(Höegh, 22.Aug.2019) — Höegh LNG Partners LP reported its financial results for the quarter ended June 30, 2019.
Highlights
— Reported total time charter revenues of $33.8 million for the second quarter of 2019 compared to $35.5 million of time charter revenues for the second quarter of 2018
— Generated operating income of $15.3 million, net income of $6.2 million and limited partners’ interest in net income of $2.8 million for the second quarter of 2019 compared to operating income of $28.9 million, net income of $19.9 million and limited partners’ interest in net income of $16.9 million for the second quarter of 2018
— Planned off-hire for the Höegh Gallant and maintenance with accelerated timing to allow completion during the scheduled drydock impacted operating income, net income and limited partners’ interest in net income in the second quarter of 2019
— Operating income, net income and limited partners’ interest in net income were impacted by unrealized losses on derivative instruments for the second quarter of 2019, compared with unrealized gains on derivative instruments for the second quarter of 2018, mainly on the Partnership’s share of equity in earnings (losses) of joint ventures in the second quarter of 2019 and 2018
— Excluding the impact of the unrealized gains (losses) on derivative instruments for the second quarter of 2019 and 2018 impacting the equity in earnings (losses) of joint ventures, operating income for the three months ended June 30, 2019 would have been $19.9 million, a decrease of $6.0 million from $25.9 million for the three months ended June 30, 2018
— Generated Segment EBITDA 1 of $31.0 million for the second quarter of 2019 compared to $36.9 million for the second quarter of 2018
— On August 14, 2019, paid a $0.44 per unit distribution on common and subordinated units with respect to the second quarter of 2019, equivalent to $1.76 per unit on an annualized basis
— On August 15, 2019, paid a cash distribution of $0.546875 per 8.75% Series A cumulative redeemable preferred unit (the “Series A preferred unit”), for the period commencing on May 15, 2019 to August 14, 2019
Steffen Føreid, Chief Executive Officer and Chief Financial Officer stated: “In the second quarter, the Partnership’s modern assets continued to perform according to contract, underpinning its stable distribution, however, the planned off-hire and maintenance during the scheduled dry-docking of two of the vessels weighed on the result. More broadly, global trade in LNG continues to increase year-on-year, driven by fuel-switching and new LNG production facilities coming on stream, which is fueling demand for more LNG import terminals. With an established platform of long-term contracts generating stable and predictable cash flows, Höegh LNG Partners is in a strong position to maintain its leadership position in the FSRU sector and grow as new opportunities crystalize.”
1 Segment EBITDA is a non-GAAP financial measure used by investors to measure financial and operating performance. Please see Appendix A for a reconciliation of Segment EBITDA to net income, the most directly comparable GAAP financial measure.
Financial Results Overview
Effective January 1, 2019, the Partnership adopted the new accounting standard, Leases, which did not change the timing or amount of revenue recognized for the Partnership.
The Partnership reported net income of $6.2 million for the three months ended June 30, 2019, a decrease of $13.7 million from net income of $19.9 million for the three months ended June 30, 2018. The net income for both periods was significantly impacted by unrealized gains and losses on derivative instruments mainly on the Partnership’s share of equity in earnings (losses) of joint ventures.
Excluding all of the unrealized gains (losses) on derivative instruments, net income for the three months ended June 30, 2019 would have been $10.8 million, a decrease of $5.6 million from $16.4 million for the three months ended June 30, 2018. Excluding the impact of the unrealized gains (losses) on derivatives, the decrease for the three months ended June 30, 2019 is primarily due to lower time charter revenue as a result of off-hire related to the drydock for the Höegh Gallant, lower other revenue related to the receipt of insurance proceeds associated with prior periods expenses and higher vessel operating expenses as a result of maintenance, principally for the Höegh Gallant but also for the PGN FSRU Lampung. These items were also the main drivers for the lower limited partners’ interest in net income, operating income and Segment EBITDA for the three months ended June 30, 2019 compared with the three months ended June 30, 2018.
