Höegh LNG Partners LP reported its financial results for the quarter ended September 30, 2021.
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
• No reported cases of COVID–19; 100% availability of FSRUs for the third quarter of 2021
• Reported total time charter revenues of $35.6 million for the third quarter of 2021, compared to $35.9 million of time charter revenues for the third quarter of 2020
• Generated operating income of $27.1 million, net income of $17.4 million and limited partners’ interest in net income of $13.5 million for the third quarter of 2021, compared to 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
• Operating income, net income and limited partners’ interest in net income were impacted by unrealized gains on derivative instruments for the third quarter of 2021 and 2020, mainly on the Partnership’s share of equity in earnings of joint ventures
• On November 15, 2021, paid a cash distribution of $0.01 per common unit with respect to the third quarter of 2021, which was the same as in the second quarter of 2021
• On November 15, 2021, paid a cash distribution of $0.546875 per 8.75% Series A cumulative redeemable preferred unit (“Series A preferred unit”), for the period commencing on August 15, 2021 to November 14, 2021
• On September 23, 2021, entered into agreements with subsidiaries of New Fortress Energy Inc (“NFE”) to charter the Höegh Gallant primarily for FSRU operations for a period of ten years, with an expected commencement during December 2021 (the “New Charter”). The Partnership has also entered into an agreement to suspend the existing charter for the Höegh Gallant with a subsidiary of Höegh LNG, with effect from the commencement of the New Charter (the “Suspension Agreement”). The charter rate under the New Charter, in line with the current market, will be lower than under the existing charter for the Höegh Gallant. However, under the Suspension Agreement, Höegh LNG’s subsidiary will compensate the Partnership monthly for the difference between the charter rate earned under the New Charter and the charter rate earned under the existing charter with the addition of a modest increase until July 31, 2025, the original expiration date of the existing charter. Afterwards, the Partnership will continue to receive the charter rate agreed with NFE for the remaining term of the New Charter. In addition, pursuant to the Suspension Agreement, certain capital expenditures incurred to prepare and relocate the Höegh Gallant for performance under the New Charter will be shared 50/50 between Höegh LNG and the Partnership, subject to a cap on the obligations of the Partnership.
• On September 29, 2021, the Partnership entered into an agreement with its lenders to defer the maturity date of the commercial tranche of its Lampung facility to allow for more time to conclude a refinancing of this tranche. The lenders agreed to defer the maturity date of the commercial tranche from September 29, 2021 until January 14, 2022. Subject to commitment letters and a term sheet for a refinancing of the commercial tranche being in place by December 29, 2021, the maturity date will automatically be further deferred to March 29, 2022.
• The charterer under the lease and maintenance agreement for the PGN FSRU Lampung (“LOM”) served a notice of arbitration (“NOA”) on August 2, 2021 to declare the LOM null and void, and/or to terminate the LOM, and/or seek damages. PT Hoegh LNG Lampung (“PT HLNG”) has served a reply refuting the claims as baseless and without legal merit and has also served a counterclaim against the charterer for multiple breaches of the LOM. PT HLNG will take all necessary steps and will vigorously defend against the charterer’s claims in the legal process. Notwithstanding the NOA, both parties have continued to perform their respective obligations under the LOM.
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
For the three months ended September 30, 2021, 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 COVID–19 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, 2021.
The Partnership reported net income of $17.4 million for the three months ended September 30, 2021, a decrease of $2.1 million from net income of $19.5 million for the three months ended September 30, 2020. Net income was impacted by unrealized gains on derivative instruments for the third quarter of 2021 and 2020, mainly included in the Partnership’s share of equity in earnings of joint ventures.
Excluding all of the unrealized gains (losses) on derivative instruments, net income for the three months ended September 30, 2021 would have been $15.1 million, a decrease of $2.2 million from $17.3 million for the three months ended September 30, 2020. Excluding the impact of the unrealized gains (losses) on derivatives, the decrease is primarily due to higher administrative expenses and a higher income tax expense for the three months ended September 30, 2021, compared to the corresponding period in 2020.
Preferred unitholders’ interest in net income was $3.9 million for the three months ended September 30, 2021, an increase of $0.2 million from $3.7 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 September 30, 2021 was $13.5 million, a decrease of $2.3 million from limited partners’ interest in net income of $15.8 million for the three months ended September 30, 2020. Excluding all of the unrealized gains (losses) on derivative instruments, limited partners’ interest in net income for the three months ended September 30, 2021 would have been $11.3 million, a decrease of $2.3 million from limited partners’ interest in net income of $13.6 million for the three months ended September 30, 2020.
