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Executives

Graham Robjohns - CEO

Brian Tienzo - CFO

Analysts

Ben Nolan - Stifel

Michael Webber - Wells Fargo

T.J. Schultz - RBC Capital Markets

Shawn Collins - Bank of America

Fotis Giannakoulis - Morgan Stanley

Golar LNG Partners LP (GMLP) Q1 2014 Earnings Conference Call May 28, 2014 10:45 AM ET

Operator

Good day, and welcome to the Golar LNG Partners LP Q1 2014 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Graham Robjohns. Please go ahead, sir.

Graham Robjohns

Thank you, and good afternoon or good morning to all of you. My name is Graham Robjohns and I'm joined here today by our CFO, Brian Tienzo.

Starting with the presentation on Slide 2; forward-looking statements, which I'll leave you to read. Then moving over to Slide 3, we'll start the presentation with the Q1 2014 highlights. We're very pleased to report net income attributable to unit holders of 32.7 million and operating income of 53.8 million for the first quarter 2014.

We generated distributable cash flow of 36.1 million for the quarter with a coverage ratio of 1.06. This has however have been negatively impacted by the issuance of the 5.2 million new units in December in connection with the acquisition of the Golar Igloo.

If distributions paid on those units for the first quarter were excluded from the Q1 distribution, our coverage ratio would have been 1.16. We paid distribution per unit of $0.5225, which was declared for the first quarter of 2014.

The acquisition of the Floating Storage Re-gas Unit or FSRU Golar Igloo from Golar LNG was of course completed just before the quarter end for a purchase price of 310 million. And as a result of the Golar Igloo acquisition, management have guided that they intend to recommend to the Board a distribution increase of between $0.09 and $0.11 per unit per annum with effect from the second quarter of 2014.

Moving over to Slide 4, the income statement; revenues are down slightly on the fourth quarter, 87.7 million largely to there being two less days in the first quarter, and 90 of course as opposed to 92 in the fourth quarter of 2013.

Total operating expenses were slightly increased to 33.9 million, and so operating income was slightly down at 53.8 million compared to 54.7 million for the fourth quarter of 2013.

Interest expenses were lower this quarter as a result of the expiration of two relatively high cost interest rate swaps in the fourth quarter and because we used funds for the equity raise in December to pay down revolvers prior to the acquisition of the Golar Igloo.

Other financial items were a loss of 6.2 million in Q1 as compared to the gain of 1.5 million in Q4 as a result of non-cash mark-to-market interest rate swap valuations which were a loss of 1.8 million in the first quarter, and as a result of declining longer term interest rates, but a gain in the fourth quarter.

Tax at 2.8 million for the quarter, expense has normalized after we had a credit of 4.3 million tax expense in the fourth quarter of 2013. As a result, net income after non-controlling interest was 33.7 million as compared to 47.6 million for the full quarter.

Turning over to Slide 5, we have balance sheet assets. One item really to point out there, relating to the acquisition of the Igloo, cash has reduced at 48.9 million as we drew down on funds to acquire the Igloo. And of course the vessels line item has increased 1.7 billion also as a result of the acquisition.

On Slide 6, the balance sheet, liability of the balance sheet, our long-term debt also increased as a result of the assumption of 161 million of debt related to the Golar Igloo as well as re-drawing 70 million on our revolvers.

Our total debt and capital lease obligations net of restricted cash were 1.13 billion at quarter end, and our net debt to EBITDA multiple was 3.9 times, although this only includes four days of earnings for the Igloo, so it should decline in second quarter.

Without the Igloo debt, the ratio would have been 4.34 times which puts us we believe in a strong financial position and allows us to report this flexibility when looking at future acquisitions.

We were over-hedged at the quarter end, but we have around 130 million of interest rate swap maturing in the second quarter. Our average swap rate was 2.3% exclusive of bank margins. And our average bank margin was also in fact 2.3%.

Turning over to Slide 7 and distributable cash flow, we start here as usual with net income and calculate distributable cash flow and adjust for non-cash items, and you can see of course the impact of the non-cash interest rate swap valuations of 5.99 million gain in Q4 and a 1.83 million loss in Q1. As I said, just to reiterate, those are non-cash accounting valuation movement.

Distributable cash flow, however, is lower in the quarter, 36.1 million and mainly due to a result of the recording of tax – [normalize] [ph] tax expense of 2.8 million in the first quarter of 2014 as compared to a tax credit of 4.3 million in the fourth quarter of 2013.

