Höegh LNG Partners reports profit drop

Hoegh-LNG-Partners

Höegh LNG Partners LP reported its preliminary financial results for the quarter ended December 31, 2019.

Highlights

• Reported time charter revenues of $38.5 million for the fourth quarter of 2019, compared to $37.3 million of time charter revenues for the fourth quarter of 2018
• Generated operating income of $27.9 million, net income of $18.7 million and limited partners’ interest in net income of $15.1 million for the fourth quarter of 2019 compared to operating income of $22.2 million, net income of $16.1 million and limited partners’ interest in net income of $12.8 million for the fourth quarter of 2018
• Operating income, net income and limited partners’ interest in net income were impacted by unrealized gains (losses) on derivative instruments for the fourth quarter of 2019 and 2018
• Excluding the impact of unrealized gains and losses on derivative instruments, net income for the three months ended December 31, 2019 would have been $14.6 million, compared to $17.3 million for the three months ended December 31, 2018. The decrease was mainly due to the assessment of $3.0 million of Indonesian property tax and penalties for the years 2015 through 2019 on the vessel during the three months ended December 31, 2019.
• Generated Segment EBITDA 1 of $34.6 million for the fourth quarter of 2019 compared to $37.5 million for the fourth quarter of 2018
• On February 14, 2020, paid a $0.44 per unit distribution on the common units with respect to the fourth quarter of 2019, equivalent to $1.76 per unit on an annualized basis
• On February 17, 2020, paid a $0.546875 per unit distribution on the 8.75% Series A cumulative redeemable preferred units (“Series A preferred units”) for the period commencing on November 15, 2019 to February 14, 2020, equivalent to $2.1875 per unit on an annualized basis

Steffen Føreid, Chief Executive Officer and Chief Financial Officer stated: “Höegh LNG Partner’s assets performed according to contract during the fourth quarter, resulting in a robust coverage ratio despite historical property taxes weighting on the result. More broadly, global trade in LNG continues to increase year-on-year, which together with competitive LNG pricing is having a positive impact on the demand for regasification services. With an established platform of long-term contracts, Höegh LNG Partners is in a strong position to maintain its leadership position in the FSRU sector and to grow as acquisition 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 for the three months ended December 31, 2019 of $18.7 million, an increase of $2.6 million from net income of $16.1 million for the three months ended December 31, 2018. The net income for the three months ended December 31, 2019 and 2018 were impacted by unrealized gains and losses on derivative instruments mainly on the Partnership’s share of equity in earnings (losses) of joint ventures.

Excluding the impact of all the unrealized gains and losses on derivative instruments, net income for the three months ended December 31, 2019 would have been $14.6 million, a decrease of $2.7 million from $17.3 million for the three months ended December 31, 2018. The positive impact of higher total revenues and lower income tax expense was offset by the negative impact of higher operating expenses and amortization of debt issuance cost. The main reason for the higher operating expenses was the assessment of $3.0 million of Indonesian property tax and penalties for the years 2015 through 2019 on the vessel during the three months ended December 31, 2019. The retroactive assessment was as a result of the issuance of a new regulation in 2019, defining Floating Storage and Regasification Units (“FSRUs”), as subject to Indonesian property tax.

Preferred unitholders’ interest in net income was $3.6 million for the three months ended December 31, 2019, an increase of $0.2 million from $3.4 million for the three months ended December 31, 2018 due to additional Series A 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 December 31, 2019 was $15.1 million, an increase of $2.3 million from limited partners’ interest in net income of $12.8 million for the three months ended December 31, 2018. Excluding all of the unrealized gains and losses on derivative instruments, limited partners’ interest in net income for the three months ended December 31, 2019 would have been $11.0 million, a decrease of $2.9 million from $13.9 million for the three months ended December 31, 2018.

