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ALTERA INFRASTRUCTURE LP (NYSE:TOO)
Q3 2020 Earnings Call
Nov 3, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Altera Infrastructure Third Quarter Earnings Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded.

Now for the opening remarks and the introductions, I would like to turn the call over to Ingvild Saether, Altera Infrastructure's President and Chief Executive Officer. Please go ahead.

Jan Rune Steinsland -- Chief Financial Officer

Before Ingvild begins, I would like to direct all participants to our website at alterainfra.com, where you will find a copy of the third quarter 2020 earnings presentation. Ingvild and I will take you through this presentation during today's conference call.

Please let me remind you that our discussion today contains forward-looking statements. Actual results may differ materially from results projected by those forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements are contained in the third quarter 2020 earnings release and earnings presentation that are available on our website.

I will now turn the call over to Ingvild to begin.

Ingvild Saether -- President and Chief Executive Officer

Thank you, Jan Rune. Hello, everyone, and thank you for joining us on our third quarter 2020 earnings call. With me today, I have Jan Rune Steinsland, CFO; and Duncan Donaldson, General Counsel of Altera Infrastructure Group.

Starting with Slide 3. Our large and diversified portfolio of forward revenues stands at approximately $4.2 billion dollars at the end of the third quarter. Majority of this revenue is secured under medium-term contracts, which provides significant cash flow stability to Altera. And this is before including any contract options or upsides from oil price and production tariffs on certain FPSO contracts.

Turning to Slide 4. Before providing an update on the actions we are taking in response to the COVID-19 pandemic, I wanted to provide a summary of our third quarter. In terms of financial results, we have converted from US GAAP to IFRS, and under IFRS, we have generated adjusted EBITDA of $140 million in the quarter. Jan Rune will walk you through more details on our financial results later in the presentation.

In terms of operating highlights, during the third quarter, we took delivery of Tide Spirit and Current Spirit, the third and fourth of the six E-Shuttle newbuildings. Tide Spirit joined our CoA fleet in the North Sea and commenced operations in October. The added capacity in our CoA fleet will provide more flexibility in servicing our customers, including a new five-year CoA contract with ENI for several broad [Phonetic] energy fields, that was awarded to us in the September. This new contract has the potential to utilize up to an additional 1.2 shuttle tankers.

Current Spirit will be operating for Equinor under a long-term master agreement for trading in the North Sea from November this year. In August, we signed a Towage contract that will require up to four vessels to tow the Liza Unity FPSO in mid-2021, and the secured day rates reflects the anticipated medium to long-term improvements in demand in the towage market.

Turning to Slide 5. Like all businesses around the world, we continue to actively manage the challenges and the risks related to COVID-19's unprecedented global impacts. During this time, our priority continues to be safe and reliable operations for which we have introduced several proactive measures to protect the health and safety of both our vessel crews and our onshore staff.

One work stream has been to have mitigating plants for outbreaks onboard our vessels. Unfortunately, at the end of October, we had confirmed COVID cases onboard one of our FPSO assets. The second work stream has been to find ways to carry out crew changes. Carrying out crew changes in a world that has closed down is very challenging, especially for crews who have to travel between continent. We are working through national and international associations to find ways to make this happen, and we are quite concerned what the second wave will do to the fragile global systems that are now in place.

I must say, I am extremely impressed by our crew and offshore workers in this situation and their flexibility and constructive attitudes. We keep very close dialogue between offshore and onshore. And as an example, we have created a COVID-19 hotline to support our offshore crew and address any concerns that may arise.

As mentioned previously, most of our revenues are secured under medium-term contract, and we do not expect these to be materially impacted by short-term volatility in oil prices. To-date, we have not experienced any material interruptions to our business and the financial impact has been limited to our Towage segments in the first and the second quarter.

We are actively monitoring our counterparts risk associated with all contracts. At this time, we have not identified any indications of insolvencies that would affect payment of outstanding receivables.

I will now turn it over to Jan Rune to discuss the financial results in more detail.

