Highlights for the quarter ended 30 September 2022
•EBITDA1 of USD 0.1 million
•Net loss after taxes of USD 45.9 million
•Höegh LNG Holdings Ltd. completed the acquisition of the publicly held common units of Höegh LNG Partners LP funded with new equity from its shareholder
•Höegh Giant left India in July, after an agreement was reached with the previous charterer which had disputed Höegh LNG’s termination of the contract
•Höegh LNG Holdings Ltd. sold an aggregate of NOK 396 million of HLNG03 bonds held in treasury
Subsequent events
•The charterer of Independence has declared the purchase option to acquire the FSRU in December 2024
•In October, Nordic Trustee on behalf of the HLNG03 and HLNG04 bond holders released the pledge over 15.3 million common units in Höegh LNG Partners as Höegh LNG Holdings Ltd. had fulfilled the requirement to increase its equity by at least USD 100 million
•Höegh LNG was awarded 5 stars in the GRESB ESG benchmark, a global standard for ESG reporting that compares companies across a spectre of ESG-criteria.
Group financial review
Höegh LNG Holdings Ltd (Höegh LNG Holdings or the company) and its subsidiaries (together Höegh LNG or the group) reported a total income of USD 96.1 million and an EBITDA of USD 0.1 million for the third quarter of 2022, compared to USD 86.9 million and USD 46.8 million for the preceding quarter. The decrease in EBITDA is to a large extent related to lost revenues and costs incurred to ready three FSRUs for long-term FSRU contracts commencing in the coming months and completing the acquisition of the publicly held common units of Höegh LNG Partners LP. The third quarter EBITDA reflects that no charter revenue has been earned by Höegh Giant since late April, Höegh Gannet was idle for about half of the third quarter while being repositioned to a yard for modifications, higher OPEX, fuel costs and administrative expenses related to several ongoing FSRU projects incurring costs for repositioning of vessels, modifications to ready the vessels for FSRU operations and a settlement agreement reached with the previous charterer of Höegh Giant. Moreover, Neptune was out of service during the third quarter for regular class renewal and incurred 22 days off-hire as well as certain associated costs that were not reimbursable by the charterer.
The group recorded a net loss after tax of USD 45.9 million for the third quarter of 2022, down from a net loss after tax of USD 7.5 million in the preceding quarter. This decrease is mainly related to the above- mentioned reduction in EBITDA, partly offset by unrealized foreign exchange gains on an unhedged portion of the NOK-denominated bonds, and a reduction of provision for potential tax liabilities related to the group’s operations in Indonesia.
Operating cash flows decreased in the third quarter by USD 5.4 million to USD 32.7 million. The decrease was mainly driven by lower EBITDA which was partly offset by a reduction in working capital. Net cash outflows from investing activities of USD 163.2 million is related to the acquisition of common units in HMLP. Net cash inflows from financing activities of USD 146.8 million during the quarter mainly comprised of USD163.5 million in new equity and USD 40.5 million raised from sale of HLNG03 bonds held in treasury, offset by USD 57.2 million in repayment of borrowings and lease payments, dividends paid to non-controlling interests in Höegh LNG Partners (HMLP) and interest payments. The net increase in cash and cash equivalents during the third quarter was USD 16.3 million.
On 30 September 2022, Höegh LNG held USD 151.1 million in unrestricted cash (USD 134.8 million). Net interest-bearing debt, including lease liabilities, decreased during the third quarter by USD 21 million to USD 1 344 million (USD 1 365 million). Total assets and book equity on 30 September 2022, after adjusting for the mark-to-market of interest rate swaps, were USD 2 431 million (USD 2 427 million) and USD 706 million (USD 768 million) respectively, equivalent to an adjusted book equity ratio of 29% (32%).
Business review
Business development
Following the surge in demand for FSRUs earlier this year, Höegh LNG has secured long-term FSRU employment for its entire fleet. Consequently, Höegh LNG’s main focus is to prepare the FSRUs for start-up of the new contracts and ensure the projects are delivered on time to our customers over the next 3-6 months, except for the potential later start of the contract in Australia.
Following Höegh LNG’s termination of Höegh Giant’s FSRU contract in India in April, Höegh LNG reached an agreement with the previous charterer in July dropping all claims and counterclaims against a settlement amount to be paid by Höegh LNG and Höegh Giant thereafter left India. The vessel was modified and prepared for FSRU operations at a yard during October/November, and will be allocated to one of the group’s new FSRU contracts.