Total revenues are comprised of time charter revenues and other revenue related to the PGN FSRU Lampung, the Höegh Gallant and the Höegh Grace for the three months ended December 31, 2019 and 2018. Time charter revenues for the three months ended December 31, 2019 were $38.5 million, an increase of $1.2 million from $37.3 million for the three months ended December 31, 2018. The increase mainly relates to higher revenues for the Höegh Gallant for the three months ended December 31, 2019. The Höegh Gallant was on hire for the entire fourth quarter of 2019, while there was a performance claim for the Höegh Gallant due to technical issues for the three months ended December 31, 2018.

Other revenue for the three months ended December 31, 2019 was $0.1 million, a decrease of $0.4 million from $0.5 million for the three months ended December 31, 2018. For the three months ended December 31, 2019, other revenue related to a final insurance settlement for the 2018 technical issues on the Höegh Gallant. For the three months ended December 31, 2018, other revenue consisted of insurance proceeds received for a claim related to the PGN FSRU Lampung’s activities from prior periods and the probable insurance recovery for repair expenses incurred for the Höegh Gallant.

All FSRUs were on hire for the entire fourth quarter of 2019.

Total operating expenses for the three months ended December 31, 2019 were $17.3 million, an increase of $2.9 million, compared with $14.4 million for the three months ended December 31, 2018. Total operating expenses consists of vessel operating expenses, administrative expenses and depreciation and amortization. Vessel operating expenses and administrative expenses increased by $2.0 million and $0.9 million, respectively, for the three months ended December 31, 2019 compared to the corresponding period of 2018, while depreciation and amortization was largely unchanged. The increase in vessel operating expenses was mainly due to higher expenses for the PGN FSRU Lampung.

During December 2019, the PGN FSRU Lampung was assessed with a Land and Building (“property”) tax and penalties of $3.0 million by the Indonesian authorities for the years 2015 through 2019. This was partially offset by reduced vessel operating expenses of approximately $1.1 million for the Höegh Gallant. For the three months ended December 31, 2018, the higher vessel operating expenses for the Höegh Gallant were due to the repair expenses incurred as a result of technical issues with the vessel. Higher administrative expenses for the three months ended December 31, 2019 were mainly due to higher legal costs and higher audit fees as a result of the first external audit of the Partnership’s internal controls over financial reporting.

Equity in earnings of joint ventures for the three months ended December 31, 2019 was $6.7 million, an increase of $7.8 million from equity in losses of joint ventures of $1.1 million for the three months ended December 31, 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 December 31, 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 gains for the three months ended December 31, 2019 and the unrealized losses for the three months ended December 31, 2018, the equity in earnings of joint ventures would have been $2.5 million for the three months ended December 31, 2019, a decrease of $0.5 million compared to equity in earnings of joint ventures of $3.0 million for the three months ended December 31, 2018. This decrease was mainly due to lower reimbursements for project activities for the charterer resulting in lower revenues for the three months ended December 31, 2019 compared with the corresponding period of 2018.

For additional information on the boil-off claim related to the time charters of the joint ventures refer to “Financing and Liquidity” below.

Operating income for the three months ended December 31, 2019 was $27.9 million, an increase of $5.7 million from operating income of $22.2 million for the three months ended December 31, 2018. Excluding the impact of the unrealized gains and losses on derivative instruments for the three months ended December 31, 2019 and 2018 impacting the equity in earnings (losses) of joint ventures, operating income for the three months ended December 31, 2019 would have been $23.8 million, a decrease of $2.6 million from $26.4 million for the three months ended December 31, 2018.

Segment EBITDA 1 was $34.6 million for the three months ended December 31, 2019, a decrease of $2.9 million from $37.5 million for the three months ended December 31, 2018.

