Höegh: LNG to play leading role in driving energy transition

Hoegh LNG

Höegh LNG Partners reported its financial results for the quarter ended September 30, 2020.

Highlights

• Continued measures to mitigate the risks from the COVID-19 pandemic and ensure health and safety of crews and staff, whose wellbeing is the Partnership’s highest priority
• 100% availability of FSRUs for the third quarter of 2020
• Reported total time charter revenues of $35.9 million for the third quarter of 2020 compared to $37.0 million of time charter revenues for the third quarter of 2019
• Generated operating income of $28.1 million, net income of $19.5 million and limited partners’ interest in net income of $15.8 million for the third quarter of 2020 compared to operating income of $23.4 million, net income of $13.7 million and limited partners’ interest in net income of $10.2 million for the third quarter of 2019
• Operating income, net income and limited partners’ interest in net income were impacted by unrealized gains on derivative instruments for the third quarter of 2020 compared with unrealized losses on derivative instruments for the third quarter of 2019 mainly on the Partnership’s share of equity in earnings of joint ventures
• Excluding the impact of the unrealized gains (losses) on derivative instruments for the third quarter of 2020 and 2019 impacting the equity in earnings of joint ventures, operating income for the three months ended September 30, 2020 would have been $25.8 million, an increase of $0.2 million from $25.6 million for the three months ended September 30, 2019
• Generated Segment EBITDA1 of $36.4 million for each of the third quarter of 2020 and 2019
• On November 13, 2020, paid a $0.44 per unit distribution on common units with respect to the third quarter of 2020, equivalent to $1.76 per unit on an annualized basis
• On November 16, 2020, paid a distribution of $0.546875 per 8.75% Series A cumulative redeemable preferred unit (“Series A preferred unit”), for the period commencing on August 15, 2020 to November 14, 2020

Sveinung J.S. Støhle, Chief Executive Officer stated: “In the third quarter, we are very pleased to have once again delivered a high level of safe and reliable operating and financial performance, despite the continuing challenges presented by COVID-19. The Partnership’s ability to achieve a full quarter of 100% availability for our fleet of high-quality, modern FSRUs enabled us to maximize the value of our long-term, fixed-rate contracts and to demonstrate the robust distribution coverage inherent in our more than 8.5 years of average remaining contract cover. Liquid natural gas is readily available and highly cost competitive globally, and it is clear that LNG will play a leading role in driving the energy transition for decades to come.”

Financial Results Overview

For the three months ended September 30, 2020, each of the Partnership’s FSRUs have had 100% availability due to the diligent efforts of the crew and staff to ensure all aspects of operations continued to function smoothly in spite of challenges as a result of the COVID-19 pandemic. The Partnership has mitigated the risk of an outbreak of the Coronavirus on board its vessels by extending time between crew rotations on the vessels and developing mitigating actions for crew rotations. Management and administrative staffs have largely transitioned to working remotely from home to address the specific COVID-19 situation in the applicable geographic location. The Partnership has fulfilled its obligations under the time charter contracts and not experienced any off-hire for its FSRUs for the three months ended September 30, 2020.

The Partnership reported net income of $19.5 million for the three months ended September 30, 2020, an increase of $5.8 million from net income of $13.7 million for the three months ended September 30, 2019. Net income was impacted by unrealized gains on derivative instruments for the third quarter of 2020 compared with unrealized losses for the third quarter of 2019, mainly included in the Partnership’s share of equity in earnings of joint ventures.

Excluding the impact of all of the unrealized gains (losses) on derivative instruments, net income for the three months ended September 30, 2020 would have been $17.3 million, an increase of $1.4 million from $15.9 million for the three months ended September 30, 2019. Excluding the impact of the unrealized gains (losses) on derivatives, the increase for the three months ended September 30, 2020, is primarily due to lower total operating expenses, improved results for the equity in earnings of joint ventures and lower interest expense which were partially offset by the impact of lower time charter revenues.

Preferred unitholders’ interest in net income was $3.7 million for the three months ended September 30, 2020, an increase of $0.2 million from $3.5 million for the three months ended September 30, 2019, which was 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 September 30, 2020 was $15.8 million, an increase of $5.6 million from limited partners’ interest in net income of $10.2 million for the three months ended September 30, 2019. Excluding all of the unrealized gains and losses on derivative instruments, limited partners’ interest in net income for the three months ended September 30, 2020 would have been $13.6 million, an increase of $1.1 million from $12.5 million for the three months ended September 30, 2019.

The PGN FSRU Lampung, the Höegh Gallant and the Höegh Grace were on-hire for the entire third quarter of 2020 and 2019.