Distributions in total was 34 million, and our coverage ratio is 1.06, and although as I said, we have price distributions to unit holders of the 5.2 million new units in the first quarter. Without these distributions, coverage ratio would have been 1.16.

Turning to Slide 8, here we set out the progression of distributions and coverage over time and set our distributable cash flow against distributions on the growth illustrated by the red and yellow lines. You can see there are a couple of points where distributable cash dipped below distribution, firstly, similar to the Golar Igloo where we issued units in connection with the Nusantara Regas acquisition in advance of the actual acquisition, and then in the latter part of 2012 and early 2013 where we had a series of four drydockings over a three-quarter periods. However, we're back to positive coverage ratio, and we expect that to extend and improve into the second quarter.

Turning over to Slide 9, again, it gives you the -- it shows your distribution increase over time from the point in time of our IPO and all the way up to current date with the relative acquisitions that we've made along the way.

Slide 10, and we have the usual slides on assets and contracts with our regular of course is now from that acquisition with a five-year contract. We have $2.5 billion contracted revenue and an average contract term of 6.2 years which, as I said, puts us -- in addition to our low debt levels, puts us in a very strong position both operationally and financially.

Turning over to Slide 11, we have a summary of the numbers in relation to the acquisition of the Igloo. As I said, it was purchased for approximately 310 million. That was funded by the assumption of 161 million in debt and proceeds from the December 2013 equity issuance of five-year contract. The contract is structured such that it is used by the charter for nine months of the year and then during the December-January and February we are able to take the vessel away and trade it in the LNG carrier market.

So, the EBITDA from the vessel simply related to nine months period between 32 million and 34 million annually. That acquisition was completed on the 28th of March, and as I've said, management have guided they expect to recommend to the board the distribution increase up to $0.545 to $0.550 per quarter or up to an annualized distribution rate of 2.18 to 2.20, which would represent between 41%-43% distribution growth since IPO in April 2011.

Turning to future growth opportunities, we have three main avenues; firstly, FSRUs. We have five FSRUs in the current portfolio, an attractive six acquisition target, the Golar Eskimo, which is Golar LNG new build FSRU which has been awarded a ten-year contract with the Jordanian government. And that contract is due to commence in the first quarter of 2015.

Golar Energy has one further un-contracted new build FSRU under construction, which delivers towards the end of 2015. And this vessel is very well suited to a number of new FSRU opportunities that Golar LNG is developing globally.

Secondly, the second avenue of growth is LNG carriers. We have four carriers in the current fleet and go by for the 12 carriers operating we are under construction that all effectively represent potential future acquisition targets.

The current short-term LNG carrier markets is of course weak and has been limited contracting completed recently. However there is well over 100 million tons of new liquefaction production coming on stream or expected to come on stream by 2020 around 90 million tons of this by the end of 2016, and therefore in our view the medium term demand outlook for LNG carriers is very strong, provides a strong growth avenue for partners moving into the future.

Currently the possibility of the acquisition of FLNG assets is extremely interesting to Golar LNG partners. For those of you who listen to the Golar LNG call govern their own track to enter into a contract to construct the first FLNG unit by the end of Q2 2014 and that's obviously entering into contract not actually constructed by the end of the second quarter, and have identified multiple opportunities for deployment of the vessel which they are developing.

All of these opportunities for Golar LNG partners is some 36 months at least -- why the scale and the profitability of these projects is extremely significant for Golar LNG partners. And of course in addition to the high cost, high margin FLNG assets themselves, each of these products will of course require shipping which provides an additional avenue for growth.

Turning over to slide 13 and in summary Golar LNG partners has a solid contract base, revenue backlog at 2.5 billion and average contract term of 6.2 years had some effects on operating results, 100% utilization in the first quarter and closer to 100% utilization through most of 2013 and identify the acquisition target in the FSRU Eskimo with a long term contract to strong market growth outlook growing demand for LNG and supply of LNG around the world is creating demand for related infrastructure which will include carriers FSRUs and FLNG assets as well.

And of course as I've described we've a large sponsor active base. Golar LNG has a fleet of two modern carriers, 10 uncontracted LNG new buildings, one on contracted FSRU new build and is developing FLNG assets and projects which could provide substantial growth in the future.

