Höegh LNG Partners LP Expects Higher Crew Expenses to Mitigate Effects of the Pandemic


Höegh LNG Partners LP yesterday reported its financial results for the quarter ended June 30, 2020 .

Highlights

• Implemented 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 second quarter of 2020
• Reported total time charter revenues of $34.4 million for the second quarter of 2020 compared to $33.8 million of time charter revenues for the second quarter of 2019
• Generated operating income of $27.7 million , net income of $19.7 million and limited partners’ interest in net income of $16.0 million for the second quarter of 2020 compared to operating income of $15.3 million , net income of $6.2 million and limited partners’ interest in net income of $2.8 million for the second quarter of 2019
• Operating income, net income and limited partners’ interest in net income were impacted by unrealized gains on derivative instruments for the second quarter of 2020 compared with unrealized losses on derivative instruments for the second quarter of 2019 mainly on the Partnership’s share of equity in earnings (losses) of joint ventures in the second quarter of 2020 and 2019
• Excluding the impact of unrealized gains (losses) on derivative instruments for the second quarter of 2020 and 2019 impacting the equity in earnings (losses) of joint ventures, operating income would have been $25.5 million for the three months ended June 30, 2020 compared with $19.9 million for the three months ended June 30, 2019
• Generated Segment EBITDA 1 of $36.0 million and $31.0 million for the second quarter of 2020 and 2019, respectively
• On April 30, 2020 , entered into a lease and maintenance agreement (the “Subsequent Charter”) with a subsidiary of Höegh LNG for the time charter of the Höegh Gallant. The Subsequent Charter commenced on May 1, 2020 and expires on July 31, 2025
• On August 6, 2020 , announced that Mr. Steffen Føreid intends to step down from his position as the Partnership’s Chief Executive Officer and Chief Financial Officer. On August 19, 2020 , announced that Mr. Føreid’s resignation will take effect on August 21, 2020 (the “Effective Date”). As of the Effective Date, the President & CEO of Höegh LNG Holdings Ltd., Sveinung J.S. Støhle, will become the Partnership’s Chief Executive Officer and Håvard Furu, the Chief Financial Officer of Höegh LNG Holdings Ltd., will become the Partnership’s Chief Financial Officer
• On August 14, 2020 , paid a $0.44 per unit distribution on common units with respect to the second quarter of 2020, equivalent to $1.76 per unit on an annualized basis
• On August 17, 2020 , paid a cash distribution of $0.546875 per 8.75% Series A cumulative redeemable preferred units (the “Series A preferred unit”), for the period commencing on May 15, 2020 to August 14, 2020

Steffen Føreid, Chief Executive Officer and Chief Financial Officer stated: ” Thanks to the hard work of all our crew and staff, we have continued to provide safe and reliable services through these unprecedented times caused by the COVID-19 pandemic. The consistent operational excellence has resulted in stable cash flows and strong distribution coverage for the quarter from the Partnership’s portfolio of fixed-rate contracts. With the completion of the Subsequent Charter for the Höegh Gallant during the quarter, the average remaining contract length of the Partnership’s long term contract portfolio stands at more than 9 years, ensuring that Höegh LNG Partners is well-positioned to continue generating stable and predictable cash flows.”

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 June 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 transitioned to working remotely from home to address the specific COVID-19 situation in the applicable geographic location. The Partnership has been fulfilling its obligations under the time charter contracts and not experienced any off-hire for its FSRUs for the three months ended June 30, 2020 .

The Partnership reported net income of $19.7 million for the three months ended June 30, 2020 , an increase of $13.5 million from net income of $6.2 million for the three months ended June 30, 2019 . Net income was impacted by unrealized gains on derivative instruments for the second quarter of 2020 compared with unrealized losses for the second quarter of 2019, mainly included in the Partnership’s share of equity in earnings (losses) of joint ventures.

Excluding all of the unrealized gains (losses) on derivative instruments, net income for the three months ended June 30, 2020 would have been $17.4 million , an increase of $6.6 million from $10.8 million for the three months ended June 30, 2019 . Excluding the impact of the unrealized gains (losses) on derivatives, the increase for the three months ended June 30, 2020 is primarily due to higher time charter revenue as a result of off-hire related to the drydock for the Höegh Gallant during the second quarter of 2019, and lower vessel operating expenses as a result of maintenance, principally for the Höegh Gallant but also for the PGN FSRU Lampung, during the second quarter of 2019. For the three months ended June 30, 2019 , higher maintenance expenses were approximately $3.0 million . These items were also the main drivers for the higher limited partners’ interest in net income and operating income, excluding the impact of the unrealized gains (losses) on derivatives, as well as Segment EBITDA for the three months ended June 30, 2020 compared with the three months ended June 30, 2019 .

Preferred unitholders’ interest in net income was $3.7 million for the three months ended June 30, 2020 , an increase of $0.3 million from $3.4 million due to additional preferred units issued as part of the at-the-market offering program (“ATM program”). Limited partners’ interest in net income, for the three months ended June 30, 2020 was $16.0 million , an increase of $13.2 million from limited partners’ interest in net income of $2.8 million for the three months ended June 30, 2019 . Excluding all of the unrealized gains (losses) on derivative instruments, limited partners’ interest in net income for the three months ended June 30, 2020 would have been $13.7 million , an increase of $6.3 million from $7.4 million for the three months ended June 30, 2019 .