Equity in earnings of joint ventures was $5.8 million for the three months ended September 30, 2020, an increase of $5.2 million from $0.6 million for the three months ended September 30, 2019. The joint ventures own the Neptune and the Cape Ann. Unrealized gains and losses on derivative instruments in the joint ventures significantly impacted the equity in earnings of joint ventures for the three months ended September 30, 2020 and 2019. 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 and losses for the three months ended September 30, 2020 and 2019, the equity in earnings of joint ventures would have been $3.6 million for the three months ended September 30, 2020, an increase of $0.8 million compared to equity in earnings of joint ventures of $2.8 million for the three months ended September 30, 2019. Excluding the unrealized gains (losses) on derivative instruments, the increase was mainly due to lower vessel operating expenses incurred for maintenance and lower administrative and interest expenses between the periods. For the three months ended September 30, 2019, the Neptune completed an on-water class renewal survey and routine maintenance was completed during the survey. The Neptune was on-hire during the class renewal period.

Operating income for the three months ended September 30, 2020 was $28.1 million, an increase of $4.7 million from $23.4 million for the three months ended September 30, 2019. Excluding the impact of the unrealized gains (losses) on derivatives for the three months ended September 30, 2020 and 2019 impacting the equity in earnings of joint ventures, operating income for the three months ended September 30, 2020 would have been $25.8 million, an increase of $0.2 million from $25.6 million for the three months ended September 30, 2019.

Segment EBITDA1 was $36.4 million for each of the three months ended September 30, 2020 and 2019.

Effective January 1, 2020, the Partnership adopted the new accounting standard, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, with recognition of a net decrease to retained earnings of $0.16 million as of January 1, 2020 for the cumulative effect of adopting the new standard. The cumulative effect includes allowances for expected credit losses related to the net investment in financing lease and trade receivables. For the three months ended September 30, 2020, there was no change in the allowance for expected credit losses.

Financing and Liquidity

As of September 30, 2020, the Partnership had cash and cash equivalents of $25.0 million. Current restricted cash for operating obligations of the PGN FSRU Lampung was $6.5 million and long-term restricted cash required under the Lampung facility was $12.2 million as of September 30, 2020. As of November 19, 2020, the Partnership had an undrawn balance of $14.7 million on the $63 million revolving credit tranche of the $385 million facility and an undrawn balance of $63.0 million on the $85 million revolving credit facility from Höegh LNG.

As of September 30, 2020, the Partnership has no material commitments for capital expenditures. However, during the fourth quarter of 2020, part of the procedures for the on-water class renewal survey for the Höegh Grace will be performed. No off-hire is expected during the fourth quarter of 2020. The remainder of the on-water class renewal survey is expected to be completed during the first half of 2021. Expenditures of approximately $0.6 million are expected to be incurred by December 31, 2020 in connection with the survey. In addition, the joint ventures have a remaining outstanding liability for a boil-off claim under the time charters totaling $6.5 million as of September 30, 2020. The Partnership’s 50% share of the liability is $3.3 million as of September 30, 2020. In February 2020, each of the joint ventures and the charterer reached a commercial settlement addressing all the past and future claims. The final settlement and release agreements were signed on and had an effective date of April 1, 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 the arbitration tribunal will be equally split between the two 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 were amended regarding the computation and settlement of prospective boil-off claims. The first instalment of the settlement of $17.2 million was paid by the joint ventures in April 2020. The Partnership’s 50% share was $8.6 million. The joint ventures expect to pay the remaining instalment, which is due no later than December 15, 2020, with accumulated cash balances on the joint ventures’ respective balance sheets as of September 30, 2020 and with cash from operations in 2020.

The Partnership is 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. On April 8, 2020, the Partnership was indemnified by Höegh LNG for its share of the joint ventures boil-off settlement payments by a reduction of $8.6 million on its outstanding balance on the $85 million revolving credit facility from Höegh LNG. The remaining amount of the indemnification for the boil-off claim will be settled when the amount is paid to the charterer.

During the third quarter of 2020, the Partnership made quarterly repayments of $4.8 million on the Lampung facility and $6.4 million on the $385 million facility. In addition, the Partnership drew $6.6 million on the $85 million revolving credit facility from Höegh LNG on August 7, 2020. The Partnership’s book value and outstanding principal of total long-term debt was $436.5 million and $443.9 million, respectively, as of September 30, 2020, 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 September 30, 2020, the Partnership’s total current liabilities exceeded total current assets by $15.7 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 $12.2 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 tranche of the $385 million facility, will be sufficient to meet the Partnership’s working capital requirements for its business for the next twelve months.

As of September 30, 2020, the Partnership had outstanding interest rate swap agreements for a total notional amount of $334.5 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 $28.9 million as of September 30, 2020.

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 earnings in joint ventures” on the consolidated balance sheet and are not included in the balance sheet figures disclosed above.

On August 7, 2020, the Partnership drew $6.6 million on the $85 million revolving credit facility from Höegh LNG.

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

On August 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 May 15, 2020 to August 14, 2020.

For the period from July 1, 2020 to September 30, 2020, the Partnership sold 11,383 Series A preferred units under the ATM program at an average gross sales price of $24.02 per unit and received net proceeds, after sales commissions, of $0.3 million. The Partnership did not issue any common units under the ATM program during the three and nine months ended September 30, 2020.