Equity in earnings of joint ventures for the three months ended September 30, 2021 was $6.1 million, an increase of $0.3 million from equity in earnings of joint ventures of $5.8 million for the three months ended September 30, 2020. Unrealized gains on derivative instruments in the Partnership’s joint ventures impacted the equity in earnings of joint ventures for the three months ended September 30, 2021 and 2020, respectively. Excluding the unrealized gain on derivative instruments for the three months ended September 30, 2021 and 2020, the equity in earnings of joint ventures would have been $3.8 million for the three months ended September 30, 2021, an increase of $0.3 million from $3.5 million for the three months ended September 30, 2020. Excluding the unrealized gain on derivative instruments for the three months ended September 30, 2021 and 2020, the increase was mainly due to lower interest expenses for the three months ended September 30, 2021, compared to those for the three months ended September 30, 2020. The Partnership’s share of its joint ventures’ operating income was $6.4 million for the three months ended September 30, 2021 and 2020, respectively.
Operating income for the three months ended September 30, 2021 was $27.1 million, a decrease of $1.0 million from operating income of $28.1 million for the three months ended September 30, 2020. Excluding the impact of the unrealized gains on derivatives impacting the equity in earnings of joint ventures for the three months ended September 30, 2021 and 2020, operating income for the three months ended September 30, 2021 would have been $24.9 million, a decrease of $0.9 million from $25.8 million for the three months ended September 30, 2020.
Segment EBITDA1 for the three months ended September 30, 2021 was $35.1 million, a decrease of $1.3 million from $36.4 million for the three months ended September 30, 2020.
Total operating expenses for the three months ended September 30, 2021 were $14.5 million, an increase of $0.9 million from $13.6 million for the three months ended September 30, 2020. The increase is principally due to higher administrative expenses for the three months ended September 30, 2021, compared with the three months ended September 30, 2020.
Total financial expense, net for the three months ended September 30, 2021 was $7.0 million, an increase of $0.3 million from $6.7 million for the three months ended September 30, 2020. Interest expense consists of the interest incurred, amortization and gain (loss) on cash flow hedges, commitment fees and amortization of debt issuance costs for the period. The increase in interest expense in the third quarter of 2021 was principally due to fees on the Lampung debt facility.
Financing and Liquidity
As of September 30, 2021, the Partnership had cash and cash equivalents of $45.4 million. Current restricted cash for operating obligations of the PGN FSRU Lampung was $6.2 million, and long-term restricted cash required under the long-term debt facility for the PGN FSRU Lampung (the “Lampung facility”) was $9.1 million as of September 30, 2021. As of November 18, 2021, the Partnership has fully drawn on the $63 million revolving credit tranche of the $385 million facility and has an undrawn balance of $60.3 million on the $85 million revolving credit facility from Höegh LNG. However, the Partnership has received notice from Höegh LNG that it will not extend the $85 million revolving credit facility when it matures on January 1, 2023, and that it will have very limited capacity to extend any additional advances to the Partnership thereunder beyond what is currently drawn under such facility. Further drawdowns on the $85 million revolving credit facility may be subject to Höegh LNG’s consent because of the arbitration notice received from the charterer of PGN FSRU Lampung, as described below.
The Partnership is continuously working on its financing and liquidity needs. The commercial tranche of the Lampung facility was initially due on September 29, 2021. During the third quarter of 2021, the maturity date was deferred to January 14, 2022 and will be further deferred to March 29, 2022 if commitment letters and a term sheet for an Approved Refinancing (as defined in the Lampung facility agreement) are in place by December 29, 2021. The export credit tranche of the Lampung facility can be called if the commercial tranche is not refinanced. The ongoing refinancing of the Lampung credit facility, which had been scheduled to close by the end of the second quarter of 2021, is not yet completed due to the failure by the charterer to countersign certain customary documents related to the new credit facility. These circumstances left the Partnership exposed to having to arrange alternative refinancing. Such alternative refinancing is in progress. In November, the Partnership received commitment letters and a term sheet for an Approved Refinancing from a group of lenders. The Partnership expects to complete this refinancing before the deferred maturity date, subject to certain required approvals by export credit tranche lenders, completing documentation and customary closing conditions. However, the Partnership is also continuing to pursue other potential alternative debt structures. The terms of the alternative refinancing, if the Partnership is successful in finalizing such refinancing, are likely to be less favourable than the terms of the originally agreed refinancing and the existing Lampung facility.
As of September 30, 2021, the Partnership has no material commitments for capital expenditures.
During the third quarter of 2021, 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 $422.1 million and $427.4 million, respectively, as of September 30, 2021, including the Lampung facility, the $385 million facility and the $85 million revolving credit facility.