Thank you very much, and with that I'd like to turn over back to the operator for questions and answers.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will now take our first question from Ben Nolan of Stifel. Please go ahead. Your line is open.

Ben Nolan - Stifel

Great, thank you. So, I actually just have two pretty quick questions. Number one is as it relates to the grant, and I know that comes up for -- or the initial period the contract rolls off in the early part of next year, and I know that there is an extension option, but at least at the moment it would seem as though that's out of the money. At what point do you guys start having discussions about a new or a subsequent contract for that asset?

Graham Robjohns

Yeah. You are correct at the extension option is out of the money at the moment, but when we acquired the asset it came with an option, Golar LNG Partners option to contract the vessel back to Golar LNG. There is a rate reduction if we trigger that around about 25% reduction. That would -- that's represented by the green bar on the chart which takes it from sort of Q1 '15 out to the end of 2017.

Ben Nolan - Stifel

Okay, perfect.

Graham Robjohns

Hopefully, ideally we’d try and contract the vessel out for a longer period. In the meantime whether that materializes between now and March 15 is debatable I guess.

Ben Nolan - Stifel

Yeah, okay. But suffice it to say it's available, I guess, subsequent to that.

Graham Robjohns

Yeah.

Ben Nolan - Stifel

And then another question and this has obviously been something that has been happening in the market as of late where you are seeing some of oil majors selling and leasing back their assets. And you guys didn't really mention that as a function of your growth potential. But have you been approached at all or have there been any discussions at all about the possibility of taking assets and leasing them back from other third-party operators aside from the parent?

Graham Robjohns

Yeah. It's something over time that we've [inaudible] acquisition generally that we have always and continue to look at. You are quite right that some of the majors have and are looking at necessarily on our write off and if we can get those assets at the right price with term contracts and it's for sure it’s something that we would look at.

Ben Nolan - Stifel

Okay. And has there been -- I don't know, I guess is there much of a market for that today or have some of the ones that have been done in the market, would you categorize this as maybe just one-off opportunity?

Graham Robjohns

I think there is potential to do it, yeah.

Ben Nolan - Stifel

Okay.

Graham Robjohns

I guess it's a matter of price and economics certainly.

Ben Nolan - Stifel

Okay, perfect. That does it for my questions, I appreciate you guys.

Graham Robjohns

Thanks a lot.

Operator

We will now take our next question from Michael Webber of Wells Fargo Securities. Please go ahead. Your line is open.

Michael Webber - Wells Fargo

Hi. Good morning, Graham. How are you?

Graham Robjohns

Hi, Mike.

Michael Webber - Wells Fargo

Hey, just a couple of questions. First one, and forgive me if you mentioned this in your opening remarks, but given everything that going on right now at, up at GLNG, with FLNG and the capital outlays there. If you guys were to participate in newer tenders either it be a more conventional tender or something else, would you do that directly at GMLP or would that still be done over the parent?

Graham Robjohns

I think there will come a time when we will stop potentially looking at that - doing that at the GMLP level. We haven't to-date discussed doing that.

Michael Webber - Wells Fargo

Okay.

Graham Robjohns

So, not in the immediate future.

Michael Webber - Wells Fargo

Okay, that's helpful. And just along the lines of those tenders obviously GAIL’s been out there for a while, Yamal’s ice-class tender is completed, but they got that big conventional backend of that tender that looks like it's going to be, I would believe the backend of the year. Is that something you guys are looking at? Can you maybe give us some color in terms of the conventional tenders you are looking at to maybe kind of bulk out the backend of your dropdown profile outside of the existing assets of the parent?

Graham Robjohns

Yeah, I think -- well, I mean all of those that you mentioned for sure are now [inaudible], and we've discussed with the various parties. So that's for sure something that's -- that we are looking at.

Michael Webber - Wells Fargo

Okay. Let me put it this way, is there anything that I've omitted or is there anything that I missed that would be out there that you guys are -- made your tender that you guys could be looking at that I didn't mention or did I catch all.

Graham Robjohns

Yeah. Not sort of big public things that you haven't mentioned.

Michael Webber - Wells Fargo

Got you. Okay. And just it seems obviously the spot market is pretty weak and anything that's on the water right now it's pretty difficult to find a long-term contract, but if there was a level that was available right now, it would seem like we are kind of in that grey area where the rate would be low enough that it wouldn't support a dropdown price, that would be above cost. Is that the right way to kind of think about the current environment that even if there is demand for longer term deals for existing on the water tonnage, not stuff that's delivering two or three years from now, but existing on the water tonnage that the rate doesn't really make the dropdown that makes sense?