Preferred unitholders’ interest in net income was $3.4 million for the three months ended June 30, 2019, an increase of $0.4 million from $3.0 million due to additional preferred units issued as part of the at-the-market offering program (“ATM program”). Limited partners’ interest in net income, for the three months ended June 30, 2019 was $2.8 million, a decrease of $14.1 million from limited partners’ interest in net income of $16.9 million for the three months ended June 30, 2018. Excluding all of the unrealized gains (losses) on derivative instruments, limited partners’ interest in net income for the three months ended June 30, 2019 would have been $7.4 million, a decrease of $6.0 million from $13.4 million for the three months ended June 30, 2018.
The Höegh Gallant had the equivalent of 16 days of off-hire due to the scheduled drydock for the three months ended June 30, 2019 compared with no days off-hire for the three months ended June 30, 2018. The PGN FSRU Lampung and the Höegh Grace were both on-hire for the full three months periods ended June 30, 2019 and 2018.
During the second quarter of 2019, the drydock was completed for the Höegh Gallant and the on-water class renewal survey commenced for the PGN FSRU Lampung. The opportunity was utilized to accelerate the timing of as many maintenance procedures as possible resulting in an increase in maintenance expenses of approximately $3.0 million for the three months ended June 30, 2019 compared with the three months ended June 30, 2018. Performing routine maintenance during the drydock reduces the risk of service interruption or off-hire in subsequent periods.
Equity in losses of joint ventures for the three months ended June 30, 2019 was $1.6 million, a decrease of $6.7 million from equity in earnings of joint ventures of $5.1 million for the three months ended June 30, 2018. The joint ventures own the Neptune and the Cape Ann. Unrealized gains (losses) on derivative instruments in the joint ventures significantly impacted the equity in earnings (losses) of joint ventures for the three months ended June 30, 2019 and 2018. The joint ventures do not apply hedge accounting for interest rate swaps and all changes in fair value are included in equity in earnings (losses) of joint ventures. Excluding the unrealized loss on derivative instruments for the three months ended June 30, 2019 and the unrealized gain on derivative instruments for the three months ended June 30, 2018, the equity in earnings (losses) of joint ventures would have been $3.1 million for the three months ended June 30, 2019, an increase of $1.0 million from $2.1 million for the three months ended June 30, 2018. Excluding the unrealized gains (losses) on derivative instruments, the increase was mainly due to higher time charter revenues related to the reimbursement of project costs in the three months ended June 30, 2019 and additional expenses for the three months ended June 30, 2018 in relation to a new project for the charterer related to the Cape Ann and higher maintenance expenses.
Operating income for the three months ended June 30, 2019 was $15.3 million, a decrease of $13.6 million from operating income of $28.9 million for the three months ended June 30, 2018. Excluding the impact of the unrealized gains (losses) on derivatives impacting the equity in earnings (losses) of joint ventures for the three months ended June 30, 2019 and 2018, operating income for the three months ended June 30, 2019 would have been $19.9 million, a decrease of $6.0 million from $25.9 million for the three months ended June 30, 2018.
Segment EBITDA 1 was $31.0 million for the three months ended June 30, 2019, a decrease of $5.9 million from $36.9 million for the three months ended June 30, 2018.
Financing and Liquidity
As of June 30, 2019, the Partnership had cash and cash equivalents of $27.1 million, an undrawn portion of $42.2 million of the $85 million revolving credit facility from Höegh LNG Holdings Ltd. (“Höegh LNG”) and an undrawn $63 million revolving credit facility under the $385 million facility. On August 12, 2019, the Partnership drew $48.3 million on the $63 million revolving credit facility under the $385 million facility. On August 13, 2019, the Partnership repaid $34.0 million on the $85 million revolving credit facility. As a result, the Partnership currently has undrawn balances of $76.2 million and $14.7 million on the $85 million revolving credit facility and $63 million revolving credit facility, respectively. Current restricted cash for operating obligations of the PGN FSRU Lampung was $8.0 million and long-term restricted cash required under the Lampung facility was $12.9 million as of June 30, 2019.
During the second quarter of 2019, the Partnership made quarterly repayments of $4.8 million on the Lampung facility and $6.4 million on the $385 million facility.
