This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
Hoegh LNG Partners LP Common Units representing Limited Partner Interests
Q2 2021 Earnings Conference Call
8/26/2021
spk04: Good day and welcome to the Hogue LNG Partners second 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 touch-tone phone. To withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Svendon Stola, CEO. Please go ahead, sir.
spk00: Thank you, Rocco. Good morning, ladies and gentlemen, and welcome to Fergal & G Partners' earnest call for the second quarter of 2021. For your convenience, this webcast and presentation is available on our website. With me today, I have Mr. Håvard Fyri, the CFO of the partnership. Turning to page two 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 three and the glossary on page four. Turning to page five 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 Höganygi 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 the vessels and onshore, The fleet is operating as expected despite the pandemic. All revenues have been collected in accordance with contractual terms. I am therefore 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 a 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 FSAU Lampung has served a notice of arbitration a 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 six, where we address the PGN-FSIU Lampung arbitration. By letter dated July 13th, 2020 on, the Charter under the LOM raised certain issues with PT Högel & G. Lampung, a subsidiary of the partnership, in relation to the operations of the PGN-FSIU Lampung and the LOM. and by further letter dated July 27, 2021, stated that it would commence arbitration against PT Hög LNG. On August 2, 2021, the Charter served a NOA to declare the LOM null and void and or to terminate the LOM and or to seek damages. PT Hög LNG 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 for multiple breaches of the LOM. PT Hög LNG will take all necessary steps and will vigorously defend against the Charter's claims in the legal process. Both parties are continuing to perform their respective obligations under the LOM. Turning to page seven, where we provide an update on the ongoing refinancing activities. First, PGN-FSAU Lampung debt facility. The commercial tranche of the Lampung facility becomes due end September 2021, and the export credit plan can be called if the commercial tranche is not refinanced. The ongoing refinancing of the PGN-FSAU 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 by the charterer of the PGE and FSHU Lampung to countersign certain customary documents related to the new credit facility. We have asked the existing lenders to approve a six-month extension to the maturity date to allow for more time to complete a refinancing and have commenced discussions with existing lenders and certain other potential lenders 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 original agreed refinancing. No insurance can be given at this time as to the outcome of the dispute with the Charter of PG&E Ulaanbaum or the aforementioned discussions with lenders. We are highly focused on securing a solution for this near-term issue and will provide further information as and when such solution is finalized. Neptune and Cape Anne debt facilities. Progress is being made in relation to the refinancing of the Neptune facility and the Cape Anne 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 eight years remaining on those. Turning to page 8, we are showing the overview of the partnership's fleet of modern assets, where there are no changes since the previous quarter. The partnership still has more than eight years average remaining contract length. With that, I would like to hand over the word to Mr. Furu, who will take us through the financials. Thank you, Sven, and good morning, everyone. 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 34.3 million in the quarter compared to 36 million in the same quarter of 2020. The partnership expensed significant financing costs in the quarter related to the refinancing of 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 partners' interest in the net result 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 graphs, 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 Hogue Gallants. Her grades 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 EBTA, you can see that our adjusted net income this quarter was 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 was 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 in earnings of joint ventures for the second quarter of 2021 and 2020, respectively. Excluding these derivative items, the equity in earnings of joint ventures would have been 3.3 million this quarter, a decrease from 4.2 million for the same period in 2020. Total financial expense of 10.2 million in the quarter equals an increase of 3.6 million from the same quarter in 2020, mainly due to expensing debt issuance cost 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, with total liabilities and equities 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 and debt facilities is ongoing. I will now hand it back to Mr. Söller to take us through the remaining part of the presentation. Thank you, Håvard. So for the market, turning to page 15, as you can see, global energy trade 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. We're 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 energy demand growth is projected to remain robust and mainly driven by Asian region, including existing or potential markets for FSIU 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. 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 deal averaging. And last but not least, strong market fundamentals. So with that, we will now open up for questions from the audience.
spk04: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Today's first question comes from Chris Weatherby at Citi. Please go ahead.
spk02: Hey, 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 would be on annual earnings from a top perspective?
spk00: Well, thanks for that, Chris. First of all, we expect that we 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 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.
spk02: Okay, I appreciate that. And then I don't know if this is possible. Is there any sense on maybe the timing of potential resolution? Let's just say you can come to a successful resolution with this contract term. Any sort of window that you can point us to that you feel pretty good about in terms of executing that?
spk00: 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. I apologize, but I will have to leave it with that.
spk02: Okay. I completely understand. And then maybe a couple of quick other ones here. Just on the Neptune and the Cape Ann refinancing, 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?
