Höegh LNG Partners LP (HMLP) Q2 2021 Earnings Call Transcript

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Höegh LNG Partners LP (HMLP)
Q2 2021 Earnings Call
Aug 26, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Hoegh LNG Partners Second Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, today's event is being recorded.

I would now like to turn the conference over to Sveinung Stohle, CEO. Please go ahead, sir.

Sveinung J.S. Stohle -- Chief Executive Officer

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 is available on our website. With me today, I have Mr. Havard Furu, the CFO of the Partnership.

Turning 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 a 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 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 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 deposition[Phonetic] taken by the tax authorities. After the end of the quarter, the charterer of PGN FSRU 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 6 where we address the PGN FSRU Lampung arbitration. By letter dated July 13, 2021, the charterer under the LOM raised certain issues with PT Hoegh LNG Lampung, a subsidiary of the Partnership, in relation to the operations of the PGN FSRU Lampung and the LOM. And by further letter dated July 27, 2021, stated that it would commence arbitration against PT Hoegh LNG.

On August 2, 2021, the charterer served a NOA to declare the LOM null and void and/or to terminate the LOM and/or to seek damages. PT Hoegh LNG has served a reply refuting the claims by the charterer as baseless and without legal merit, and has also served a counterclaim against the charterer for multiple breaches of the LOM. PT Hoegh LNG will take all necessary steps and will vigorously defend against the charterer's 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 by the charterer 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-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 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 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 eight years remaining on those.

Turning to Page 8, we are showing the overview of the Partnership's fleet of modern assets. While 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.

Havard Furu -- Chief Financial Officer

Thank you, Sveinung, 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 drydocking and maintenance of the Hoegh Gallant.

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 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 revenue 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 equity standing at just below $1 billion at the end of the quarter. As already mentioned earlier in this presentation, the refinancing on the Lampung debt facility and the Neptune and Cape Ann debt facilities is ongoing.

I will now hand it back to Mr. Sveinung to take us through the remaining part of the presentation.

Sveinung J.S. Stohle -- Chief Executive Officer

Thank you, Havard. So, for the market, turning to Page 15. As you can see, global LNG 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, 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 LNG market 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 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, 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.

So with that, we will now open up for questions from the audience.

Questions and Answers:

Operator

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

Christian Wetherbee -- Citi -- Analyst

Yeah. 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 [Technical Issues]?

Sveinung J.S. Stohle -- Chief Executive Officer

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, [Indecipherable] are all able to being 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.

Christian Wetherbee -- Citi -- Analyst

Okay. 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?

Sveinung J.S. Stohle -- Chief Executive Officer

Well, I wish I could be more concrete on that, but I -- 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.

Christian Wetherbee -- Citi -- Analyst

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 rolled off from what's going on there?

Sveinung J.S. Stohle -- Chief Executive Officer

Havard, would you like to answer?

Havard Furu -- Chief Financial Officer

Yeah. So, I can answer that or I -- 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 refinancing costs.

Christian Wetherbee -- Citi -- Analyst

Okay. Thank you. 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 we wouldn't expect to see something similar to this $10 million repeat again in 3Q or 4Q?

Sveinung J.S. Stohle -- Chief Executive Officer

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 audits in Indonesia. So that's from 2016 up until today.

Christian Wetherbee -- Citi -- Analyst

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

Sveinung J.S. Stohle -- Chief Executive Officer

Sure. You're welcome.

Operator

[Operator Instructions] And our next question today comes from Ben Nolan at Stifel. Please go ahead.

Ben Nolan -- Stifel Nicolaus and Company -- Analyst

Hi, 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 more or sort of what the reason that this has come up in the first place? What are they saying with the issue?

Sveinung J.S. Stohle -- Chief Executive Officer

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 it relates -- certain things related to some operational matters and some certain things related 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.

Ben Nolan -- Stifel Nicolaus and Company -- Analyst

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 that credit facility further? And why they choose to not or sort of [Indecipherable] that there is no intention of refinancing beyond 2023?

Sveinung J.S. Stohle -- Chief Executive Officer

Well, I can start and then maybe Havard can add in if necessary. I think the first point is, the facility has an expiry date over the January 1, 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, 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 its own financing. So that is the -- that is the main reason for that decision by the holding company.

Ben Nolan -- Stifel Nicolaus and Company -- Analyst

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

Sveinung J.S. Stohle -- Chief Executive Officer

Well, I think the -- what has been said from the holding company is that the holding company have -- will have limited possibility to make available further financing under that facility. It -- and that's where it stands. So the -- 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 financing -- finance its own activities, standing on its own feet.

Ben Nolan -- Stifel Nicolaus and Company -- Analyst

Okay. So you could draw down on the unfunded portion currently if you chose to, it's not that's available still, correct?

Havard Furu -- Chief Financial Officer

I can comment on that. And it's available, but we cannot rule out given the pending arbitration with the charterer of the Lampung FSRU. But the banks would have to actually approve prior to drawdown.

Ben Nolan -- Stifel Nicolaus and Company -- Analyst

Okay. All right. That's it for me. Thank you.

Sveinung J.S. Stohle -- Chief Executive Officer

Thank you.

Operator

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

Liam Burke -- B. Riley FBR -- Analyst

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 -- Chief Financial Officer

Yeah, sure. So normally when we arrange refinancings or financings, there are upfront fees to be paid -- the [Indecipherable] fees to be paid to the lenders and we will pay a commitment fee from signing the finance documents until you make the drawdown. Those fees can normally be capitalized and amortized over the tenure 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.

Liam Burke -- B. Riley FBR -- Analyst

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

Sveinung J.S. Stohle -- Chief Executive Officer

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 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 -- B. Riley FBR -- Analyst

Great, thank you very much.

Sveinung J.S. Stohle -- Chief Executive Officer

Sure.

Operator

And our next question today comes from with Ted John[Phonetic] with Cooperative Holding Corporation. Please go ahead.

Ted John -- Cooperative Holding Corporation -- Analyst

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 27th 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 has 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 is as frankly as I can.

My question to you has to do with what happens with -- if you are unable to refinance a charter? Explain to me -- to us, exactly what will be the results to the Company if the charter cannot be refinanced?

Sveinung J.S. Stohle -- Chief Executive Officer

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. 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 John -- Cooperative Holding Corporation -- Analyst

And 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 -- what is being accused by the charterer 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.

Sveinung J.S. Stohle -- Chief Executive Officer

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'm not at liberty to -- because I'm bound to the confidentiality to give any details around the process itself. I apologize for that, but that is just the way it is.

Ted John -- Cooperative Holding Corporation -- Analyst

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

Sveinung J.S. Stohle -- Chief Executive Officer

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.

Ted John -- Cooperative Holding Corporation -- Analyst

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

Sveinung J.S. Stohle -- Chief Executive Officer

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 and it's too early for that.

Ted John -- Cooperative Holding Corporation -- Analyst

Another final question, final statement is a major disappointment in the major financial [Indecipherable] lot of people. And I certainly hope that this charterer is way off track and that you really do have to defend this because otherwise this company is a disaster. End of my conversation.

Sveinung J.S. Stohle -- Chief Executive Officer

Okay, understood.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Sveinung Stohle for closing remarks.

Sveinung J.S. Stohle -- Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 28 minutes

Call participants:

Sveinung J.S. Stohle -- Chief Executive Officer

Havard Furu -- Chief Financial Officer

Christian Wetherbee -- Citi -- Analyst

Ben Nolan -- Stifel Nicolaus and Company -- Analyst

Liam Burke -- B. Riley FBR -- Analyst

Ted John -- Cooperative Holding Corporation -- Analyst

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