Höegh LNG Partners LP
Q3 2021 Earnings Call Transcript

Published: 18 Nov 2021

[Operator:]

Good morning and welcome to the Höegh LNG Partners third quarter 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please 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.

[Håvard Furu:]

Thank you Anya, and good morning ladies and gentlemen. Welcome to Höegh LNG Partners earnings call for the third quarter of 2021. My name is Håvard Furu and I am the Chief Financial Officer of the partnership, and I also fill the role of 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 third 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 a look at the forward-looking statements on Page 3 and 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 Höegh 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 both vessels and onshore, the fleet is operating as expected despite the pandemic. All revenues have been collected in accordance with contractual terms. I’m therefore happy to report that all units in the fleet had 100% availability in the quarter. This resulted in total revenues of $35.6 million and a segment EBITDA of $35.1 million in the quarter. In the quarter, the partnership contributed a new long term FSRU contract for the Höegh Gallant. We also the deferral of the maturity date of the commercial tranche for the PGN FSRU Lampung debt facility. 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. After the end of the quarter, the partnership has received commitment letters for a so-called approved refinancing of the PGN FSRU Lampung debt facility’s commercial tranche. In addition, the loan agreement for refinancing the Neptune’s debt facility has also been signed. I will get back to this in a few minutes. Turning to Page 6, where we address a new long term FSRU contract for the Höegh Gallant. In September, the partnership entered into a 10-year FSRU contract with subsidiaries of New Fortress Energy with planned commencement in December 2021. The partnership also entered into an agreement to suspend the existing charter for the Höegh Gallant with a subsidiary of Höegh LNG Holdings with effect from commencement of the new charter. Under the suspension agreement, Höegh LNG subsidiary will compensate the partnership monthly for the difference between the charter rate earned under the new charter and the charter rate earned under the existing charter with the addition of a modest increase until July 31, 2025, which is the original expiration date on the existing charter. Afterwards, the partnership will continue to receive the charter rate agreed with New Fortress Energy for the remaining term of the new charter. In addition, pursuant to the suspension agreement, certain capital expenditures incurred to prepare and relocate the Höegh Gallant for performance under the new charter will be shared 50/50 between Höegh LNG and the partnership, subject to a cap on the obligations of the partnership. Turning to Page 7, we provide an update on the ongoing refinancing activities. As for the PGN FSRU Lampung debt facility, the commercial tranche of the facility was recently due on September 29, 2021. During the third quarter, the maturity date was deferred to January 14, 2022 and we will further defer to March 29, 2022 if commitment letters and a term sheet for an approved refinancing, as defined in the Lampung facility agreement, are in place by December 29 this year. If an approved financing on the commercial tranche is not completed by the deferred maturity date, the associated export credit tranche can be called by the lenders. In November, the partnership received commitment letters and a term sheet for Lampung refinancing on the commercial tranche from a group of lenders. The partnership expects to complete the refinancing before the deferred maturity date subject to certain required approvals by export credit tranche lenders, completing documentation and customary closing conditions. The terms of the refinancing if the partnership is successful in finalizing it are likely to be less favorable than the terms of the originally agreed refinancing under the existing Lampung facility. When it comes to the Neptune and Cape Ann debt facilities, the joint ventures are at an advanced stage for refinancing of these facilities, which mature and become payable by our joint ventures on November 30, 2021 and June 1, 2022 respectively. The new loan agreement for Neptune has been signed and we expect that the new loan agreement for Cape Ann will be signed in December 2021. Subject to customary closing conditions, the refinancing of each of Neptune and Cape Ann is expected to be completed on or about the respective maturity dates of the existing debt facilities. The vessels are on charter with Total until late 2029 and mid-2030 respectively. Turning to Page 8, we show an overview of the partnership’s fleet of modern assets where the new charter with New Fortress Energy has been added since the previous quarter. The partnership has more than nine years average remaining contract length and full contract coverage until late 2026. Turning to Page 10, we have the key figures for the quarter, showing an operating performance which was slightly weaker than in the same quarter of 2020 with a segment EBITDA of $35.1 million in the quarter compared to $36.4 million in the third quarter of 2020. Limited partners interest in that result was $13.5 million in the quarter, down from a profit of $15.8 million in the same quarter of 2020. Turning to Page 11, 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. The deviation in the second quarter of 2021 was primarily caused by a tax provision for previous periods following the result of a tax audit, which we disagreed to and have disputed. Turning to Page 12, we are showing the income statement in more detail. Total revenues of $35.6 million in the quarter was about $0.3 million less than in the same period in 2020. Vessel operating expenses of $5.9 million in the quarter were almost the same as in the same period last year. Equity earnings of joint ventures for the quarter was $6.1 million, an increase from $5.8 million for the same period in 2020. Earnings less gains from instruments impacted the equity and earnings of joint ventures for the third quarter of 2021 and 2020 respectively. Excluding these items, equity and earnings from joint ventures would have been $3.8 million this quarter, an increase from $3.5 million for the same period in 2020. Total financial expense of $7 million in the quarter equals an increase of $0.2 million from the same quarter of 2020 mainly due to commitment fees incurred for the Lampung refinancing. Income tax expense of $2.8 million in the quarter represents an increase of $0.9 million from the same quarter of 2020. Turning to Page 13, the balance sheet has not changed much since year-end 2020 with total liabilities and equities standing at just below $1 billion at the end of the quarter. Also as I mentioned, the refinancing on the Lampung facility and the Neptune and Cape Ann debt facilities is ongoing. Turning to Page 15, we have--we are covering the LNG market. Global LNG trade rose by 10.5% year-over-year in the third quarter of 2021, and Asia keeps being the region with the highest growth in LNG in port volumes. China continues to increase its imports and shows strong growth of 13.2% year-on-year. Turning to Page 16, we have two graphs illustrating the projected development in the global LNG market from now until 2025. The graph on the left shows the projected growth in LNG imports globally. As you can see, the global LNG demand growth is projected to remain robust, mainly driven by the Asian region, including existing or potential markets for FSRU import volumes. Examples of this are China, India, Pakistan, and Thailand. On the supply side, the incremental volume is projected for the most part to come from Europe and the Americas, more specifically the USA and Russia. From 2020 to 2025, the market growth is projected to be around 22%. With that, I turn to Page 18 for a short summary, where I would like to highlight the following

