Golar LNG Partners L.P. announced it preliminary fourth quarter and financial year 2017 results.
· Golar LNG Partners LP (“Golar Partners” or “the Partnership”) reports net income attributable to unit holders of $25.4 million and operating income of $40.5 million for the fourth quarter of 2017.
· Generated distributable cash flow of $26.0 million1 for the fourth quarter with a distribution coverage ratio of 0.631.
· Closed a Series A Preferred Unit offering raising net proceeds of $133.0 million.
· Secured a 15-year contract for one of the Partnership’s two available FSRUs.
· Declared an unchanged distribution for the fourth quarter of $0.5775 per unit.
Financial Results Overview
Golar Partners reports net income attributable to unit holders of $25.4 million and operating income of $40.5 million for the fourth quarter of 2017 (“the fourth quarter” or “4Q”), as compared to net income attributable to unit holders of $26.5 million and operating income of $53.3 million for the third quarter of 2017 (“the third quarter” or “3Q”) and net income attributable to unit holders of $71.4 million and operating income of $72.1 million for the fourth quarter of 2016.
|(USD ‘000)||Q4 2017||Q3 2017||Q4 2016|
|Total Operating Revenues||90,113||105,635||114,942|
|Adjusted EBITDA 2||67,053||80,573||98,695|
|Other Financial Items||9,080||(2,034||)||20,556|
|Net Income attributable to Golar Partners Owners||25,355||26,543||71,443|
|Net Debt 3||1,069,228||1,171,153||1,264,336|
As anticipated, total operating revenues decreased, from $105.6 million in the third quarter to $90.1 million in the fourth quarter. Three key events contribute to the $15.5 million decrease. Firstly, the FSRU Golar Winter was off-hire for 52 days as a result of its scheduled dry-dock. This was 10 days longer than originally expected due to a general strike initiated by the shipyard’s workforce. Secondly, the sub charter arrangement with Golar LNG Limited (“Golar”) in respect of the carrier Golar Grand expired on November 1, 2017. From November 2, 2017, the Partnership receives hire at a reduced daily rate direct from the vessel’s oil major charterer. Thirdly, on November 30, 2017 the carrier Golar Maria completed its charter with ENI. After repositioning, Golar Maria secured spot business at market rates for 12 days and idled for the remaining 19 days of the quarter.
Despite repositioning costs incurred by the Golar Maria, 4Q voyage and commission expenses were $1.6 million lower than 3Q. Positioning the FSRU Golar Spirit to temporary layup contributed to the higher 3Q cost. Operating expenses at $15.4 million were also lower than the prior quarter. Savings as a result of the FSRU Golar Spirit being in layup accounted for a significant proportion of the $1.8 million reduction.
Administrative expenses at $5.5 million were $0.5 million higher than 3Q and also higher than average expected costs. Legal and advisory costs in connection with the forthcoming Hilli Episeyo acquisition and higher than average management fees accounted for the increase.
Depreciation and amortization at $26.6 million is in line with 3Q.
Interest expense at $18.4 million for the fourth quarter was lower than the third quarter at $19.9 million. Much of the $1.5 million decrease reflects savings following settlement of the outstanding NOK 304 million balance of the October maturing NOK 1,300 million high yield bond.
The $107 million from the put back of Golar Tundra and the additional $70 million deposited with Golar in connection with the agreement to acquire the interest in Hilli Episeyo has given rise to interest income at a rate of 5% which accounts for the increase in interest income from $2.1 million to $3.1 million in 4Q.
Other financial items recorded a gain of $9.1 million for 4Q compared to a 3Q loss of $2.0 million. Non-cash interest rate swap gains of $9.2 million, compared to a $4.3 million gain in 3Q, were augmented by a non-cash $1.6 million gain following a decrease in the mark-to-market valuation loss of the embedded derivative liability on the earn out units in connection with the Incentive Distribution Right (“IDR”) reset transaction. A loss of $2.5 million on this derivative was recorded in 3Q.
As a result of the foregoing, 4Q distributable cash flow1 was lower at $26.0 million compared to $41.0 million in the third quarter. As anticipated, the distribution coverage ratio1 decreased accordingly from 1.0 in 3Q to 0.63 in 4Q.
On November 1, 2017, the LNG carrier Golar Grand completed its charter with Golar. From November 2, 2017 through to May 2019 Golar Partners will receive revenue only from the vessel’s new oil major charterer. Although the new hire rate is significantly lower than the charter rate to Golar, the new charter also contains a series of options at increased rates.
On January 19, 2018 the Partnership executed a 15-year charter with an energy and logistics company for the provision of an FSRU in the Atlantic Basin. Golar Partners can nominate either of its two available FSRUs to service the contract provided that the nominated unit satisfies certain technical specifications ahead of project start-up, expected in the fourth quarter of 2018. The capital element of the charter rate will vary according to demand for regasification throughput but includes a cap and a floor that is expected to generate annual operating income before depreciation and amortization of between approximately $18 and $22 million. The charter includes an option after three years for the charterer to terminate the contract and seek an alternative regasification solution, but only in the event that certain throughput targets have not been met. Additionally, Golar Partners will have a matching right to provide such alternative solution. The charter also includes a 5-year extension option.