Total financial expense, net for the three months ended December 31, 2019 was $7.4 million, an increase of $3.6 million from $3.8 million for the three months ended December 31, 2018. The increase was mainly due to a gain on derivative instruments for the three months ended December 31, 2018. As a result of adopting the revised guidance for Derivates and Hedging, Targeted Improvements to Accounting for Hedging Activities on January 1, 2019 on a prospective basis, the gain on the ineffective portion of the derivative hedge for the three months ended December 31, 2018 was not reclassified to other comprehensive income. There was no significant corresponding ineffectiveness during the three months ended December 31, 2019. Interest expense consists of the interest incurred, amortization of cash flow hedge, commitment fees and amortization of debt issuance cost and fair value of debt assumed for the period. Interest expense increased by $0.4 million in the fourth quarter of 2019 compared to the fourth quarter of 2018 mainly due to higher amortization of debt issuance cost on the $385 million facility which offset the impacts of repayment of outstanding loan balances for the loan facilities. On January 29, 2019, the Partnership entered into a loan agreement with a syndicate of banks (the “$385 million facility”) to refinance the outstanding balances of the loan facilities related to the Höegh Gallant (the “Gallant facility”) and the Höegh Grace (the “Grace facility”).

Income tax expense was $1.8 million for the three months ended December 31, 2019, a decrease of $0.5 million from $2.3 million for the three months ended December 31, 2018. In December 2019, the Indonesian authorities assessed $3.0 million of property tax and penalties on the vessel for 2015 through 2019. Excluding the penalties, the amount was deductible for corporate income taxes in 2019. The main reason for the decrease of $0.5 million in income tax expense was the tax impact of the deduction for the property tax in 2019.

Segments

The Partnership has two operating segments. The segment profit measure is Segment EBITDA, which is defined as earnings before interest, taxes, depreciation, amortization, impairment and other financial items (gain (loss) on debt extinguishment, gain (loss) on derivative instruments and other items, net). The two segments are “Majority held FSRUs” and “Joint venture FSRUs.” In addition, unallocated corporate costs, interest income from advances to joint ventures, and interest expense related to the outstanding balances on the $85 million revolving credit facility and the $385 million facility are included in “Other.” For additional information on the segments, including a reconciliation of Segment EBITDA to operating income and net income for each segment, refer to the description and the tables included in “Unaudited Segment Information for the Quarter Ended December 31, 2019 and 2018” beginning on page 18.

Segment EBITDA for the Majority held FSRUs for the three months ended December 31, 2019 was $28.3 million, a decrease of $1.6 million from $29.9 million for the three months ended December 31, 2018 mainly due to higher vessel operating expenses due to the inclusion of Indonesian property tax which was partially offset by higher total revenues.

Segment EBITDA for the Joint venture FSRUs for the three months ended December 31, 2019 was $8.1 million, a decrease of $0.7 million from $8.8 million for the three months ended December 31, 2018. This decrease was mainly due to lower reimbursements for project activities for the charterer resulting in lower revenues for the three months ended December 31, 2019 compared with the corresponding period of 2018.

For Other, Segment EBITDA consists of administrative expenses. Administrative expenses for the three months ended December 31, 2019 were $1.8 million, an increase of $0.6 million from $1.2 million for the three months ended December 31, 2018. The increase in expenses mainly related to higher audit and legal fees for the three months ended December 31, 2019 compared with the three months ended December 31, 2018.

Financing and Liquidity

As of December 31, 2019, the Partnership had cash and cash equivalents of $39.1 million. Current restricted cash for operating obligations of the PGN FSRU Lampung was $8.1 million and long-term restricted cash required under the Lampung facility was $12.6 million as of December 31, 2019. As of February 24, 2020, the Partnership had undrawn balances of $76.2 million and $14.7 million on the $85 million revolving credit facility and $63 million revolving credit facility, respectively.

