UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
Commission File Number 001-36588
Höegh LNG Partners LP
(Translation of registrant’s name into English)
Wessex House, 5th Floor
45 Reid Street
Hamilton, HM 12 Bermuda
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
| Form 20-F x | Form 40-F ¨ |
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101 (b)(1).
| Yes ¨ | No x |
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101 (b)(7).
| Yes ¨ | No x |
HÖEGH LNG PARTNERS LP
REPORT ON FORM 6-K FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019
Table of Contents
| 2 |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of our financial condition and results of operations for the three months ended March 31, 2019 and 2018. References in this report to “Höegh LNG Partners,” “we,” “our,” “us” and “the Partnership” refer to Höegh LNG Partners LP or any one or more of its subsidiaries, or to all such entities unless the context otherwise indicates. References in this report to “our operating company” refer to Höegh LNG Partners Operating LLC, a wholly owned subsidiary of the Partnership. References in this report to “Höegh Lampung” refer to Hoegh LNG Lampung Pte Ltd., a wholly owned subsidiary of our operating company. References in this report to “Höegh FSRU III” refer to Höegh LNG FSRU III Ltd., a wholly owned subsidiary of our operating company. References in this report to “Höegh Cyprus” refer to Hoegh LNG Cyprus Limited including its wholly owned branch, Hoegh LNG Cyprus Limited Egypt Branch (“Egypt Branch”), a wholly owned subsidiary of our operating company and the owner of the Höegh Gallant. References in this report to “PT Höegh” refer to PT Hoegh LNG Lampung, the owner of the PGN FSRU Lampung. References in this report to “Höegh Colombia Holding” refer to Höegh LNG Colombia Holding Ltd., a wholly owned subsidiary of our operating company. References in this report to “Höegh FSRU IV” refers to Höegh LNG FSRU IV Ltd., a wholly owned subsidiary of Höegh Colombia Holding and the owner of the Höegh Grace. References in this report to “Höegh Colombia” refer to Höegh LNG Colombia S.A.S., a wholly owned subsidiary of Höegh Colombia Holding. References in this report to our or the “joint ventures” refer to SRV Joint Gas Ltd. and/or SRV Joint Gas Two Ltd., the joint ventures that own two of the vessels in our fleet, the Neptune and the Cape Ann, respectively. References in this Annual Report to “Global LNG Supply” refer to Global LNG Supply SA, a subsidiary of Total S.A. (“Total”). References in this Report to “PGN LNG” refer to PT PGN LNG Indonesia, a subsidiary of PT Perusahaan Gas Negara (Persero) Tbk (“PGN”). References in this report to “SPEC” refer to Sociedad Portuaria El Cayao S.A. E.S.P. References in this report to “Höegh LNG” refer, depending on the context, to Höegh LNG Holdings Ltd. and to any one or more of its direct and indirect subsidiaries, other than us. References in this Report to “EgyptCo” refer to Höegh LNG Egypt LLC, a wholly owned subsidiary of Höegh LNG.
You should read this section in conjunction with the unaudited condensed interim consolidated financial statements as of March 31, 2019 and for the periods ended March 31, 2019 and 2018 and the related notes thereto included elsewhere in this report, as well as our historical consolidated financial statements and related notes included in our report on Form 20-F filed with the Securities and Exchange Commission (“SEC”) on April 10, 2019 (our “2018 Form 20-F”). This discussion includes forward looking statements which, although based on assumptions that we consider reasonable, are subject to risks and uncertainties which could cause actual events or conditions to differ materially from those currently anticipated and expressed or implied by such forward looking statements. See also the discussion in the section entitled “Forward Looking Statements” below.
Highlights
| · | Reported total time charter revenues of $36.1 million for the first quarter of 2019 compared to $34.9 million of time charter revenues for the first quarter of 2018 |
| · | Generated operating income of $22.7 million and net income of $14.1 million for the first quarter of 2019 compared to operating income of $30.4 million and net income of $21.7 million for the first quarter of 2018; operating income and net income were impacted by unrealized losses on derivative instruments on the Partnership’s share of equity in earnings of joint ventures for the first quarter of 2019 compared with unrealized gains on derivative instruments for the first quarter of 2018 |
| · | On May 15, 2019, paid a $0.44 per unit distribution on common and subordinated units with respect to the first quarter of 2019, equivalent to $1.76 per unit on an annualized basis |
| · | On May 15, 2019, paid a cash distribution of $0.546875 per 8.75% Series A cumulative redeemable preferred unit (the "Series A preferred unit"), for the period commencing on February 15, 2019 to May 14, 2019 |
| 3 |
Our results of operations
| Three months ended | ||||||||
| March 31, | ||||||||
| (in thousands of U.S. dollars, except per unit amounts) | 2019 | 2018 | ||||||
| Statement of Income Data: | ||||||||
| Time charter revenues | $ | 36,075 | $ | 34,885 | ||||
| Other revenue | 64 | — | ||||||
| Total revenues | 36,139 | 34,885 | ||||||
| Vessel operating expenses | (5,893 | ) | (5,752 | ) | ||||
| Administrative expenses | (2,576 | ) | (2,787 | ) | ||||
| Depreciation and amortization | (5,323 | ) | (5,268 | ) | ||||
| Total operating expenses | (13,792 | ) | (13,807 | ) | ||||
| Equity in earnings (losses) of joint ventures | 351 | 9,369 | ||||||
| Operating income (loss) | 22,698 | 30,447 | ||||||
| Interest income | 199 | 187 | ||||||
| Interest expense | (6,836 | ) | (6,864 | ) | ||||
| Gain (loss) on debt extinguishment | 1,030 | — | ||||||
| Gain (loss) on derivative instruments | — | 631 | ||||||
| Other items, net | (1,047 | ) | (606 | ) | ||||
| Income (loss) before tax | 16,044 | 23,795 | ||||||
| Income tax expense | (1,910 | ) | (2,109 | ) | ||||
| Net income (loss) | $ | 14,134 | $ | 21,686 | ||||
| Preferred unitholders' interest in net income | 3,364 | 2,660 | ||||||
| Limited partners’ interest in net income (loss) | $ | 10,770 | $ | 19,026 | ||||
| Basic earnings per unit | ||||||||
| Common unit public | $ | 0.31 | $ | 0.57 | ||||
| Common unit Höegh LNG | $ | 0.34 | $ | 0.59 | ||||
| Subordinated unit | $ | 0.34 | $ | 0.59 | ||||
| Diluted earnings per unit | ||||||||
| Common unit public | $ | 0.31 | $ | 0.56 | ||||
| Common unit Höegh LNG | $ | 0.34 | $ | 0.59 | ||||
| Subordinated unit | $ | 0.34 | $ | 0.59 | ||||
| Cash Flow Data: | ||||||||
| Net cash provided by (used in) operating activities | $ | 21,875 | $ | 19,325 | ||||
| Net cash provided by (used in) investing activities | — | 920 | ||||||
| Net cash provided by (used in) financing activities | $ | (13,077 | ) | $ | (14,710 | ) | ||
| Other Financial Data: | ||||||||
| Segment EBITDA(1) | $ | 36,120 | $ | 34,868 | ||||
| (1) | Segment EBITDA is a non-GAAP financial measure. Please read “Non-GAAP Financial Measure” for a definition of Segment EBITDA and a reconciliation of Segment EBITDA to net income, the comparable U.S. GAAP financial measure. |
| 4 |
Three Months Ended March 31, 2019 Compared with the Three Months Ended March 31, 2018
Time Charter Revenues. The following table sets forth details of our time charter revenues for the three months ended March 31, 2019 and 2018:
| Positive | ||||||||||||
| Three months ended March 31, | (negative) | |||||||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | variance | |||||||||
| Time charter revenues | $ | 36,075 | $ | 34,885 | $ | 1,190 | ||||||
Time charter revenues for the three months ended March 31, 2019 were $36.1 million, an increase of $1.2 million from $34.9 million for the three months ended March 31, 2018. The increase was mainly due to higher time charter revenue for theHöegh Gallant for the three months ended March 31, 2019. TheHöegh Gallant had 10 days of off-hire due to scheduled maintenance for the three months ended March 31, 2018 compared with no days off-hire for the three months ended March 31, 2019.
Time charter revenues for thePGN FSRU Lampung consist of the lease element of the time charter, accounted for as a direct financing lease using the effective interest rate method, as well as variable consideration for providing time charter services, reimbursement for vessel operating expenses, performance warranties, if any, and withholding taxes borne by the charterer. Time charter revenues for theHöegh Gallant consist of the fixed daily hire rate which covers the operating lease and the provision of time charter services including the costs incurred to operate the vessel and performance warranties, if any. Time charter revenues for theHöegh Grace consist of a lease element accounted for as an operating lease, as well as variable consideration for providing time charter services, reimbursement of vessel operating expenses, performance warranties, if any, and certain taxes incurred. Effective January 1, 2019, we adopted the revised guidance in the new accounting standard,Leases, which did not change the timing or amount of lease revenue recognized but requires additional disclosures. Refer to notes 2 and 4 in the unaudited condensed interim consolidated financial statements.
Other revenue. The following table sets forth details of our other revenue for the three months ended March 31, 2019 and 2018:
| Positive | ||||||||||||
| Three months ended March 31, | (negative) | |||||||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | variance | |||||||||
| Other revenue | $ | 64 | $ | — | $ | 64 | ||||||
Other revenue consists of insurance proceeds received for a claim related to thePGN FSRU Lampung's warranty work from prior periods.
Vessel Operating Expenses. The following table sets forth details of our vessel operating expenses for the three months ended March 31, 2019 and 2018:
| Positive | ||||||||||||
| Three months ended March 31, | (negative) | |||||||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | variance | |||||||||
| Vessel operating expenses | $ | (5,893 | ) | $ | (5,752 | ) | $ | (141 | ) | |||
Vessel operating expenses for the three months ended March 31, 2019 were $5.9 million, an increase of $0.1 million from $5.8 million for the three months ended March 31, 2018. The increase reflects increased vessel operating expenses for theHöegh Gracewhich were largely offset by lower operating expenses for thePGN FSRU Lampung and theHöegh Gallantfor the three months ended March 31, 2019 compared with the corresponding period of 2018.
Administrative Expenses. The following table sets forth details of our administrative expenses for the three months ended March 31, 2019 and 2018:
| Positive | ||||||||||||
| Three months ended March 31, | (negative) | |||||||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | variance | |||||||||
| Administrative expenses | $ | (2,576 | ) | $ | (2,787 | ) | $ | 211 | ||||
| 5 |
Administrative expenses for the three months ended March 31, 2019 were $2.6 million, a decrease of $0.2 million from $2.8 million for the three months ended March 31, 2018. The decrease reflects lower administrative expenses for partnership expenses.
Depreciation and Amortization. The following table sets forth details of our depreciation and amortization for the three months ended March 31, 2019 and 2018:
| Positive | ||||||||||||
| Three months ended March 31, | (negative) | |||||||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | variance | |||||||||
| Depreciation and amortization | $ | (5,323 | ) | $ | (5,268 | ) | $ | (55 | ) | |||
Depreciation and amortization were $5.3 million for each of the three months ended March 31, 2019 and 2018.
Total Operating Expenses. The following table sets forth details of our total operating expenses for the three months ended March 31, 2019 and 2018:
| Positive | ||||||||||||
| Three months ended March 31, | (negative) | |||||||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | variance | |||||||||
| Total operating expenses | $ | (13,792 | ) | $ | (13,807 | ) | $ | 15 | ||||
Total operating expenses were $13.8 million for each of the three months ended March 31, 2019 and 2018.
Equity in Earnings (Losses) of Joint Ventures. The following table sets forth details of our equity in earnings (losses) of joint ventures for the three months ended March 31, 2019 and 2018:
| Positive | ||||||||||||
| Three months ended March 31, | (negative) | |||||||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | variance | |||||||||
| Equity in earnings (losses) of joint ventures | $ | 351 | $ | 9,369 | $ | (9,018 | ) | |||||
Equity in earnings of joint ventures for the three months ended March 31, 2019 was $0.4 million, a decrease of $9.0 million from equity in earnings of joint ventures of $9.4 million for the three months ended March 31, 2018. Unrealized gains and losses on derivative instruments in our joint ventures significantly impacted the equity in earnings of joint ventures for the three months ended March 31, 2019 and 2018.
Excluding the unrealized loss on derivative instruments for the three months ended March 31, 2019 and the unrealized gain on derivative instruments for the three months ended March 31, 2018, the equity in earnings of joint ventures would have been $2.9 million for each of the three months ended March 31, 2019 and 2018.
Our share of our joint ventures’ operating income was $5.9 million for the three months ended March 31, 2019, compared with $6.1 million for the three months ended March 31, 2018. Our share of other financial expense, net, principally consisting of interest expense, was $3.0 million for the three months ended March 31, 2019, a decrease of $0.3 million from $3.3 million for the three months ended March 31, 2018. The reduction was mainly due to lower interest expense due to repayment of principal on debt between the two periods.
Our share of unrealized loss on derivative instruments was $2.5 million for the three months ended March 31, 2019, a decrease of $9.0 million from an unrealized gain of $6.5 million for the three months ended March 31, 2018.
There was no accrued income tax expense for the three months ended March 31, 2019 and 2018. Our joint ventures did not pay any dividends for the three months ended March 31, 2019 and 2018.
| 6 |
Operating Income (Loss). The following table sets forth details of our operating income for the three months ended March 31, 2019 and 2018:
| Positive | ||||||||||||
| Three months ended March 31, | (negative) | |||||||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | variance | |||||||||
| Operating income (loss) | $ | 22,698 | $ | 30,447 | $ | (7,749 | ) | |||||
Operating income for the three months ended March 31, 2019 was $22.7 million, a decrease of $7.7 million from operating income of $30.4 million for the three months ended March 31, 2018. Excluding the impact of the unrealized gains (losses) on derivatives impacting the equity in earnings of joint ventures for the three months ended March 31, 2019 and 2018, operating income for the three months ended March 31, 2019 would have been $25.2 million, an increase of $1.3 million from $23.9 million for the three months ended March 31, 2018. Excluding the impact of the unrealized gains (losses) on derivatives, the increase for the three months ended March 31, 2019 is primarily due to increased time charter revenue as a result of all vessels being on-hire for the full three month period ended March 31, 2019 and decreased administrative expenses which were partly offset by increased vessel operating expenses.
Interest Income. The following table sets forth details of our interest income for the three months ended March 31, 2019 and 2018:
| Positive | ||||||||||||
| Three months ended March 31, | (negative) | |||||||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | variance | |||||||||
| Interest income | $ | 199 | $ | 187 | $ | 12 | ||||||
Interest income was $0.2 million for each of the three months ended March 31, 2019 and 2018. Interest income is mainly related to interest on cash balances and accrued interest on the advances to our joint ventures for the three months ended March 31, 2019 and 2018. The interest rate under the joint venture shareholder loans is a fixed rate of 8.0% per year.
Interest Expense. The following table sets forth details of our interest expense for the three months ended March 31, 2019 and 2018:
| Positive | ||||||||||||
| Three months ended March 31, | (negative) | |||||||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | variance | |||||||||
| Interest expense | $ | (6,465 | ) | $ | (6,640 | ) | $ | 175 | ||||
| Amortization and gain on cash flow hedge | 217 | — | 217 | |||||||||
| Commitment fees | (112 | ) | (37 | ) | (75 | ) | ||||||
| Amortization of debt issuance cost and fair value of debt assumed | (476 | ) | (187 | ) | (289 | ) | ||||||
| Total interest expense | $ | (6,836 | ) | $ | (6,864 | ) | $ | 28 | ||||
Interest expense was $6.8 million for each of the three months ended March 31, 2019 and 2018. Interest expense consists of the interest incurred, commitment fees and amortization of debt issuance cost and fair value of debt assumed for the period. As a result of adopting the revised guidance forDerivatives and Hedging, Targeted Improvements to Accounting for Hedging Activities on January 1, 2019 on a prospective basis, those amounts related to cash flow hedges are reclassified to earnings in the same income statement line as the hedged item when the hedged item affects earnings. Amortization amounts reclassified to or recorded to earnings for our interest rate swaps for the three months ended March 31, 2019 are presented as a component of interest expense compared with the presentation in previous periods in the gain (loss) on derivatives instruments line item in our consolidated statements of income. Refer to notes 2 and 13 to the unaudited condensed interim consolidated financial statements for additional information.
The interest incurred of $6.4 million for the three months ended March 31, 2019, decreased by $0.2 million compared to $6.6 million for the three months ended March 31, 2018, principally due to repayment of outstanding loan balances for the loan facilities related to thePGN FSRU Lampung (the "Lampung facility"). On January 29, 2019, we entered into a loan agreement with a syndicate of banks to refinance the outstanding balances of the Gallant/Grace facility. On January 31, 2019, we drew $320 million to refinance outstanding amounts under the existing Gallant/Grace facility. For more information refer to "Liquidity and Capital Resources".
| 7 |
Amortization and gain on cash flow hedge of $0.2 million for the three months ended March 31, 2019 were mainly due to the inclusion of a gain on the settlement of the interest rate swaps terminated when the Gallant/Grace facility was extinguished. This line item also includes the amortization of the amounts excluded from hedge effectiveness, for discontinued hedges and the initial fair values of interest rate swaps related to the Lampung facility and the $385 million facility.
Commitment fees were $0.1 million for the three months ended March 31, 2019, an increase of $0.1 million from the three months ended March 31, 2018. For the three months ended March 31, 2019, the commitment fees relate to the undrawn $63 million revolving credit facility under the $385 million facility.
Amortization of debt issuance cost and fair value of debt assumed for the three months ended March 31, 2019 were $0.5 million, an increase of $0.3 million from $0.2 million for the three months ended March 31, 2018. The increase in amortization of debt issuance cost and fair value of debt assumed was mainly a result of the refinancing and repayment of the Gallant/Grace facility with the $385 million facility on January 31, 2019. Payment of debt issuance costs was $5.8 million, which is deferred and presented as a direct deduction from the outstanding principal of the $385 million facility in the consolidated balance sheet and amortized on an effective interest rate method over the term of the $385 million facility.
