 4, I am pleased to report another strong quarter for the Partnership with total revenues of $36.1 million, limited partners' interest in net income of $10.7 million. And segment EBITDA of $36.1 million. Based on its good performance and financial position, the Partnership distributed $0.44 per common unit during the quarter, equivalent to annualized distribution of $1.76 per unit.
Turning to Page 5, we are putting more numbers to the quarter. And reported numbers in this quarter are positively impacted by 100% availability of the fleet compared to 10 days of schedule maintenance off-hire in the same quarter last year. As already mentioned, revenues were $36.1 million in the quarter, up $1.3 million from the first quarter last year. Adjusting for unrealized gains and losses on derivative instruments in joint venture companies, the operating income was $25.2 million and limited partners' interest in adjusted net income was $13.3 million in the quarter, which is up $1.4 million and $1.5 million from the same quarter last year respectively.
Based on the distribution of $0.44 per unit, the coverage ratio reached 1.26 in the quarter. However, it is worth mentioning that the cash flow in the quarter included $1.4 million of proceeds from the settlement of derivatives in relations to the refinancing of Höegh Gallant and Höegh Grace which is a non-recurring item.
Turning to Page 6, we are showing the development in key metrics over time where the year consistency stands out across all key figures, explained by the stable and predictable cash flow generated by the Partnership. With the distribution coverage reaching 1.26 for the quarter, the ratio has been exceeding 1.15 for six consecutive quarters underpinning the Partnership's world supported distribution
Now turning to Page 7, we are showing the income statement in more detail. There are no large variances in operating and administrative expenses quarter-on-quarter. However, the movement in equity in earnings of joint ventures standout explained by the impact from unrealized gains and losses on derivative instruments. Going further down the income statement, preferred unitholders' interest in net income for the quarter was $3.3 million, up $700,000 from the same quarter last year due to additional units issued under the ATM program.
Regarding the ATM program, the Partnership raised approximately $2.2 million in net proceeds during April and May 2019 issuing both common and preferred units, and taking the total net proceeds to $45 million since the start of the program.
Turning to Page 8, the balance sheet has not changed much since yearend 2018. I would just like to highlight that long-term interest bearing debt increased by $5 million to $395 million at the end of the quarter, reflecting the increased leverage in connection with the refinancing of Höegh Gallant and Höegh Grace.
Growing under the revolving credit facility provided by the sponsors to the $39 million at the end of the quarter, equivalent to the amount outstanding at the yearend 2018. Available drawing under two revolving credit facilities available to the Partnership was $108 million at the end of the quarter.
Turning to Page 9 represent the Partnerships' platform of modern, high quality assets with an average remaining contract length of more than 10 years. Neptune is still operating in FSRU mode in Turkey expected to start in LNG carrier mode from the end of June this year in worldwide trade with time charter with Total. Cape Ann is currently operating in LNG carrier mode and expected to start FSRU operation in India during the second half of 2019 and their subcharter from Total to H-Energy.
PGN-FSRU Lampung and Höegh Grace continues to operate in out of Indonesia and Colombia respectively. While Höegh Gallant is operating in LNG carrier mode under subcharter from Höegh LNG to Clearlake shipping.
As already mentioned, all units operating according to contract during the quarter. It's worth mentioning that during the second quarter of 2019, Höegh Gallant will have a dry docking while PGN FSRU Lampung will complete a class renewal survey on site. Expenses relating to these activities will be covered by the Partnership in addition the units will be off-fire during the procedure which is expected to last for 14 to 16 days in total.
Turning to Page 10. This slide updates the picture at the sponsor level. As you can see all FSRU on the waterhead employment operating in FSRU or LNG carrier mode. FSRU number 10 which is expected to be delivered during the third-order 2019 is being marketed in the short to medium term market as a bridge to enter long-term FSRU employment is secured.
When it comes to business development activities, Höegh LNG has won exclusivity or been selected as the FSRU provided for three potential FSRU projects. Two of which are located in Australia and one in South Asia. All three projects are subject to the word of government approvals and/ or a final investment decision. However, one of the Australian projects the AIE LNG import at Port Kembla in New South Wales recently received government approval and has reported progress on securing offtake agreements.