[Operator:]

The first question will come from Chris Wetherbee of Citigroup.

[Chris Wetherbee:]

Hey, great. Thanks for taking the question. Maybe wanted to start with the Lampung and understanding if there’s an update on the timing of the arbitration, sort of what are the next steps in the process, and if we have any sense of what the potential resolution might look like with that vessel.

[Håvard Furu:]

Yes, hi Chris. Thanks for the question. This vehicle with the charterer of the Lampung is subject to strict confidentiality, so I’m afraid I can’t give much comment to that. It’s still early days for an arbitration process and we expect it will take time, and we don’t have much more than that to share, unfortunately.

[Chris Wetherbee:]

Okay, that’s fine. Maybe we could pivot to the facility then for a moment. You talk about the potential for a step-up in the interest expense on the renegotiated facility, assuming it kind of goes through as expected. Can you give us a sense, when we think about that and then we think about the Neptune and Cape Ann debt facilities, maybe a bigger picture question about the debt expense as we move forward. How should we be thinking about the next couple quarters, or maybe if you think about 2022, what is the run rate interest expense we should be thinking about for the business?

[Håvard Furu:]

It’s a bit hard to comment on the final terms for the Lampung facility, given that we’re not at the point where we are ready to complete it, but we do see that it will be slightly more expensive. We will have to get back with more details on that when it’s completed. As for the Neptune and Cape Ann, I think the interest expense for the two joint ventures are going to continue around the same level as today, a slight uptick in the margin. As to the existing debt facilities, we concluded where the margin was very, very slim, but overall I think interest expense will increase slightly on the back of that, but of course the debt is being amortized, so it’s coming down year by year.

[Chris Wetherbee:]

Okay, all right, that’s helpful. Then maybe a question just on the Gallant, wanted to get a sense of--could you maybe give us a little bit more color on the potential step-up that’s included from Höegh LNG in terms of that make-whole, right? So there’s a make-whole provision, it sounds like that steps up progressively through the duration of the original charter terms. Can you just give us a sense of what that might mean for the economics of that vessel?

[Håvard Furu:]

Yes, certainly. As we have commented, it’s a modest increase, and talking numbers, it’s limited to $3000 a day step-up over that period from commencement of the new charter until July 2025.

[Chris Wetherbee:]

Okay, and that happens how often - I’m sorry, the $3,000?

[Håvard Furu:]

It’s an increase in the day rate, so $3,000 per day.

[Chris Wetherbee:]

Okay, got it. Thank you very much.

[Håvard Furu:]

Thank you.

[Operator:]

This concludes our question and answer session. I would like to turn the conference back over to Håvard Furu for any closing remarks.

[Håvard Furu:]

Yes, thank you. Just to close the call, I would like to thank everyone for dialing in and participating. Thank you all, and have a good day.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation, and you may now disconnect.