Graham Robjohns

Yeah. And I guess that’s right. But I think it’s probably also right, that if the MLP wasn't in existence, Golar LNG wouldn't want to be contracting in long-term deals at rates that we are going to get a return on capital that wasn't even enough for an MLP to make money on.

Michael Webber - Wells Fargo

Right. Yeah, exactly. Okay, all right. That's helpful. And then I guess one more from me and it's more just a clerical question, but with regards to kind of replacement CapEx and what we are holding back up in our models for your assets or your fleet relative to your carriers maybe on a percentage of EBITDA basis, how big a delta should we be using there? Ballpark?

Graham Robjohns

Between the carriers and the FSRUs, I guess you are talking roughly, so the ratio two to three.

Michael Webber - Wells Fargo

Okay. Yeah, I think that makes…

Graham Robjohns

LNG carriers, it's two; FSRUs is three, something like that.

Michael Webber - Wells Fargo

Yes. Okay. No, that makes sense. Okay, thank you for the time.

Graham Robjohns

Okay.

Operator

We will now take our next question from T.J. Schultz of RBC Capital Markets. Please go ahead, your line is open.

T.J. Schultz - RBC Capital Markets

Hi. In the press release the comment was that you all are well positioned to make further acquisitions without raising additional equity. So just trying to get some clarification there if that's just specific to the Eskimo. We should expect that to be holding debt front in order if you could just talk more generally maybe on kind of the target leverage ratios that you are comfortable with?

Graham Robjohns

I think the point that we were trying to make for the -- the general point if you like is that if once we move into the second quarter and you get all the EBITDA contribution from the (indiscernible) the Igloo. On kind of pro forma basis we are around about 2.4 times net to EBITDA ratio which is pretty sort of midlevel niche for an MLP, but it's pretty low for an offshore based asset company. And therefore we feel as though we have got qualitative scope and financial flexibility to acquire assets and without using that common equity whether that's specifically for the Eskimo, specifically for another asset is not really the point. The point is that we -- there is a lot of scope there.

T.J. Schultz - RBC Capital Markets

Okay. So you are down the 3.4 times, what level would you be comfortable with?

Graham Robjohns

Well, I think we probably wouldn't be looking to much above 4.5 times. That had been at anything in between what I think is unreasonable.

T.J. Schultz - RBC Capital Markets

Okay. Thank you.

Operator

Our next question comes from Shawn Collins of Bank of America. Please go ahead. Your line is open.

Shawn Collins - Bank of America

Great, thank you. Good afternoon Graham and Brian.

Graham Robjohns

Hi.

Shawn Collins - Bank of America

Can you just talk about the dynamic and how you thought about that the increase to the dividend and the amount that you increased that you know 9% to 11% per annum? How you quantifiably came up to the range?

Graham Robjohns

Yeah, sure. I mean basically every time we make an acquisition we do an accretion analysis and look at the expected income cash flow generation from the asset and take off reserve for placing CapEx -- making its CapEx and drive off down time and interest expense etcetera, etcetera, and arise at sales plus distributable cash flow. And then just simply what that new accretion obviously taking into account coverage off that as well and simply work that accretion to unit holders taking into account the new unit. I mean it's kind of the simple and finish the math if you like, and that what we are basically -- the distribution increase and we would kind of come down and we are just making that assessment when we make an acquisition and as opposed to sort of drip feeding the distribution increase over time.

Shawn Collins - Bank of America

Okay, great. That's helpful. I appreciate it. Tom, can you -- second question, can you comment on the new build outlook for FSRUs and for floating liquification units that you are seeing out there and how you think about that.

Graham Robjohns

I think on the FSRU side, I mean there are not too many. Obviously Golar has two that are under construction. The Eskimo that's actually being contracted and has one other that is uncontracted. And then others have the specific numbers, but maybe three or four other FSRUs under construction and one or two of those probably uncontracted at this time. And I know there are a number of difficult -- sort of to get a number but sending more opportunities and assets, and it's typical to your numbers -- you need to sort of find out at what level of development certain opportunities arrive. But there are a number of opportunities around the world in Africa, South America, Asia, Europe where people are looking to deploy FSRUs. I think our belief is that all of those (indiscernible) FSRUs including ours will find contracts and homes as they're delivered.

