Höegh LNG Partners LP
Q2 2021 Earnings Call Transcript

Published: 26 Aug 2021

[Operator:]

Good day and welcome to the Hoegh LNG Partner Second Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. I would now like to turn the conference over to Sveinung Stohle, CEO. Please go ahead, Sir.

[Sveinung J. S. Stohle:]

Thank you, Rocco. Good morning, ladies and gentlemen, and welcome to Hoegh LNG Partners Earnings Call for the Second Quarter of 2021. For your convenience, this webcast and presentation are available on our website. With me today, I have Mr. Havard Furu, the CFO of the Partnership. Turn 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 the summary. You will have the opportunity to ask questions to both of us at the end of the presentation. Before we start, please take note of the forward-looking statements on page 3 and lastly 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. Thanks to the hard work of our people on board the vessels and onshore, the fleet are operating as expected despite the pandemic. Old revenues have been collected in accordance with the contract and terms. I am definitely happy to report that all units in the fleet had 100% availability in the quarter. This resulted in total revenues of 34.7 million and the segment EBITDA of 34.3 million in the quarter. In the quarter, the partnership has recorded a tax provision of 10.9 million following a tax audit for 2019 conducted by tax authorities in Indonesia. We disagree with this and will dispute the position taken by the tax authorities. After the end of the quarter, the charterer of PGN FSRU Lampung has served a Notice of Arbitration, an NOA, to declare the Lease and Maintenance Agreement, the LOM, null and void, and/or terminate the LOM and/or seek damages. The Partnership has served a reply refuting the claims as baseless and without legal merit. Both parties continue to perform their respective obligations under the LOM. Turning to page 6, where we address the PGN FSRU Lampung arbitration by letter dated July 13th, 2020 on the charter under the LOM raised certain issues with PT HLNG Lampung, a subsidiary of the partnership in relation to the operations of the PGN FSRU Lampung and the LOM. And further letter dated July 27th, 2021, stated that it would commence an arbitration against PT HLNG. On August 2nd, 2021, the charter served an NOA to declare the LOM null and void and or to terminate the LOM and or to seek damages. PT HLNG has served a reply refuting the claims by the charter as baseless, and without legal merit, and has also served a counterclaim against the charter or multiple breaches of the LOM. PT HLNG will take all necessary steps and will vigorously defend against the Charters ' claims in the legal process. Both parties are continuing to perform their respective obligations under the LOM. Turning to page 7, where we provide an update on the ongoing refinancing activities. First, PGN FSRU Lampung Debt facility. The commercial tranche of the Lampung facility becomes due in September 2021, and the export credit tranche can be called if the commercial tranche is not refinanced. The ongoing refinancing of the PGN FSRU Lampung credit facility, which had been scheduled to close by the end of the second quarter of 2021 is not yet completed due to the failure of the charter of the PGN FSRU Lampung to countersign certain customary documents related to the new credit facility. We have asked the existing lenders to approve a six months extension to the maturity date to allow for more time to complete the refinancing and have commenced discussions with existing vendors and certain other potential vendors about this. We expect that the terms of any alternative refinancing if we are successful in finalizing such refinancing, are likely to be less favorable than the terms of the originally agreed refinancing. No assurance can be given at this time as to the outcome of the dispute with the charterer of PGN FSRU Lampung or the aforementioned discussions with lenders. We are highly focused on securing a solution for this near-term issue. And we'll provide further information as and when such a solution is finalized. Neptune and Cape Ann debt facilities, progress is being made in relation to the refinancing of the Neptune facility and the Cape Ann facility, which mature and become payable by our joint ventures in November 2021 and June 2022, respectively. The vessels are on charter to Total and have more than 8 years remaining on those. Turning to page 8, we are showing the overview of the product ships lead to modern assets, where there are no changes since the previous quarter. The Partnership still has more than 8 years on average remaining contract. length. With that, I would like to hand over the word to Mr. Furu, who will take us through the financials.