During the fourth 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 $465.8 million and $474.9 million, respectively, as of December 31, 2019, including the Lampung and the $385 million facilities (including the associated $63 million revolving credit facility) and the $85 million revolving credit facility. As of December 31, 2019, the Partnership’s total current liabilities exceeded total current assets by $3.5 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 $12.6 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 cash flows from operations will be sufficient to meet its debt amortization and working capital needs for operations. In addition, the Partnership requires liquidity to pay distributions to its unitholders. The undrawn balances on the $85 million revolving credit facility to Höegh LNG Holdings Ltd. (“Höegh LNG”) and the $63 million revolving credit facility provide sources of liquidity reserves to supplement funding of its distributions and other general liquidity needs. 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.

In October 2019, the Partnership entered into a sales agreement with B. Riley FBR Inc. (the “Agent”) for a new ATM program and terminated the sales agreement under its prior ATM program. Under the terms of the new sales agreement, the Partnership may offer and sell up to $120 million aggregate offering amount of common units and Series A preferred units, from time to time, through the Agent, acting as an agent for the Partnership. Sales of such units may be made in negotiated transactions or transactions that are deemed to be “at the market” offerings, including sales made directly on the New York Stock Exchange or through a market marker other than on an exchange.

As of December 31, 2019, the Partnership did not have material commitments for capital expenditures for its current business. However, the joint ventures have a probable liability for a boil-off claim under the time charters for which an accrual of $23.7 million was recorded as of December 31, 2019. The Partnership’s 50% share of the accrual was approximately $11.9 million as of December 31, 2019. The claim has been subject to an arbitration process. The parties have continued discussions with the objective of reaching a negotiated solution to settle the boil-off dispute. In February 2020, each of the joint ventures and the charterer reached a commercial settlement addressing all the past and future claims related to boil-off with respect to the Neptune and the Cape Ann, in the context of the charterer’s efforts to deploy these vessels as FSRUs in projects under development. The settlement amount is in line with the accrual made by the joint ventures. Accordingly, the accrual was unchanged as of December 31, 2019. The settlement reached is subject to executing final binding agreements between the parties and the necessary board of directors’ and lenders’ approvals, which are expected to be finalized and signed during April 2020. Among other things, the settlement provides that 1) the boil-off claim, up to the signature date of the settlement agreements, will be settled for an aggregate amount of $23.7 million, paid in instalments during 2020, 2) the costs of arbitration will be equally split between the parties and each party will settle its legal and other costs, 3) the joint ventures have or will implement technical upgrades on the vessels at their own cost to minimize boil-off, and 4) the relevant provisions of the time charters will be amended regarding the computation and settlement of prospective boil-off claims. The Partnership will be indemnified by Höegh LNG for its share of the cash impact of the settlement, the arbitration costs and any legal expenses, the technical modifications of the vessels and any prospective boil-off claims or other direct impacts of the settlement agreement. The remaining costs to be incurred for the technical modifications of the vessels are estimated to be $0.8 million, of which the Partnership’s 50% share would be $0.4 million. Höegh LNG will indemnify the Partnership for the Partnership’s share of such costs.

In addition, the Partnership’s Indonesian subsidiary was assessed a property tax and penalties of $3.0 million by the Indonesian authorities for the period from 2015 through 2019. The assessment was due to the issuance of the Indonesian Minister of Finance’s Decree No. 186/PMK.03/2019 (“PMK 186/2019”) which includes Floating Storage and Regasification Units (“FSRUs”) as a “Building” subject to the tax. The property tax and penalties were paid in February 2020 from cash flows from operations. The Partnership’s Indonesian subsidiary plans to appeal the assessment. Depending on the level of appeal pursued, the appeal process could take a number of years to conclude. There can be no assurance of the result of the appeal or whether the Indonesian subsidiary will prevail. As a result, the property tax and penalties were expensed during the three months ended December 31, 2019. Until the appeal is concluded, the Indonesian subsidiary will be required to pay an annual property tax of approximately $0.6 million.