Gain (Loss) on Debt Extinguishment. The following table sets forth details of our gain (loss) on debt extinguishment for the three months ended March 31, 2019 and 2018:
| Positive | ||||||||||||
| Three months ended March 31, | (negative) | |||||||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | variance | |||||||||
| Gain (loss) on debt extinguishment | $ | 1,030 | $ | — | $ | 1,030 | ||||||
Gain on debt extinguishment for the three months ended March 31, 2019 was $1.0 million, an increase of $1.0 million compared to the three months ended March 31, 2018. Gain on debt extinguishment for the three months ended March 31, 2019 related to the repayment of the Gallant/Grace facility on January 31, 2019. The unamortized amounts related to the fair value of debt assumed, or premium, recognized in relation to the acquisitions of the entities owning theHöegh Gallant on October 1, 2015 and the entities owning theHöegh Grace on January 1, 2017, of approximately $1.0 million, which was recognized as a gain on January 31, 2019 due to the extinguishment of the Gallant/Grace facility.
Gain (Loss) on Derivative Instruments. The following table sets forth details of our gain (loss) on derivative instruments for the three months ended March 31, 2019 and 2018:
| Positive | ||||||||||||
| Three months ended March 31, | (negative) | |||||||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | variance | |||||||||
| Gain (loss) on derivative instruments | $ | — | $ | 631 | $ | (631 | ) | |||||
As discussed under interest expense above, the gain (loss) on derivative instruments for cash flow hedges for the three months ended March 31, 2019, is presented as a component of interest expense. Gain on derivative instruments for the three months ended March 31, 2018 was $0.6 million.
Gain on derivative instruments for the three months ended March 31, 2018 related to the interest rate swaps for the Lampung facility, Gallant facility and the Grace facility.
Other Items, Net. The following table sets forth details of our other items, net for the three months ended March 31, 2019 and 2018:
| Positive | ||||||||||||
| Three months ended March 31, | (negative) | |||||||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | variance | |||||||||
| Foreign exchange gain (loss) | $ | (19 | ) | $ | 58 | $ | (77 | ) | ||||
| Bank charges, fees and other | (53 | ) | (35 | ) | (18 | ) | ||||||
| Withholding tax on interest expense and other | (975 | ) | (629 | ) | (346 | ) | ||||||
| Total other items, net | $ | (1,047 | ) | $ | (606 | ) | $ | (441 | ) | |||
| 8 |
Other items, net for the three months ended March 31, 2019 were $1.0 million, an increase of $0.4 million from $0.6 million for the three months ended March 31, 2018. The increase is mainly due to a negative change in the foreign exchange gain (loss) of $0.1 million and an increase of $0.3 million in withholding tax on interest expense and other for the three months ended March 31, 2019 compared to same period last year.
Income (Loss) Before Tax. The following table sets forth details of our income (loss) before tax for the three months ended March 31, 2019 and 2018:
| Positive | ||||||||||||
| Three months ended March 31, | (negative) | |||||||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | variance | |||||||||
| Income (loss) before tax | $ | 16,044 | $ | 23,795 | $ | (7,751 | ) | |||||
Income before tax for the three months ended March 31, 2019 was $16.0 million, a decrease of $7.8 million from $23.8 million for the three months ended March 31, 2018. The income before tax for both periods was impacted by the unrealized gains (losses) on derivative instruments mainly on our share of equity in earnings of joint ventures. Excluding all the unrealized gains and losses on derivative instruments, income before tax for the three months ended March 31, 2019 was $18.6 million, an increase of $2.0 million from $16.6 million for the three months March 31, 2018. Excluding the unrealized gains (losses) on derivative instruments, the increase is primarily due to increased time charter revenue and the gain on debt extinguishment.
Income Tax Expense. The following table sets forth details of our income tax expense for the three months ended March 31, 2019 and 2018:
| Positive | ||||||||||||
| Three months ended March 31, | (negative) | |||||||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | variance | |||||||||
| Income tax expense | $ | (1,910 | ) | $ | (2,109 | ) | $ | 199 | ||||
Income tax expense for the three months ended March 31, 2019 was $1.9 million, a decrease of $0.2 million compared to $2.1 million for the three months ended March 31, 2018. We are not subject to Marshall Islands income taxes. However, we are subject to tax for earnings of our subsidiaries incorporated in Singapore, Indonesia, and for certain Colombian source income. For the three months ended March 31, 2019 and 2018, the income tax expense largely related to the subsidiaries in Singapore, Indonesia and Colombia. The charterer in Colombia pays certain taxes directly to the Colombian tax authorities on behalf of our subsidiaries that own and operate theHöegh Grace. The tax payments are a mechanism for advance collection of part of the income taxes for the Colombian subsidiary and a final income tax on Colombian source income for the non-Colombian subsidiary. We concluded these third party payments to the tax authorities represent income taxes that must be accounted for under the guidance for income taxes. The amount of non-cash income tax expense was $0.2 million for each of the three months ended March 31, 2019 and 2018.
Benefits of uncertain tax positions are recognized when it is more-likely-than-not that a tax position taken in a tax return will be sustained upon examination based on the technical merits of the position. For the three months ended March 31, 2019 and 2018, there were increases in uncertain tax positions related to Indonesia of $0.1 million and $0.4 million, respectively. As of March 31, 2019, the unrecognized tax benefits were $1.8 million.
Net Income (Loss). The following table sets forth details of our net income for the three months ended March 31, 2019 and 2018:
| Positive | ||||||||||||
| Three months ended March 31, | (negative) | |||||||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | variance | |||||||||
| Net income (loss) | $ | 14,134 | $ | 21,686 | $ | (7,552 | ) | |||||
| Preferred unitholders' interest in net income | 3,364 | 2,660 | 704 | |||||||||
| Limited partners’ interest in net income (loss) | $ | 10,770 | $ | 19,026 | $ | (8,256 | ) | |||||
As a result of the foregoing, net income for the three months ended March 31, 2019 was $14.1 million, a decrease of $7.6 million from net income of $21.7 million for the three months ended March 31, 2018. For the three months ended March 31, 2019, net income of $3.4 million was attributable to the holders of the Series A preferred units, an increase of $0.7 million from $2.7 million due to additional preferred units issued as part of our at-the-market offering (“ATM program”). Our limited partners' interest in net income, for the three months ended March 31, 2019 was $10.8 million, a decrease of $8.2 million from net income of $19.0 million for the three months ended March 31, 2018.
| 9 |
Segments
There are two operating segments. The segment profit measure is Segment EBITDA, which is defined as earnings before interest, taxes, depreciation, amortization and other financial items (gains and losses on derivative instruments and other items, net). Segment EBITDA is reconciled to operating income and net income in the segment presentation below. The two segments are “Majority held FSRUs” and “Joint venture FSRUs.” In addition, unallocated corporate costs, interest income from advances to joint ventures, and interest expense related to the outstanding balances on the $85 million revolving credit facility and the $385 million facility are included in “Other.”
For the three months ended March 31, 2019 and 2018, Majority held FSRUs includes the direct financing lease related to thePGN FSRU Lampung and the operating leases related to theHöegh Gallant and theHöegh Grace.
For the three months ended March 31, 2019 and 2018, Joint Venture FSRUs include two 50% owned FSRUs, theNeptune and theCape Ann, that operate under long-term time charters with one charterer.
The accounting policies applied to the segments are the same as those applied in the financial statements, except that i) Joint Venture FSRUs are presented under the proportional consolidation method for the segment note and in the tables below, and under equity accounting for the consolidated financial statements and ii) internal interest income and interest expense between the Partnership's subsidiaries that eliminate in consolidation are not included in the segment columns for the other financial income (expense), net line. Under the proportional consolidation method, 50% of the Joint Venture FSRUs’ revenues, expenses and assets are reflected in the segment note. Management monitors the results of operations of joint ventures under the proportional consolidation method and not the equity method of accounting.
Majority Held FSRUs. The following table sets forth details of segment results for the Majority Held FSRUs for the three months ended March 31, 2019 and 2018:
| Three months ended | Positive | |||||||||||
| Majority Held FSRUs | March 31, | (negative) | ||||||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | variance | |||||||||
| Time charter revenues | $ | 36,075 | $ | 34,885 | $ | 1,190 | ||||||
| Other revenues | 64 | — | 64 | |||||||||
| Total revenues | 36,139 | 34,885 | 1,254 | |||||||||
| Vessel operating expenses | (5,893 | ) | (5,752 | ) | (141 | ) | ||||||
| Administrative expenses | (805 | ) | (781 | ) | (24 | ) | ||||||
| Segment EBITDA | 29,441 | 28,352 | 1,089 | |||||||||
| Depreciation and amortization | (5,323 | ) | (5,268 | ) | (55 | ) | ||||||
| Operating income (loss) | 24,118 | 23,084 | 1,034 | |||||||||
| Gain (loss) on debt extinguishment | 1,030 | — | 1,030 | |||||||||
| Gain (loss) on derivative instruments | — | 631 | (631 | ) | ||||||||
| Other financial income (expense), net | (4,239 | ) | (6,571 | ) | 2,332 | |||||||
| Income (loss) before tax | 20,909 | 17,144 | 3,765 | |||||||||
| Income tax expense | (1,910 | ) | (2,109 | ) | 199 | |||||||
| Net income (loss) | $ | 18,999 | $ | 15,035 | $ | 3,964 | ||||||
| Limited partners' interest in net income (loss) | $ | 18,999 | $ | 15,035 | $ | 3,964 | ||||||
Time charter revenues for the three months ended March 31, 2019 were $36.1 million compared to $34.9 million for the three months ended March 31, 2018. As discussed above, the increase was mainly due to higher time charter revenue for theHöegh Gallant.TheHöegh Gallant had 10 days of off-hire due to scheduled maintenance for the three months ended March 31, 2018 compared with no off-hire for the three months ended March 31, 2019. ThePGN FSRU Lampung and theHöegh Grace were both on-hire for the full three months periods ended March 31, 2019 and 2018.
Other revenue consists of insurance proceeds received for a claim related to thePGN FSRU Lampung's warranty work from prior periods.
| 10 |
Vessel operating expenses for the three months ended March 31, 2019 were $5.9 million, an increase of $0.1 million from $5.8 million for the three months ended March 31, 2018. The increase reflects increased vessel operating expenses for theHöegh Gracewhich were largely offset by lower operating expenses for thePGN FSRU Lampung and theHöegh Gallantfor the three months ended March 31, 2019 compared to the corresponding period of 2018.
Administrative expenses were $0.8 million for each of the three months ended March 31, 2019 and 2018.
Segment EBITDA for the three months ended March 31, 2019 was $29.4 million, an increase of $1.0 million from $28.4 million for the three months ended March 31, 2018. The Segment EBITDA was negatively impacted by the scheduled off-hire for theHöegh Gallantfor the three months ended March 31, 2018 while all three vessels have been on-hire during the three months ended March 31, 2019.
Joint Venture FSRUs. The following table sets forth details of segment results for the Joint Venture FSRUs for the three months ended March 31, 2019 and 2018:
| Three months ended | Positive | |||||||||||
| Joint Venture FSRUs | March 31, | (negative) | ||||||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | variance | |||||||||
| Time charter revenues | $ | 10,330 | $ | 10,996 | $ | (666 | ) | |||||
| Total revenues | 10,330 | 10,996 | (666 | ) | ||||||||
| Vessel operating expenses | (1,530 | ) | (2,116 | ) | 586 | |||||||
| Administrative expenses | (350 | ) | (358 | ) | 8 | |||||||
| Segment EBITDA | 8,450 | 8,522 | (72 | ) | ||||||||
| Depreciation and amortization | (2,553 | ) | (2,401 | ) | (152 | ) | ||||||
| Operating income (loss) | 5,897 | 6,121 | (224 | ) | ||||||||
| Gain (loss) on derivative instruments | (2,541 | ) | 6,515 | (9,056 | ) | |||||||
| Other income (expense), net | (3,005 | ) | (3,267 | ) | 262 | |||||||
| Income (loss) before tax | 351 | 9,369 | (9,018 | ) | ||||||||
| Income tax expense | — | — | — | |||||||||
| Net income (loss) | $ | 351 | $ | 9,369 | $ | (9,018 | ) | |||||
Total time charter revenues for the three months ended March 31, 2019 were $10.3 million, a decrease of $0.7 million compared to $11.0 million for the three months ended March 31, 2018. For the three months ended March 31, 2019, both theNeptune and theCape Ann had lower time charter revenues related to reimbursement of project costs and for vessel operating expenses which were partially offset by higher amortization of deferred revenue compared to the three months ended March 31, 2018. For the three months ended March 31, 2019, the higher amortization of deferred revenue related to vessel modifications and drydock completed in 2018 that were reimbursed by the charterer for theCape Ann.
Vessel operating expenses were $1.5 million for the three months ended March 31, 2019, a decrease of $0.6 million compared to $2.1 million for the three months ended March 31, 2018. Vessel operating expenses for the three months ended March 31, 2019 were lower for both vessels reflecting, in part, less costs incurred for projects for the charterer related to theNeptune and theCape Ann.
Administrative expenses were $0.4 million for each of the three months ended March 31, 2019 and 2018.
Segment EBITDA was $8.5 million for each of the three months ended March 31, 2019 and 2018.
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Other. The following table sets forth details of other results for the three months ended March 31, 2019 and 2018:
| Three months ended | Positive | |||||||||||
| Other | March 31, | (negative) | ||||||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | variance | |||||||||
| Administrative expenses | $ | (1,771 | ) | $ | (2,006 | ) | $ | 235 | ||||
| Segment EBITDA | (1,771 | ) | (2,006 | ) | 235 | |||||||
| Operating income (loss) | (1,771 | ) | (2,006 | ) | 235 | |||||||
| Other financial income (expense), net | (3,445 | ) | (712 | ) | (2,733 | ) | ||||||
| Income (loss) before tax | (5,216 | ) | (2,718 | ) | (2,498 | ) | ||||||
| Income tax expense | — | — | — | |||||||||
| Net income (loss) | $ | (5,216 | ) | $ | (2,718 | ) | $ | (2,498 | ) | |||
Administrative expenses and Segment EBITDA for the three months ended March 31, 2019 were $1.8 million, a decrease of $0.2 million from $2.0 million for the three months ended March 31, 2018. The decrease of $0.2 million reflects lower project type expenses for partnership for the three months ended March 31, 2019, while administrative expenses included higher advisor costs incurred in preparation for establishing the ATM program for the three months ended March 31, 2018.
Other financial income (expense), net, which is not part of the segment measure of profits, is related to the interest income accrued on the advances to our joint ventures and the $85 million revolving credit facility from Höegh LNG. In addition, for the three months ended March 31, 2019, other financial income (expense), net also includes interest expense, consisting of interest incurred, commitment fees and amortization of debt issuance costs, related to the $385 million facility entered into and drawn down at the end of January 2019 with no comparable expenses for the three months ended March 31, 2018.
As of March 31, 2019, the revolving credit facility under the $385 million facility has not been drawn and a commitment fee is paid on the undrawn balance. Refer to "Liquidity and Capital Resources" below as well as note 9 to the unaudited condensed interim consolidated financial statements for more details on the refinancing of the Gallant/Grace facility and the new $385 million facility.
Other financial income (expense), net was an expense of $3.4 million for the three months ended March 31, 2019, an increase of $2.7 million from $0.7 million for the three months ended March 31, 2018 principally due to higher interest expense as a result of drawing on the $385 million facility.
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Liquidity and Capital Resources
Liquidity and Cash Needs
We operate in a capital-intensive industry, and we expect to finance the purchase of additional vessels and other capital expenditures through a combination of cash from operations, the utilization of borrowings from commercial banks and debt and equity financings. Our liquidity requirements relate to paying our unitholder distributions, servicing interest and quarterly repayments on our debt (“debt amortization”), funding working capital, funding on-water surveys or drydocking and maintaining cash reserves against fluctuations in operating cash flows. The liquidity requirements of our joint ventures relate to the servicing of debt, including repayment of shareholder loans, funding working capital, including drydocking and on-water surveys, and maintaining cash reserves against fluctuations in operating cash flows.
Our sources of liquidity include cash balances, cash flows from our operations, interest payments from our advances to our joint ventures, our current undrawn balance of $45.0 million as of March 31, 2019 under the $85 million revolving credit facility from Höegh LNG and our undrawn balance under the $63 million revolving credit facility as described below. In addition, liquidity can also be supplemented, from time to time, by net proceeds of the ATM program, depending on the market conditions. Cash and cash equivalents are denominated primarily in U.S. dollars. We do not currently use derivative instruments for other purposes than managing interest rate risks. The advances to our joint ventures (accrued interest from prior periods on repaid shareholder loans) are subordinated to the joint ventures’ long-term bank debt, consisting of the Neptune facility and the Cape Ann facility. Under terms of the shareholder loan agreements, the repayments shall be prioritized over any dividend payment to the owners of the joint ventures. As discussed in note 14 under "Joint ventures claims and accruals" to the unaudited condensed interim consolidated financial statements, the joint ventures have recorded accruals for the probable liability for boil-off claim under the time charters. As a precaution, the joint ventures suspended payments on the shareholder loans as of September 30, 2017 pending the outcome of the boil-off claim since the amounts and timing of a potential settlement are not clear. The suspension of the payments on the shareholder loans reduces cash flows available to us. Dividend distributions from our joint ventures require a) agreement of the other joint venture owners; b) fulfilment of requirements of the long-term bank loans; and c) under Cayman Islands law may be paid out of profits or capital reserves subject to the joint venture being solvent after the distribution. Dividends from Höegh Lampung may only be paid out of profits under Singapore law. Dividends from PT Höegh may only be paid if its retained earnings are positive under Indonesian law and requirements are fulfilled under the Lampung facility. In addition, PT Höegh, as an Indonesian incorporated company, is required to establish a statutory reserve equal to 20% of its paid up capital. The dividend can only be distributed if PT Höegh’s retained earnings are positive after deducting the statutory reserve. As of March 31, 2019, PT Höegh LNG Lampung is in the process of establishing the required statutory reserves and therefore expects to be able to make dividend payments in the future under Indonesia law. Under the Lampung facility, there are limitations on cash dividends and loan distributions that can be made to the Partnership. Subject to meeting a debt service ratio of 1.20 to 1.00, PT Höegh can distribute cash from its cash flow from operations to us as payment of intercompany accrued interest and/or intercompany debt, after quarterly payments of the Lampung facility and fulfilment of the “waterfall” provisions to meet operating requirements as defined by the Lampung facility. Under Cayman Islands law, Höegh Cyprus, Höegh FSRU IV and Höegh Colombia Holding may only pay distributions out of profits or capital reserves if the entity is solvent after the distribution. Dividends from Höegh Cyprus may only be distributed out of profits and not from the share capital of the company. Dividends and other distributions from Höegh Cyprus, Höegh Colombia and Höegh FSRU IV may only be distributed if after the dividend payment, the Partnership would remain in compliance with the financial covenants under the $385 million facility. For a description of our credit facilities and revolving credit facilities, please see notes 15 and 20 to the audited consolidated financial statements contained in our 2018 Form 20-F as well as notes 9 and 11 to the unaudited condensed interim consolidated financial statements contained in this Report on Form 6-K.
| 13 |
As of March 31, 2019, the Partnership has no material commitments for capital expenditures. However, during the second quarter of 2019, theHöegh Gallant will have a drydock and thePGN FSRU Lampung will complete a class renewal survey while remaining on the water. The combined expenditure is expected to be approximately $7.0 to $8.5 million which will not be covered by the respective charterers. TheHöegh Gallant and thePGN FSRU Lampung are expected to be off-hire for 10-12 days and 4 days, respectively, during the second quarter of 2019 for these procedures. In addition, certain performance warranties related to vessel performance have not been met during the second quarter of 2019 which could result in reduced hire for several days depending on the performance for the remainder of the quarter.