The nominated FSRU is expected to remain in service for up to 15-years without dry-dock. In the event that the Golar Freeze is selected to service this contract Golar Partners has the right to terminate its obligations under the current DUSUP charter whilst continuing to receive the capital element of the charter from DUSUP until April 2019. Modifications and dry-docking costs for the Golar Freeze are expected to cost approximately $15.0 million. Dry-dock, modification and re-activation costs for the Golar Spirit would be in excess of this.
An increasing number of emerging markets for LNG require smaller volumes on more flexible terms. Demand growth within these markets is also subject to higher levels of uncertainty. A large industrial user or small utility may represent initial anchor demand for an FSRU with the expectation that new end users will cluster around the anchor customer or that other users nearby will switch from more expensive fuels to take advantage of an FSRU’s underutilized regas capacity over time. An FSRU that provides for small scale offloading also allows for other less proximate demand to be met. Excess capacity that will never be utilized on larger and more expensive newbuild FSRUs undermines this business model. Golar Partners is in a good position to capitalize on this mid-size FSRU market with its remaining FSRU, ships available for conversion to suitably sized FSRUs and access to Golar’s proven low cost conversion model. Active discussions and negotiations with other potential customers continue, which include projects to convert LNGCs to FSRUs.
Golar Partners also continues to pursue re-contracting shipping opportunities for the LNG carriers Golar Maria and Golar Mazo which completed their long-term charters on November 30, 2017 and December 29, 2017 respectively. A dramatic reduction in prompt available vessels over the winter period meant that steam turbine vessels represented the majority of available tonnage on several occasions. Attracted by their lower rates, traders have also favored modern steam turbine vessels from time to time. Golar Maria and Golar Mazo have undertaken spot charters and although spot rates for these vessels have improved to levels close to $40kpd, utilization levels mean that revenues received currently cover little more than operating & voyage expenses. A reduction in opportunities for steam vessels is expected as the shoulder period between the winter and summer season approaches.
On August 15, 2017 the Partnership announced that it had entered into an agreement to acquire an equity interest in FLNG Hilli Episeyo. Equivalent to 50% of the two contracted liquefaction trains, out of a total of four, the common units also include a 5% stake in any future incremental earnings generated by the currently uncontracted expansion capacity but do not include exposure to the oil linked component of Hilli’s tolling fee.
FLNG Hilli Episeyo arrived in Cameroon in late November. Customs clearance, positioning, mooring hook-up and connection to the riser and umbilicals followed shortly thereafter. In early December a Notice of Readiness was tendered to Perenco and SNH. A ship-to-ship transfer of cool down LNG with the Golar Bear was completed in mid-December followed by the introduction of feed gas from the onshore processing plant. Full commissioning of the gas treatment systems is now substantially complete and they are running satisfactorily. Commissioning of the refrigerant trains continued through to February and first LNG production is expected to commence in the coming days. Although Golar reiterates the importance of taking the time it needs to safely commission the vessel, at this time, final commissioning followed by acceptance testing remains on track for mid-April. Subject to the satisfaction of certain conditions, including the acceptance of Hilli Episeyo under its contract with Perenco and SNH, closing of the acquisition also remains on track to take place on or before April 30, 2018.
The acquisition is expected to be an accretive transaction that will substantially increase the Partnership’s effective revenue backlog4. Distributable cash from the acquisition will be used to offset the expected reduction in earnings related to vessels with expiring contracts.
Once again the fleet performed well during the quarter achieving 100% availability for scheduled operations. After accounting for layup of the Golar Spirit and the scheduled dry-docking of the Golar Winter, utilization of 91% was recorded for the quarter.
On September 30, 2017 the FSRU Golar Winter entered a shipyard in Spain for its scheduled dry dock. On October 5, 2017 the shipyard’s workforce initiated a general strike which continued through to October 27, 2017. This resulted in 4Q offhire increasing to 52 days, 10 more than initially anticipated.
Financing and Liquidity
As of December 31, 2017, the Partnership had cash and cash equivalents of $247.0 million and restricted cash of $182.9 million. The Partnership’s total net debt3 as at December 31, 2017 was $1,069.2 million. Based on the above net debt3 amount and annualized5 fourth quarter 2017 Adjusted EBITDA2, Golar Partners’ net debt3 to Adjusted EBITDA2 ratio was 4.0. As of December 31, 2017, Golar Partners had interest rate swaps with a notional outstanding value of approximately $1,335.3 million (including swaps with a notional value of $400.0 million in connection with the Partnership’s bonds) representing approximately 99% of total debt and capital lease obligations net of long-term restricted cash.