Jan Rune Steinsland -- Chief Financial Officer

Thank you, Ingvild. Turning to Slide 6. This has been a very active quarter for our finance and accounting teams, as we have converted from US GAAP to International Financial Reporting Standards, or IFRS. Under IFRS, we have generated adjusted EBITDA for the third quarter of 2020 of $140 million, which is down $13 million from the second quarter of 2020.

Our FPSO segment delivered an adjusted EBITDA of $58 million, down from $75 million in the second quarter. This decrease is mainly due to the Voyager FPSO coming off day rate and starting demobilization from June and due to low uptime on the Petrojarl I FPSO as certain wells were temporarily shut in while we installed and commenced new equipment. In addition, we have some further unplanned repair and maintenance.

The shuttle tanker segment recorded an adjusted EBITDA of $61 million, a decrease of $10 million due to somewhat lower North Sea volumes and the CoA crew [Phonetic] from seasonal maintenance on our clients' production installations. Decreasing earnings from our two DP1 shuttle tankers operating in the conventional tanker market and Navion Anglia being [Indecipherable] storage contract in early September.

Our FSO segment delivered an adjusted EBITDA of $21 million, up from $16 million in the second quarter. This increas is due to one-time cost in the second quarter related to the Dampier Spirit FSO, which ceased operations in September.

Finally, our long-distance Towage segment came in with an adjusted EBITDA of $1 million, a solid increase of $7 million from the second quarter. This is due to higher fleet utilization as market activity have generally picked up as travel restrictions have eased and projects have been restarted.

I will now turn the call back to Ingvild to cover our operating performance.

Ingvild Saether -- President and Chief Executive Officer

Thank you, Jan Rune. Turning to Slide 7. We continued to see solid economic uptime on our FPSO units. However, this quarter was slightly lower at 92%, due to the lower uptime on Petrojarl I as outlined by Jan Rune. In the third quarter, our team was very busy in developing solutions and robust cost estimates to assist our customers and return their projects to the decision stage. In August, we delivered on the partially paid competitive pre-FEED study with samples for an FPSO for the Australian Dorado field, and on the partially paid conflict [Phonetic] study with Equinor for the possible redeployment of an FPSO to the UK Rosebank field, West of Shetlands.

The Knarr FPSO is a strong candidate for redeployment in harsh waters. Knarr is relatively new and modern asset, and it was constructed to allow for electrification from some of its power requirements to be provided from shore, which could reduce operational CO2 emissions.

We see a strong interest from several parties, especially in light of the new Norwegian [Phonetic] tax incentive system targeted to stimulate investments in a COVID world. We have also made further progress in respect of outstanding disputes this quarter. In September, we have reached a settlement with the Dutch Shipyard, Damen, in relation to a long running and significant disputes over the refurbishment of the Petrojarl I FPSO. The parties agreed that no further payments were due by either party in respect of the claims made.

Looking at Slide 8, our Shuttle Tankers segment delivered strong technical uptime of 98% in the quarter. This is up from 91% in the second quarter due to an acquired claim [Phonetic] from a customer from one of the Shuttle Tankers. In terms of new contracts, we signed a five-year CoA contract with ENI for several broad [Phonetic] energy fields in September. Also in September, a two-year extension of the Skarv CoA was signed with Aker BP. This will extend the contract until minimum March 2023. In August, our customer, Premier exercised the one year option of a CoA contract for the Solan field, which is equivalent to 0.25 of a vessel.

Turning to Slide 9, our FSO segment achieved another quarter with 100% [Phonetic] technical uptime. In June, Equinor exercised the first of 12 options to expand the time charter contract for one more year until a minimum of October 2021. In September, the Dampier Spirit FSO ceased operations and is in the process of being exported from Australia for recycling in Turkey. Our team continues to work on the Pre-FEED contracts from BHP to develop a new build FSO for the Trion field in Gulf of Mexico. The FEED is expected to be awarded in 2021 to one of the three companies during the Pre-FEED and first oil is expected in 2025.