As of December 31, 2019, the Partnership’s Indonesian subsidiary is subject to examination by the Indonesian tax authorities for its corporate income tax returns for the years from 2015 through 2018 for up to five years following the completion of a fiscal year. As a result, it is likely there will be an examination by the Indonesian tax authorities for the tax return for 2015 during 2020. For December 31, 2019, the Indonesian subsidiary plans to request a refund for overpayment of estimated taxes for 2019 when filing the 2019 tax return which will result in an automatic examination of the tax return for the year ended December 31, 2019. Based upon the Partnership’s experience in Indonesia, tax regulations, guidance and interpretation may not always be clear and may be subject to alternative interpretations or changes in interpretations over time. The examinations may lead to ordinary course adjustments or proposed adjustments to the subsidiary’s income taxes with respect to years under examination. Future examinations may or may not result in changes to the Partnership’s provisions on tax filings from 2015 through 2019. As of December 31, 2019, the unrecognized tax benefits for uncertain tax positions were $2.3 million.

As of December 31, 2019, the Partnership had outstanding interest rate swap agreements for a total notional amount of $362.9 million to hedge against the interest rate risks of its long-term debt under the Lampung and the $385 million facilities. 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 a fixed rate 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 $14.9 million as of December 31, 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 December 31, 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 lines “accumulated earnings of joint ventures” and “accumulated losses of the joint ventures” on the consolidated balance sheet and are not included in the balance sheet figures disclosed above.

On November 14, 2019, the Partnership paid a quarterly cash distribution of $15.0 million, or $0.44 per common unit, with respect to the third quarter of 2019.

On November 15, 2019, the Partnership paid a cash distribution of $3.6 million, or $0.546875 per Series A preferred unit, for the period commencing on August 15, 2019 to November 14, 2019.

On February 14, 2020, the Partnership paid a quarterly cash distribution of $15.0 million, or $0.44 per common unit, with respect to the fourth quarter of 2019, equivalent to $1.76 per unit on an annualized basis.

On February 17, 2020, the Partnership paid a cash distribution of $3.7 million, or $0.546875 per Series A preferred unit, for the period commencing on November 15, 2019 to February 14, 2020.

For the period from January 1, 2020 to January 7, 2020, the Partnership sold 82,409 Series A preferred units under the ATM program at an average gross sales price of $26.25 per unit and received net proceeds, after sales commissions, of $2.1 million. No further sales were made between January 8, 2020 and February 24, 2020. For the period from January 1, 2020 to February 24, 2020, no common units were sold under our ATM program. The Partnership sold 391,398 Series A preferred units and no common units under the ATM program in the fourth quarter of 2019 at an average gross sales price of $26.91 per unit. From the commencement of the ATM program in January 2018 through December 31, 2019, the Partnership has sold 2,025,590 Series A preferred units and 306,266 common units and received net proceeds of $51.7 million and $5.6 million, respectively. The compensation paid to the Agent for such sales was $1.0 million.

Cash Flows

Net cash provided by operating activities was $26.2 million for the three months ended December 31, 2019, a decrease of $0.1 million compared with $26.3 million for the three months ended December 31, 2018. Before changes in working capital, net cash flows were $21.1 million for the three months ended December 31, 2019, a decrease of $0.5 million compared with $21.6 million for the three months ended December 31, 2018. The decrease was mainly attributable to lower operating results of the Majority held FSRU segment which were partially offset by the positive impact of including the repayment of principal on direct financing lease as a component of operating activities as a result of the new leasing standard adopted on January 1, 2019, lower incurred interest expense and current income tax expense for the three months ended December 31, 2019 compared to the three months ended December 31, 2018. Changes in working capital contributed positively to net cash provided by operating activities by $5.2 million for the three months ended December 31, 2019 compared with a positive contribution of $4.7 million for the three months ended December 31, 2018. The positive working capital impact in the fourth quarter of 2019 was mainly due to cash provided by trade receivables of $3.8 million and accrued liabilities and other payable of $2.5 million, and the positive working capital impact in the fourth quarter of 2018 was mainly due to cash provided by trade receivables and value added and withholding tax liabilities.