The Partnership’s book value and outstanding principal of total long-term debt was $472.5 million and $482.9 million, respectively, as of June 30, 2019, including long-term debt financing of the FSRUs and $42.8 million on the $85 million revolving credit facility. As of June 30, 2019, the Partnership’s total current liabilities exceeded total current assets by $12.4 million. This is partly a result of the current portion of long-term debt of $44.7 million being classified as current while restricted cash of $12.9 million associated with the Lampung facility is classified as long-term. The current portion of long-term debt reflects principal payments for the next twelve months which will be funded, for the most part, by future cash flows from operations. The Partnership does not intend to maintain a cash balance to fund the next twelve months’ net liabilities.
The Partnership believes its current resources, including the undrawn balances under the $85 million revolving credit facility and the $63 million revolving credit facility, are sufficient to meet the Partnership’s working capital requirements for its business for the next twelve months.
As of June 30, 2019, the Partnership did not have material commitments for capital or other expenditures for its current business. However, during the third quarter of 2019, the PGN FSRU Lampung will complete its on-water class renewal survey that commenced in the second quarter of 2019. Additional maintenance expenses for the PGN FSRU Lampung are expected to be incurred during the third quarter of 2019.
For the joint ventures, the Neptune will have an on-water class renewal survey during the third quarter of 2019. The majority of the survey expenditures are expected to be compensated by the charterer and the Neptune will remain on-hire. During the class survey of the Neptune, the joint venture expects to incur costs for certain capital improvements that will not be reimbursed by the charterer for which the Partnership’s 50% share is expected to be approximately $0.2 million for the year ended December 31, 2019. As discussed in note 14 under “Joint ventures claims and accruals” in the Partnership’s unaudited condensed interim consolidated financial statements for the period ended June 30, 2019, the joint ventures have a probable liability for a boil-off claim under the time charters. The Partnership’s 50% share of the accrual was approximately $11.9 million as of June 30, 2019. The joint ventures will continue to monitor this issue and adjust accruals, as might be required, based upon additional information and further developments. The claim may be resolved through negotiation or arbitration. To the extent that excess boil-off claims result in a settlement, the Partnership would be indemnified by Höegh LNG for its share of the cash impact of any settlement. However, other concessions, if any, would not be expected to be indemnified.
As of June 30, 2019, the Partnership had outstanding interest rate swap agreements for a total notional amount of $381.9 million to hedge against the interest rate risks of its long-term debt under the Lampung facility and the $385 million facility. The Partnership applies hedge accounting for derivative instruments related to those facilities. The Partnership receives interest based on three month US dollar LIBOR and pays fixed rates of 2.8% for the Lampung facility. The Partnership receives interest based on the three month US dollar LIBOR and pays a fixed rate of an average of approximately 2.8% for the $385 million facility. The carrying value of the liability for derivative instruments was a net liability of $15.6 million as of June 30, 2019. The Partnership adopted the revised guidance for Derivatives and Hedging, Targeted Improvements to Accounting for Hedging Activities on January 1, 2019 on a prospective basis. Amortization amounts reclassified or recorded to earnings for the Partnership’s interest rate swaps for the three months ended June 30, 2019 are presented as a component of interest expense compared with the presentation in previous periods in the gain (loss) on derivatives instruments line item in the consolidated statements of income.
The Partnership’s share of the joint ventures is accounted for using the equity method. As a result, the Partnership’s share of the joint ventures’ cash, restricted cash, outstanding debt, interest rate swaps and other balance sheet items are reflected net on the line “accumulated losses in joint ventures” on the consolidated balance sheet and are not included in the balance sheet figures disclosed above.
On May 13, 2019, the Partnership drew $3.5 million under the $85 million revolving credit facility.
On May 15, 2019, the Partnership paid a quarterly cash distribution of $15.0 million, or $0.44 per common and subordinated unit, with respect to the first quarter of 2019.
On May 15, 2019, the Partnership paid a cash distribution of $3.4 million, or $0.546875 per Series A preferred unit, for the period commencing on February 15, 2019 to May 14, 2019.
On August 12, 2019, the Partnership drew $48.3 million on the revolving credit facility under the $385 million facility. On August 13, 2019, the Partnership repaid $34.0 million on the $85 million revolving credit facility.
