Höegh LNG Partners LP (HMLP) Q3 2021 Earnings Call Transcript

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Höegh LNG Partners LP (HMLP)
Q3 2021 Earnings Call
Nov 18, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Hoegh LNG Partners Third Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Havard Furu, Chief Financial Officer and interim CEO. Please go ahead.

Havard Furu -- Interim Chief Executive Officer and Chief Financial Officer

Thank you, Anya, and good morning, ladies and gentlemen. Welcome to Hoegh LNG Partners' earnings call for the third quarter of 2021. My name is Havard 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 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 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 of 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 concluded a new long-term FSRU contract for the Hoegh Gallant. We also agreed [Phonetic] a 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 the new long-term FSRU contract for the Hoegh 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 Hoegh Gallant with a subsidiary of Hoegh LNG Holdings with effect from commencement of the new charter.

Under the suspension agreement, Hoegh 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 Hoegh Gallant for performance under the new charter will be shared 50/50 between Hoegh 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 will be further deferred 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 refinancing 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 two 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 two vessels are on charter with Total until late 2029 and mid-2030 respectively.

Turning to Page 8, we're showing 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 net 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 Hoegh 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. Unrealized gains on derivative instruments impacted the equity in earnings of joint ventures for the third quarter of 2021 and 2020 respectively. Excluding these items, equity in earnings of 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 $0.3 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. As already 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 import 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: no material impact from the 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 reduction of debt over time. We see strong market fundamentals.

We will now open up for questions from the audience.

Questions and Answers:

Operator

[Operator instructions] Our first question will come from Chris Wetherbee of Citigroup. Please go ahead.

Christian Wetherbee -- Citigroup -- Analyst

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.

Havard Furu -- Interim Chief Executive Officer and Chief Financial Officer

Yeah. Hi, Chris. Thanks for the question. This vehicle [Phonetic] 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.

Christian Wetherbee -- Citigroup -- Analyst

Okay, that's fine. Maybe we could pivot to the facility then for a moment. Can 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?

Havard Furu -- Interim Chief Executive Officer and Chief Financial Officer

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. And 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 the existing debt facilities were concluded [Indecipherable] 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.

Christian Wetherbee -- Citigroup -- Analyst

Okay, all right, that's helpful. Then maybe a final 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 Hoegh LNG in terms of that make-whole? 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?

Havard Furu -- Interim Chief Executive Officer and Chief Financial Officer

Yeah, certainly. And it's -- as we have commented, it's a modest increase. And talking numbers, it's limited to $3,000 a day step-up over that period from commencement of the new charter until July 2025.

Christian Wetherbee -- Citigroup -- Analyst

Okay. And that happens how often, I'm sorry, the $3,000?

Havard Furu -- Interim Chief Executive Officer and Chief Financial Officer

It's an increase in the day rates, so $3,000 per day.

Christian Wetherbee -- Citigroup -- Analyst

Okay, got it. Thank you very much.

Havard Furu -- Interim Chief Executive Officer and Chief Financial Officer

Thank you.

Operator

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

Havard Furu -- Interim Chief Executive Officer and Chief Financial Officer

Yes, thank you. So, 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

[Operator Closing Remarks]

Duration: 16 minutes

Call participants:

Havard Furu -- Interim Chief Executive Officer and Chief Financial Officer

Christian Wetherbee -- Citigroup -- Analyst

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