There was no net cash provided by investing activities for the three months ended December 31, 2019, a decrease of $0.2 million compared to net cash provided by investing activities of $0.2 million for the three months ended December 31, 2018. The change in net cash provided by investing activities was mainly the result of reclassification of the receipts from repayment on principal on the direct financing lease related to PGN FSRU Lampung from investing activities in 2018 to operating activities in 2019 due to adoption of the new leasing standard, which was partially offset by expenditures for equipment on the vessels for the three months ended December 31, 2018.

Net cash used in financing activities for the three months ended December 31, 2019 was $19.4 million, a decrease of $6.5 million compared to net cash used in financing activities of $25.9 million for the three months ended December 31, 2018. The main reason for the decrease was higher net proceeds from the issuance of the Series A preferred units for the three months ended December 31, 2019 and repayment of $1.3 million of a customer loan for funding a value added liability on import for the three months ended December 31, 2018. For the three months ended December 31, 2019, net proceeds from the issuance of the Series A preferred units were $10.3 million compared with $4.7 million for the three months ended December 31, 2018. Repayments of long-term debt were $11.2 million and $11.4 million for the three months ended December 31, 2019 and 2018, respectively. Cash distributions to limited partners and preferred unit holders were $18.6 million for the three months ended December 31, 2019 compared with $18.4 million for the three months ended December 31, 2018.

As a result of the foregoing, cash and cash equivalents increased by $6.8 million and $0.7 million for the three months ended December 31, 2019 and 2018, respectively.

Outlook

A subsidiary of the Partnership, as the owner of the Höegh Gallant, has a lease and maintenance agreement with Höegh LNG Egypt LLC (“EgyptCo”), a wholly owned subsidiary of Höegh LNG, 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, plus any incremental taxes or operating expenses as a result of the new charter. The Partnership intends to exercise its option pursuant to the option agreement and to enter into a new time charter with Höegh LNG for the Höegh Gallant (the “Subsequent Charter”), the final terms of which are subject to approval by the Partnership’s conflicts committee and board of directors. Höegh LNG’s ability to make payments to the Partnership under the Subsequent Charter 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 under the Subsequent Charter, the Partnership’s financial condition, results of operations and ability to make cash distributions to unitholders could be materially adversely affected.

For the joint ventures, the charterer of the Cape Ann expects to sub-contract the vessel to operate as an FSRU in India. The sub-contract is expected to commence in the first quarter of 2020 and continue until the fourth quarter of 2025. Subject to lender approval, an amendment of the time charter party with the joint venture and the charterer is being finalized which will provide for the reimbursement of direct and indirect taxes that the joint venture will incur in India. The tax regulations, guidance and interpretations in India are not clear with respect to certain aspects of taxation of an FSRU operation. As a result, the sub-charter in India will be cash neutral with respect to the joint venture’s operations. However, the reimbursement of taxes will be based upon tax filings and actual tax payments, while the financial statements will also be impacted by accrued taxes including the impact of uncertain tax positions, if any. As a result, there may be differences in the timing of recognition of revenue for tax reimbursement and the accrual of income tax and other tax expenses.

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 four operating FSRUs, the Höegh Giant (HHI Hull No. 2552), delivered from the shipyard on April 27, 2017, the Höegh Esperanza (HHI Hull No. 2865), delivered from the shipyard on April 5, 2018, Höegh Gannet (HHI Hull No. 2909), delivered from the shipyard on December 6, 2018, and the Höegh Galleon (SHI Hull No. 2220), delivered from the shipyard on August 27, 2019. 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. The Höegh Gannet serves on a 15-month LNGC contract with Naturgy. The Höegh Galleon operates on an interim LNGC contract with Cheniere Marketing International LLP (“Cheniere”) that commenced in September 2019.

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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