For the joint ventures, theNeptune will also have class renewal survey while remaining on the water during the third quarter of 2019. The majority of the survey expenditures are expected to be compensated by the charterer and theNeptune will remain on-hire. During the class survey of theNeptune, the joint venture expects to incur costs for certain capital improvements that will not be reimbursed by the charterer for which our 50% share is expected to be approximately $0.2 million for the year ended December 31, 2019. As discussed in note 14 under "Joint ventures claims and accruals" in our unaudited condensed interim consolidated financial statements, the joint ventures have a probable liability for a boil-off claim under the time charters. Our 50% share of the accrual was approximately $11.9 million as of March 31, 2019. The joint ventures will continue to monitor this issue and adjust accruals, as might be required, based upon additional information and further developments. The claim may be resolved through negotiation or arbitration. Subsequent to the partial determination of the arbitration, the parties have initiated discussions with the objective of reaching a negotiated solution. To the extent that excess boil-off claims result in a settlement, we would be indemnified by Höegh LNG for our share of the cash impact of any settlement. However, other concessions, if any, would not be expected to be indemnified.
EgyptCo began chartering theHöegh Gallant on an LNG carrier time charter to a third party in October 2018 and the amended contract expires in April 2020. A subsidiary of the Partnership, as the owner of theHöegh Gallant, has a lease and maintenance agreement ("LMA") with EgyptCo until April 2020. As a result of this contract structure, it was announced that the LMA could become subject to amendment. It has been concluded that there will be no amendment to the hire terms of the LMA. To date, the Partnership has not entered a new contract for theHöegh Gallant from April 2020. Pursuant to an option agreement, the Partnership has the right to cause Höegh LNG to charter theHöegh Gallant from the expiration or termination of the EgyptCo charter until July 2025, at a rate equal to 90% of the rate payable pursuant to the current charter with EgyptCo, plus any incremental taxes or operating expenses as a result of the new charter. Höegh LNG’s ability to make payments to us with respect to an exercise of the option by us may be affected by events beyond our and its control, including opportunities to obtain new employment for the vessel, prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, Höegh LNG’s ability to meet its obligations to us may be impaired. If Höegh LNG is unable to meet its obligations to us for the option, our financial condition, results of operations and ability to make cash distributions to our unitholders could be materially adversely affected.
On January 29, 2019, we entered into a loan agreement with a syndicate of banks to refinance the outstanding balances of the Gallant/Grace facility. The new facility includes a senior secured term loan and revolving credit facilities with an aggregate borrowing capacity of the lesser of (i) $385 million and (ii) 65% of the fair market value of theHöegh Gallant and 75% of the market value of theHöegh Grace as of the initial borrowing date. The $385 million facility is structured as a term loan with commercial and export tranches for each vessel to refinance outstanding amounts under the existing Gallant/Grace facility and a revolving credit facility for the Partnership with a drawing capacity of $63 million. On January 31, 2019, we drew $320 million under the commercial and the export credit tranches on the $385 million facility and used proceeds of $303.2 million and $1.6 million to settle the outstanding balance and accrued interest, respectively, on the Gallant/Grace facility and $5.5 million to pay arrangement fees (debt issuance cost) under the $385 million facility. The remaining proceeds of $9.6 million were used for general partnership purposes.
As of March 31, 2019, the total outstanding principal on our long-term debt was $491.3 million related to the Lampung and the $385 million facilities and the $85 million revolving credit facility. The book value of our total long-term debt was $480.2 million as of March 31, 2019. On May 28, 2019, the repayment date on the $85 million revolving credit facility was extended to January 1, 2023 and the terms amended for the interest rate to be LIBOR plus a margin of 1.4% in 2019, 3.0% in 2020 and 4.0% thereafter. For a description of our credit facilities and revolving credit facilities, please see notes 15 and 20 to the audited consolidated financial statements contained in our 2018 Form 20-F as well as notes 9 and 11 to the unaudited condensed interim consolidated financial statements contained in this Report on Form 6-K.
We have not made use of derivative instruments for currency risk management purposes. We had interest rate swaps contracts for the Lampung facility ("Lampung interest rate swaps") and the $385 million facility ("$385 million interest rate swaps") as of March 31, 2019. As of March 31, 2019, we had outstanding interest rate swap agreements for a total notional amount of $389.0 million to hedge against the floating interest rate risks of our long-term debt under the Lampung facility and the $385 million facility. For additional information, refer to “Qualitative and Quantitative Disclosure About Market Risk” and note 13 to the unaudited condensed interim consolidated financial statements.
| 14 |
As of March 31, 2019, we had cash and cash equivalents of $34.2 million, an undrawn portion of $45.0 million of the $85 million revolving credit facility from Höegh LNG and an undrawn $63 million revolving credit facility under the $385 million facility as defined below. On May 13, 2019, we drew $3.5 million on the $85 million revolving credit facility. Current restricted cash for operating obligations of thePGN FSRU Lampung was $7.0 million and long-term restricted cash required under the Lampung facility was $13.0 million as of March 31, 2019.
As of March 31, 2019, the Partnership's total current liabilities exceeded total current assets by $0.9 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 $13.0 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. We believe our cash flows from operations, including distributions to us from PT Höegh, Höegh Cyprus, and Höegh FSRU IV as payment of intercompany interest and/or intercompany debt or dividends, will be sufficient to meet our debt amortization and working capital needs and maintain cash reserves against fluctuations in operating cash flows. In addition, we require liquidity to pay distributions to our unitholders. Our available balances on the $85 million revolving credit facility to Höegh LNG and the $63 million revolving credit facility provide sources of liquidity reserves to supplement funding of our distributions and other general liquidity needs. In addition, liquidity can also be supplemented, from time to time, by net proceeds of the ATM program, depending on the market conditions. We believe our current resources, including the undrawn balance on the $85 million revolving credit facility to Höegh LNG and the undrawn balance on the $63 million revolving credit facility, are sufficient to meet our working capital requirements for our current business for the next twelve months.
On February 14, 2019 the Partnership paid a quarterly cash distribution of $15.0 million, or $0.44 per common and subordinated unit, with respect to the fourth quarter of 2018.
On February 15, 2019, the Partnership paid a cash distribution of $3.4 million, or $0.546875 per Series A preferred unit, for the period commencing on November 15, 2018 to February 14, 2019.
On May 13, 2019, the Partnership drew $3.5 million under the $85 million revolving credit facility.
On May 15, 2019, the Partnership paid a cash distribution of $15.0 million, or $0.44 per common and subordinated unit, with respect to the first quarter of 2019, equivalent to $1.76 per unit on an annualized basis.
On May 15, 2019, the Partnership paid a cash distribution of $3.4 million, or $0.546875 per Series A preferred unit, for the period commencing on February 15, 2019 to May 14, 2019.
For the period from April 1, 2019 to May 27, 2019, we sold 48,630 Series A preferred units under our ATM program at an average gross sales price of $26.16 per unit and received net proceeds, after sales commissions, of $1.2 million. For the period from April 1, 2019 to May 27, 2019, we sold 53,060 common units under our ATM program at an average gross price of $19.60 per unit and received net proceeds, after sales commissions, of $1.0 million. The Partnership has paid an aggregate of $0.04 million in sales commissions to the Agent in connection with such sales in the period from April 1, 2019 to May 27, 2019. We did not sell any units under the ATM program in the first quarter of 2019. From the commencement of the ATM program in January 2018, we have sold 1,577,700 Series A preferred units and 306,166 common units, and received net proceeds of $39.9 million and $5.6 million, respectively. The compensation paid to the Agent for such sales was $0.8 million.
| 15 |
Cash Flows
The following table summarizes our net cash flows from operating, investing and financing activities and our cash, cash equivalents and restricted cash for the periods presented:
| Three months ended | ||||||||
| March 31, | ||||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | ||||||
| Net cash provided by (used in) operating activities | $ | 21,875 | $ | 19,325 | ||||
| Net cash provided by (used in) investing activities | — | 920 | ||||||
| Net cash provided by (used in) financing activities | (13,077 | ) | (14,710 | ) | ||||
| Increase (decrease) in cash, cash equivalents and restricted cash | 8,798 | 5,535 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 21 | — | ||||||
| Cash, cash equivalents and restricted cash, beginning of period | 45,454 | 43,281 | ||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 54,273 | $ | 48,816 | ||||
Net Cash Provided by (Used in) Operating Activities
Net cash provided by operating activities was $21.9 million for the three months ended March 31, 2019, an increase of $2.6 million compared with $19.3 million for the three months ended March 31, 2018. Before changes in working capital, cash provided by operating activities was $25.5 million for the three months ended March 31, 2019, an increase of $5.6 million compared to $19.9 million for the three months ended March 31, 2018. The increase of $5.6 million was primarily due to increased earnings in the Majority held FSRU segment for the three months ended March 31, 2019 compared with the same period last year, an increase in accrued interest expense as a result of the repayment schedule of the $385 million facility drawn on January 31, 2019, a positive impact as a result of settlement of the Gallant/Grace interest rate swap agreements on January 1, 2019, and a positive impact of including the repayment of principal on direct financing lease as a component of operating activities as a result of the new leasing standard adopted on January 1, 2019.
On January 1, 2019, we adopted the new leasing standard using the optional transition method to apply the new standard at the transition date of January 1, 2019 with no retrospective adjustments to prior periods. As of January 1, 2019, cash payments received for the principal portion of the direct financing lease related to thePGN FSRU Lampung are presented as an operating cash inflow rather than as an investing cash inflow as presented for prior periods in the consolidated statement of cash flows.
Changes in working capital reduced net cash provided by operating activities by $3.6 million for the three months ended March 31, 2019, an increase of $3.0 million from a negative contribution of $0.6 million for the three months ended March 31, 2018. The increase in negative contribution of changes in working capital was mainly due to an increase in trade receivables between the two periods partly offset by a decrease in accrued liabilities.
Net Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities was $0.0 million and $0.9 million for the three months ended March 31, 2019 and 2018, respectively. The decrease in net cash provided by investing activities of $0.9 million was the result of reclassification of the receipts from repayment on principal on the direct financing lease from investing activities in 2018 to operating activities in 2019 due to adoption of the new standard as further described above.
Net Cash Provided by (Used in) Financing Activities
Net cash used in financing activities for the three months ended March 31, 2019 was $13.1 million compared with net cash used in financing activities of $14.7 million for the three months ended March 31, 2018.
| 16 |
Net cash used in financing activities for the three months ended March 31, 2019 was mainly due to the repayment of long-term debt of $308.9 million which includes the quarterly repayment of $4.8 million on the Lampung facility, the quarterly repayment of $0.9 million on the export credit tranche of the Gallant facility on January 29, 2019, and a settlement of $303.2 million of the remaining outstanding balance on the Gallant/Grace facility on January 31, 2019, our payment of $5.8 million in debt issuance costs under the $385 million facility, our payment of cash distributions to our common and subordinated unitholders of $15.0 million and our payment of cash distribution to the holders of our Series A preferred units of $3.4 million. This was partially offset by receipt of $320.0 million in proceeds under the $385 million facility drawn on January 31, 2019.
Net cash used in financing activities for the three months ended March 31, 2018 was mainly due to the quarterly repayment of $4.8 million on the Lampung facility, $3.3 million on the Gallant facility, $3.3 million on the Grace facility, payment of $1.3 million on a customer loan for funding of VAT on import in Indonesia, our payment of cash distributions to our common and subordinated unitholders of $14.4 million and our payment of cash distribution to the holders of our Series A preferred units of $3.7 million. This was partially offset by receipt of $5.4 million under the revolving credit facility and proceeds of $2.8 million and $7.9 million for issuance of common and Series A preferred units, respectively, under our ATM program.
As a result of the foregoing, cash, cash equivalents and restricted cash increased by $8.8 million for the three months ended March 31, 2019, while cash, cash equivalents and restricted cash increased by $5.5 million for the three months ended March 31, 2018.
Qualitative and Quantitative Disclosures About Market Risk
We are exposed to various market risks, including interest rate risk, foreign currency risk, credit risk and concentrations of risk.
Interest Rate Risk, Derivative Instruments and Cash Flow Hedges
Cash flow hedging strategy
The Partnership is exposed to fluctuations in cash flows from floating interest rate exposure on its long-term debt used principally to finance its vessels. Interest rate swaps are used for the management of the floating interest rate risk exposure. The interest rate swaps have the effect of converting a portion of the outstanding debt from a floating to a fixed rate over the life of the interest rate swaps. Interest rate swaps exchange a receipt of floating interest for a payment of fixed interest which reduce the exposure to interest rate variability on its outstanding floating-rate debt over the life of the interest rate swaps. As of March 31, 2019, there are interest rate swap agreements related to the Lampung facility ("Lampung interest rate swaps") and the commercial tranche of the $385 million facility floating rate debt ("$385 million interest rate swaps") that are designated as cash flow hedges for accounting purposes. As of March 31, 2018, there were interest rate swap agreements related to the Lampung, Gallant and Grace facilities floating rate debt that were designated as cash flow hedges for accounting purposes. As of January 31, 2019, the commercial and export credit tranches of the $385 million facility was drawn and financed the repayment of the Gallant and Grace facilities as of the same date. The interest rate swaps related to the Gallant and Grace facilities were also terminated on the same date. As of March 31, 2019, the following interest rate swap agreements were outstanding:
| Fair | ||||||||||||||||||||
| value | ||||||||||||||||||||
| Interest | carrying | Fixed | ||||||||||||||||||
| rate | Notional | amount | interest | |||||||||||||||||
| (in thousands of U.S. dollars) | index | amount | liability | Term | rate (1) | |||||||||||||||
| LIBOR-based debt | ||||||||||||||||||||
| Lampung interest rate swaps (2) | LIBOR | $ | 131,318 | (2,066 | ) | Sept 2026 | 2.8% | |||||||||||||
| $385 million facility swaps (2) | LIBOR | $ | 65,000 | (1,946 | ) | Jan 2026 | 2.9% | |||||||||||||
| $385 million facility swaps (2) | LIBOR | $ | 65,000 | (1,614 | ) | Oct 2025 | 2.8% | |||||||||||||
| $385 million facility swaps (2) | LIBOR | $ | 63,826 | (1,330 | ) | Jan 2026 | 2.7% | |||||||||||||
| $385 million facility swaps (2) | LIBOR | $ | 63,826 | (1,084 | ) | Jan 2026 | 2.7% | |||||||||||||
| 1) | Excludes the margins paid on the floating—rate debt. |
| 2) | All interest rate swaps are U.S. dollar denominated and principal amount reduces quarterly. |
| 17 |
Foreign Currency Risk
All financing, interest expenses from financing and most of our revenue and expenditures for vessel improvements are denominated in U.S. dollars. Certain operating expenses can be denominated in currencies other than U.S. dollars. For the three months ended March 31, 2019, and 2018, no derivative financial instruments have been used to manage foreign exchange risk.
Credit Risk
Credit risk is the exposure to credit loss in the event of non-performance by the counterparties related to cash and cash equivalents, restricted cash, trade receivables and interest rate swap agreements. In order to minimize counterparty risk, bank relationships are established with counterparties with acceptable credit ratings at the time of the transactions. Credit risk related to receivables is limited by performing ongoing credit evaluations of the customers’ financial condition. In addition, Höegh LNG guarantees the payment of theHöegh Gallant time charter hire under certain circumstances. PGN also guarantees PGN LNG's obligations under thePGN FSRU Lampung time charter. The other time charters do not have parent company guarantees.