On July 27, 2021, the Partnership’s board of directors announced a reduction in the quarterly cash distribution on its common units to $0.01 per common unit, down from a distribution of $0.44 per common unit in the first quarter of 2021, commencing with the distribution for the second quarter of 2021 and continuing in the third quarter of 2021. The Partnership intends to conserve its internally generated cash flow to resolve issues related to the ongoing refinancing of the Lampung facility as described below. Thereafter, the Partnership expects to use its internally generated cash flow to reduce debt levels and strengthen its balance sheet.
As of September 30, 2021, the Partnership’s total current liabilities exceeded total current assets by $7.0 million. The current portion of long-term debt reflects principal payments for the next twelve months and the balloon payment on the commercial tranche of the Lampung facility deferred to January 14, 2022. The Lampung facility’s export credit tranche can be called if the commercial tranche is not refinanced. The current liabilities are expected to be funded, for the most part, by future cash flows from operations, and refinancing or amendment of the Lampung facility. 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, including distributions to it from Höegh LNG Cyprus Limited, and Höegh LNG FSRU Ltd as payment of intercompany interest and/or intercompany debt or dividends, will be sufficient to meet its debt amortization and working capital needs and maintain cash reserves against fluctuations in operating cash flows and pay distributions to its unitholders at its current level of distributions, for the next twelve months, assuming the amendment or refinancing of the Lampung facility, the Neptune and Cape Ann facilities on a timely basis and its continuing compliance with the covenants under its credit facilities.
As of September 30, 2021, the Partnership had outstanding interest rate swap agreements for a total notional amount of $281.2 million to hedge against the floating 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 these 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 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 in joint ventures” and “accumulated losses in joint ventures” on the consolidated balance sheet and are not included in the balance sheet figures disclosed above.
In August 2021, the Partnership paid a distribution of $0.3 million, or $0.01 per common unit, with respect to the second quarter of 2021.
In August 2021 the Partnership paid a distribution of $3.9 million, or $0.546875 per Series A preferred unit, for the period commencing on May 15, 2021 to August 14, 2021.
On September 3, 2021, the Partnership drew the remaining $14.7 million available on the $63 million revolving credit tranche of the $385 million facility.
On November 15, 2021, the Partnership paid a cash distribution of $0.3 million, or $0.01 per common unit, with respect to the third quarter of 2021.
On November 15, 2021, the Partnership paid a cash distribution of $3.9 million, or $0.546875 per Series A preferred unit, for the period commencing on August 15, 2021 to November 14, 2021.
For the period from July 1, 2021 to November 18, 2021, no Series A preferred units or common units were sold under the Partnership’s ATM program.
Management Transition
On November 1, 2021, Mr. Sveinung J. S. Støhle stepped down from his position as the Partnership’s Chief Executive Officer in order to pursue an alternative career opportunity. The Board of Directors of the Partnership is undertaking a process to select a successor for the CEO position, and has appointed Håvard Furu, the Partnership’s Chief Financial Officer, to also act as the Partnership’s interim Chief Executive Officer while the board conducts its search.
Outlook
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 and counterparty 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. While there is a pending arbitration as further discussed below, as of November 18, 2021, 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.
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 (the “Subsequent Charter”) and provided the Partnership the $85 million revolving credit facility. However, in July 2021, the Partnership received notice from Höegh LNG that the revolving credit line of $85 million will not be extended when it matures on January 1, 2023, and that Höegh LNG will have very limited capacity to extend any additional advances to the Partnership beyond what is currently drawn under such facility. Also, further drawdowns on the $85 million revolving credit facility may be subject to Höegh LNG’s consent because of the NOA received from the charterer of PGN FSRU Lampung. With these recent changes, the Partnership’s liquidity and financial flexibility will be reduced. If Höegh LNG is unable to meet its obligations to us under the Subsequent Charter or the Suspension Agreement or meet funding requests or indemnification obligations, our financial condition, results of operations and ability to make cash distributions to unitholders could be materially adversely affected. Furthermore, if the Partnership’s other charterparties or third-party lenders are unable to meet their obligations to the Partnership 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 distributions to unitholders could be materially adversely affected.
Höegh LNG’s ability to make payments to the Partnership under the Subsequent Charter, the Suspension Agreement and funding requests under the $85 million revolving credit facility and any claims for indemnification may be affected by events beyond the control of Höegh LNG or the Partnership, including 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 financial institutions providing the Partnership’s interest rate swaps or lenders under the revolving credit facilities are unable to meet their obligations, the Partnership could experience a higher interest expense or be unable to obtain funding. 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.