[Havard Furu:]

Thank you, Sveinung, and good morning, everyone. Turning to page ten, we have the key figures for the quarter showing an operating performance which was slightly weaker than in the same port drove 2020 with a segment EBITDA of 34.3 million in the quarter, compared to 36 million in the same quarter of 2020. The partnership expense, significant financing costs in the quarter related to the refinancing on the Lampung debt facility, and also made a provision of 10.9 million for uncertain tax position as a consequence on tax audit in Indonesia. The limited partner's interest in the Neptune South was a loss of 1.2 million in the quarter down from a profit of 16 million in the same quarter of 2020. Moving to page 11, we are showing the development in key measures over time. And as you can see from the graph, the operating performance remains relatively stable. The only exception is the second quarter of 2019, which was impacted by the dry docking and maintenance of the whole gallons. Hoegh Grace completed its periodic survey during the second quarter this year. This was carried out afloat and did not cause significant downtime or off-hire. As opposed to the stable segment EBITDA you can see that our adjusted net income this quarter significantly negatively impacted by the tax provision I mentioned a moment ago. Moving to page 12, here we are showing the income statement in more detail. Total revenues of 34.7 million in the quarter were about 0.3 million more than in the same period in 2020. Vessel operating expenses of 6.1 million in the quarter are up by 0.3 million from the same period last year. Equity in earnings of joint ventures for the quarter was 3.3 million, a decrease from 6.5 million in the same period in 2020. Unrealized gains on derivative instruments impacted the equity and earnings on joint ventures for the second quarter of 2021 and 2020, respectively. Excluding these three items, the equity and earnings of joint ventures would have been 3.3 million this quarter, a decrease from 4.4 -- 4.2 million for the same period in 2020. Total financial expense of 10.2 million in the quarter, it was an increase of 3.6 million from the same quarter in 2020, mainly due to expense in debt issuance costs and commitment fees for the Lampung refinancing. This was partly offset with lower interest expense as debt is amortized. Income tax expense of 11.2 million in the quarter represents an increase of 9.8 million from the same quarter of 2020, mainly due to the tax provision made in the quarter. Turning to page 13, the balance sheet has not changed much since year-end 2020, and with total liabilities and equity standing at just below 1 billion at the end of the quarter. As already mentioned earlier in this presentation, the refinancing of the Lampung debt facility and the Neptune and Cape Ann debt facilities is ongoing. I'll now hand it back to Mr. Stohle to take us through the remaining part of the presentation.

[Sveinung J. S. Stohle:]

Thank you, Havard. So for the market, turning to page 15. As you can see, global energy trades rose 5.3% year-on-year in the first half of 2021, and Asia continues to be the region with the highest growth in LNG import volumes. Where also China recorded an all-time high in LNG imports in the second quarter with 20.6 million tons. Turning to Page 16, we have two graphs illustrating the projected development in the global energy markets from now until 2025. The graph on the left shows the projected growth in LNG imports globally. As you can see, Global LNG demand growth is projected to remain robust and mainly driven by the Asian region, including existing or potential markets for FSRU import terminals, such as China, India, Pakistan, and Thailand. On the supply side, the incremental volume is projected to come for the most part from Europe and the Americas, which means more specifically the United States, and Russia. From 2020 to 2025, the market growth is projected to be 22%. With that, I would like to turn to page 18 for the summary where I would like to highlight the following. No material impact from COVID-19 pandemic to date. The 100% availability of the fleet resulting in stable operating performance and stable segment EBITDA. Our long-term contracts support both our refinancing activities and our deleveraging. And last but not least, strong market fundamentals. But with that, we will now open up for questions from the audience.

[Operator:]

Thank you. We will now begin the question and answer session. Today's first question comes from Chris Wetherbee of Citi. Please go ahead.

[Chris Wetherbee:]

Thanks for taking the question. A couple here. First, just on the Lampung. I guess, assuming that you can't reach a compromise on the existing charter, how quickly can it be redeployed in the market and maybe roughly speaking, what do you think the financial impact of beyond annual earnings when the op perspective.

[Sveinung J. S. Stohle:]

Well, thanks for that, Chris. First of all, we expect that we will find a resolution to this dispute. And that of course, is our base case. We think that the issues that have been raised as we have explained, are without merit and we think that there is room for a commercial arrangement. Having said that, obviously, our are used -- are all able to be redeployed from where they operate. And that normally would take a relatively short period of time. It all depends on when that decision is made and actually where it's going.