Concentration of Risk
Financial instruments, which potentially subject us to significant concentrations of credit risk, consist principally of cash and cash equivalents, restricted cash, trade receivables and derivative contracts (interest rate swaps). The maximum exposure to loss due to credit risk is the book value at the balance sheet date. We do not have a policy of requiring collateral or security. Cash and cash equivalents and restricted cash are placed with qualified financial institutions. Periodic evaluations are performed of the relative credit standing of those financial institutions. In addition, exposure is limited by diversifying among counterparties. There are three charterers so there is a concentration of risk related to trade receivables. Credit risk related to trade receivables is limited by performing ongoing credit evaluations of the customer’s financial condition. In addition, Höegh LNG guarantees the payment of theHöegh Gallant time charter hire under certain circumstances. No impairment loss was recorded for the three months periods ended March 31, 2019 and 2018 and the year ended December 31, 2018. While the maximum exposure to loss due to credit risk is the book value of trade receivables at the balance sheet date, should the time charter for thePGN FSRU Lampung, theHöegh Gallant or theHöegh Grace terminate prematurely, or the option to acquire thePGN FSRU Lampung be exercised, there could be delays in obtaining a new time charter and the rates could be lower depending upon the prevailing market conditions.
| 18 |
Non-GAAP Financial Measure
Segment EBITDA. EBITDA is defined as earnings before interest, depreciation and amortization and taxes. Segment EBITDA is defined as earnings before interest, depreciation and amortization, taxes and other financial items. Other financial items consist of gains and losses on derivative instruments and other items, net (including foreign exchange gains and losses and withholding tax on interest expenses). Segment EBITDA is used as a supplemental financial measure by management and external users of financial statements, such as the Partnership's lenders, to assess its financial and operating performance. The Partnership believes that Segment EBITDA assists its management and investors by increasing the comparability of its performance from period to period and against the performance of other companies in the industry that provide Segment EBITDA information. This increased comparability is achieved by excluding the potentially disparate effects between periods or companies of interest, other financial items, depreciation and amortization and taxes, which items are affected by various and possibly changing financing methods, capital structure and historical cost basis and which items may significantly affect net income between periods. The Partnership believes that including Segment EBITDA as a financial and operating measure benefits investors in (a) selecting between investing in it and other investment alternatives and (b) monitoring its ongoing financial and operational strength in assessing whether to continue to hold common units. Segment EBITDA is a non-GAAP financial measure and should not be considered an alternative to net income, operating income or any other measure of financial performance presented in accordance with U.S. GAAP. Segment EBITDA excludes some, but not all, items that affect net income, and these measures may vary among other companies. Therefore, Segment EBITDA as presented below may not be comparable to similarly titled measures of other companies. The following tables reconcile Segment EBITDA for each of the segments and the Partnership as a whole to net income (loss), the comparable U.S. GAAP financial measure, for the periods presented:
| Three months ended March 31, 2019 | ||||||||||||||||||||||||
| Joint venture | ||||||||||||||||||||||||
| Majority | FSRUs | Total | ||||||||||||||||||||||
| held | (proportional | Segment | Elimin- | Consolidated | ||||||||||||||||||||
| (in thousands of U.S. dollars) | FSRUs | consolidation) | Other | reporting | ations(1) | reporting | ||||||||||||||||||
| Reconciliation to net income (loss) | ||||||||||||||||||||||||
| Net income (loss) | $ | 18,999 | 351 | (5,216 | ) | 14,134 | $ | 14,134 | (3) | |||||||||||||||
| Interest income | (71 | ) | (128 | ) | (128 | ) | (327 | ) | 128 | (4) | (199 | ) | ||||||||||||
| Interest expense | 3,295 | 3,140 | 3,541 | 9,976 | (3,140 | ) (4) | 6,836 | |||||||||||||||||
| Gain (loss) on debt extinguishment | (1,030 | ) | — | — | (1,030 | ) | — | (1,030 | ) | |||||||||||||||
| Depreciation and amortization | 5,323 | 2,553 | — | 7,876 | (2,553 | ) (5) | 5,323 | |||||||||||||||||
| Other financial items (2) | 1,015 | 2,534 | 32 | 3,581 | (2,534 | ) (6) | 1,047 | |||||||||||||||||
| Income tax (benefit) expense | 1,910 | — | — | 1,910 | 1,910 | |||||||||||||||||||
| Equity in earnings of JVs: Interest (income) expense, net | — | — | — | — | 3,012 | (4) | 3,012 | |||||||||||||||||
| Equity in earnings of JVs: Depreciation and amortization | — | — | — | — | 2,553 | (5) | 2,553 | |||||||||||||||||
| Equity in earnings of JVs: Other financial items (2) | — | — | — | — | 2,534 | (6) | 2,534 | |||||||||||||||||
| Segment EBITDA | $ | 29,441 | 8,450 | (1,771 | ) | 36,120 | $ | 36,120 | ||||||||||||||||
| 19 |
| Three months ended March 31, 2018 | ||||||||||||||||||||||||
| Joint venture | ||||||||||||||||||||||||
| Majority | FSRUs | Total | ||||||||||||||||||||||
| held | (proportional | Segment | Elimin- | Consolidated | ||||||||||||||||||||
| (in thousands of U.S. dollars) | FSRUs | consolidation) | Other | reporting | ations(1) | reporting | ||||||||||||||||||
| Reconciliation to net income (loss) | ||||||||||||||||||||||||
| Net income (loss) | $ | 15,035 | 9,369 | (2,718 | ) | 21,686 | $ | 21,686 | (3) | |||||||||||||||
| Interest income | (80 | ) | (41 | ) | (107 | ) | (228 | ) | 41 | (4) | (187 | ) | ||||||||||||
| Interest expense | 6,066 | 3,308 | 798 | 10,172 | (3,308 | ) (4) | 6,864 | |||||||||||||||||
| Depreciation and amortization | 5,268 | 2,401 | — | 7,669 | (2,401 | ) (5) | 5,268 | |||||||||||||||||
| Other financial items (2) | (46 | ) | (6,515 | ) | 21 | (6,540 | ) | 6,515 | (6) | (25 | ) | |||||||||||||
| Income tax (benefit) expense | 2,109 | — | — | 2,109 | 2,109 | |||||||||||||||||||
| Equity in earnings of JVs: Interest (income) expense, net | — | — | — | — | 3,267 | (4) | 3,267 | |||||||||||||||||
| Equity in earnings of JVs: Depreciation and amortization | — | — | — | — | 2,401 | (5) | 2,401 | |||||||||||||||||
| Equity in earnings of JVs: Other financial items (2) | — | — | — | — | (6,515 | ) (6) | (6,515 | ) | ||||||||||||||||
| Segment EBITDA | $ | 28,352 | 8,522 | (2,006 | ) | 34,868 | $ | 34,868 | ||||||||||||||||
| (1) | Eliminations reverse each of the income statement reconciling line items of the proportional amounts for Joint venture FSRUs that are reflected in the consolidated net income for the Partnership's share of the Joint venture FSRUs net income (loss) on the Equity in earnings (loss) of joint ventures line item in the consolidated income statement. Separate adjustments from the consolidated net income to Segment EBITDA for the Partnership's share of the Joint venture FSRUs are included in the reconciliation lines starting with “Equity in earnings of JVs.” |
| (2) | Other financial items consist of gains and losses on derivative instruments and other items, net including foreign exchange gains or losses and withholding tax on interest expense. |
| (3) | There is no adjustment between net income for Total Segment reporting and the Consolidated reporting because the net income under the proportional consolidation and equity method of accounting is the same. |
| (4) | Interest income and interest expense for the Joint venture FSRUs is eliminated from the Total Segment reporting to agree to the interest income and interest expense in the Consolidated reporting and reflected as a separate adjustment to the equity accounting on the lineEquity in earnings of JVs: Interest (income) expense for the Consolidated reporting. |
| (5) | Depreciation and amortization for the Joint venture FSRUs is eliminated from the Total Segment reporting to agree to the depreciation and amortization in the Consolidated reporting and reflected as a separate adjustment to the equity accounting on the lineEquity in earnings of JVs: Depreciation and amortization for the Consolidated reporting. |
| (6) | Other financial items for the Joint venture FSRUs is eliminated from the Segment reporting to agree to the Other financial items in the Consolidated reporting and reflected as a separate adjustment to the equity accounting on the lineEquity in earnings of JVs: Other financial items for the Consolidated reporting. |
| 20 |
This report contains certain forward-looking statements concerning future events and our operations, performance and financial condition. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words "believe," "anticipate," "expect," "estimate," "project," "will be," "will continue," "will likely result," "plan," "intend" or words or phrases of similar meanings. These statements involve known and unknown risks and are based upon a number of assumptions and estimates that are inherently subject to significant uncertainties and contingencies, many of which are beyond the Partnership's control. Actual results may differ materially from those expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially include, but are not limited to:
| · | market conditions and trends for FSRUs and LNG carriers, including hire rates, vessel valuations, technological advancements, market preferences and factors affecting supply and demand of LNG, LNG carriers, and FSRUs; |
| · | our distribution policy and ability to make cash distributions on our units or any increases in the quarterly distributions on our common units; |
| · | restrictions in our debt agreements and pursuant to local laws on our joint ventures' and our subsidiaries' ability to make distributions; |
| · | our ability to settle or resolve the boil-off claim for the joint ventures, including the estimated amount thereof; |
| · | the ability of Höegh LNG to satisfy its indemnification obligations to the Partnership, including in relation to the boil-off claim; |
| · | our ability to compete successfully for future chartering opportunities; |
| · | demand in the FSRU sector or the LNG shipping sector, including demand for our vessels; |
| · | our ability to purchase additional vessels from Höegh LNG in the future; |
| · | our ability to integrate and realize the anticipated benefits from acquisitions; |
| · | our anticipated growth strategies; including the acquisition of vessels; |
| · | our anticipated receipt of dividends and repayment of indebtedness from subsidiaries and joint ventures; |
| · | effects of volatility in global prices for crude oil and natural gas; |
| · | the effect of the worldwide economic environment; |
| · | turmoil in the global financial markets; |
| · | fluctuations in currencies and interest rates; |
| · | general market conditions, including fluctuations in hire rates and vessel values; |
| · | changes in our operating expenses, including drydocking, on-water class surveys, insurance costs and bunker costs; |
| · | our ability to comply with financing agreements and the expected effect of restrictions and covenants in such agreements; |
| · | the financial condition, liquidity and creditworthiness of our existing or future customers and their ability to satisfy their obligations under our contracts; |
| · | our ability to replace existing borrowings, make additional borrowings and to access public equity and debt capital markets; |
| 21 |
| · | planned capital expenditures and availability of capital resources to fund capital expenditures; |
| · | the exercise of purchase options by our customers; |
| · | our ability to perform under our contracts and maintain long-term relationships with our customers; |
| · | our ability to leverage Höegh LNG's relationships and reputation in the shipping industry; |
| · | our continued ability to enter into long-term, fixed-rate charters and the hire rate thereof; |
| · | the operating performance of our vessels and any related claims by Total S.A. or other customers; | |
| · | our ability to maximize the use of our vessels, including the redeployment or disposition of vessels no longer under long-term charters; |
| · | our ability to compete successfully for future chartering and newbuilding opportunities; |
| · | timely acceptance of our vessels by their charterers; |
| · | termination dates and extensions of charters; |
| · | the cost of, and our ability to comply with, governmental regulations and maritime self-regulatory organization standards, as well as standard regulations imposed by our charterers applicable to our business; |
| · | economic substance laws and regulations adopted or considered by various jurisdictions of formation or incorporation of us and certain of our subsidiaries; |
| · | availability and cost of skilled labor, vessel crews and management; | |
| · | the ability of Höegh LNG to meet its financial obligations to us, including its indemnity, guarantee and option obligations; |
| · | the number of offhire days and drydocking requirements, including our ability to complete scheduled drydocking on time and within budget; |
| · | our incremental general and administrative expenses as a publicly traded limited partnership and our fees and expenses payable under our ship management agreements, the technical information and services agreement and the administrative services agreements; |
| · | the anticipated taxation of the Partnership, its subsidiaries and affiliates and distributions to its unitholders; |
| · | estimated future maintenance and replacement capital expenditures; |
| · | our ability to retain key employees; |
| · | customers' increasing emphasis on environmental and safety concerns; |
| · | potential liability from any pending or future litigation; |
| · | risks inherent in the operation of our vessels including potential disruption due to accidents, political events, piracy or acts by terrorists; |
| 22 |
| · | future sales of our common units and Series A preferred units in the public market; |
| · | our business strategy and other plans and objectives for future operations; |
| · | our ability to maintain effective internal control over financial reporting and effective disclosure controls and procedures; and |
| · | other factors listed from time to time in the reports and other documents that we file with the SEC, including our Annual Report on Form 20-F for the year ended December 31, 2018 and subsequent quarterly reports on Form 6-K. |
All forward-looking statements included in this report are made only as of the date of this report. New factors emerge from time to time, and it is not possible for the Partnership to predict all of these factors. Further, the Partnership cannot assess the impact of each such factor on its business or the extent to which any factor, or combination of factors, may cause actual results to be materially different from those contained in any forward-looking statement. The Partnership does not intend to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in its expectations with respect thereto or any change in events, conditions or circumstances on which any such statement is based.
| 23 |
INDEX TO THE FINANCIAL STATEMENTS
| F-1 |
UNAUDITED CONDENSED INTERIM CONSOLIDATED
STATEMENTS OF INCOME
(in thousands of U.S. dollars, except per unit amounts)
| Three months ended | ||||||||||||
| March 31, | ||||||||||||
| Notes | 2019 | 2018 | ||||||||||
| REVENUES | ||||||||||||
| Time charter revenues | 3,4 | $ | 36,075 | $ | 34,885 | |||||||
| Other revenue | 3,4 | 64 | — | |||||||||
| Total revenues | 3,4 | 36,139 | 34,885 | |||||||||
| OPERATING EXPENSES | ||||||||||||
| Vessel operating expenses | (5,893 | ) | (5,752 | ) | ||||||||
| Administrative expenses | (2,576 | ) | (2,787 | ) | ||||||||
| Depreciation and amortization | (5,323 | ) | (5,268 | ) | ||||||||
| Total operating expenses | (13,792 | ) | (13,807 | ) | ||||||||
| Equity in earnings (losses) of joint ventures | 3,10 | 351 | 9,369 | |||||||||
| Operating income (loss) | 3 | 22,698 | 30,447 | |||||||||
| FINANCIAL INCOME (EXPENSE), NET | ||||||||||||
| Interest income | 199 | 187 | ||||||||||
| Interest expense | 13 | (6,836 | ) | (6,864 | ) | |||||||
| Gain (loss) on debt extinguishment | 1,030 | — | ||||||||||
| Gain (loss) on derivative instruments | — | 631 | ||||||||||
| Other items, net | (1,047 | ) | (606 | ) | ||||||||
| Total financial income (expense), net | 5 | (6,654 | ) | (6,652 | ) | |||||||
| Income (loss) before tax | 16,044 | 23,795 | ||||||||||
| Income tax expense | 6 | (1,910 | ) | (2,109 | ) | |||||||
| Net income (loss) | 3 | $ | 14,134 | $ | 21,686 | |||||||
| Preferred unitholders' interest in net income | 3,364 | 2,660 | ||||||||||
| Limited partners' interest in net income (loss) | $ | 10,770 | $ | 19,026 | ||||||||
| Basic earnings per unit | ||||||||||||
| Common unit public | 17 | $ | 0.31 | $ | 0.57 | |||||||
| Common unit Höegh LNG | 17 | $ | 0.34 | $ | 0.59 | |||||||
| Subordinated unit | 17 | $ | 0.34 | $ | 0.59 | |||||||
| Diluted earnings per unit | ||||||||||||
| Common unit public | 17 | $ | 0.31 | $ | 0.56 | |||||||
| Common unit Höegh LNG | 17 | $ | 0.34 | $ | 0.59 | |||||||
| Subordinated unit | 17 | $ | 0.34 | $ | 0.59 | |||||||
The accompanying notes are an integral part of the unaudited condensed interim consolidated financial statements.
| F-2 |
UNAUDITED CONDENSED INTERIM CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of U.S. dollars, except per unit amounts)
| Three months ended | ||||||||||||
| March 31, | ||||||||||||
| Notes | 2019 | 2018 | ||||||||||
| Net income (loss) | $ | 14,134 | $ | 21,686 | ||||||||
| Unrealized gains (losses) on cash flow hedge | 13 | (5,360 | ) | 3,827 | ||||||||
| Income tax benefit (expense) | 13 | (63 | ) | (86 | ) | |||||||
| Other comprehensive income (loss) | (5,423 | ) | 3,741 | |||||||||
| Comprehensive income (loss) | $ | 8,711 | $ | 25,427 | ||||||||
| Preferred unitholders' interest in net income | 3,364 | 2,660 | ||||||||||
| Limited partners' interest in comprehensive income (loss) | $ | 5,347 | $ | 22,767 | ||||||||
The accompanying notes are an integral part of the unaudited condensed interim consolidated financial statements.
| F-3 |
UNAUDITED CONDENSED INTERIM CONSOLIDATED
BALANCE SHEETS
(in thousands of U.S. dollars)
| As of | ||||||||||||
| March 31, | December 31, | |||||||||||
| Notes | 2019 | 2018 | ||||||||||
| ASSETS | ||||||||||||
| Current assets | ||||||||||||
| Cash and cash equivalents | 12 | $ | 34,245 | $ | 26,326 | |||||||
| Restricted cash | 12 | 6,993 | 6,003 | |||||||||
| Trade receivables | 4 | 5,442 | 1,228 | |||||||||
| Amounts due from affiliates | 4,11,12 | 4,548 | 4,328 | |||||||||
| Inventory | 646 | 646 | ||||||||||
| Current portion of net investment in direct financing lease | 4,261 | 4,168 | ||||||||||
| Derivative instruments | 12,13 | — | 1,199 | |||||||||
| Prepaid expenses and other receivables | 4 | 3,672 | 2,967 | |||||||||
| Total current assets | 59,807 | 46,865 | ||||||||||
| Long-term assets | ||||||||||||
| Restricted cash | 12 | 13,035 | 13,125 | |||||||||
| Vessels, net of accumulated depreciation | 653,064 | 658,311 | ||||||||||
| Other equipment | 512 | 445 | ||||||||||
| Intangibles and goodwill | 19,844 | 20,739 | ||||||||||
| Advances to joint ventures | 7,12 | 3,606 | 3,536 | |||||||||
| Net investment in direct financing lease | 277,804 | 278,905 | ||||||||||
| Long-term deferred tax asset | 6 | 172 | 174 | |||||||||
| Other long-term assets | 935 | 940 | ||||||||||
| Total long-term assets | 968,972 | 976,175 | ||||||||||
| Total assets | $ | 1,028,779 | $ | 1,023,040 | ||||||||
The accompanying notes are an integral part of the unaudited condensed interim consolidated financial statements.
