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Höegh LNG Partners LP Achieves 100% FRSU Availability During First Quarter

Thursday, 28 May 2020 | 23:00

Höegh LNG Partners LP reported its financial results for the quarter ended March 31, 2020.

Highlights

• Implemented measures to mitigate the risks from the COVID-19 pandemic and ensure the health and safety of our crews and staff, whose wellbeing are our highest priority
• No reported cases of COVID-19; 100% availability of FSRUs for the first quarter of 2020
• Reported time charter revenues of $36.7 million for the first quarter of 2020, compared to $36.1 million of time charter revenues for the first quarter of 2019
• Generated operating income of $13.4 million, net income of $5.5 million and limited partners’ interest in net income of $1.8 million for the first quarter of 2020 compared to operating income of $22.7 million, net income of $14.1 million and limited partners’ interest in net income of $10.8 million for the first quarter of 2019
• Operating income, net income and limited partners’ interest in net income were impacted by higher unrealized losses on derivative instruments for the first quarter of 2020 compared with the first quarter of 2019 mainly on the Partnership’s share of equity in earnings (losses) of joint ventures
• Excluding the impact of unrealized losses on derivative instruments for the first quarter of 2020 and 2019 impacting the equity in earnings (losses) of joint ventures, operating income would have been $25.2 million for both the three months ended March 31, 2020 and 2019
• Generated Segment EBITDA1 of $36.1 million for both the first quarter of 2020 and 2019
• On April 30, 2020, entered 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 May 15, 2020, paid a $0.44 per unit distribution on common units with respect to the first quarter of 2020, equivalent to $1.76 per unit on an annualized basis
• On May 15, 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 February 15, 2020 to May 14, 2020, equivalent to $2.1875 per unit on an annualized basis
Steffen Føreid, Chief Executive Officer and Chief Financial Officer stated: “We have implemented measures to mitigate the risks from the COVID-19 pandemic and ensure the health and safety of our crews and staff, whose wellbeing are our highest priority. All our crew and staff have continued to work hard to deliver what is required in these unprecedented circumstances caused by the COVID-19 pandemic. As a result, Höegh LNG Partners delivered consistent operational excellence and achieved 100% availability of our FRSUs, ensuring strong distribution coverage from our long-term, fixed-rate contracts. With the execution of our 5-year option for the Höegh Gallant during the quarter, we have further ensured the long-term stability of the partnership’s cash flows. With more than 9 years of average remaining contracted duration, Höegh LNG Partners is well positioned to continue providing our unitholders with predictable distributions.”

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, 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 March 31, 2020, there was no change in the allowance for expected credit losses.

The Partnership reported net income for the three months ended March 31, 2020 of $5.5 million, a decrease of $8.6 million from net income of $14.1 million for the three months ended March 31, 2019. Net income was impacted by higher unrealized losses on derivative instruments for the first quarter of 2020 compared with the first quarter of 2019, mainly on the Partnership’s share of equity in earnings (losses) of joint ventures. Excluding the impact of all of the unrealized gains and losses on derivative instruments, net income for the three months ended March 31, 2020 would have been $17.3 million, an increase of $0.6 million from $16.7 million for the three months ended March 31, 2019. Excluding the unrealized losses on derivative instruments, the lower results from equity in earnings of joint ventures for the three months ended March 31, 2020 were largely offset by the increase in time charter revenue and lower vessel operating expenses. In addition, the impact of lower interest expense, other financial items, net and income tax expense for the three months ended March 31, 2020 more than offset the negative variance from the gain on debt extinguishment for the three months ended March 31, 2019. The main reason for the decrease in income tax expense was the reduction of the tax rate in Indonesia which was enacted on March 31, 2020. The effect of changes in tax rates on deferred tax assets and liabilities is recognized at the date of enactment.

Preferred unitholders’ interest in net income was $3.7 million for the three months ended March 31, 2020, an increase of $0.3 million from $3.4 million for the three months ended March 31, 2019 due to additional Series A preferred units issued as part of the at-the-market (“ATM”) program. Limited partners’ interest in net income was $1.8 million for the three months ended March 31, 2020, a decrease of $9.0 million from limited partners’ interest in net income of $10.8 million for the three months ended March 31, 2019. Excluding the impact of all of the unrealized gains and losses on derivative instruments, limited partners’ interest in net income for the three months ended March 31, 2020 would have been $13.7 million, an increase of $0.4 million from $13.3 million for the three months ended March 31, 2019.