In October, the charterer of Independence declared the purchase option to acquire the FSRU in December 2024.
Operations
The fleet delivered a stable operating performance in the third quarter. However, Höegh Giant has been idle since late April following the termination of its FSRU contract and Höegh Gannet was idle for a period towards the end of third quarter while repositioning to yard for class renewal and modifications to be carried out in the fourth quarter to prepare the vessel for FSRU operations. Furthermore, Neptune was out of service for a period in the third quarter for regular class renewal and maintenance.
Russia’s invasion of Ukraine
The situation in Ukraine continues to impact the market for LNG as well as for LNG carriers and FSRUs, in particular since Russia is a major global exporter of crude oil and natural gas. This has led to a surge in demand for LNG, LNG carriers and FSRUs, which has caused LNG prices and FSRU charter rates to increase. While near-terms business opportunities have materialised for the company in Europe, the potential effects on the group’s business and operations of the conflict in Ukraine are complex to project and therefore highly uncertain. For example, the situation may lead to further regional and international conflicts or armed action. It is possible that such conflict could disrupt supply chains and cause instability in the global economy. Additionally, the ongoing conflict could result in the imposition of further economic sanctions by the United States, the European Union and other countries against Russia. While much uncertainty remains regarding the global impact of the invasion, it is possible that such tensions could adversely affect our business, financial condition, results of operation and cash flows. Furthermore, it is possible that third parties with whom we have charter contracts may be impacted by events in Russia and Ukraine, which could adversely affect our operations.
Covid-19
Höegh LNG is experiencing limited operational impacts from Covid-19. Ensuring the health and safety of its personnel continues to be the group’s highest priority. The board of directors recognises the challenges for all employees and in particular for the seafarers during these challenging times and is grateful for the extraordinary efforts.
The Covid-19 situation is dynamic and could change quickly – in particular with regards to maritime personnel and vessel operational logistics, including repairs and maintenance. Although Höegh LNG’s operations are not materially and directly affected by the Covid-19 pandemic at present, the group has been taking and will continue to take necessary measures to mitigate risks to employees and its operations. The group is continuously monitoring the Covid-19 situation and undertaking scenario analysis and other evaluations to address any changes related to the health, safety and wellbeing of personnel, the LNG and FSRU markets, government restrictions, and other aspects potentially affecting operations and the business.
Environment, social and governance (ESG)
Technical availability and LTI statistics
Safe and reliable operation of its fleet is a key focus for the group, especially in the current circumstances, and the results demonstrate a strong record of performance. Technical availability was close to 100% by the end of the third quarter, and there was no LTI’s recorded during the annualised period up to 30 September 2022.
ESG rating – Höegh LNG awarded 5 stars
Sustainability is a high priority for Höegh LNG. The company acknowledges the responsibility to drive the environmental, social and governance agenda through the development of its operations. In October 2022, Höegh LNG was awarded 5 stars with 97/100 score and 1st in Peer Comparison in the GRESB Infrastructure Asset Benchmark Report. With the high score of 97, Höegh LNG outranked the average peers’ score of 81.
GRESB is an index that compares companies across a spectre of ESG-criteria, and a global standard for ESG reporting.
Höegh LNG has an ambition to stay in the forefront of our industry. A full presentation of Höegh LNG’s sustainability strategy, is presented in the 2021 Sustainability Report published on https://www.hoeghlng.com/Sustainability/default.aspx
Corporate/other activities
New equity and release of pledge
During the quarter, Höegh LNG Holdings Ltd. raised USD 167.6 million in new equity from its shareholder. USD 163.5 million was in cash which was used to acquire the publicly held common units of Höegh LNG Partners LP and USD 4.1 million in was common units in Höegh LNG Partners LP previously owned by the shareholder.
In October, Nordic Trustee on behalf of the HLNG03 and HLNG04 bond holders released the pledge over 15.3 million common units in Höegh LNG Partners as Höegh LNG Holdings Ltd. had fulfilled the requirement to increase its equity by at least USD 100 million.
Financing
During the quarter, Höegh LNG Holdings Ltd. sold an aggregate of NOK 396 million of HLNG03 bonds held in treasury at an average price of 99.85% of par value, net of broker commission.