The other Australian project AGL FSRU project in Crib Point is not depending on offtake agreements and is working on obtaining government approval. The three potential FSRU projects have a scheduled start up of operations in 2020 to 2021 timeframe which fits nicely with expire of the employment contracts in place for the FSRU intended for these projects.
Now turning to Page11, we are showing the development in global LNG trade historically which is driving the demand for FSRU as the preferred way of opening up new markets to the supply of LNG. So as you can see from this graph, the global LNG trade has increased consistently year-on-year, responding positively to the increased supply, and the competitive pricing of LNG but also driven by environmental arguments. For the first quarter of 2019, the LNG trade reached almost 90 million tons which is up 4% in the same period last year. China and Europe are the main drivers of this volume growth while South Korea and Japan have scaled back relative to the same period last year.
While the ongoing trade war between the US and China might impact where US exports are going, it's not expected to impact China's demand for natural gas as its strategy of improving air quality.
Now turning to Page 12 and the LNG supply side which is driving global LNG trade and ultimately FSRU demand. We are showing a graph forecasting LNG production through 2025. And from this you can see that the LNG supply is expected to continue growing increasing by 50% to 485 million tons in 2025 which is equivalent to an annual growth rate of just over 6%. It's worth mentioning in this respect that most of this growth is expected to come from capacity ramping up or under construction or projects recently sanctioned and is therefore not dependent on final investment decisions.
North America along with Australia, Russia and East Africa expected to provide most of the incremental supply, with Qatar also playing a dominant role in this picture.
Turning to page 13 on the demand side. We are showing a graph forecasting the development in the global energy mix through 2040. The key takeaway from this graph is that natural gas and renewables are expected to make up an increasing share of the global energy consumption, the expense of coal and oil projects. In this picture, natural gas is forecasted to comprise more than one-fourth of the energy mix by 2040. This particular graph is based on information from IEA, but you will see an equivalent picture from other sources describing a development that has been ongoing for some time in particular in Asia where natural gas increasingly has been seen as a tool for reducing greenhouse gas emissions.
With this backdrop I would like to turn to Page 14 and the summary. I would like to highlight the stable and predictable cash flows of the Partnership, and the strong outlook in the FSRU market, driven by strong LNG supply and demand dynamics. And with that, that concludes the presentation. I would like to open up for questions from the audience.
Question-and-Answer Session
Operator
[Operator Instructions]
Our first question today comes from Chris Wetherbee with Citigroup. Please go ahead.
JamesMonigan
Good morning. James on for Chris. Wanted to touch on the drop down pipeline and get a sense of when the next drop down might occur? And if you are thinking that it was more likely to be a new build or something from the existing fleet?
SteffenFøreid
Hi, Chris. I think, yes, again the dynamics for drop down is that the sponsor secures long-term employment and when that is secured we have an asset that can be dropped down. And as I explained on the business development side, there is good progress being made and for potential projects with a commercial startup in the 2020 to 2021 timeframe. Now I think we could be in a position where we could drop down assets upon final investment decision for a long-term contract, maybe in combination with an interim contract.
We don't necessarily have to wait until commercial startup of the long-term FSRU contract which has been the case earlier, but at least we need to have a final investment decision in place. And as to the assets themselves, it would be one of the existing fleet vessels at the parent level the Giant, Esperanza, Gannett and number 10 which then would be the relevant drop-down candidates.
JamesMonigan
Thank you and then actually wanted to touch on the slide 10 which you referenced. I wanted to get a sense of the negotiations in terms of the long-term business development for the Esperanza given that the contract runs through 2021. I just want to get a sense of what the extension might look like or what sort of the current thinking around that vessel might be?
SteffenFøreid
So Esperanza is now operating in China CNOOC. And we are in discussion for an extending the contract in China. We also bidding her for other projects but there is then ongoing discussions regarding an extension and but the terms and details of such discussions is not something we that we are able to talk about yet. But there are ongoing discussions and we also bidding her in for other potential projects outside China.