All the vessels had full availability and were on-hire for the entire first quarter of 2020 and 2019.

On April 30, 2020, the Partnership entered the Subsequent Charter with a subsidiary of Höegh LNG for the time charter of the Höegh Gallant. The Subsequent Charter provides for a daily charter rate equal to 90% of the rate payable under the previous charter for the Höegh Gallant, subject to certain adjustments for avoided or incremental cost. The Subsequent Charter commenced on May 1, 2020 and expires July 31, 2025, securing the Partnership a long-term contract for the Höegh Gallant.

Equity in losses of joint ventures for the three months ended March 31, 2020 was $10.0 million, a decrease of $10.4 million from equity in earnings of joint ventures of $0.4 million for the three months ended March 31, 2019. The joint ventures own the Neptune and the Cape Ann. Unrealized losses on derivative instruments in the joint ventures significantly impacted the equity in earnings (losses) of joint ventures for the three months ended March 31, 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 losses for the three months ended March 31, 2020 and 2019, the equity in earnings of joint ventures would have been $1.7 million for the three months ended March 31, 2020, a decrease of $1.2 million compared to equity in earnings of joint ventures of $2.9 million for the three months ended March 31, 2019. The decrease primarily relates to higher charterer project costs, the majority of which are expected to qualify for reimbursements from the charterer in future periods.

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 March 31, 2020 was $13.4 million, a decrease of $9.3 million from operating income of $22.7 million for the three months ended March 31, 2019. Excluding the unrealized losses on derivative instruments impacting the equity in earnings (losses) of joint ventures for the three months ended March 31, 2020 and 2019, operating income would have been $25.2 million for each of the three months ended March 31, 2020 and 2019.

Segment EBITDA1 was $36.1 million for the three months ended March 31, 2020 and 2019.

Financing and Liquidity

As of March 31, 2020, the Partnership had cash and cash equivalents of $27.7 million. As of May 28, 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 $80.3 million on the $85 million revolving credit facility with Höegh LNG, respectively. Current restricted cash for operating obligations of the PGN FSRU Lampung was $5.8 million and long-term restricted cash required under the Lampung facility was $12.5 million as of March 31, 2020.

The Partnership’s book value and outstanding principal of total long-term debt was $455.3 million and $463.9 million, respectively, as of March 31, 2020, including long-term debt financing for the PGN FSRU Lampung (the “Lampung facility”), the $385 million facility and the $85 million revolving credit facility.

As of March 31, 2020, the Partnership’s total current liabilities exceeded total current assets by $10.4 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 $12.5 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 facility, are sufficient to meet the Partnership’s working capital requirements for its business for the next twelve months.

As of March 31, 2020, the Partnership has no material commitments for capital expenditures. However, the joint ventures had an accrual for boil-off claims under the time charters totaling $23.7 million as of March 31, 2020. The Partnership’s 50% share of the accrual was $11.9 million as of March 31, 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 venture’s respective balance sheets as at March 31, 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.

As of March 31, 2020, the Partnership had outstanding interest rate swap agreements for a total notional amount of $353.5 million to hedge against the 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 February 15, 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.

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 14, 2019 to February 14, 2020.

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 under 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.

From April 1, 2020 to May 25, 2020, no Series A preferred units or common units were sold under the ATM program. The Partnership sold 82,409 Series A preferred units and no common units under the ATM program in the first quarter of 2020.

Outlook

The Höegh Gallant’s time charter with a subsidiary of Höegh LNG expired in April 2020. Pursuant to an option agreement, the Partnership had the right to cause Höegh LNG to charter the Höegh Gallant from the end of the prior charter until 2025. On February 27, 2020, the Partnership exercised the option. On April 30, 2020, the Subsequent Charter with a subsidiary of Höegh LNG for the Höegh Gallant was executed. The Subsequent Charter provides for a daily charter rate equal to 90% of the rate payable under the previous charter for the Höegh Gallant, subject to certain adjustments for avoided or incremental cost, which will reduce the Partnership’s future revenues and cash flows from the operation of the Höegh Gallant. The Subsequent Charterer commenced on May 1, 2020 and will expire in July 2025.

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 Gallantand 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. 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. Plans have been developed to return to more normal crew rotation schedules. However, the Partnership expects that it will incur somewhat higher crewing expenses to ensure appropriate mitigation actions are in place to minimize risks of outbreaks. 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. 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 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.
Source: Höegh LNG Partners LP

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