Höegh LNG Holdings Ltd. completed the acquisition of publicly held common units of Höegh LNG Partners LP
On 23 September 2022, Höegh LNG Holdings Ltd. completed the previously announced Agreement and Plan of Merger with Höegh LNG Partners LP (“Merger Agreement”) dated 25 May 2022. Pursuant to the Merger Agreement, Höegh LNG acquired all the outstanding common units of Höegh LNG Partners LP not already owned by Höegh LNG in exchange for $9.25 in cash per common unit. Following the transaction, Höegh LNG Holdings Ltd. is the sole owner of Höegh LNG Partners LP’s common units.
Pending arbitration with the charterer of PGN FSRU Lampung
The charterer under the lease and maintenance agreement for the PGN FSRU Lampung (“LOM”) served a notice of arbitration (“NOA”) on 2 August 2021 to declare the LOM null and void, and/or to terminate the LOM, and/or seek damages. On 13 June 2022, the charterer filed a statement of claim with a request for a primary relief and three alternative reliefs. The charterer’s claim of restitution if the LOM is declared null and void is USD 416 million, increasing to USD 472 million by June 2023 plus interest and costs. PT Hoegh LNG Lampung has previously 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 and a claim against the parent company of the charterer for the fulfilment of the charterer’s obligations under the LOM as stated in a guarantee provided by the parent company, with a claim for damages. On 13 June 2022, PT Hoegh LNG Lampung filed its statement of claim, and a statement of defence was filed in September. PT Hoegh LNG Lampung will take all necessary steps and will vigorously contest the charterer’s claims in the legal process. No assurance can be given at this time as to the outcome of the dispute with the charterer of the PGN FSRU Lampung. Notwithstanding the arbitration process, both parties have continued to perform their respective obligations under the LOM. In the event the outcome of the dispute is unfavourable to PT Hoegh LNG Lampung, it could have a material adverse impact on the group’s business, financial condition and results of operations.
Market
Global LNG trade for the third quarter of 2022 was 98 million tonnes, which represents an 7% growth compared to the third quarter of 2021. LNG carrier spot rates surged again towards the end of the quarter as Europe raced to fill gas storages in anticipation of a tight winter market, resulting in import bottle necks and a congestion of LNG carriers waiting to discharge. The congestion absorbed a growing number of vessels through the quarter, thereby outweighing the effect of relatively shorter ton-mileage.
LNGC rates have continued surging into the fourth quarter reaching new record-highs as congestion outside Europe perpetuated due to a combination of full gas storages, mild weather and consequent moderate gas demand on the continent. Some cargoes were diverted from the Atlantic to the Pacific, while Freeport LNG prepared to ramp up production again – both factors also supporting a strong shipping market. As the winter season comes along, congestion off Europe may ease as rising demand for heating digs into storages, freeing up tonnage and moderating rates, not least if large players conclude they are long on LNG carriers and start offering sublets. The newbuilding market for LNG carriers was very active during the nine months of the year and newbuilding prices have continued to increase.
The demand for FSRUs increased significantly during the first half of this year and remains high. The turnaround was driven by European countries looking to ensure security of energy supply with import of LNG to substitute pipeline gas from Russia. Currently, 44 FSRUs are on the water (excluding three specialised vessels with significantly lower send-out and three small-scale barges). There is one FSRU newbuilding on order with expected delivery in 2026. Following the recent surge in demand for FSRUs, most of the world’s fleet of FSRUs is now either employed on existing long-term contracts or committed to FSRU contracts with near-term commencement.
Outlook
The group’s FSRU fleet is expected to be fully employed and commenced operations on long-term FSRU contracts over the next 3-6 months, except for the potential later start of the contract in Australia. Currently, Höegh LNG’s main operational focus is to prepare the FSRUs for start-up of the new contracts and ensure the projects are delivered on time to our customers.
Looking further ahead, the company will start considering potential growth opportunities including expansions of its FSRU fleet with newbuilds or conversion of LNG carriers to FSRUs, to meet the increased demand for FSRUs.
The group expects that the results for the fourth quarter of 2022 will be impacted by three FSRUs being out of service for modifications and preparations for new FSRU projects commencing later this year and next year. The three FSRUs will be without revenue for a period, and costs involved with the modifications may be party expensed as OPEX and partly capitalized as investments depending on the nature of the costs incurred.
Source: Höegh LNG