| F-4 |
HÖEGH LNG PARTNERS LP
UNAUDITED CONDENSED INTERIM CONSOLIDATED
BALANCE SHEETS
(in thousands of U.S. dollars)
| As of | ||||||||||||
| March 31, | December 31, | |||||||||||
| Notes | 2019 | 2018 | ||||||||||
| LIABILITIES AND EQUITY | ||||||||||||
| Current liabilities | ||||||||||||
| Current portion of long-term debt | 9,12 | $ | 44,660 | $ | 45,458 | |||||||
| Trade payables | 613 | 529 | ||||||||||
| Amounts due to owners and affiliates | 11,12 | 3,896 | 2,301 | |||||||||
| Value added and withholding tax liability | 1,174 | 1,175 | ||||||||||
| Derivative instruments | 12,13 | 823 | 259 | |||||||||
| Accrued liabilities and other payables | 4,8 | 9,494 | 7,458 | |||||||||
| Total current liabilities | 60,660 | 57,180 | ||||||||||
| Long-term liabilities | ||||||||||||
| Accumulated losses of joint ventures | 10 | 2,456 | 2,808 | |||||||||
| Long-term debt | 9,12 | 395,612 | 390,087 | |||||||||
| Revolving credit facility due to owners and affiliates | 11,12 | 39,960 | 39,292 | |||||||||
| Derivative instruments | 12,13 | 7,217 | 2,438 | |||||||||
| Long-term tax liability | 6 | 1,835 | 1,725 | |||||||||
| Long-term deferred tax liability | 6 | 9,987 | 8,974 | |||||||||
| Other long-term liabilities | 4 | 158 | 99 | |||||||||
| Total long-term liabilities | 457,225 | 445,423 | ||||||||||
| Total liabilities | 517,885 | 502,603 | ||||||||||
| EQUITY | ||||||||||||
| 8.75% Series A Preferred Units | 151,271 | 151,259 | ||||||||||
| Common units public | 322,984 | 325,250 | ||||||||||
| Common units Höegh LNG | 6,587 | 6,844 | ||||||||||
| Subordinated unit | 40,812 | 42,421 | ||||||||||
| Accumulated other comprehensive income (loss) | (10,760 | ) | (5,337 | ) | ||||||||
| Total partners' capital | 510,894 | 520,437 | ||||||||||
| Total equity | 510,894 | 520,437 | ||||||||||
| Total liabilities and equity | $ | 1,028,779 | $ | 1,023,040 | ||||||||
The accompanying notes are an integral part of the unaudited condensed interim consolidated financial statements.
| F-5 |
UNAUDITED CONDENSED INTERIM CONSOLIDATED
STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
(in thousands of U.S. dollars)
| Partners' Capital | ||||||||||||||||||||||||
| 8.75% Series A Preferred Units | Common Units Public | Common Units Höegh LNG | Subordinated Units | Accumulated Other Comprehensive Income | Total Equity | |||||||||||||||||||
| Consolidated balance as of December 31, 2017 | $ | 113,404 | 317,149 | 6,513 | 40,341 | (2,748 | ) | $ | 474,659 | |||||||||||||||
| Net income | 12,303 | 34,409 | 4,257 | 26,653 | — | 77,622 | ||||||||||||||||||
| Cash distributions to unitholders | (13,107 | ) | (31,211 | ) | (3,881 | ) | (24,298 | ) | — | (72,497 | ) | |||||||||||||
| Cash distribution to Höegh LNG | — | — | (325 | ) | (2,028 | ) | (2,353 | ) | ||||||||||||||||
| Cash contribution from Höegh LNG | — | — | 234 | 1,467 | — | 1,701 | ||||||||||||||||||
| Other comprehensive income | — | — | — | — | (2,589 | ) | (2,589 | ) | ||||||||||||||||
| Net proceeds from issuance of common units | — | 4,563 | — | — | — | 4,563 | ||||||||||||||||||
| Net proceeds from issuance of Series A Preferred Units | 38,659 | — | — | — | — | 38,659 | ||||||||||||||||||
| Issuance of units for Board of Directors' fees | — | 200 | — | — | — | 200 | ||||||||||||||||||
| Other and contributions from owners | — | 140 | 46 | 286 | — | 472 | ||||||||||||||||||
| Consolidated balance as of December 31, 2018 | $ | 151,259 | 325,250 | 6,844 | 42,421 | (5,337 | ) | $ | 520,437 | |||||||||||||||
| Net income | 3,364 | 5,616 | 710 | 4,444 | — | 14,134 | ||||||||||||||||||
| Cash distributions to unitholders | (3,352 | ) | (7,896 | ) | (979 | ) | (6,132 | ) | — | (18,359 | ) | |||||||||||||
| Other comprehensive income | — | — | — | — | (5,423 | ) | (5,423 | ) | ||||||||||||||||
| Other and contributions from owners | — | 14 | 12 | 79 | — | 105 | ||||||||||||||||||
| Consolidated balance as of March 31, 2019 | $ | 151,271 | 322,984 | 6,587 | 40,812 | (10,760 | ) | $ | 510,894 | |||||||||||||||
The accompanying notes are an integral part of the unaudited condensed interim consolidated financial statements.
| F-6 |
HÖEGH LNG PARTNERS LP
UNAUDITED CONDENSED INTERIM CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars)
| Three months ended March 31, | ||||||||
| 2019 | 2018 | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net income (loss) | $ | 14,134 | $ | 21,686 | ||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 5,323 | 5,268 | ||||||
| Equity in losses (earnings) of joint ventures | (351 | ) | (9,369 | ) | ||||
| Changes in accrued interest income on advances to joint ventures | (70 | ) | (71 | ) | ||||
| Amortization of deferred debt issuance cost and fair value of debt assumed | 476 | 187 | ||||||
| Amortization in revenue for above market contract | 895 | 895 | ||||||
| (Gain) loss on debt extinguishment | (1,030 | ) | — | |||||
| Changes in accrued interest expense | 2,806 | 460 | ||||||
| Receipts from repayment of principal on direct financing lease | 1,008 | — | ||||||
| Unrealized foreign exchange losses (gains) | (2 | ) | (60 | ) | ||||
| Gain (loss) on the settlement of the derivatives | (199 | ) | — | |||||
| Proceeds from settlement of derivatives | 1,398 | — | ||||||
| Unrealized loss (gain) on derivative instruments | (17 | ) | (631 | ) | ||||
| Non-cash revenue: tax paid directly by charterer | (202 | ) | (198 | ) | ||||
| Non-cash income tax expense: tax paid directly by charterer | 202 | 198 | ||||||
| Deferred tax expense and provision for tax uncertainty | 1,062 | 1,505 | ||||||
| Other adjustments | 105 | 49 | ||||||
| Changes in working capital: | ||||||||
| Trade receivables | (4,182 | ) | 1,067 | |||||
| Inventory | — | 10 | ||||||
| Prepaid expenses and other receivables | (1,802 | ) | (612 | ) | ||||
| Trade payables | 82 | 468 | ||||||
| Amounts due to owners and affiliates | 1,375 | 1,415 | ||||||
| Value added and withholding tax liability | 1,083 | 753 | ||||||
| Accrued liabilities and other payables | (219 | ) | (3,695 | ) | ||||
| Net cash provided by (used in) operating activities | 21,875 | 19,325 | ||||||
| INVESTING ACTIVITIES | ||||||||
| Receipts from repayment of principal on direct financing lease | — | 920 | ||||||
| Net cash provided by (used in) investing activities | $ | — | $ | 920 | ||||
The accompanying notes are an integral part of the unaudited condensed interim consolidated financial statements.
| F-7 |
UNAUDITED CONDENSED INTERIM CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars)
| Three months ended March 31, | ||||||||
| 2019 | 2018 | |||||||
| FINANCING ACTIVITIES | ||||||||
| Proceeds from long-term debt | $ | 320,000 | $ | — | ||||
| Proceeds from loans due to owners and affiliates | — | 5,400 | ||||||
| Repayment of long-term debt | (308,921 | ) | (11,365 | ) | ||||
| Payment of debt issuance costs | (5,797 | ) | — | |||||
| Repayment of customer loan for funding of value added liability on import | — | (1,265 | ) | |||||
| Net proceeds from issuance of common units | — | 2,778 | ||||||
| Net proceeds from issuance of 8.75% Series A Preferred Units | — | 7,935 | ||||||
| Cash distributions to limited partners and preferred unitholders | (18,359 | ) | (18,193 | ) | ||||
| Net cash provided by (used in) financing activities | (13,077 | ) | (14,710 | ) | ||||
| Increase (decrease) in cash, cash equivalents and restricted cash | 8,798 | 5,535 | ||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 21 | — | ||||||
| Cash, cash equivalents and restricted cash, beginning of period | 45,454 | 43,281 | ||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 54,273 | $ | 48,816 | ||||
The accompanying notes are an integral part of the unaudited condensed interim consolidated financial statements.
| F-8 |
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
1. Description of business
Höegh LNG Partners LP (the “Partnership”) is a publicly traded Marshall Islands limited partnership initially formed for the purpose of acquiring from Höegh LNG Holdings Ltd. (“Höegh LNG”) their interests in Hoegh LNG Lampung Pte. Ltd., PT Hoegh LNG Lampung (the owner of thePGN FSRU Lampung), SRV Joint Gas Ltd. (the owner of theNeptune), and SRV Joint Gas Two Ltd. (the owner of theCape Ann) in connection with the Partnership’s initial public offering of its common units (the “IPO”) in August 2014. As of March 31, 2019, the Partnership has a fleet of five floating storage regasification units (“FSRUs”).
On January 26, 2018, the Partnership entered into sales agreement with B. Riley FBR Inc. (the “Agent”). Under the terms of the sales agreement, the Partnership may offer and sell up to $120 million aggregate offering amount of common units and 8.75% Series A cumulative redeemable preferred units (“Series A preferred units”), from time to time, through the Agent, acting as agent for the Partnership (the “ATM Program”). Sales of such units may be made in negotiated transactions or transactions that are deemed to be “at the market” offerings, including sales made directly on the New York Stock Exchange or through a market marker other than on an exchange. Refer to note 15.
The interests in SRV Joint Gas Ltd. and SRV Joint Gas Two Ltd., collectively, are referred to as the “joint ventures” and the remaining entities owned by the Partnership, as reflected in the table below are, collectively, referred to as the “subsidiaries” in these consolidated financial statements. ThePGN FSRU Lampung, theHöegh Gallant, theHöegh Grace, theNeptune and theCape Ann are FSRUs and, collectively, referred to in these consolidated financial statements as the vessels or the “FSRUs.” The Tower Yoke Mooring System (the “Mooring”) is an offshore installation that is used to moor thePGN FSRU Lampung to offload the gas into an offshore pipe that transports the gas to a land terminal. PT Hoegh LNG Lampung, Hoegh LNG Cyprus Limited, the owner of theHöegh Gallant, Höegh LNG FSRU IV Ltd., the owner of theHöegh Grace, and the two joint ventures, SRV Joint Gas Ltd. and SRV Joint Gas Two Ltd., are collectively referred to as the “FSRU-owning entities.”
TheNeptune and theCape Ann operate under long-term time charters with expiration dates in 2029 and 2030, respectively, and, in each case, with an option for the charterer, Global LNG Supply SA, a subsidiary of Total S.A. (“Total”), to extend for up to one additional period of ten years or two additional periods of five years each. ThePGN FSRU Lampung, operates under a long term time charter which started in July 2014 with an expiration date in 2034, with an option for the charterer to extend for up to two additional periods of five years each, and uses the Mooring that was constructed, installed and sold to the charterer, PT PGN LNG Indonesia (“PGN LNG”), a subsidiary of PT Perusahaan Gas Negara (Persero) Tbk (“PGN”), a subsidiary of PT Pertamina, a government-controlled, Indonesian oil and gas producer, natural gas transportation and distribution company. TheHöegh Gallant operates under a long term time charter which started in April 2015 with an expiration date in April 2020 with Hoegh LNG Egypt LLC (“EgyptCo”), a subsidiary of Höegh LNG. EgyptCo had a charter with the government-owned Egyptian Natural Gas Holding Company (“EGAS”) until October 2018. EgyptCo has an LNG carrier time charter to a third party from October 2018 until April 2020. Pursuant to an option agreement, the Partnership has the right to cause Höegh LNG to charter theHöegh Gallant from the expiration or termination of the EgyptCo charter until July 2025. TheHöegh Grace operates under a long term time charter which started in December 2016 with Sociedad Portuaria El Cayao S.A. E.S.P. ("SPEC"). SPEC is owned 51% by Promigas S.A. ESP, a Colombian company focused on the transportation and distribution of natural gas, and 49% by private equity investors. The non-cancellable charter period of 10 years ends in December 2026. The initial term of the charter is 20 years. However, each party has an unconditional option to cancel the charter after 10 and 15 years without penalty. However, if SPEC waives its rights to terminate in year 10 within a certain deadline, the Partnership will not be able to exercise its right to terminate in year 10.
| F-9 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
The following table lists the entities included in these consolidated financial statements and their purpose as of March 31, 2019.
| Jurisdiction of | ||||
| Incorporation | ||||
| Name | or Registration | Purpose | ||
| Höegh LNG Partners LP | Marshall Islands | Holding Company | ||
| Höegh LNG Partners Operating LLC (100% owned) | Marshall Islands | Holding Company, Owns 100% of Hoegh LNG Cyprus Limited | ||
| Hoegh LNG Services Ltd (100% owned) | United Kingdom | Administration Services Company | ||
| Hoegh LNG Lampung Pte. Ltd. (100% owned) | Singapore | Owns 49% of PT Hoegh LNG Lampung | ||
| PT Hoegh LNG Lampung (49% owned) (1) | Indonesia | OwnsPGN FSRU Lampung | ||
| SRV Joint Gas Ltd. (50% owned) (2) | Cayman Islands | OwnsNeptune | ||
| SRV Joint Gas Two Ltd. (50% owned) (2) | Cayman Islands | OwnsCape Ann | ||
| Höegh LNG FSRU III Ltd. (100% owned) (3) (5) | Cayman Islands | Holding Company | ||
| Hoegh LNG Cyprus Limited (100% owned) (3) | Cyprus | OwnsHöegh Gallant | ||
| Hoegh LNG Cyprus Limited Egypt Branch (100% owned) (3) | Egypt | Branch of Hoegh LNG Cyprus Limited | ||
| Höegh LNG Colombia Holding Ltd. (100% owned) (4) | Cayman Islands | Owns 100% of Höegh LNG FSRU IV Ltd. and Höegh LNG Colombia S.A.S. | ||
| Höegh LNG FSRU IV Ltd. (100% indirectly owned) (4) | Cayman Islands | OwnsHöegh Grace | ||
| Höegh LNG Colombia S.A.S. (100% indirectly owned) (4) | Colombia | Operating Company |
| (1) | PT Hoegh LNG Lampung is a variable interest entity, which is controlled by Hoegh LNG Lampung Pte. Ltd. and is, therefore, 100% consolidated in the consolidated financial statements. |
| (2) | The remaining 50% interest in each joint venture is owned by Mitsui O.S.K. Lines, Ltd. and Tokyo LNG Tanker Co. |
| (3) | The ownership interests were acquired on October 1, 2015. |
| (4) | The 51% of the ownership interests were acquired on January 3, 2017, and the remaining 49% of the ownership interests were acquired on December 1, 2017. |
| (5) | On January 31, 2019, Höegh LNG FSRU III Ltd. transferred its ownership in Hoegh LNG Cyprus Limited to Höegh LNG Partners Operating LLC. As a result, the Partnership expects to liquidate the Höegh LNG FSRU III Ltd. in the future. |
| F-10 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
2. Significant accounting policies
Basis of presentation
The accompanying unaudited condensed interim consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (“US GAAP”) for interim financial information. In the opinion of Management, all adjustments considered necessary for a fair presentation, which are of a normal recurring nature, have been included. All inter-company balances and transactions are eliminated. The footnotes are condensed and do not include all of the disclosures required for a complete set of financial statements. Therefore, the unaudited condensed interim consolidated financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2018, included in the Partnership’s Annual Report on Form 20-F (the “Annual Report”).
It has been determined that PT Hoegh LNG Lampung, Hoegh LNG Cyprus Limited, Höegh LNG Colombia Holding Ltd., SRV Joint Gas Ltd. and SRV Joint Gas Two Ltd. are variable interest entities. A variable interest entity (“VIE”) is defined by US GAAP as a legal entity where either (a) the voting rights of some investors are not proportional to their rights to receive the expected residual returns of the entity, their obligations to absorb the expected losses of the entity, or both, and substantially all of the entity's activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights, or (b) the equity holders have not provided sufficient equity investment to permit the entity to finance its activities without additional subordinated financial support, or (c) equity interest holders as a group lack the characteristics of a controlling financial interest, including decision making ability and an interest in the entity's residual risks and rewards. The guidance requires a VIE to be consolidated if any of its interest holders are entitled to a majority of the entity's residual returns or are exposed to a majority of its expected losses.
Based upon the criteria set forth in US GAAP, the Partnership has determined that PT Hoegh LNG Lampung is a VIE, as the equity holders, through their equity investments, may not participate fully in the entity's expected residual returns and substantially all of the entity's activities either involve, or are conducted on behalf of, the Partnership. The Partnership is the primary beneficiary, as it has the power to make key operating decisions considered to be most significant to the VIE and receives all the expected benefits or expected losses. Therefore, 100% of the assets, liabilities, revenues and expenses of PT Hoegh LNG Lampung are included in the consolidated financial statements. Dividends may only be paid if the retained earnings are positive and a statutory reserve has been established equal to 20% of its paid up capital under Indonesian law. As of March 31, 2019, PT Hoegh LNG Lampung is in the process of establishing the required statutory reserves and therefore is expected to be able to make dividend payments in the future under Indonesia law. Under the Lampung facility, there are limitations on cash dividends and loan distributions that can be made to the Partnership. Refer to note 9.