On Slide 10, you will see the results of the Towage segment. The fleet utilization has greatly increased to 72% as market activity has generally picked up and resulting in a positive EBITDA. Another highlight for the Towage segment is that we were awarded a contract by SBN to tow the Liza Unity FPSO to the Liza Field in Guyana. This will require up to four vessels and is expected to take place in mid-2021. After this project, we will work with up to five units on the Coral South project in Mozambique. And both of these contracts are at day rates above today's spot market and will contribute to the tightening of the market.

I will now turn it over to Jan Rune to give an update on the financing.

Jan Rune Steinsland -- Chief Financial Officer

Thank you, Ingvild. As you can see on Slide 11, we completed in July the amendment and a $106 million upsizing of the East Coast Canada Shuttle Tanker facility to include the fourth East Coast Canada vessel under construction. In October, this was approved by all parties to the loan agreements, and we canceled the $100 million [Indecipherable] ratio related to the newbuild. In August, we competed a $75 million tap issue of our senior unsecured green bonds that are due in October 2024. Tap issue was priced at $96.5 a part, but in a lower interest rate environments, and it has increased the total outstanding amount to $200 million. Net proceeds from the tap issue will be we used to partially fund the four first E-Shuttles in accordance with a green bond framework.

We have also agreed with Brookfield to upsize the general partner RCF from $125 million to $225 million, including $25 million of capitalized interest and to extend the maturity from October 2020 to October '24. We bear an interest rate of LIBOR plus 500 basis points, compared to the previous 700 basis points margin.

In September, we have announced a plan to repurchase a portion of the outstanding 8.5% senior notes due in 2023 and Series A, B and E preferred units through open market purchase and privately negotiated transactions. We will report on the progress of these repurchases in future earnings releases and/or press releases.

In September 2020, the Board of Directors of the general partner approved a relocation of the principal office in place of business of the partnership and the general partner from its current location, Bermuda to the UK. In connection with this, we will be closing our office in Bermuda and also relocating the headquarters of a number of subsidiaries from Bermuda to the UK and others to Norway. The aim is to reduce the complexity of the Group structure and better allow for future strategic management of the partnership by the general partner from the UK and the management of certain underlying assets from Norway.

We consider both UK and Norway as highly suitable jurisdictions, given the Group's history of substantial operations in the North Sea. The next is to European sources of investors in funding and the ease of doing business in well-established corporate and legal environments. We plan to complete the relocation to the UK in December 2020.

Effective September 30, 2020, their partnership adopted IFRS. Prior to the adoption of IFRS, the financial statements were prepared in accordance with US GAAP. Change to IFRS that also will be done to reduce complexity by aligning financial reporting with Brookfield. As a result, the 2019 and 2020 comparative financial information has been adjusted from amounts previously reported in accordance with US GAAP. The partnership's transition date is January 1, 2019, and a consolidated statement of financial position has been prepared as of that date and will be available in the report on form 6-K for the third quarter of 2020.

Turning to Slide 12, we have here included an updated debt maturity schedule as of third quarter, that includes all balloon payments as well as all schedule amortizations. The schedule also takes into account the changes to the East Coast Canada Shuttle Tankers financing that was completed in October, now that I just addressed.

In this context, I can also mention that the total remaining capex for our Shuttle Tanker newbuilding program, as of September 30, for the remaining two E-Shuttles and the Fourth East Coast Canada new building is approximately $265 million, of which approximately $243 million will be drawn on financing that we already have secured. In the maturity schedule, the $243 million are shown as fully drawn.

I will now hand it back to you, Ingvild.

Ingvild Saether -- President and Chief Executive Officer

Thank you. I wanted to conclude this presentation by summarizing our top priorities. The first is to continue to operate all our assets safely and reliably. In the COVID-19 world, there are a range of new methods that need to be considered and managed to deliver on this promise to our employees and to our customers.

To prepare for a new normal business environments, we are progressing our plants to enhance the overall liquidity in the business. We are doing this through several measures including optimizing both the offshore and onshore cost structures, managing discretionary spending, as well as limiting near-term capital expenditure to the committed Shuttle Tanker newbuilding program and mandatory vessels dry-docking.