The average fixed interest rate of swaps related to bank debt is approximately 1.7% with an average remaining period to maturity of approximately 3.4 years as of December 31, 2017.
Outstanding bank debt as of December 31, 2017 was $987.6 million, which had average margins, in addition to LIBOR, of approximately 2.52%. The Partnership also has a 2020 maturing $150.0 million Norwegian USD bond with a swapped all-in rate of 6.275% and a 2021 maturing $250 million Norwegian USD bond with a swapped all-in rate of 8.194%. At maturity on October 12, the NOK 304 million balance of the NOK 1,300 million bond and associated swap liabilities and accrued interest, collectively amounting to $54.0 million, were settled.
On October 31, 2017 the Partnership closed a 5.52 million $25.0 per unit 8.75% Series A Preferred Unit offering that raised net proceeds of $133.0 million. As perpetual equity without a refinancing requirement, the units are treated as equity on the balance sheet. Golar Partners has the option to redeem these units at any time after five years at par.
On December 20, 2017 the Partnership initiated the sale of common and General Partner units under its ATM facility established in September 2017. As at December 31, 2017, 145,675 common units and 2,973 General Partner units had been issued under this facility generating net proceeds of $3.3 million.
Corporate and Other Matters
As of December 31, 2017, there were 71,192,104 units outstanding in the Partnership. This includes 374,295 common units and 7,639 General Partner units issued on November 16 in connection with the first 50% of the IDR reset Earn-Out units and a further 145,675 common units and 2,973 General Partner units issued in connection with the Partnership’s ATM facility. Of the 71,192,104 units, 22,650,429, including 1,423,843 General Partner units, were owned by Golar, representing a 31.8% interest in the Partnership.
On January 25, 2018, Golar Partners declared a distribution for the fourth quarter of $0.5775 per unit for unitholders of record on February 7, 2018. Between January 1, 2018 and the record date a further 617,969 common units and 12,548 General Partner units were issued under the ATM facility generating net proceeds of $14.5 million. The distribution was paid on February 14, 2018 on total units of 71,822,621.
Total outstanding options as at December 31, 2017 were 99,000.
As anticipated, operating income for 1Q 2018 will be negatively impacted by an expected 54 days of scheduled seasonal offhire for the FSRU Golar Igloo, lower rates and levels of utilization achieved by the Golar Mazo and Golar Maria in the carrier spot market and a full quarter’s trading by the Golar Grand at her reduced daily rate. Coverage levels will be negatively impacted accordingly. Having anticipated this transition period for some time, coverage levels over prior periods have been increased such that an average ratio for the last three years up to the beginning of 4Q 2017 of 1.26 was achieved.
Including share of net income in affiliates, earnings should improve in 2Q during which the Partnership looks forward to closing the acquisition of its initial equity interest in FLNG Hilli Episeyo.
Underscoring the value of the Partnership’s existing assets and further underpinning the current distribution is the 15-year Atlantic FSRU contract due to commence in 4Q 2018. This new contract is expected to contribute around $0.4 billion of effective revenue backlog4. The Partnership believes that the level of interest in smaller scale LNG projects represents grounds for optimism for contracting its remaining uncontracted FSRU, however this is likely to take some time. Promising discussions for a converted FSRU that would utilize one of the steam carriers are also ongoing. The Partnership is planning to undertake this potential project in a joint venture with Golar Power.
The Partnership is in a transitional phase as its first vessels since IPO come off contract and redeliver into a somewhat different market. The acquisition of new assets; the Golar Eskimo in 2015 and in particular the interest in Hilli Episeyo have significantly helped to manage this transitional phase to add new contracted effective revenue backlog. The recent new 15-year FSRU contract and anticipated further new contracts are also supportive. Finally the Partnership has a solid free cash position of $247.0 million as at year end which it intends to invest in additional contracted assets as well as organic growth projects.
1Distributable cash flow is a non-GAAP financial measure used by investors to measure the performance of master limited partnerships. Distribution coverage ratio represents the ratio of distributable cash flow to total cash distributions paid. Please see Appendix A for a reconciliation to the most directly comparable GAAP financial measure.
2Adjusted EBITDA: Earnings before interest, other financial items, taxes, depreciation and amortization and non-controlling interest. Adjusted EBITDA is a non-GAAP financial measure used by investors to measure our performance. Please see Appendix A for a reconciliation to the most directly comparable GAAP financial measure.
3 Net Debt is a non-GAAP financial measure and is defined as short-term debt and current portion of long-term debt plus long-term debt plus obligations under capital leases less cash and cash equivalents less restricted cash. Please see Appendix A for a reconciliation to the most directly comparable GAAP financial measure.
4Revenue backlog and effective revenue backlog is defined as the contracted daily charter rate for each vessel multiplied by the number of scheduled hire days for the remaining contract term, which includes the Partnership’s pro-rata share of Hilli Episeyo revenues which are expected to be recorded as “Equity in net earnings of affiliates”.
5 Annualized means the figure for the quarter multiplied by 4.