On October 23, 2020, the Partnership drew $10.65 million on the $85 million revolving credit facility from Höegh LNG.

On November 13, 2020, the Partnership paid a distribution of $15.1 million, or $0.44 per common unit, with respect to the third quarter of 2020, equivalent to $1.76 per unit on an annualized basis.

On November 16, 2020, the Partnership paid a distribution of $3.7 million, or $0.546875 per Series A preferred unit for the period commencing on August 15, 2020 to November 14, 2020.

For the period from October 1, 2020 to November 17, 2020, the Partnership sold an aggregate of 32,951 Series A preferred units under the ATM program at an average gross sales price of $24.12 per unit and received net proceeds, after sales commissions, of $0.8 million.

Outlook

Höegh LNG has indemnified the Partnership for the joint ventures’ boil-off settlement, leased the Höegh Gallant under lease and maintenance agreement with a subsidiary of Höegh LNG (“Subsequent Charter”) and provided the Partnership the $85 million revolving credit facility. Höegh LNG’s ability to make payments to the Partnership under the indemnification for the boil-off settlement, the Subsequent Charter, and funding requests under the $85 million revolving credit facility may be affected by events beyond the control of Höegh LNG or the Partnership, including opportunities to obtain new employment for the Höegh Gallant and 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 indemnification for the boil-off settlement, the Subsequent Charter or meet funding requests, the Partnership’s financial condition, results of operations and ability to make cash distributions to unitholders could be materially adversely affected.

The recent outbreak of Coronavirus (COVID-19) has negatively affected economic conditions in many parts of the world which may impact the Partnership’s operations and the operations of its customers and suppliers. Although the Partnership’s operations have not been materially affected by the Coronavirus outbreak to date, the ultimate length and severity of the Coronavirus outbreak and its potential impact on the Partnership’s operations and financial condition is uncertain at this time. The Partnership believes its primary risk and exposure related to uncertainty of cash flows from its long-term time charter contracts is due to the credit risk associated with the individual charterers. Payments are due under time charter contracts regardless of the demand for the charterer’s gas output or the utilization of the FSRU. It is therefore possible that charterers may not make payments for time charter services in times of reduced demand. As of November 19, 2020, the Partnership has not experienced any reduced or non-payments for obligations under the Partnership’s time charter contracts. In addition, the Partnership has not provided concessions or made changes to the terms of payment for its customers. Furthermore, should there be an outbreak of the Coronavirus on board one of the Partnership’s FSRUs or an inability to replace critical supplies or replacement parts due to disruptions to third-party suppliers, adequate crewing or supplies may not be available to fulfill the Partnership’s obligations under its time charter contracts. This could result in off-hire or warranty payments under performance guarantees which would reduce revenues for the impacted period. To date, the Partnership has mitigated the risk of an outbreak of the Coronavirus on board its vessels by extending time between crew rotations on the vessels and developing mitigating actions for crew rotations. As a result, the Partnership expects that it may incur somewhat higher crewing expenses to ensure appropriate mitigation actions are in place to minimize risks of outbreaks. To date, the Partnership has not had service interruptions on the Partnership’s vessels. Management and administrative staffs have largely transitioned to working remotely from home to address the specific COVID-19 situation in the applicable geographic location. The Partnership has supported staffs by supplying needed internet boosters and office equipment to facilitate an effective work environment. In addition, if financial institutions providing the Partnership’s interest rate swaps or lenders under the revolving credit facility are unable to meet their obligations, the Partnership could experience a higher interest expense or be unable to obtain funding. Since implementing its prior ATM program in January 2018 until November 19, 2020, the Partnership has sold preferred units and common units for total net proceeds of $60.5 million which has supplemented the Partnership’s liquidity. In current market conditions with lower unit prices, sales under the new ATM program is a less viable and more expensive option for accessing liquidity. If the Partnership’s charterers or lenders are unable to meet their obligations under their respective contracts or if the Partnership is unable to fulfill its obligations under time charters, its financial condition, results of operations and ability to make cash distributions to unitholders could be materially adversely affected. The Partnership has long term debt maturing in October 2021 when the Lampung facility must be refinanced. The Partnership is exploring options to refinance the Lampung facility and expects to be successful in the refinancing. Should the Partnership be unable to obtain refinancing for the Lampung facility in 2021, it may not have sufficient funds or other assets to satisfy all its obligations, which would have a material adverse effect on its business, results of operations and financial condition.

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 contract with Naturgy. The Höegh Esperanza is operating on a contract that commenced on June 7, 2018 with CNOOC Gas & Power Trading and Marketing Ltd. (“CNOOC”). The Höegh Gannet serves on a 12-month LNG carrier contract that commenced in May 2020. The Höegh Galleon operates on an interim LNG carrier 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.

LEAVE A COMMENT

×

Comments are closed.