We continue to simplify and reduce the complexity of our business. The carve outs of the services provided from the Teekay Group is completed and we drive toward a more streamlined and sustainable governance model with our corporate reorganizations.

Most of our clients have tightened and reduced their capital spending budgets in response to the volatile environments. On one hand, several offshore fields developments may get postponed or cancelled. On the other hand, tight capital spending may open for redeployments of FPSOs rather than newbuildings. Our focus is to have close and collaborative dialogue with our clients around these opportunities to unlock value for both parties by competitive and flexible redeployments compared to newbuilds.

We continue to take steps to optimize our capital structure for the current environment and for future growth opportunities, including the upsizing of certain debt facilities and the repurchases of securities as Jan Rune just talked about.

We need to prepare for a role that is not going back to normal soon. Our biggest near-term concern is the ability to get our crew home to their loved ones, and to get new crews onboard to our FPSOs and vessels.

This is a challenge we share with all other ship owners around the world and as we all know, the flow of goods at sea is a critical service for the global economy to function. The recent week's development in many countries gives us concern and makes us even more pressing to engage politicians and governments to find longer term solutions to the key workers that are essential for the energy transportation and all other essential goods moved at sea.

And with that, we open up for questions.

Questions and Answers:

Operator

[Operator Instructions] We can now take our first question from Sandy Burns from Stifel. Please go ahead.

Sandy Burns -- Stifel -- Analyst

Hi. Good morning and good afternoon, everyone. Maybe a few questions on the FPSO segment. As in prior quarters, you mentioned some of the Pre-FEED activity going on with some potential customers. I wonder if you could give any more color on how it is progressing, how are you feeling about it, and when you think a decision will be made by those potential customers as to whether to proceed or not, let's say the 2020 event or we would expect to hear something in 2021?

Ingvild Saether -- President and Chief Executive Officer

Yes. Good morning, Sandy, and thank you for the question. We have been quite busy actually over the last couple of quarters with these Pre-FEEDs that we talked about also in Q2. There is one for Santos for the Dorado field, there is one for Equinor for the Rosebank field development and we are also working with BHP on a Pre-FEED for an FSO for Mexico. And I think it is fair to say that the activity under these agreements are still ongoing, still in progress and we don't expect that there will be further decisions made in 2020. It will be 2021 activity for all of those Pre-FEEDs and studies.

Sandy Burns -- Stifel -- Analyst

Okay. And then also the economic uptime has trended down a little bit in the last two quarters or what I would say, kind of one-time events. So, should we expect to see that start to improve in 4Q and through 2021? Or will it still be some issues keeping it in the low 90s for the next quarter or two?

Ingvild Saether -- President and Chief Executive Officer

I would say both on the Shuttle Tanker segment and on the FPSO segment, we have had consistently very high uptime. In Q2, we had a one event on the Shuttle Tanker that reduced it somewhat that is now resolved and as you can see its high this quarter. In the FPSO segment, we had some technical issues on one of the FPSOs, Petrojarl I. as Jan Rune was talking about that has led to some reduced downtime in Q3, and we expect that that will also critical into Q4 and reduce the uptime somewhat in Q4. But it is not a trend, it's a one-time event.

Sandy Burns -- Stifel -- Analyst

Okay. And then last question for me, in terms of the security repurchases, you disclosed going forward on quarterly calls or releases such. Can you say anything since the announcement in late September, has the company made any new purchases of bonds or preferred stock at this point in time?

Jan Rune Steinsland -- Chief Financial Officer

Yes, following a quiet period, just after the announcements, we have been in the market in October in all four security classes. And as you say, we will report further on this later. So, I think we leave it there.

Sandy Burns -- Stifel -- Analyst

Okay, great. No, that is helpful. Thank you and good luck with everything.

Ingvild Saether -- President and Chief Executive Officer

Thank you, Sandy.

Operator

[Operator instructions] We can now take our next question from Michael Samuels from [Indecipherable].

Michael Samuels -- Analyst

Yes, actually, I was trying to get out of the queue. My question had been about the buyback. So, you just answered that. But thank you very much.