On the FLNG side, that's a very different (indiscernible) Golar Energy is looking at is actually converting an existing LNG carrier. It doesn't have under consideration of minutes anyway, a new build FLNG unit. There are a couple of other FLNG units that are being built obviously the most -- probably the most talked about one is the Shell units or the (indiscernible) project that is completely different scenario to what Golar is looking at and (indiscernible) but it does go up to $5 billion. It's a huge unit design to produce around 3.6 million tons of LNG and condensate and all the processing requirements you get out of a sort of mix field. Sorry; that is in the sort of asset that Golar was looking at, and I think the deployment of FLNG assets will be a bit more embryonic in markets than FSRUs and that will be more related to -- the assets will sort of fit with projects over time, maybe not perfectly, but I don't think you are suddenly going to see a splurge of speculative FLNG units.

Shawn Collins - Bank of America

Okay, that's great. Thank you very much for the insight and the time. I appreciate it.

Graham Robjohns

Thanks.

Operator

(Operator Instructions) We will now take our next question from Fotis Giannakoulis of Morgan Stanley. Please go ahead. Your line is open.

Fotis Giannakoulis - Morgan Stanley

Yes. Hi, Graham.

Graham Robjohns

Hi, Fotis.

Fotis Giannakoulis - Morgan Stanley

I'd like to clarify one thing about the FLNG that the company -- the parent companies working on right now. Are there any thoughts that the FLNG, when it's going to be delivered will not go to GMLP and it might end up at a separate MLP rather than Golar MLP partners, and the reason I'm asking is we've seen some significant movement on the parent stock based on the FLNG potential, but we haven't seen any movement on the GMLP stock.

Graham Robjohns

No, there is nothing contemplated, no.

Fotis Giannakoulis - Morgan Stanley

So, the thought is that to stay up to the potential dropdown to -- sorry.

Graham Robjohns

Yes.

Fotis Giannakoulis - Morgan Stanley

Okay. And can you give us the potential dropdown size and what is going to be the benefit for GMLP in terms of EBITDA of FLNG and the associated vessels that they'll be serving a project like that?

Graham Robjohns

I can't give you specific cost numbers and EBITDA numbers, but I can say little bit more generally that the significant benefit of GMLP is a number of things. One is the size. That's big transactions which leads to big potential distribution increases. They're likely to be longer term contracts on average than carriers and asset values. They're going to be extremely high margins. And obviously that sort of makes them expensive as well, but the fact the high margin is positive to the accretion potential. So that's a significant guiding change of GMLP as well as GLNG. And then of course in addition to that, as I mentioned earlier, each of these projects is going to come with the shipping requirements, and so that could mean additionally long-term contracted ships to GMLP to acquire as well.

Fotis Giannakoulis - Morgan Stanley

Can you remind us how many ships they will be required, assuming that FLNG is on the largest size of, let's say, 2.5 to 2.8 million tons per annum?

Graham Robjohns

Well, I mean it depends a little bit on the cost we are excited in where the LNG is going, but if you are assuming 2 or 2.5 million tons, I mean on average the current fleet one ship moves 1.5 million tons. If it's Australia to Japan, it's about one ship per million tons. If it's U.S. to Japan, it's 2.5 making three ships per million tons.

Fotis Giannakoulis - Morgan Stanley

So, 3 to 5 per unit on the larger scale, is that correct?

Graham Robjohns

Yeah.

Fotis Giannakoulis - Morgan Stanley

All right. And any views on the dividend increase that each FLNG assuming that is on the larger scale it can provide to GMLP?

Graham Robjohns

That's difficult to be specific about, but as I said, given the high margin and the large size of these things, it's going to be significant.

Fotis Giannakoulis - Morgan Stanley

Shall we think proportionally to the rest of that you have, right now, we saw something like 5% increase for FSRU perhaps three for an LNG carrier, can we think proportionally when the FLNG is going to be in place?

Graham Robjohns

I guess very simply it's a good place to sell.

Fotis Giannakoulis - Morgan Stanley

Okay, thank you very much, Graham.

Graham Robjohns

Okay, thanks.

Operator

There are no more questions at this time, sir.

Graham Robjohns

Okay. Well, thank you very much to everyone for joining today, and we look forward to speaking with you again next quarter. Thank you.

Operator

Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation. You may now disconnect.

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