The Partnership has also determined that Hoegh LNG Cyprus Limited is a VIE, as the equity investment does not provide sufficient equity to permit the entity to finance its activities without financial guarantees. The Partnership is the primary beneficiary, as it has the power to make key operating decisions considered to be most significant to the VIE and receives all the expected benefits or expected losses. Therefore, 100% of the assets, liabilities, revenues and expenses of Hoegh LNG Cyprus Limited are included in the consolidated financial statements. Under Cayman Islands law, dividends may only be paid out of profits or capital reserves if the entity is solvent after the distribution. Dividends from Hoegh LNG Cyprus Limited may only be distributed out of profits and not from the share capital of the company. Dividends and other distributions from Hoegh LNG Cyprus Limited may only be distributed if after the dividend payment, the Partnership would remain in compliance with the financial covenants under the $385 million facility. Refer to note 9.
The Partnership has also determined that Höegh LNG Colombia Holding Ltd. is a VIE since the entity would not be able to finance its activities without financial guarantees under its subsidiary’s facility to financeHöegh Grace. As of January 1, 2017, the Partnership is the primary beneficiary, as it has the power to make key operating decisions considered to be most significant to the VIE and receives the majority of the expected benefits or expected losses. Therefore, 100% of the assets, liabilities, revenues and expenses of Höegh LNG Colombia Holding Ltd., and subsidiaries, are included in the consolidated financial statements with a non-controlling interest reflected for the minority share until December 1, 2017. On December 1, 2017, the Partnership acquired the remaining 49% ownership interest in theHöegh Grace entities and, as of that date, there is no longer a non-controlling interest in theHöegh Grace entities. Under Cayman Islands law, dividends may only be paid out of profits or capital reserves if the entity is solvent after the distributions. Höegh LNG Colombia Holding Ltd. is dependent upon receiving dividends or other distributions from Höegh LNG FSRU IV Ltd. or Höegh LNG Colombia to pay distributions to the Partnership. Dividends and other distributions from Höegh LNG FSRU IV Ltd. and Höegh LNG Colombia may only be distributed if after the dividend payment, the Partnership would remain in compliance with the financial covenants under the $385 million facility. Refer to note 9.
| F-11 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
In addition, the Partnership has determined that the two joint ventures, SRV Joint Gas Ltd. and SRV Joint Gas Two Ltd., are VIEs since each entity did not have a sufficient equity investment to permit the entity to finance its activities without additional subordinated financial support. The entities have been financed with third party debt and subordinated shareholders loans. The Partnership is not the primary beneficiary, as the Partnership cannot make key operating decisions considered to be most significant to the VIEs, but has joint control with the other equity holders. Therefore, the joint ventures are accounted for under the equity method of accounting as the Partnership has significant influence. The Partnership's carrying value is recorded in advances to joint ventures and accumulated losses of joint ventures in the consolidated balance sheets. For SRV Joint Gas Ltd., the Partnership had a receivable for the advances of $2.8 million and $2.8 million, respectively, and the Partnership’s accumulated losses or its share of net liabilities were $0.5 million and $0.8 million, respectively, as of March 31, 2019 and December 31, 2018. The Partnership's carrying value for SRV Joint Gas Two Ltd. consists of a receivable for the advances of $0.8 million and $0.7 million, respectively, and the Partnership’s accumulated losses or its share of net liabilities of $2.0 million and $2.0 million, respectively, as of March 31, 2019 and December 31, 2018. The major reason that the Partnership’s accumulated losses in the joint ventures are net liabilities is due to the fair value adjustments for the interest rate swaps recorded as liabilities on the combined balance sheets of SRV Joint Gas Ltd. and SRV Joint Gas Two Ltd. and eliminations for consolidation to the balance sheet. The maximum exposure to loss is the carrying value of the receivables, which is subordinated to the joint ventures’ long-term bank debt, the investments in the joint ventures (accumulated losses), as the shares are pledged as security for the joint ventures’ long-term bank debt, and Höegh LNG’s commitment under long-term bank loan agreements to fund its share of drydocking costs and remarketing efforts in the event of an early termination of the charters. If the charters terminate for any reason that does not result in a termination fee, the joint ventures’ long-term bank debt would be subject to mandatory repayment. Dividend distributions require a) agreement of the other joint venture owners; b) fulfilment of requirements of the long-term bank loans; c) and under Cayman Islands law may be paid out of profits or capital reserves subject to the joint venture being solvent after the distribution.
Significant accounting policies
The accounting policies used in the preparation of the unaudited condensed interim consolidated financial statements are consistent with those applied in the audited financial statements for the year ended December 31, 2018 included in the Partnership’s Annual Report.
Changes to the accounting policies as a result of adopting revised guidance for derivatives and hedging is as follows:
Derivative instruments
All derivative instruments are initially recorded at fair value as either assets or liabilities in the consolidated balance sheet and are subsequently remeasured to fair value, regardless of the purpose or intent for holding the derivative. The method of recognizing the resulting gain or loss is dependent on whether the contract is designated as a hedging instrument and qualifies for hedge accounting.
For derivative instruments that are not designated or that do not qualify for hedge accounting, the changes in the fair value of the derivative instruments are recognized in earnings. In order to designate a derivative as a cash flow hedge, formal documentation of the relationship between the derivative and the hedged item is required. This documentation includes the strategy and risk management objective for undertaking the hedge and the method that will be used to assess the effectiveness of the hedge.
Interest rate swaps are used for the management of interest rate risk exposure. The interest rate swaps have the effect of converting a portion of the outstanding debt from a floating to a fixed rate over the life of the interest rate swaps. As of January 1, 2019, the following accounting policies became effective for cash flow hedges of interest rate swaps.
For interest rate swaps qualifying as cash flow hedges, the fair value of the portion of the derivative instruments included in the assessment of hedge effectiveness ("hedge effectiveness") and the initial fair value of the hedge component excluded from hedge effectiveness are initially recorded in accumulated other comprehensive income as a component of total equity. Subsequent changes in fair value for the portion of the derivative instruments included in hedge effectiveness are recorded in other comprehensive income. In the periods when the hedged items affect earnings (interest expense is incurred for floating interest rate debt), the associated fair value changes on the hedging derivatives are transferred from accumulated other comprehensive income to the same line (interest expense) in the consolidated statement of income as the earnings effect of the hedged item. The initial fair value component excluded from hedge effectiveness is amortized to earnings over the life of the hedging instrument. The amortization is recognized the same line (interest expense) in the consolidated statement of income as the earnings effect of the hedged item. Any difference in the change in fair value of the hedge components excluded from hedge effectiveness and the amount recognized in earnings is recorded as a component of other comprehensive income. Prospective and retrospective hedge effectiveness is assessed on an ongoing basis. If a cash flow hedge is no longer deemed highly effective, hedge accounting is discontinued. If a cash flow hedge for an interest rate swap is terminated and the originally hedged item is still considered probable of occurring, the gains and losses initially recognized in accumulated other comprehensive income remain there until the hedged item impacts earnings, at which point they are amortized to earnings on a systematic and rational basis to interest expense in the consolidated statement of income. If the hedged items are no longer considered probable of occurring, amounts recognized in total equity are immediately transferred to interest expense in the consolidated statement of income. Cash flows from derivatives instruments that are accounted for as cash flow hedges are classified in the same category as the cash flows from the items being hedged.
| F-12 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
Recently adopted accounting pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued revised guidance for leasing,Leases, that amends the accounting guidance on leases for both lessors and lessees. On January 1, 2019, the Partnership adopted the new standard using the optional transition method to apply the new standard at the transition date of January 1, 2019 with no retrospective adjustments to prior periods. Consequently, the accounting and disclosures for the prior periods continue to be presented in accordance with the previous standard for leases. The Partnership elected the package of practical expedients and has not reassessed conclusions under the previous standard about whether any expired or existing contracts are, or contain leases, lease classification, and initial direct costs for any existing leases. In addition, the election to use hindsight when determining lease term for modifications to existing leases at the transition date was applied. The Partnership adopted an accounting policy to apply the short-term lease expedient as a lessee for leases under 12-months. This includes classes of leases for office equipment, office premises and vehicles used for administrative purposes, as well as, short-term leases of equipment used for projects, drydocking or maintenance associated with the vessels.
The Partnership is the lessor for the time charters for its FSRUs. There were no changes to the timing or amount of revenue recognized and, therefore, no cumulative effect adjustment to retained earnings of initially applying the standard related to the lessor accounting. Additional qualitative and quantitative disclosures are required and have been implemented for reporting periods beginning as of January 1, 2019, while prior periods are not adjusted and continue to be reported under the previous accounting standards. Refer to note 4 for the qualitative and quantitative disclosures provided. As of January 1, 2019, cash payments received for the principal portion of the direct financing lease are presented as an operating cash inflow rather than as an investing cash inflow as presented for prior periods in the consolidated statement of cash flows.
The Partnership does not have any material leased assets. Adoption of the new standard resulted in recording a right-of-use asset and a lease liability on the consolidated balance sheet for operating leases of $0.15 million and $0.15 million, respectively, as of January 1, 2019. There was no cumulative effect adjustment to retained earnings of initially applying the standard related to the lessee accounting. As of March 31, 2019, the right-of-use asset and lease liability for operating leases was $0.14 million and $0.14 million, respectively. The right-of-use asset is included as a component of other equipment in the consolidated balance sheet. The current and long-term lease liabilities are included as components of accrued liabilities and other payables and other long-term liabilities, respectively.
In August 2017, the FASB issued revised guidance forDerivatives and Hedging, Targeted Improvements to Accounting for Hedging Activities. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness. The entire change in fair value of the cash flow hedge included in the assessment of hedge effectiveness is included in other comprehensive income with the result that the hedge ineffectiveness is no longer recognized in earnings. Those amounts are reclassified to earnings in the same income statement line as the hedged item when the hedged item affects earnings. On January 1, 2019, the Partnership adopted the new standard on a prospective basis which had no material impact for accounting for cash flow hedges for the Partnership’s interest rate swaps. There was no cumulative effect adjustment to retained earnings from the initial application of the standard. However, certain amounts reclassified or recorded to earnings were reported as a component of interest expense in the first quarter of 2019 compared with the presentation in previous periods in the gain (loss) on derivative instruments line in the consolidated statements of income. In addition, the new disclosure requirements were applied on a prospective basis in note 13.
Recently issued accounting pronouncements
Recently issued accounting pronouncements are not expected to materially impact the Partnership.
| F-13 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
3. Segment information
There are two operating segments. The segment profit measure is Segment EBITDA, which is defined as earnings before interest, taxes, depreciation, amortization and other financial items (gains and losses on derivative instruments and other items, net). Segment EBITDA is reconciled to operating income and net income in the segment presentation below. The two segments are “Majority held FSRUs” and “Joint venture FSRUs.” In addition, unallocated corporate costs, interest income from advances to joint ventures and interest expense related to the outstanding balances on the $85 million revolving credit facility and the $385 million facility is included in “Other.”
For the three months ended March 31, 2019 and 2018, Majority held FSRUs includes the direct financing lease related to thePGN FSRU Lampung and the operating leases related to theHöegh Gallant and theHöegh Grace.
For the three months ended March 31, 2019 and 2018, Joint venture FSRUs include two 50% owned FSRUs, theNeptune and theCape Ann, that operate under long term time charters with one charterer.
The accounting policies applied to the segments are the same as those applied in the consolidated financial statements, except that i) Joint venture FSRUs are presented under the proportional consolidation method for the segment note and under equity accounting for the consolidated financial statements and ii) internal interest income and interest expense between the Partnership's subsidiaries that eliminate in consolidation are not included in the segment columns for the other financial income (expense), net line. Under the proportional consolidation method, 50% of the Joint venture FSRUs’ revenues, expenses and assets are reflected in the segment note. Management monitors the results of operations of joint ventures under the proportional consolidation method and not the equity method of accounting.
In time charters, the charterer, not the Partnership, controls the choice of locations or routes the FSRUs serve. Accordingly, the presentation of information by geographical region is not meaningful. The following tables include the results for the segments for the three months ended March 31, 2019 and 2018.
| F-14 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
| Three months ended March 31, 2019 | ||||||||||||||||||||||||||
| Joint venture | ||||||||||||||||||||||||||
| Majority | FSRUs | Total | ||||||||||||||||||||||||
| held | (proportional | Segment | Consolidated | |||||||||||||||||||||||
| (in thousands of U.S. dollars) | FSRUs | consolidation) | Other | reporting | Eliminations | reporting | ||||||||||||||||||||
| Time charter revenues | $ | 36,075 | 10,330 | — | 46,405 | (10,330 | ) | (1) | $ | 36,075 | ||||||||||||||||
| Other revenue | 64 | (3) | — | — | 64 | (1) | 64 | |||||||||||||||||||
| Total revenues | 36,139 | 10,330 | — | 46,469 | 36,139 | |||||||||||||||||||||
| Operating expenses | (6,698 | ) | (1,880 | ) | (1,771 | ) | (10,349 | ) | 1,880 | (1) | (8,469 | ) | ||||||||||||||
| Equity in earnings (losses) of joint ventures | — | — | — | — | 351 | (1) | 351 | |||||||||||||||||||
| Segment EBITDA | 29,441 | 8,450 | (1,771 | ) | 36,120 | |||||||||||||||||||||
| Depreciation and amortization | (5,323 | ) | (2,553 | ) | — | (7,876 | ) | 2,553 | (1) | (5,323 | ) | |||||||||||||||
| Operating income (loss) | 24,118 | 5,897 | (1,771 | ) | 28,244 | 22,698 | ||||||||||||||||||||
| Gain (loss) on debt extinguishment | 1,030 | — | — | 1,030 | (1) | 1,030 | ||||||||||||||||||||
| Gain (loss) on derivative instruments | — | (2,541 | ) | — | (2,541 | ) | 2,541 | (1) | — | |||||||||||||||||
| Other financial income (expense), net | (4,239 | ) | (3,005 | ) | (3,445 | ) | (10,689 | ) | 3,005 | (1) | (7,684 | ) | ||||||||||||||
| Income (loss) before tax | 20,909 | 351 | (5,216 | ) | 16,044 | — | 16,044 | |||||||||||||||||||
| Income tax benefit (expense) | (1,910 | ) | — | — | (1,910 | ) | — | (1,910 | ) | |||||||||||||||||
| Net income (loss) | $ | 18,999 | 351 | (5,216 | ) | 14,134 | — | $ | 14,134 | |||||||||||||||||
| Preferred unitholders’ interest in net income | — | — | — | — | 3,364 | (2) | 3,364 | |||||||||||||||||||
| Limited partners' interest in net income (loss) | $ | 18,999 | 351 | (5,216 | ) | 14,134 | (3,364 | ) | (2) | $ | 10,770 | |||||||||||||||
| (1) | Eliminations reverse each of the income statement line items of the proportional amounts for Joint venture FSRUs and record the Partnership's share of the Joint venture FSRUs net income (loss) to Equity in earnings (loss) of joint ventures. |
| (2) | Allocates the preferred unitholders’ interest in net income to the preferred unitholders. |
| (3) | Other revenue consists of insurance proceeds received for claims related to repairs under the Mooring warranty. The Partnership was indemnified by Höegh LNG for the cost of the repairs related to the Mooring, subject to repayment to the extent recovered from insurance proceeds. The amount will be refunded to Höegh LNG during the second quarter of 2019. Refer to notes 3, 11 and 14. |
| F-15 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
| As of March 31, 2019 | |||||||||||||||||||||||||
| Joint venture | |||||||||||||||||||||||||
| Majority | FSRUs | Total | |||||||||||||||||||||||
| held | (proportional | Segment | Consolidated | ||||||||||||||||||||||
| (in thousands of U.S. dollars) | FSRUs | consolidation) | Other | reporting | Eliminations | reporting | |||||||||||||||||||
| Vessels, net of accumulated depreciation | $ | 653,064 | 259,245 | — | 912,309 | (259,245 | ) | (1) | $ | 653,064 | |||||||||||||||
| Net investment in direct financing lease | 282,065 | — | — | 282,065 | — | 282,065 | |||||||||||||||||||
| Goodwill | 251 | — | — | 251 | — | 251 | |||||||||||||||||||
| Advances to joint ventures | — | — | 3,606 | 3,606 | — | 3,606 | |||||||||||||||||||
| Total assets | 1,019,375 | 285,005 | 9,404 | 1,313,784 | (285,005 | ) | (1) | 1,028,779 | |||||||||||||||||
| Accumulated losses of joint ventures | — | — | 50 | 50 | (2,506 | ) | (1) | (2,456 | ) | ||||||||||||||||
| Expenditures for vessels & equipment | — | 71 | — | 71 | (71 | ) | (2) | — | |||||||||||||||||
| Expenditures for drydocking | — | 16 | — | 16 | (16 | ) | (2) | — | |||||||||||||||||
| Principal repayment direct financing lease | 1,008 | — | — | 1,008 | — | 1,008 | |||||||||||||||||||
| Amortization of above market contract | $ | 895 | — | — | 895 | — | $ | 895 | |||||||||||||||||
| (1) | Eliminates the proportional share of the Joint venture FSRUs’ Vessels, net of accumulated depreciation and Total assets and reflects the Partnership’s share of net assets (assets less liabilities) of the Joint venture FSRUs as Accumulated losses of joint ventures. |
| (2) | Eliminates the Joint venture FSRUs’ Expenditures for vessels & equipment and drydocking to reflect the consolidated expenditures of the Partnership. |
| F-16 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
| Three months ended March 31, 2018 | |||||||||||||||||||||||||
| Joint venture | |||||||||||||||||||||||||
| Majority | FSRUs | Total | |||||||||||||||||||||||
| held | (proportional | Segment | Consolidated | ||||||||||||||||||||||
| (in thousands of U.S. dollars) | FSRUs | consolidation) | Other | reporting | Eliminations | reporting | |||||||||||||||||||
| Time charter revenues | $ | 34,885 | 10,996 | — | 45,881 | (10,996 | ) | (1) | $ | 34,885 | |||||||||||||||
| Total revenues | 34,885 | 10,996 | — | 45,881 | 34,885 | ||||||||||||||||||||
| Operating expenses | (6,533 | ) | (2,474 | ) | (2,006 | ) | (11,013 | ) | 2,474 | (1) | (8,539 | ) | |||||||||||||
| Equity in earnings (losses) of joint ventures | — | — | — | — | 9,369 | (1) | 9,369 | ||||||||||||||||||
| Segment EBITDA | 28,352 | 8,522 | (2,006 | ) | 34,868 | ||||||||||||||||||||
| Depreciation and amortization | (5,268 | ) | (2,401 | ) | — | (7,669 | ) | 2,401 | (1) | (5,268 | ) | ||||||||||||||
| Operating income (loss) | 23,084 | 6,121 | (2,006 | ) | 27,199 | 30,447 | |||||||||||||||||||
| Gain (loss) on derivative instruments | 631 | 6,515 | — | 7,146 | (6,515 | ) | (1) | 631 | |||||||||||||||||
| Other financial income (expense), net | (6,571 | ) | (3,267 | ) | (712 | ) | (10,550 | ) | 3,267 | (1) | (7,283 | ) | |||||||||||||
| Income (loss) before tax | 17,144 | 9,369 | (2,718 | ) | 23,795 | — | 23,795 | ||||||||||||||||||
| Income tax expense | (2,109 | ) | — | — | (2,109 | ) | — | (2,109 | ) | ||||||||||||||||
| Net income (loss) | $ | 15,035 | 9,369 | (2,718 | ) | 21,686 | — | $ | 21,686 | ||||||||||||||||
| Preferred unitholders’ interest in net income | — | — | — | — | 2,660 | (2) | 2,660 | ||||||||||||||||||
| Limited partners' interest in net income (loss) | $ | 15,035 | 9,369 | (2,718 | ) | 21,686 | (2,660 | ) | (2) | $ | 19,026 | ||||||||||||||
| (1) | Eliminations reverse each of the income statement line items of the proportional amounts for Joint venture FSRUs and record the Partnership's share of the Joint venture FSRUs net income (loss) to Equity in earnings (loss) of joint ventures. |
| (2) | Allocates the preferred unitholders’ interest in net income to the preferred unitholders. |
| F-17 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
| As of December 31, 2018 | |||||||||||||||||||||||||
| Joint venture | |||||||||||||||||||||||||
| Majority | FSRUs | Total | |||||||||||||||||||||||
| held | (proportional | Segment | Consolidated | ||||||||||||||||||||||
| (in thousands of U.S. dollars) | FSRUs | consolidation) | Other | reporting | Eliminations | reporting | |||||||||||||||||||
| Vessels, net of accumulated depreciation | $ | 658,311 | 261,614 | — | 919,925 | (261,614 | ) | (1) | $ | 658,311 | |||||||||||||||
| Net investment in direct financing lease | 283,073 | — | — | 283,073 | — | 283,073 | |||||||||||||||||||
| Goodwill | 251 | — | — | 251 | — | 251 | |||||||||||||||||||
| Advances to joint ventures | — | — | 3,536 | 3,536 | — | 3,536 | |||||||||||||||||||
| Total assets | 1,007,202 | 286,283 | 15,838 | 1,309,323 | (286,283 | ) | (1) | 1,023,040 | |||||||||||||||||
| Accumulated losses of joint ventures | — | — | 50 | 50 | (2,858 | ) | (1) | (2,808 | ) | ||||||||||||||||
| Expenditures for vessels & equipment | 257 | 3,305 | — | 3,562 | (3,305 | ) | (2) | 257 | |||||||||||||||||
| Expenditures for drydocking | — | 2,490 | — | 2,490 | (2,490 | ) | (2) | — | |||||||||||||||||
| Principal repayment direct financing lease | 3,814 | — | — | 3,814 | — | 3,814 | |||||||||||||||||||
| Amortization of above market contract | $ | 3,631 | — | — | 3,631 | — | $ | 3,631 | |||||||||||||||||
| (1) | Eliminates the proportional share of the Joint venture FSRUs’ Vessels, net of accumulated depreciation, and Total assets and reflects the Partnership’s share of net assets (assets less liabilities) of the Joint venture FSRUs as Accumulated losses of joint ventures. | |
| (2) | Eliminates the Joint venture FSRUs’ Expenditures for vessels & equipment and drydocking to reflect the consolidated expenditures of the Partnership. |
| F-18 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
4. Time charter revenues and related contract balances
The Partnership presents its revenue by segment, disaggregated by revenue recognized in accordance with accounting standards on leasing and on revenue from contracts with customers for time charter services. In addition, material elements where the nature, amount, timing and uncertainty of revenue and cash flows differ from the monthly invoicing under time charter contracts are separately presented. Revenue recognized for the Majority held FSRUs includes the amortization of above market contract intangibles. Revenue recognized for Joint venture FSRUs includes the amortization of deferred revenues related to the charterer's reimbursements for certain vessel modifications and drydocking costs. As a result, the timing of cash flows differs from monthly time charter invoicing. The Partnership believes the nature of its time charter contracts are same, regardless of whether the contracts are accounted for as direct financing leases or operating leases for accounting purposes. As such, when adopting the revised guidance on leases, the Partnership did not elect to apply the practical expedient to not separate lease and services components for operating leases because this would result in inconsistent disclosure for the time charter contracts.
