Höegh LNG Partners LP (NYSE:HMLP) Q1 2022 Earnings Conference Call May 25, 2022 8:30 AM ET
Håvard Furu – Chief Financial Officer and Interim Chief Executive Officer
Conference Call Participants
Chris Wetherbee – Citi
Good morning, and welcome to the Höegh LNG Partners First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Note, this event is being recorded.
I would now like to turn the conference over to Håvard Furu, Chief Financial Officer and Interim CEO. Please go ahead.
Thank you, Andrea. And good morning, ladies and gentlemen, and welcome to Höegh LNG Partners earnings call for the first quarter of 2022. My name is Håvard Furu and I’m the Chief Financial Officer of the Partnership. And I also fill the role as Interim CEO. For your convenience, this webcast and presentation is available on our website.
Turning to Page 2 in today's presentation, we have an overview of the content of the presentation. I will start with some highlights from the first quarter and then cover the quarterly financials. Thereafter, I will give a market update before summarizing the presentation. You will have the opportunity to ask questions at the end of the call.
Before we start, please take note of the forward-looking statements on Page 3 and the glossary on Page 4. Then turning to Page 5 and the highlights, I’m pleased to report that the fleet had 100% availability in the quarter. This resulted in total revenues of $35.3 million and a segment EBITDA of $33.4 million in the quarter. As of today the Partnership has not been materially impacted by the COVID-19 pandemic. The Höegh LNG Group has taken steps to mitigate risks from COVID-19 and ensure the health and safety of our crews and staffs, which is our highest priority.
Thanks to the hard work of our people on both vessels and onshore, the fleet is operating as expected despite the pandemic. The Höegh Gallant commenced FSRU operation in Jamaica for New Fortress LNG towards the end of the first quarter. Despite the pending arbitration with the charterer under the lease and maintenance agreement for the PGN FSRU Lampung both parties have continued to perform their respective obligations under the agreement. No assurance can be given at this time as to the outcome of the disputes with the charterer. The refinancing of the Cape Ann debt facility, which was agreed on December 15, 2021 is expected to close on June 1, 2022.
Today, the Partnership announced it has entered into definitive merger agreement with Höegh LNG pursuant to which Höegh LNG will acquire, for cash, all of the outstanding publicly held common units of the Partnership, at a price of $9.25 per common unit. I will speak more about this on the next page.
Turning to Page 6, we cover the merger agreement with Höegh LNG. As mentioned, pursuant to the merger agreement, Höegh LNG will acquire, for cash, all of the outstanding publicly held common units of the Partnership, at a price of $9.25 per common unit. The revised price represents an increase of $5 when compared to the offer of $4.25 per common unit made by Höegh LNG on December 3, 2021 and a premium of 35% to the closing price of the Partnership's common units of $6.85 per unit yesterday.
In connection with the transaction, the Board of Directors of the Partnership directed the conflicts committee of the Board of Directors comprised solely of directors unaffiliated with Höegh LNG to consider Höegh LNG’s offer. Following a period of discussion with Höegh LNG and its advisors, the Conflicts Committee approved the merger agreement and determined that the merger agreement and the transactions contemplated thereby are in the best interests of the Partnership and the holders of the Partnership's common units unaffiliated with Höegh LNG.
Based on the recommendation of the Conflicts Committee, the Board of Directors unanimously approved the merger agreement and recommended that the Partnership's common unitholders approve the merger. The merger is expected to close in the second half of 2022, and is subject to approval of the merger agreement and the transactions contemplated thereby by a majority of the outstanding common units of the Partnership and certain regulatory filings and customary closing conditions. Höegh LNG owns 45.7% of the common units and has entered into a support agreement with the Partnership committing to vote its common units in favor of the merger. The Series A preferred units of the Partnership will remain outstanding.
Turning to Page 7. We are showing an overview of the Partnership’s modern assets. The Partnership has approximately 8.5 years average remaining contract length and full contract coverage until late 2026.
Turning to Page 9, we have the key figures for the quarter, showing an operating performance, which was weaker than in the same quarter of 2021 with a segment EBITDA of $33.4 million in the quarter compared to $34.5 million in the first quarter of 2021. The decrease is mainly due to increased administrative expenses. The Limited partners' interest in net result was $16.3 million in the quarter, down from $20 million in the same quarter of 2021.
Turning to Page 10, we are showing the development in key measures over time. And as you can see from the graphs, the operating performance remains relatively stable. Two quarters have marked negative deviations, the second quarter of 2019 and the second quarter of 2021. In the first instance, the deviation was primarily caused by the drydocking and maintenance of the Höegh Gallant in 2019. The deviation in the second quarter of 2021 was primarily caused by a tax provision for previous periods following a result of a tax audit, which we disagreed to and have disputed.
Turning to Page 11. Here, we are showing the income statement in more detail. Total revenues of $35.3 million in the quarter was about $0.5 million more than in the same period in 2021. Vessel operating expenses of $6.2 million in the quarter were almost the same as in the same period last year.