Operator
Our next question comes from Ben Nolan with Stifel. Please go ahead.
BenNolan
Great. Thank you. So I have a few questions. My first relates to some of the drydocking cost that you call out in press release for the second quarter. They were a little bit higher $7 million – $8.5 million relative to the amount of time without service. I was curious if there's any a special outfitting or new equipment or something like that might be fitting under the vessels?
SteffenFøreid
Yes. Hi, Ben. Thanks for the question. And first of all this amount is for both units Gallant and Grace. And for Gallant, we will be drydocking and for Lampung we will do the survey on site. So that means we don't have to go out to drydocking to do the survey for Lampung. And we have developed procedures enabling us to stay on site and that's a little bit more expensive, but on the other hand it makes the unit available to the client for a longer period of time. So these are the costs slightly higher for the on site survey, but there are no particular things that needs to be done. And again it relates — it is sum of the cost for both the units.
BenNolan
Okay, now that's very helpful, appreciate that. And then moving on to sort of a growth strategy, you laid out just now sort of how you're thinking about possible drop down which is I appreciate hard to do without the contracts to verify but it was curious there, there's not really I don't think ever been any second hand or third party acquisitions in the entire FSRU space. Is that something that you think could materialize there being a seller of an FSRU in the market maybe even something with a contract that you guys might be interested in and looking at?
SteffenFøreid
Well, I mean that's a –it's –it is part of our strategy to consider that as well. I mean the strategy of MLP is to acquire assets on long-term contracts from the parent or third parties. So far it hasn't taken place. That might happen in the future. The primary source of growth comes from the parent, Höegh Gallant Holdings and good progress is being made there on the business development side. But that does not refrain us from considering acquisition from third parties.
BenNolan
Have you ever — has there ever been an opportunity that where you might have been able to do that? I'm just curious whether that is something that is realistic to consider or probably not.
SteffenFøreid
Well, it's not something that we have actively pursued so far. And not to say that there hasn't been opportunities, but it's not something that we have actively pursued so far.
BenNolan
Okay and so more than likely that the realistic means to the next drop is still going to be through a drop down from the parent the way that we should think about.
SteffenFøreid
Yes. I mean that is the primary source of growth from the sponsor, but it doesn't refrain the MLP from considering third party exhibition at the same time. And that's part of the strategy.
Operator
Our next question comes from Liam Burke with B. Riley FBR. Please go ahead.
LiamBurke
Yes. Thank you. Good morning. You talked about the coverage on the long-term contracts and the pipeline on the drop downs from your sponsor. Taking a look on the other side of the equation on the overall demand for FSRU even though you are protected on contract. How do you see the competition rolling out over time understanding the production is continuing to increase?
SteffenFøreid
So I think if you go a little bit back in time we, there are four large established players in this space and there has for some time been increased competition now from ship owners and stating they want to expand in the segment and some have made the speculative order. I think it's fair to say though that's after the — let's call the outlook for the carrier market has improved. There has been less talk from ship owners. So I think while there is oversupply of FSRU at the moment, we believe and hope that there will be more balanced going forward as traditional ship owners focus on carrier business rather than FSRU. So I think over time we will see a balance in the supply-demand of FSRU. And we don't expect that the universe of FSRU providers will increase considerably.
Operator
Our next question comes from Mark Tolentino with Barclays. Please go ahead.
UnidentifiedAnalyst
Hi, good morning. In your press release you reference certain performance warranties related to vessel performance that were not met during the second quarter. Just wondering if you could talk a little bit more about that?
SteffenFøreid
No, in — all our contract and units were operating according to the contract during the quarter and we had 100% availability of our fleet. And that's also some of the main reason for the increase in revenues that we see from the first quarter 2018. So during the quarter, our units were operating according to contract 100%.
End of Q&A
Operator
And this will conclude our question-and-answer session. I'd like to turn the conference back over to
Steffen Føreid for any closing remarks.
Steffen Føreid
Well, I would then just like to thank everyone for dialing-in and listening into to the call and for the question. And thank you for today. Thank you.
Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time. And have a nice day.