[Chris Wetherbee:]

Okay. I appreciate that. And then I don't know if this is possible to any sense on maybe the timing of potential resolution which you say you can come to a successful resolution with this contract term and any sort of window that you've been pointing us to that you feel pretty good about in terms of executing that?

[Sveinung J. S. Stohle:]

Well, I wish I could be more concrete on that, but where we are today is that this process has just been started. So it's very difficult to predict and I apologize, but I would have to leave it with that.

[Chris Wetherbee:]

Okay. No, I completely understand. And then maybe a couple of quick other ones here. Just on the Neptune and the Cape Ann refinancing. Any impact -- would you expect any impact to that process because of what's happening with the Lampung? Or does that operate completely walled off from what's going on there?

[Sveinung J. S. Stohle:]

So I can answer that. Those two assets are operating completely separate from the Lampung as you are aware, they are owned in a joint venture with other co-owners together with us and it is separate. So we don't expect any implications on the bucks refinancing process.

[Chris Wetherbee:]

Okay. Just sort of bear with me one last one on tax. Just want to make sure the tax issue that impacted the second quarter, is that something that we should expect to be ongoing or is that isolated to 2Q? And then we wouldn't expect to see something similar to this $10 million repeat again in 3Q or 4Q?

[Sveinung J. S. Stohle:]

We don't expect that to happen. The provision made, covers the tax for 2019, but it also covers potential additional liability for the other open tax year that could be subject to audit in Indonesia. So that's from 2016 until today.

[Chris Wetherbee:]

Okay. That's very helpful. Thanks for the time. I appreciate it.

[Sveinung J. S. Stohle:]

Sure. You're welcome.

[Operator:]

Our next question today comes from Ben Nolan (ph) at Stifel. Please go ahead.

[Ben Nolan:]

Hey, good afternoon. My first question relates clearly to the Lampung. Just curious if you can maybe give a little bit more color as to what it concerns more or what the reason that this has come up in the first place? What are they saying was the issue?

[Sveinung J. S. Stohle:]

On that point, unfortunately, these discussions and these processes are all confidential. I think what we have said -- previously is that it relates -- certain things relate to some operational matters, and some certain things relate to some contractual matters. I am afraid I cannot be more specific than that because I'm bound by confidentiality. So again, I apologize for that, but that's just the way it is.

[Ben Nolan:]

Okay. Yeah, I understand. And then as it relates to the credit facility from the sponsor, any color as to sort of why the sponsor is limiting your availability to draw down on the credit facility further, and why they chose to not or sort of they say that there is no intention of refinancing beyond 2023?

[Sveinung J. S. Stohle:]

I can start and then maybe Havard can add-in if it's necessary. I think the first point is the facility has an expiry date of 1 January 2023. And in order to give the partnership time to potentially make other arrangements, the Holding Company has given notice that it will not be extended. And I think the point there is that seeing from that side that the expectation is that for the future departments should basically be able to live within its own cash flow and the arrange its own financing. So that is the main reason for that decision by the holding Company.

[Havard Furu:]

Okay. And with respect to not having access to effectively draw more on what is currently available.

[Sveinung J. S. Stohle:]

Well, I think what has been said from the holding Company is that the holding Company will have limited possibility to make available further financing under that facility. And that's where it stands. It -- so the -- again, I think the main point again is that the expectation is that the partnerships should be able to live within their own cash flow and financing, finance their own activities, standing on their own feet.

[Ben Nolan:]

Okay. So you could draw down on the unfunded portion. Currently, the future is stated it's not that's available still, correct?

[Havard Furu:]

I can comment on that. It's available, but we kind of ruled out given the pending arbitration with the chart flow of the Lampung FSRU that the banks would have to actually accrue prior to drawing downs.

[Ben Nolan:]

Okay. All right, that's it for me. Thank you.

[Havard Furu:]

Thank you.

[Operator:]

And our next question today comes from Liam Burke, at B. Riley FBR. Please go ahead.

[Liam Burke:]

Thank you. And good afternoon. Could you step us through again your discussion on the interest expense for the quarter? There was something involved in the Lampung and could you just give me a little clarification on that?