spk00: Paolo, would you like to answer? Yeah, so I can answer that. Sure. 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's separate. So we don't expect any implications on that refinancing process.
spk02: Okay, maybe just sort of bear with me here. 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 we wouldn't expect this to be something similar to the $10 million repeat again in 3Q or 4Q?
spk00: We don't expect that to happen. The provision made covers the tax audit for 2019, but it also covers potential additional liability for the other open tax years that could be subject to audit in Indonesia. So that's from 2016 until today. Okay.
spk02: That's very helpful. Thanks for the time. I appreciate it.
spk00: Sure.
spk04: You're welcome. Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press stars and one at this time. And our next question today comes from Ben Nolan at Stiefel. Please go ahead.
spk03: Hey, good afternoon. My first question relates clearly to the Lampung. I'm just curious if you can maybe give a little bit more color as to sort of what the concerns were or sort of what the, you know, the reason that this has come up in the first place. What are they saying today? was the issue.
spk00: Well, on that point, unfortunately, I mean, these discussions and these processes are all confidential. So I think what we have said previously is that certain things relate to some operational matters and certain things relate to some contractual matters. I'm 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.
spk03: 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 um, not, um, or, or sort of preemptively say that there's no intention of refinancing, um, beyond 2023.
spk00: Well, I can start and then maybe Hove can add in if necessary. I think the, the, the first point is the facility, um, uh, has a, has a, um, expiry date of the 1st of January of 2023. Um, and, um, 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, seen from that side, that the expectation is that for the future the partnership should basically be able to live within its own cash flow and arrange his own financing. So that is the main reason for that decision by the holding company.
spk03: Okay, and with respect to not having access to effectively draw more on what is currently available?
spk00: 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. So again, I think the main point again is that the expectation is that the partnership should be able to live within its own cash flow and finance its own activities standing on its own feet.
spk03: Okay, so you could draw down on the unfunded portion currently if you chose to. It's not... that's available still, correct?
spk00: I can comment on that. It's available, but we cannot rule out that given the pending arbitration with the charter of the Lampung FSU that the banks would have to actually approve prior to drawdown. Okay.
spk03: All right. That's it for me. Thank you.
spk00: Thank you.
spk04: And our next question today comes from Liam Burke at B Riley FBR. Please go ahead.
spk01: Thank you. And good afternoon. Um, could you step us through again, uh, your discussion on the interest expense for the quarter? Uh, there was something involved in the Lampong and it, could you just give me a little clarification on that?
spk00: Yeah, sure. Uh, so, Normally, when we arrange refinancings or financings, there are upfront fees to be paid and arrangement fees to be paid to the lenders. And you 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 financing. So that is all charged to the second quarter results. If I remember correctly, the amount is around $4 million in charges total for the quarter, including legal costs.
spk01: Right. 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're in dispute on the current charter, that they're willing to move forward on the refinancing?
spk00: 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.
spk01: Great. Thank you very much.
spk04: And our next question today comes from Ted Kohn with Cooperative Holding Corporation. Please go ahead.
spk05: Good morning, gentlemen. First of all, let me be a little bit more outspoken than some of the other questioners. I think that the announcement that you made on July 27th with no follow-up for a month is totally improper as far as reporting to shareholders. This is a major hit for almost anybody who's participated in the ownership of 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 if you are unable to refinance the charter. Explain to us exactly what will be the results to the company if the charter cannot be refinanced.
spk00: Well, 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 here, in particular the banks, will have a very strong interest that we do find a resolution to refinance this. And the key here is 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.
spk05: And with respect to the arbitration, I understand what confidentiality agreements represent. but is there a reason why something which should be in the public domain as to what is being accused by the charter is not discussed? We have no way of knowing whether or not what the merits of their claim is, and the total absence of any information is very distressing.
spk00: Well, 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 puts 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.
spk05: My last question is, can you give us any idea what is the status of the arbitration process as of today, and what is the timing for any type of a decision or resolution?
spk00: The status is that the arbitration process formally has just started and that both parties have filed their claim and counterclaims. That's where we are today.
spk05: So you have no sense of timing. It could be a week, a month, or a year.
spk00: I mean, I would... hesitate to give any firm timing on that. It's just started out. I'd like to say that these type 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.
spk05: Not a final question, final statement. There's a major disappointment and a major financial loss to an awful 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.
spk04: Okay, understood. And ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Simon Stonehouse for closing remarks.
spk00: Yes. Thanks for that. Thanks, everybody, for taking the time to participate. We appreciate that. So have a nice day, everybody.
spk04: 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.
Disclaimer