The following tables summarize the disaggregated revenue of the Partnership by segment for the three months ended March 31, 2019 and 2018:
| Three months ended March 31, 2019 | ||||||||||||||||||||||||
| Joint venture | ||||||||||||||||||||||||
| Majority | FSRUs | Total | ||||||||||||||||||||||
| held | (proportional | Segment | Consolidated | |||||||||||||||||||||
| (in thousands of U.S. dollars) | FSRUs | consolidation) | Other | reporting | Eliminations (1) | reporting | ||||||||||||||||||
| Lease revenues, excluding amortization (2) | $ | 22,375 | 6,335 | — | 28,710 | (6,335 | ) | $ | 22,375 | |||||||||||||||
| Time charter service revenues, excluding amortization | 14,595 | 3,277 | — | 17,872 | (3,277 | ) | 14,595 | |||||||||||||||||
| Amortization of above market contract intangibles | (895 | ) | — | — | (895 | ) | (895 | ) | ||||||||||||||||
| Amortization of deferred revenue for modifications & drydock | — | 718 | — | 718 | (718 | ) | — | |||||||||||||||||
| Other revenue (3) | 64 | — | — | 64 | — | 64 | ||||||||||||||||||
| Total revenues (4) | $ | 36,139 | 10,330 | — | 46,469 | (10,330 | ) | $ | 36,139 | |||||||||||||||
| (1) | Eliminations reverse the proportional amounts of revenue for Joint venture FSRUs to reflect the consolidated revenues included in the consolidated income statement. The Partnership's share of the Joint venture FSRUs revenues is included in Equity in earnings (loss) of joint ventures on the consolidated income statement. | |
| (2) | The direct financing lease revenues comprise about one-fourth of the total lease revenues. | |
| (3) | Other revenue consists of insurance proceeds received for claims related to repairs under the Mooring warranty. The Partnership was indemnified by Höegh LNG for the cost of the repairs related to the Mooring, subject to repayment to the extent recovered from insurance proceeds. The amount is expected to be refunded to Höegh LNG during the second quarter of 2019. Refer to notes 3, 11 and 14. | |
| (4) | Payments made by the charterer directly to the tax authorities on behalf of the subsidiaries for advance collection of income taxes or final income tax is recorded as a component of total revenues and is disclosed separately in the consolidated statement of cash flows. |
| Three months ended March 31, 2018 | ||||||||||||||||||||||||
| Joint venture | ||||||||||||||||||||||||
| Majority | FSRUs | Total | ||||||||||||||||||||||
| held | (proportional | Segment | Consolidated | |||||||||||||||||||||
| (in thousands of U.S. dollars) | FSRUs | consolidation) | Other | reporting | Eliminations (1) | reporting | ||||||||||||||||||
| Lease revenues, excluding amortization | $ | 21,678 | 6,335 | — | 28,013 | (6,335 | ) | $ | 21,678 | |||||||||||||||
| Time charter service revenues, excluding amortization | 14,102 | 4,058 | — | 18,160 | (4,058 | ) | 14,102 | |||||||||||||||||
| Amortization of above market contract intangibles | (895 | ) | — | — | (895 | ) | — | (895 | ) | |||||||||||||||
| Amortization of deferred revenue for modifications & drydock | — | 603 | — | 603 | (603 | ) | — | |||||||||||||||||
| Total revenues (2) | $ | 34,885 | 10,996 | — | 45,881 | (10,996 | ) | $ | 34,885 | |||||||||||||||
| F-19 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
| (1) | Eliminations reverse the proportional amounts of revenue for Joint venture FSRUs to reflect the consolidated revenues included in the consolidated income statement. The Partnership's share of the Joint venture FSRUs revenues is included in Equity in earnings (loss) of joint ventures on the consolidated income statement. |
| (2) | Payments made by the charterer directly to the tax authorities on behalf of the subsidiaries for advance collection of income taxes or final income tax is recorded as a component of total revenues and is disclosed separately in the consolidated statement of cash flows. |
The Partnership’s risk and exposure related to uncertainty of revenues or cash flows related to its long-term time charter contracts primarily relate to the credit risk associated with the individual charterers. Payments are due under time charter contracts regardless of the demand for the charterers’ gas output or the utilization of the FSRU.
The consolidated trade receivables, contract assets, contract liabilities and refund liabilities included in the tables below, exclude the balances for the Joint venture FSRUs. The Partnership’s share of net assets in the Joint venture FSRUs are recorded in the consolidated balance sheet using the equity method on the line accumulated losses in joint ventures.
The following table summarizes the allocation of consolidated receivables between lease and service components:
| As of | ||||||||
| March 31, | December 31, | |||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | ||||||
| Trade receivable for lease | $ | 5,588 | $ | 2,898 | ||||
| Trade receivable for time charter services | 4,402 | 2,658 | ||||||
| Total trade receivable and amounts due from affiliates | $ | 9,990 | $ | 5,556 | ||||
There were no impairment losses for trade receivables for lease or time charter services or contract assets for the three months ended March 31, 2019 or for the year ended December 31, 2018.
The following table summarizes the consolidated contract assets, contract liabilities and refund liabilities to customers:
| Lease related | Services related | |||||||||||||||
| Contract | Contract | Contract | Refund liability | |||||||||||||
| (in thousands of U.S. dollars) | asset | liability | asset | to charters | ||||||||||||
| Balance January 1, 2019 | $ | 7,517 | (7,517 | ) | — | $ | (1,834 | ) | ||||||||
| Additions | — | — | 186 | (7 | ) | |||||||||||
| Reduction for receivables recorded | (203 | ) | — | — | — | |||||||||||
| Reduction for revenue recognized (excluding amortization) | — | 203 | — | — | ||||||||||||
| Repayments of refund liabilities to charterer | — | — | — | 1,101 | ||||||||||||
| Balance March 31, 2019 | 7,314 | (7,314 | ) | 186 | (740 | ) | ||||||||||
| Netting of contract asset and contract liability | (7,314 | ) | 7,314 | — | — | |||||||||||
| Balance reflected in balance sheet March 31, 2019 | $ | — | — | 186 | $ | (740 | ) | |||||||||
| F-20 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
| Lease related | Services related | |||||||||||||||
| Contract | Contract | Contract | Refund liability | |||||||||||||
| (in thousands of U.S. dollars) | asset | liability | asset | to charters | ||||||||||||
| Balance January 1, 2018 | $ | 8,326 | (8,326 | ) | 303 | $ | (6,187 | ) | ||||||||
| Additions | — | — | — | (1,747 | ) | |||||||||||
| Reduction for receivables recorded | (809 | ) | — | (303 | ) | — | ||||||||||
| Reduction for revenue recognized | — | 809 | — | — | ||||||||||||
| Reduction for revenue recognized from previous years | — | — | — | 2,772 | ||||||||||||
| Repayments of refund liabilities to charterer | — | — | — | 3,328 | ||||||||||||
| Balance December 31, 2018 | 7,517 | (7,517 | ) | — | (1,834 | ) | ||||||||||
| Netting of contract asset and contract liability | (7,517 | ) | 7,517 | — | — | |||||||||||
| Balance reflected in balance sheet December 31, 2018 | $ | — | — | — | $ | (1,834 | ) | |||||||||
Contract assets are reported in the consolidated balance sheet as a component of prepaid expenses and other receivables. Current and non-current contract liabilities are reported in the consolidated balance sheet as components of accrued liabilities and other payables and other long-term liabilities, respectively. Refund liabilities are reporting in the consolidated balance sheet as a component of accrued liabilities and other payables.
The service related contract asset reflected in the balance sheet relates to accrued revenue for reimbursable costs for other charterers.
Refund liabilities to charterers include invoiced revenue to be refunded to charterers for estimated reimbursable costs that exceeded the actual cost incurred and for non-compliance with performance warranties in the time charter contracts that result in reduction of hire, liquidated damages or other performance related payments.
During the three months ended March 31, 2019 the major changes in the refund liability to charterers related to the settlement of a 2018 performance claim of $1,101. During the year ended December 31, 2018, the major changes in the refund liability to charterers related to recognition of previously constrained revenue related to prior periods' performance obligations of $2,772 and repayment of $3,328 for the conclusion of an audit by a charterer at the end of 2017 and in the third quarter of 2018 for the amount the charterer would reimburse for certain 2014, 2015 and 2016 costs.
As a result of adopting the revised guidance on leasing, the lessor accounting did not change. Refer to note 2.Significant accounting policies;Time charter revenues, related contract balances and expenses;Lease revenue recognition; andSignificant judgments in revenue recognition in the Partnership’s 2018 Annual Report for a description of the leases, lessor accounting policy and significant judgments made in applying lease accounting.
As of March 31, 2019, the minimum contractual future revenues to be received under the time charters for thePGN FSRU Lampung, theHöegh Gallant and theHöegh Grace during the next five years and thereafter are as follows:
| (in thousands of U.S. dollars) | Service related | Lease related | Total | ||||||||||
| 2019 (excluding the three months ended March 31, 2019) | $ | 26,007 | 69,219 | $ | 95,226 | ||||||||
| 2020 | 24,880 | 71,100 | 95,980 | ||||||||||
| 2021 | 19,703 | 59,903 | 79,606 | ||||||||||
| 2022 | 19,703 | 59,903 | 79,606 | ||||||||||
| 2023 | 19,703 | 59,903 | 79,606 | ||||||||||
| 2024 | 19,703 | 59,903 | 79,606 | ||||||||||
| Thereafter | 116,386 | 346,369 | 462,755 | ||||||||||
| Total | $ | 246,085 | 726,300 | $ | 972,385 | ||||||||
| Operating lease | $ | 270,954 | |||||||||||
| Direct financing lease | 455,346 | ||||||||||||
| Discounting effect | (319,281 | ) | |||||||||||
| Direct financing lease receivable | $ | 136,065 | |||||||||||
| F-21 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
The long-term time charter for thePGN FSRU Lampung with PGN LNG has an initial term of 20 years from the acceptance date of October 30, 2014 and the contract expires in 2034. The time charter hire payments began July 21, 2014 when the project was ready to begin commissioning. The lease element of the time charter is accounted for as a direct financing lease. The minimum contractual future revenues in the table above include the fixed payments for the services and lease elements for the initial term but exclude the variable fees from the charterer for vessel operating expenses and reimbursement of tax expenses. The charterer has an option to purchase thePGN FSRU Lampung, which can be exercised after the third anniversary of the commencement of the charter until the twentieth anniversary, at stated prices in the time charter. The minimum contractual future revenues do not include the unexercised purchase option price. Should the purchase option be exercised in the short to medium term, the contractual price would exceed the net investment in financing lease but the future hire payments would cease. The time charter also provides options for the charterer to extend the lease term for two five-year periods. Unexercised option periods are excluded from the minimum contractual future revenues.
The long-term time charter for theHöegh Gallant has an initial term of five years from April 2015 and the contract expires in 2020. The lease element of the time charter is accounted for as an operating lease. The minimum contractual future revenues in the table above include the fixed payments for the services element and the lease element which also covers the vessel operating expenses and taxes. Pursuant to an option agreement, the Partnership has the right to cause Höegh LNG to charter theHöegh Gallant from the expiration or termination of the initial five-year charter until July 2025 at a rate equal to 90% of the rate payable pursuant to the current charter plus any incremental taxes or operating expenses as a result of the new charter. Unexercised option periods are excluded from the minimum contractual future revenues.
The long-term time charter for theHöegh Grace has an initial term of 20 years and the contract expires in 2036. The minimum contractual future revenues in the table above include the fixed payments for the services element and lease element but exclude the variable fees from the charterer for vessel operating expenses and reimbursement of certain taxes. The non-cancellable charter period is 10 years. The initial term of the lease is 20 years. However, each party has an unconditional option to cancel the charter after 10 and 15 years without penalty. However, if the charterer waives its right to terminate in year 10 within a certain deadline, the Partnership will not be able to exercise its right to terminate in year 10. The charterer has an option to purchase theHöegh Grace at a price specified in theHöegh Grace charter in year 15 and year 20 of such charter. The minimum contractual future revenues do not include the unexercised purchase option price. Only the non-cancellable lease period is included the minimum contractual future revenues.