[Havard Furu:]

Yes. Sure. Normally when we arrange to refinance, so financings, there are upfront fees to be paid and the fees to be paid to the lenders, and to pay a commitment fee from signing the finance documents until you make the drawdown. Those fees can normally be capitalized and amortized over the tenor of the facility. This time around, there is so much uncertainty around that new facility that we took a write-down of the costs involved with arranging that debt financing, so that is all charged to the second-quarter results. If I remember correctly, the amount is around $4,000,000 in charges totaled for the quarter, including legal costs.

[Liam Burke:]

Great. Okay. And Lampung is obviously a complicated situation both on the contract, on the charter side, and on the lending side. And do you seem comfortable that there are enough lenders involved, even understanding that you are in dispute on the current charter, that they are willing to move forward on the refinancing?

[Sveinung J. S. Stohle:]

I think that's a good question. I think what we've said also in the release is that we've asked for a six-month extension, and that is not in place, but that is our main objective right now. And assuming that that is approved by the current lending group, then we believe we will have enough time to find a resolution to the refinancing of the Lampung facility.

[Liam Burke:]

Great. Thank you very much.

[Sveinung J. S. Stohle:]

Sure.

[Operator:]

For my next question today comes from Ted Johong with Cooperative Holding Corporation. Please go ahead.

[Ted John:]

Good morning, gentlemen. First of all, let me be a little bit more outspoken in some of the other questioners. I think that the announcement that you made on July 27 with no follow-up for a month is totally out -- improper as far as reporting to shareholders. This is a major hit for almost anybody who's participated in the ownership with this Company and to wait a month to get a very vague explanation as to what's happening to me is unconscionable and I don't mind saying it as frankly as I can. My question to you has to do with what happens with the -- if you are unable to refinance the charter? Explain to me -- us -- to us exactly what will be the results to the Company if the charter cannot be refinanced?

[Havard Furu:]

I mean. Let me start. First of all, our view is that we will be able to refinance that. So that is not really an option that we look at. And I think also all parties involved there, in particular, the banks will have a very strong interest, that we do find a resolution to refinance this. So, and the key here is to give -- to get ourselves some more time. And we believe that we will get an extension. And therefore, our view is that we will find a resolution with the existing banking group after having some further discussions with them.

[Ted Johong:]

With respect to the arbitration, I understand what confidentiality agreements represent, but is there a reason why something which is -- which should be in the public domain as to what is being accused by the charterer is not discussed. We have no way of knowing whether or not the merits of their claim are and the total absence of any information is very distressing.

[Havard Furu:]

I can only sympathize with that and I understand that that is obviously not what you would like to see, but again, the agreements we have in place put a very strong confidentiality umbrella over these discussions and the whole arbitration process. So I am -- this is a legal process and I am not at liberty to -- because I'm bound of the confidentiality to give any details around the process itself. I apologize for that, but that is just the way it is.

[Ted Johong:]

And my last question is, can you give us an idea what is the status of your arbitration as of today, and what is the timing for any type of decision to resolution?

[Havard Furu:]

The status is that the arbitration process formerly has just started and that both parties have filed their claims and counterclaims. That's where we are today.

[Ted Johong:]

So you have no sense of timing, it could be a week, month, or a year?

[Havard Furu:]

I mean, I would hesitate to give any firm timing on that. It just started out. I'd like to say that these types of processes, normally you have a legal process and then you have a commercial process going in parallel. And the expectation is that that would be the case also here. So hopefully we will have a resolution of this sometime in the future. But I cannot give you any specific timeline. It's too early for that.

[Ted Johong:]

Now the final question, the final statement is a major disappointment in a major financials lot of people and I certainly hope that this charter is way off track and that you really do have a defense to this because otherwise, this Company is a disaster. End of my conversation.

[Havard Furu:]

Okay, understood.

[Operator:]

And ladies and gentlemen, this concludes the question-and-answer session, I would like to turn the conference back over to Sveinung Stohle for closing remarks.

[Sveinung J. S. Stohle:]

Yes. Thanks for that. Thanks, everybody for taking the time to participate. We appreciate that. Have a nice day, everybody.

[Operator:]

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.