On August 14, 2019, the Partnership paid a cash distribution of $15.0 million, or $0.44 per common and subordinated unit, with respect to the second quarter of 2019, equivalent to $1.76 per unit on an annual basis.
On August 15, 2019, the Partnership paid a cash distribution of $3.4 million, or $0.546875 per Series A preferred unit, for the period commencing on May 15, 2019 to August 14, 2019.
Outlook
As discussed under “Financing and Liquidity” above, there is additional maintenance expense expected during the on-water renewal class survey for the PGN FSRU Lampung during the third quarter of 2019.
A subsidiary of the Partnership, as the owner of the Höegh Gallant, has a lease and maintenance agreement with EgyptCo until April 2020. To date, the Partnership has not entered a new contract for the Höegh Gallant from April 2020. Pursuant to an option agreement, the Partnership has the right to cause Höegh LNG to charter the Höegh Gallant from the expiration or termination of the EgyptCo charter until July 2025, at a rate equal to 90% of the rate payable pursuant to the current charter with EgyptCo, plus any incremental taxes or operating expenses as a result of the new charter. Höegh LNG’s ability to make payments to the Partnership with respect to an exercise of the option by the Partnership may be affected by events beyond either of the control of Höegh LNG or the Partnership, including opportunities to obtain new employment for the vessel, prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, Höegh LNG’s ability to meet its obligations to the Partnership may be impaired. If Höegh LNG is unable to meet its obligations to the Partnership for the option, the Partnership’s financial condition, results of operations and ability to make cash distributions to unitholders could be materially adversely affected.
Pursuant to the omnibus agreement that the Partnership entered into with Höegh LNG at the time of the initial public offering, Höegh LNG is obligated to offer to the Partnership any floating storage and regasification unit (“FSRU”) or LNG carrier operating under a charter of five or more years.
Höegh LNG is actively pursuing the following projects that are subject to a number of conditions, outside its control, impacting the timing and the ability of such projects to go forward. The Partnership may have the opportunity in the future to acquire the FSRUs listed below, when operating under a charter of five years or more, if one of the following projects is fulfilled:
— On December 21, 2018, Höegh LNG announced that it had entered a contract with AGL Shipping Pty Ltd. (“AGL”), a subsidiary of AGL Energy Ltd., to provide an FSRU to service AGL’s proposed import facility in Victoria, Australia. The contract is for a period of 10 years and is subject to AGL’s final investment decision by the board of directors of AGL Energy Ltd. for the project and obtaining necessary regulatory and environmental approvals.
— Höegh LNG has also won exclusivity to provide an FSRU for potential projects for Australian Industrial Energy (“AIE”) at Port Kembla, Australia and for another company in the Asian market. Both projects are dependent on a variety of regulatory approvals or permits as well as final investment decisions.
Höegh LNG has two operating FSRUs, the Höegh Giant (HHI Hull No. 2552), which was delivered from the shipyard on April 27, 2017, and the Höegh Esperanza (HHI Hull No. 2865), which was delivered from the shipyard on April 5, 2018. The Höegh Giant is operating on a three-year contract that commenced on February 7, 2018 with Gas Natural SGD, SA (“Gas Natural Fenosa”). The Höegh Esperanza is operating on a three-year contract that commenced on June 7, 2018 with CNOOC Gas & Power Trading and Marketing Ltd. (“CNOOC”) which has an option for a one-year extension. Höegh LNG took delivery of the Höegh Gannet (HHI Hull No. 2909) on December 6, 2018, which serves on a 15 month LNGC contract with Naturgy. Höegh LNG has one additional FSRU, named Höegh Galleon, on order (SHI Hull No. 2220). The Höegh Galleon will operate on an interim LNGC contract with Cheniere Marketing International LLP (“Cheniere”) commencing in September 2019 following its delivery from the shipyard.
Pursuant to the terms of the omnibus agreement, the Partnership will have the right to purchase the Höegh Giant, the Höegh Esperanza, the Höegh Gannet and the Höegh Galleon following acceptance by the respective charterer of the related FSRU under a contract of five years or more, subject to reaching an agreement with Höegh LNG regarding the purchase price.
There can be no assurance that the Partnership will acquire any vessels from Höegh LNG or of the terms upon which any such acquisition may be made.
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