Jan Rune Steinsland -- Chief Financial Officer

Thanks.

Operator

[Operator instructions] And we have another question from Ryan Ball from Cambridge Global Asset Management. Please go ahead.

Ryan Ball -- Cambridge Global Asset Management -- Analyst

Good morning. How is everyone doing?

Ingvild Saether -- President and Chief Executive Officer

Great, thank you. How are you?

Ryan Ball -- Cambridge Global Asset Management -- Analyst

Good, thanks. Can I just ask a question, it looks like the option was accepted on the Itajai in Brazil. Is there any -- could you maybe comment on that a little bit and is there any read through potential for the other two Brazilian FPSOs that have contracts expiring over the next couple of years?

Jan Rune Steinsland -- Chief Financial Officer

Yes, it is true that on Itajai, there is a process where current petroleum is in process of buying the Bauna [Phonetic] field from Petrobras, and that's the field where the Itajai is operating. That transaction is about to close, it is approved by the governments. From our perspective, there are certain steps that will most likely take place this week and that is why we did not included in this quarterly earnings release. But that would then also imply a certain exercise of options and the firm period would be extended. So, I think we thought it was a little bit premature. So, we would like to come back with the details on that in the next release, but that transaction is just about to close.

Ryan Ball -- Cambridge Global Asset Management -- Analyst

Okay, can I maybe quickly ask, it looks like the direct operating costs were up in the quarter over last year, where it seems like a lot of the revenue decline was volume related. Could you speak to that a bit, that potentially some of the cost pressures due to COVID?

Jan Rune Steinsland -- Chief Financial Officer

No, we've had somewhat higher costs related to COVID in terms of crew changes, in relation to salaries for seafarers that are onshore and waiting to get off-shore, that is not impacting materially on the overall opex. There are some opex related to the mobilization of the new Shuttle Tankers, and that is of course coming without the corresponding revenue stream. In general, I would say, we are very focused on the onshore part of the cost, both the costs directly related to operations, but also the G&A parts.

And we see that is coming down both with efforts to reduce discretionary spending, but also from the initiatives where we gather management of the company in Norway from the carve-out with UK, where we streamlined the corporate structure and moved the headquarters to the UK, where we go to the same reporting language, accounting reporting language as Brookfield and so on. So, the headline of all of that is to simplify and to reduce complexity, and we are feeling we are doing steps in the right direction on that.

Ryan Ball -- Cambridge Global Asset Management -- Analyst

Okay. So basically the higher operating costs are based on the demobilization?

Jan Rune Steinsland -- Chief Financial Officer

Yes. I think what I offered now is what I can refer to.

Ryan Ball -- Cambridge Global Asset Management -- Analyst

Okay. Maybe just my last question is, you have provided some indication of the capex going forward on the three remaining Shuttle Tankers. How should we think about maintenance and the dry-docking expenses over the next few years on top of those capex related to the shores?

Jan Rune Steinsland -- Chief Financial Officer

Dry-dockings, we have 30 Shuttle Tankers or so and every five-years, there is a dry-docking. Normally, we are in the range of $12 million, $15 million to $25 million or so, depending on how many that are coming in and how lumpy that is. So, $15 million to $20 million or so per year.

Ryan Ball -- Cambridge Global Asset Management -- Analyst

Okay. Alright, thank you.

Jan Rune Steinsland -- Chief Financial Officer

Thanks.

Operator

We have no further questions on the line. At this time, I would now like to turn the call back to the host for any additional or closing remarks.

Ingvild Saether -- President and Chief Executive Officer

I just wants to thank everyone for joining the call today. It is challenging times out there. So stay safe, stay healthy. Thank you.

Operator

[Operator Closing Remarks]

Duration: 33 minutes

Call participants:

Jan Rune Steinsland -- Chief Financial Officer

Ingvild Saether -- President and Chief Executive Officer

Sandy Burns -- Stifel -- Analyst

Michael Samuels -- Analyst

Ryan Ball -- Cambridge Global Asset Management -- Analyst

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