Administrative expenses of $4.1 million in the quarter, were $1.4 million higher than in the first quarter of 2021. The increase is primarily caused by higher consultancy fees and audit fees. Equity in earnings of joint ventures for the quarter was $8.6 million, a decrease from $11.1 million for the same period of 2021. Unrealized gains on derivative instruments impacted the equity in earnings of joint ventures for the first quarter of 2022 and 2021 respectively. Excluding these derivative items, equity in earnings of joint ventures would have been $3.8 million this quarter, an increase from $3.4 million for the same period in 2021.
Total financial expense of $5.5 million in the quarter, equals a decrease of $0.7 million from the same quarter of 2021. Income tax expense of $2.8 million in the quarter represents an increase of $1.1 million from the same quarter of 2021.
Turning to Page 12. The balance sheet has not changed much since year end 2021 with total liabilities and equity standing at $1 billion at the end of the quarter. The $85 million revolving credit facility from Höegh LNG, which is currently drawn with $24.5 million is now classified as current liabilities as it matures on January 1, 2023.
Turning to Page 14 on the LNG markets. Global LNG trade rose 8% in the first quarter of 2022 compared to the first quarter of 2021. The LNG market witnessed a significant shift in regional demand with Europe in the driving seats. The European LNG import increased with an impressive 64% in the quarter – first quarter of 2022 compared to the first quarter of 2021 and LNG prices continue to be high. The high demand for LNG in Europe is to a large degree driven by uncertainty around access to Russian pipeline gas.
Turning to Page 15. We have two graphs illustrating the projected development in global LNG markets from now until 2026. In the chart to the left, the incremental volume supply is projected for the most part to come from the USA, Russia and the Middle East. The recent surge in demand and higher LNG prices have led to more long-term LNG sale and purchase agreements concluded lately bringing potential new liquefaction capacity closer to FID. This would potentially add to the long-term supply growth at the back end of this period.
The graph to the right shows the projected growth in LNG imports globally. As you can see, global LNG demand growth is projected to remain robust, mainly driven by the Asian region and Europe. In the current geopolitical situation, European countries seem to be determined to secure both LNG and LNG import capacity to safeguard the energy supply and shift away from Russian pipeline gas. This has recently led to an increased demand for FSRUs as the import facilities from countries, such as Germany, the Netherlands, Italy, Poland, Finland and others, typically looking to secure a large capacity FSRUs with prompt delivery.
With that, I turn to Page 17 for a summary where I would like to highlight the following. 100% availability of the fleet during the quarter, segment EBITDA of $33.4 million in the quarter, refinancing on the Cape Ann debt facility expected to close on June 1, 2032, merger agreement with Höegh LNG pursuant to which Höegh LNG will acquire for cash, all of the outstanding publicly held common units of the partnership at a price of $9.25 per common unit.
And with that, I think we will open for questions from the audience.
We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Chris Wetherbee of Citi. Please go ahead.
Great. Thanks. And thanks for taking the question. Maybe the first question is just on the transaction. So curious if you could sort of help us understand the $5 premium relative to the last offer price. If there’s some basis that was agreed upon on the back of that or how you think about sort of capturing that premium and ultimately, how it’s justified given this obviously strong market outlook that you have?
Yes. Thank you. Thank you, Chris. And as you’ve seen with the transaction was announced this morning and as we say in the press release, it has been an ongoing process, obviously between the conflicts committee and Höegh LNG negotiating and arriving at what has been agreed as the price details around this will follow in the proxy statement that will be prepared and published to the shareholders in a few weeks from now. So I need to wait with further details until the proxy statement is complete.
Okay. Okay. And then in terms – and I know back half close is what we’re thinking about. Do you have a rough sense of how many months you think you might need, obviously we need a shareholder vote, but then probably closing relatively shortly after that. Is this something that can get done in the third quarter? Or are we thinking fourth quarter?
It’s a bit hard to tell. I mean, first of all, the proxy statement needs to be prepared and then approved by SEC for filing. That could take one to two months. And then there will be a shareholder meeting as you say. So we think third quarter could be possible, but it’s also likely that it slides into the fourth quarter. That’s why we say during the second half.
Okay. That’s helpful. And then I guess the last question, just sort of taking a step back and thinking about the market a little bit more broadly. So clearly significant demand in the market for FSRUs a lack of capacity, and obviously the geopolitical situation in Europe has changed the perspective significantly over the past several months. How does Höegh take advantage of that? So what are sort of the strategic opportunities that you guys are looking at to try to leverage this just given the fact that you have 100% utilized fleet as it stands right now? I know that the merger’s happening, so maybe this is a moot point, but I’m kind of curious about how you guys think about taking advantage could persist for some time.
Yes. It’s a good question. And as you know, the partnership has full contract coverage until 2026. So there’s not much the partnership can do with existing assets. You may have seen that the parent has concluded two contracts into Europe recently it was announced two contracts to Germany. So the parent had assets available for short or almost immediate startup. So the parent has been able to utilize that market. And unfortunately, the partnership has full contract coverage. So that’s not much to do with that.
Okay. All right. Well, thanks very much for the time. I appreciate it.
Thank you for the great questions, Chris.
This concludes our question-and-answer session. I would like to turn the conference back over to Håvard Furu for any closing remarks.
Okay. Thank you. With that I would like to thank everyone for dialing in and participating on the call. Thank you and have a good day.
Conference is now concluded. Thank you for attending today’s presentation and you may now disconnect.