The PGN FSRU Lampung and the Höegh Grace were both on-hire for the full three months periods ended June 30, 2020 and 2019. The Höegh Gallant was on-hire during the full three months ended June 30, 2020 compared with the equivalent of 16 off-hire days due to the scheduled drydock for the three months ended June 30, 2019 .

Equity in earnings of joint ventures for the three months ended June 30, 2020 was $6.5 million , an increase of $8.1 million from equity in losses of joint ventures of $1.6 million for the three months ended June 30, 2019 . Unrealized gains and losses on derivative instruments in the Partnership’s joint ventures significantly impacted the equity in earnings (losses) of joint ventures for the three months ended June 30, 2020 and 2019. Excluding the unrealized gain on derivative instruments for the three months ended June 30, 2020 and the unrealized loss on derivative instruments for the three months ended June 30, 2019 , the equity in earnings of joint ventures would have been $4.2 million for the three months ended June 30, 2020 , an increase of $1.1 million from $3.1 million for the three months ended June 30, 2019 . Excluding the unrealized gain on derivative instruments for the three months ended June 30, 2020 and the unrealized loss on derivative instruments for the three months ended June 30, 2019 , the increase was mainly due to higher time charter revenues related to the reimbursement of maintenance and project costs which more than offset the increase in vessel operating expenses related to increased maintenance for the three months ended June 30, 2020 compared with the three months ended June 30, 2019 . The Partnership’s share of its joint ventures’ operating income was $7.0 million for the three months ended June 30, 2020 , compared with $6.1 million for the three months ended June 30, 2019 .

Operating income for the three months ended June 30, 2020 was $27.7 million , an increase of $12.4 million from operating income of $15.3 million for the three months ended June 30, 2019 . Excluding the impact of the unrealized gains (losses) on derivatives impacting the equity in earnings (losses) of joint ventures for the three months ended June 30, 2020 and 2019, operating income for the three months ended June 30, 2020 would have been $25.5 million , an increase of $5.6 million from $19.9 million for the three months ended June 30, 2019 .

Segment EBITDA 1 for the three months ended June 30, 2020 was $36.0 million , an increase of $5.0 million from $31.0 million for the three months ended June 30, 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 June 30, 2020 , there was no change in the allowance for expected credit losses.

Financing and Liquidity

As of June 30, 2020 , the Partnership had cash and cash equivalents of $25.6 million . Current restricted cash for operating obligations of the PGN FSRU Lampung was $6.0 million and long-term restricted cash required under the long-term debt for the PGN FSRU Lampung (the “Lampung facility”) was $12.4 million as of June 30, 2020 . As of August 20, 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 $73.6 million on the $85 million revolving credit facility from Höegh LNG, respectively.

As of June 30, 2020 , the Partnership has no material commitments for capital expenditures. However, the joint ventures have a liability for a boil-off claim under the time charters totaling $6.5 million as of June 30, 2020 . The Partnership’s 50% share of the liability is $3.3 million as of June 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 with accumulated cash balances on the joint ventures’ respective balance sheets as of June 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.

On April 24, 2020 , the Partnership drew $4.5 million on the $85 million revolving credit facility from Höegh LNG. On August 7, 2020 , the Partnership drew $6.6 million on the $85 million revolving credit facility from Höegh LNG.

During the second 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.

The Partnership’s book value and outstanding principal of total long-term debt was $440.6 million and $448.5 million , respectively, as of June 30, 2020 , including the Lampung facility, the $385 million facility and the $85 million revolving credit facility.

As of June 30, 2020 , the Partnership’s total current liabilities exceeded total current assets by $15.0 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 $12.4 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, are sufficient to meet the Partnership’s working capital requirements for its business for the next twelve months.

As of June 30, 2020 , the Partnership had outstanding interest rate swap agreements for a total notional amount of $344.0 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 those facilities. The Partnership receives interest based on three-month US dollar LIBOR and pays fixed rates of 2.8% for the Lampung facility. The Partnership receives interest based on the three-month US dollar LIBOR and pays a fixed rate of an average of approximately 2.8% for the $385 million facility.

The 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.

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.

On April 24, 2020 , the Partnership drew $4.5 million on the $85 million revolving credit facility from Höegh LNG.

On May 15, 2020 , the Partnership paid a cash distribution of $15.0 million , or $0.44 per common unit, with respect to the first quarter of 2020, equivalent to $1.76 per unit on an annualized basis.

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

The Partnership sold 82,409 Series A preferred units and no common units under the ATM program in the first quarter of 2020. The Partnership did not issue Series A preferred units or common units under the ATM program in the second quarter of 2020.

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

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 August 20, 2020 , no Series A preferred units or common units were sold under the ATM program.

Outlook

Höegh LNG has the Subsequent Charter for the Höegh Gallant , has indemnified the Partnership for the joint ventures’ boil-off settlement 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 August 20, 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 our 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 will 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 our vessels. Management and administrative staffs have 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 our Prior ATM program in January 2018 until January 2020 , the Partnership has sold preferred units and common units for total net proceeds of $59.5 million which has supplemented our 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 does not have long term debt maturing in the next twelve months. However, the Lampung facility must be refinanced in October 2021 . 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.
Source: Höegh LNG Partners LP



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