As previously reported, by letter dated July 13, 2021, the charterer under the LOM for the PGN FSRU Lampung raised certain issues with PT HLNG in relation to the operations of the PGN FSRU Lampung and the LOM and by further letter dated July 27, 2021, stated that it would commence arbitration against PT HLNG. On August 2, 2021 the charterer served a notice of arbitration to declare the LOM null and void, and/or to terminate the LOM, and/or seek damages. PT HLNG has served a reply refuting the claims as baseless and without legal merit and has also served a counterclaim against the charterer for multiple breaches of the LOM. PT HLNG will take all necessary steps and will vigorously defend against the charterer’s claims in the legal process.
The commercial tranche of the Lampung facility was initially due on September 29, 2021. During the third quarter of 2021, the maturity date was deferred to January 14, 2022 and will be further deferred to March 29, 2022 if commitment letters and a term sheet for an Approved Refinancing (as defined in the Lampung facility agreement) are in place by December 29, 2021. The export credit tranche of the Lampung facility can be called if the commercial tranche is not refinanced. The ongoing refinancing of the Lampung credit facility, which had been scheduled to close by the end of the second quarter of 2021, is not yet completed due to the failure by the charterer to countersign certain customary documents related to the new credit facility. These circumstances left the Partnership exposed to having to arrange alternative refinancing. Such alternative refinancing is in progress. In November the Partnership received commitment letters and a term sheet for an Approved Refinancing from a group of lenders. The Partnership expects to complete this refinancing before the deferred maturity date, subject to certain required approvals by export credit tranche lenders, completing documentation and customary closing conditions. However, the Partnership is also continuing to pursue other potential alternative debt structures. The terms of the alternative refinancing, if the Partnership is successful in finalizing such refinancing, is likely to be less favourable than the terms of the originally agreed refinancing and the existing Lampung facility.
No assurance can be given at this time as to the outcome of the dispute with the charterer of the PGN FSRU Lampung, or of the ongoing refinancing of the Lampung facility. Notwithstanding the NOA, both parties have continued to perform their respective obligations under the LOM. In the event that the Partnership is unable to refinance the Lampung facility or if the outcome of such dispute is unfavorable to it, it could have a material adverse impact on its business, results of operations, financial condition and ability to pay distributions to unitholders.
In addition, the Partnership is at an advanced stage for the refinancing of the Neptune facility and the Cape Ann facility which mature and become payable by its Joint Ventures on November 30, 2021 and June 1, 2022, respectively. The loan agreement for the Neptune has been executed and it is expected that the loan agreement for the Cape Ann will be executed in December 2021 for this refinancing. Subject to customary closing conditions the refinancing of each of the Neptune and the Cape Ann is expected to be completed on or about the respective maturity dates of the existing debt facilities. Should the Partnership be unable to complete a refinancing of the Lampung facility, the Neptune and Cape Ann facilities or its other debt maturities on a timely basis or at all, the Partnership 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, financial condition and ability to make distributions to unitholders.
On September 23, 2021, the Partnership entered into the New Charter with subsidiaries of NFE to charter the Höegh Gallant primarily for FSRU operations for a period of ten years, with an expected commencement during December 2021. The Partnership has also entered into an agreement to suspend the existing charter for the Höegh Gallant with a subsidiary of Höegh LNG, with effect from the commencement of the New Charter (the “Suspension Agreement”). The charter rate under the New Charter, in line with the current market, will be lower than under the Subsequent Charter for the Höegh Gallant. However, under the Suspension Agreement, Höegh LNG’s subsidiary will compensate the Partnership monthly for the difference between the charter rate earned under the New Charter and the charter rate earned under the Subsequent Charter plus a modest increase, mainly to cover higher operating expenses and taxes under the New Charter (“Suspension Payments”). The Suspension Payments will continue until July 31, 2025, the original expiration date of the Subsequent Charter. Afterwards, the Partnership will continue to receive the charter rate agreed with NFE for the remaining term of the New Charter. In addition, pursuant to the Suspension Agreement, certain capital expenditures and maintenance expenses incurred to prepare and relocate the Höegh Gallant for performance under the New Charter will be shared 50/50 between Höegh LNG and the Partnership, subject to a cap on the obligations of the Partnership. The Board of Directors of the Partnership and the Conflicts Committees (the “Conflicts Committee”) approved the New Charter and the Suspension Agreement. The Conflicts Committee retained an outside financial advisor and outside legal advisor to assist with its evaluation of the agreements.
The 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 COVID-19 outbreak to date, the ultimate length and severity of the COVID–19 outbreak and its potential impact on the Partnership’s operations and financial condition is uncertain at this time. Furthermore, should there be an outbreak of COVID–19 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 COVID–19 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 will incur somewhat higher crewing expenses to ensure appropriate mitigating actions are in place to minimize the risk of outbreaks. To date, the Partnership has not had service interruptions on the Partnership’s FSRUs. 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.