The lease element of time charter hire for thePGN FSRU Lampung is recognized over the lease term using the effective interest rate method and is included in time charter revenues. The direct financing lease is reflected on the consolidated balance sheets as net investment in direct financing lease, including the direct financing lease receivable and unguaranteed residual value, as follows:
| As of | ||||||||
| March 31, | December 31, | |||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | ||||||
| Minimum lease payments | $ | 589,074 | $ | 589,074 | ||||
| Unguaranteed residual value | 146,000 | 146,000 | ||||||
| Unearned income | (440,345 | ) | (440,345 | ) | ||||
| Initial direct cost, net | 3,095 | 3,095 | ||||||
| Net investment in direct financing lease | 297,824 | 297,824 | ||||||
| Principal repayment and amortization | (15,759 | ) | (14,751 | ) | ||||
| Net investment in direct financing lease at period end | 282,065 | 283,073 | ||||||
| Less: Current portion | (4,261 | ) | (4,168 | ) | ||||
| Long term net investment in direct financing lease | $ | 277,804 | $ | 278,905 | ||||
| Net investment in direct financing lease consists of: | ||||||||
| Direct financing lease receivable | $ | 136,065 | $ | 137,073 | ||||
| Unguaranteed residual value | 146,000 | 146,000 | ||||||
| Net investment in direct financing lease at period end | $ | 282,065 | $ | 283,073 | ||||
| F-22 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
5. Financial income (expense), net
The components of financial income (expense), net are as follows:
| Three months ended | ||||||||
| March 31, | ||||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | ||||||
| Interest income | $ | 199 | $ | 187 | ||||
| Interest expense: | ||||||||
| Interest expense (note 13) | (6,248 | ) | (6,640 | ) | ||||
| Commitment fees | (112 | ) | (37 | ) | ||||
| Amortization of debt issuance cost and fair value of debt assumed | (476 | ) | (187 | ) | ||||
| Total interest expense | (6,836 | ) | (6,864 | ) | ||||
| Gain (loss) on debt extinguishment | 1,030 | — | ||||||
| Gain (loss) on derivative instruments | — | 631 | ||||||
| Other items, net: | ||||||||
| Foreign exchange gain (loss) | (19 | ) | 58 | |||||
| Bank charges, fees and other | (53 | ) | (35 | ) | ||||
| Withholding tax on interest expense and other | (975 | ) | (629 | ) | ||||
| Total other items, net | (1,047 | ) | (606 | ) | ||||
| Total financial income (expense), net | $ | (6,654 | ) | $ | (6,652 | ) | ||
Interest income related to cash balances and interest accrued on the advances to the joint ventures for each of the three months ended March 31, 2019 and 2018. As of January 1, 2019, interest expense includes reclassifications from accumulated other comprehensive income and other gains or losses from derivatives due to the adoption of the revised guidance for derivatives and hedging. Refer to note 2. Refer to note 13 for additional information on the types of gains and losses on derivatives included in interest expense. Interest expense also includes interest related to the revolving credit facility from Höegh LNG, the Lampung facility, the Gallant/ Grace facility for the period from January 1, 2018 to January 31, 2019 and the $385 million facility for the period from January 31, 2019 to March 31, 2019. The gain on debt extinguishment relates to the refinancing of the Gallant/Grace facility with the $385 million facility. When the entities owning theHöegh Gallant and theHöegh Grace were acquired, a premium on the debt under the Gallant/Grace facility was recognized. The unamortized balance was recorded as a gain when the debt was extinguished on January 31, 2019. Refer to note 9.
| F-23 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
6. Income tax
The Partnership is not subject to Marshall Islands corporate income taxes. The Partnership is subject to tax for earnings of its subsidiaries incorporated in Singapore, Indonesia, Cyprus, the UK and for certain Colombian source income. The income tax expense recorded in the consolidated income statements was $1,910 and $2,109 for the three months ended March 31, 2019 and 2018, respectively. For the three months ended March 31, 2019 and 2018, the income tax expense principally related to subsidiaries in Indonesia, Singapore and Colombia. The Singapore subsidiary’s taxable income mainly arises from internal interest income. The charterer in Colombia pays certain taxes directly to the Colombian tax authorities on behalf of the Partnership’s subsidiaries that own and operate theHöegh Grace. The tax payments are a mechanism for advance collection of part of the income taxes for the Colombian subsidiary and a final income tax on Colombian source income for the non-Colombian subsidiary. The Partnership concluded these third-party payments to the tax authorities represent income taxes that must be accounted for under the guidance for income taxes. The amount of non-cash income tax expense was $202 and $198 for the three months ended March 31, 2019 and 2018.
Benefits of uncertain tax positions are recognized when it is more-likely-than-not that a tax position taken in a tax return will be sustained upon examination based on the technical merits of the position. For the three months ended March 31, 2019 and 2018, there were increases in uncertain tax positions related to Indonesia of $110 and $407, respectively. As of March 31, 2019 and December 31, 2018, the unrecognized tax benefits were $1,835 and $1,725, respectively.
| F-24 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
7. Advances to joint ventures
| As of | ||||||||
| March 31, | December 31, | |||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | ||||||
| Current portion of advances to joint ventures | $ | — | $ | — | ||||
| Long-term advances to joint ventures | 3,606 | 3,536 | ||||||
| Advances/shareholder loans to joint ventures | $ | 3,606 | $ | 3,536 | ||||
The Partnership had advances of $2.8 million and $2.8 million due from SRV Joint Gas Ltd. as of March 31, 2019 and December 31, 2018, respectively. The Partnership had advances of $0.8 million and $0.7 million due from SRV Joint Gas Two Ltd. as of March 31, 2019 and December 31, 2018, respectively. The joint ventures repaid the original principal of all shareholder loans during 2016. As of March 31, 2019, the outstanding balances are accrued interest on the shareholder loans.
As of September 30, 2017, the joint ventures suspended payments on the shareholder loans pending the outcome of the boil-off claim. Accordingly, the outstanding balance on the shareholder loans is classified as long-term as of March 31, 2019 and December 31, 2018. Refer to note 14 under “Joint ventures claims and accruals.” The advances, including accrued interest, can be repaid based on available cash after servicing of long-term bank debt. There are no financial covenants in the joint ventures’ bank debt facilities, but certain other covenants and restrictions apply. Certain conditions apply to making distributions for the shareholder loans or dividends, including meeting a 1.20 historical and projected debt service coverage ratio. As of March 31, 2019, the 1.20 historical debt service coverage ratio had not been met by either SRV Joint Gas Ltd. or SRV Joint Gas Two Ltd. As a result, no payments on the shareholder loans can be made until the debt service coverage ratio is met in future periods.
8. Accrued liabilities and payables
| As of | ||||||||
| (in thousands of U.S. dollars) | March 31, 2019 | December 31, 2018 | ||||||
| Accrued administrative and operating expense | $ | 2,967 | $ | 3,004 | ||||
| Current tax payable | 1,883 | 1,375 | ||||||
| Refund liabilities | 740 | 1,834 | ||||||
| Current portion of advance for refundable value added tax | 434 | 429 | ||||||
| Accrued interest | 2,742 | 604 | ||||||
| Other accruals and payables | 728 | 212 | ||||||
| Total accrued liabilities and other payables | $ | 9,494 | $ | 7,458 | ||||
| F-25 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
9. Long-term debt
| As of | ||||||||
| March 31, | December 31, | |||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | ||||||
| Lampung facility: | ||||||||
| Export credit tranche | $ | 105,374 | $ | 109,096 | ||||
| FSRU tranche | 25,944 | 26,988 | ||||||
| Gallant facility: | ||||||||
| Commercial tranche | — | 111,264 | ||||||
| Export credit tranche | — | 29,333 | ||||||
| Grace facility: | ||||||||
| Commercial tranche | — | 135,813 | ||||||
| Export credit tranche | — | 27,750 | ||||||
| $385 million facility | ||||||||
| Commercial tranche | 263,833 | — | ||||||
| Export credit tranche | 56,167 | — | ||||||
| Outstanding principal | 451,318 | 440,244 | ||||||
| Lampung facility unamortized debt issuance cost | (5,421 | ) | (5,809 | ) | ||||
| Gallant facility unamortized fair value of debt assumed | — | 215 | ||||||
| Grace facility unamortized fair value of debt assumed | — | 895 | ||||||
| $385 million facility unamortized debt issuance costs | (5,625 | ) | — | |||||
| Total debt | 440,272 | 435,545 | ||||||
| Less: Current portion of long-term debt | (44,660 | ) | (45,458 | ) | ||||
| Long-term debt | $ | 395,612 | $ | 390,087 | ||||
Lampung facility
PT Hoegh LNG Lampung is the Borrower and Höegh LNG is the guarantor for the Lampung facility.
The primary financial covenants under the Lampung facility are as follows:
| · | Borrower must maintain a minimum debt service coverage ratio of 1.10 to 1.00 for the preceding nine-month period tested on each quarterly repayment date; | |
| · | Guarantor’s book equity must be greater than the higher of (i) $200 million and (ii) 25% of total assets; and | |
| · | Guarantor’s free liquid assets (cash and cash equivalents or available draws on credit facilities) must be greater than $20 million. |
As of March 31, 2019, the borrower and the guarantor were in compliance with the financial covenants under the Lampung facility.
The Lampung facility requires cash reserves that are held for specifically designated uses, including working capital, operations and maintenance and debt service reserves. Distributions are subject to “waterfall” provisions that allocate revenues to specified priorities of use (such as operating expenses, scheduled debt service, targeted debt service reserves and any other reserves) with the remaining cash being distributable only on certain dates and subject to satisfaction of certain conditions, including meeting a 1.20 historical debt service coverage ratio, no default or event of default then continuing or resulting from such distribution and the guarantor not being in breach of the financial covenants applicable to it. The Lampung facility limits, among other things, the ability of the borrower to change its business, sell or grant liens on its property including thePGN FSRU Lampung, incur additional indebtedness or guarantee other indebtedness, make investments or acquisitions, enter into intercompany transactions and make distributions.
| F-26 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
Gallant/Grace facility
The Gallant/Grace facility included two borrowers, the Partnership’s subsidiaries owning theHöegh Gallant and theHöegh Grace. The Gallant/Grace facility included two commercial tranches and the export credit tranche related to theHöegh Gallant (the “Gallant facility”) and a commercial tranche and the export credit tranche related to theHöegh Grace(the “Grace facility”). Höegh LNG, Höegh LNG Colombia Holding Ltd., Höegh LNG FSRU III Ltd. and the Partnership were guarantors for the facility.
On January 31, 2019, the outstanding balance and accrued interest of $303.2 million and $1.6 million, respectively, on the Gallant/Grace facility was repaid from the proceeds of the $385 million facility. The unamortized balance of the fair value of debt assumed, or premium, was recorded as a gain when the debt was extinguished. Refer to note 5. The interest rate swaps related to the Gallant/Grace facility were terminated on the same date. Refer to note 13.
$385 million facility
On January 29, 2019, the Partnership entered a loan agreement with a syndicate of banks to refinance the outstanding balances of the Gallant/Grace facility. Höegh LNG Partners LP is the borrower (the “Borrower”) for the senior secured term loan and revolving credit facility (the “$385 million facility”). The aggregate borrowing capacity is $320 million on the senior secured term loan (which includes a commercial tranche and the export credit tranche) and $63 million on the revolving credit facility. Hoegh LNG Cyprus Limited, Höegh LNG FSRU IV Ltd., (collectively, the "Vessel Owners"), Höegh LNG Colombia S.A.S., and Höegh LNG Egypt LLC, a subsidiary of Höegh LNG, are guarantors for the facility.
On January 31, 2019, the Partnership drew $320 million under the commercial and the export credit tranches on the $385 million facility to settle $303.2 million and $1.6 million of the outstanding balance and accrued interest, respectively, on the Gallant/Grace facility and used proceeds of $5.5 million to pay arrangement fees due under the $385 million facility. The remaining proceeds of $9.6 million were used for general partnership purposes. The revolving credit facility under the $385 million facility has not yet been drawn.
The primary financial covenants under the $385 million facility are as follows:
| · | The Partnership must maintain |
| o | Consolidated book equity (excluding hedge reserves and mark to market value of derivatives) equal to the greater of |
| § | 25% of total assets, and |
| § | $150 million |
| o | Consolidated working capital (current assets, excluding intercompany receivables and marked-to-market value of any financial derivative, less current liabilities, excluding intercompany payables, marked-to-market value of any financial derivative and the current portion of long-term debt) shall at all time be greater than zero | |
| o | Minimum liquidity (cash and cash equivalents and available draws under a bank credit facility for a term of more than 12 months) equal to the greater of |
| § | $15 million, and |
| § | $2.5 million multiplied by the number of vessels owned or leased by the Partnership (prorate for partial ownership), subject to a cap of $20 million |
| o | A ratio of combined EBITDA for the Vessel Owners to debt service (principal repayments, guarantee commission, commitment fees and interest expense) for the preceding twelve months of a minimum of 115% |
In addition, a security maintenance ratio based on the aggregate market value of theHöegh Gallant, theHöegh Grace and any additional security must be at least 125% of the aggregate outstanding loan balance.
As of March 31, 2019, the borrower and the Vessel Owners were in compliance with the financial covenants.
Under the $385 million facility, cash accounts are freely available for the use of the Borrower and the guarantors, unless there is an event of default. Cash can be distributed as dividends or to service loans of owners and affiliates provided that after the distribution the Borrower and the guarantors would remain in compliance with the financial covenants. The $385 million facility limits, among other things, the ability of the Borrower and the guarantors to change their business, grant liens on theHöegh Gallant or theHöegh Grace, incur additional indebtedness that is not at pari passu with the $385 million facility, enter into intercompany debt that is not subordinated to the $385 million facility and for the Vessel Owners to make investments or acquisitions.
| F-27 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
10. Investments in joint ventures
| As of | ||||||||
| March 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Accumulated losses of joint ventures | $ | 2,456 | $ | 2,808 | ||||
The Partnership has a 50% interest in each of SRV Joint Gas Ltd. (owner of theNeptune) and SRV Joint Gas Two Ltd. (owner of theCape Ann). The following table presents the summarized financial information for 100% of the combined joint ventures on an aggregated basis.
| Three months ended | ||||||||
| March 31, | ||||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | ||||||
| Time charter revenues | $ | 19,002 | $ | 19,655 | ||||
| Other income | 1,657 | 2,336 | ||||||
| Total revenues | 20,659 | 21,991 | ||||||
| Operating expenses | (3,760 | ) | (4,948 | ) | ||||
| Depreciation and amortization | (5,259 | ) | (4,955 | ) | ||||
| Operating income | 11,640 | 12,088 | ||||||
| Unrealized gain (loss) on derivative instruments | (5,082 | ) | 13,030 | |||||
| Other financial expense, net | (6,010 | ) | (6,533 | ) | ||||
| Net income (loss) | $ | 548 | $ | 18,585 | ||||
| Share of joint ventures owned | 50 | % | 50 | % | ||||
| Share of joint ventures net income (loss) before eliminations | 274 | 9,293 | ||||||
| Eliminations | 77 | 76 | ||||||
| Equity in earnings (losses) of joint ventures | $ | 351 | $ | 9,369 | ||||
| F-28 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
| As of | ||||||||
| March 31, | December 31, | |||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | ||||||
| Cash and cash equivalents | $ | 7,958 | $ | 7,958 | ||||
| Restricted cash | 17,509 | 13,844 | ||||||
| Other current assets | 451 | 1,894 | ||||||
| Total current assets | 25,918 | 23,696 | ||||||
| Restricted cash | 25,602 | 25,448 | ||||||
| Vessels, net of accumulated depreciation | 534,432 | 539,324 | ||||||
| Deferred charges | — | 194 | ||||||
| Total long-term assets | 560,034 | 564,966 | ||||||
| Current portion of long-term debt | 27,014 | 26,599 | ||||||
| Amounts and loans due to owners and affiliates | 390 | 1,215 | ||||||
| Derivative instruments | 10,685 | 10,178 | ||||||
| Refund liabilities | 25,223 | 26,055 | ||||||
| Other current liabilities | 8,310 | 8,924 | ||||||
| Total current liabilities | 71,622 | 72,971 | ||||||
| Long-term debt | 396,225 | 403,052 | ||||||
| Loans due to owners and affiliates | 7,213 | 7,071 | ||||||
| Derivative instruments | 56,139 | 51,563 | ||||||
| Other long-term liabilities | 43,724 | 43,526 | ||||||
| Total long-term liabilities | 503,301 | 505,212 | ||||||
| Net liabilities | $ | 11,029 | $ | 10,479 | ||||
| Share of joint ventures owned | 50 | % | 50 | % | ||||
| Share of joint ventures net liabilities before eliminations | 5,515 | 5,240 | ||||||
| Eliminations | (7,971 | ) | (8,048 | ) | ||||
| Accumulated losses of joint ventures | $ | (2,456 | ) | $ | (2,808 | ) | ||
| F-29 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
11. Related party transactions
Income (expenses) from related parties
As described inRelated party agreements below, subsidiaries of Höegh LNG have provided the administrative services to the Partnership and ship management and/or technical support services for thePGN FSRU Lampung, theHöegh Gallant and theHöegh Grace.
Amounts included in the consolidated statements of income for the three months ended March 31, 2019 and 2018 or included in the consolidated balance sheets as of March 31, 2019 and December 31, 2018 are as follows:
| Three months ended | ||||||||
| Statement of income: | March 31, | |||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | ||||||
| Revenues | ||||||||
| Time charter revenueHöegh Gallant (1) | $ | 12,179 | $ | 10,825 | ||||
| Operating expenses | ||||||||
| Vessel operating expenses (2) | (5,289 | ) | (5,062 | ) | ||||
| Hours, travel expense and overhead (3) and Board of Directors' fees (4) | (1,358 | ) | (1,009 | ) | ||||
| Financial (income) expense | ||||||||
| Interest income from joint ventures (5) | 70 | 71 | ||||||
| Interest expense and commitment fees to Höegh LNG (6) | (668 | ) | (798 | ) | ||||
| Total | $ | 4,934 | $ | 4,027 | ||||
| As of | ||||||||
| Balance sheet | March 31, | December 31, | ||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | ||||||
| Equity | ||||||||
| Cash contribution from Höegh LNG (7) | $ | — | $ | 1,701 | ||||
| Repayment of indemnification received from Höegh LNG (7) | — | (2,353 | ) | |||||
| Issuance of units for Board of Directors' fees (4) | — | 200 | ||||||
| Other and contribution from owner (8) | 105 | 472 | ||||||
| Total | $ | 105 | $ | 20 | ||||
| 1) | Time charter revenue Höegh Gallant: A subsidiary of Höegh LNG, EgyptCo, leases theHöegh Gallant. |
| 2) | Vessel operating expenses: Subsidiaries of Höegh LNG provide ship management of vessels, including crews and the provision of all other services and supplies. |
| 3) | Hours, travel expenses and overhead: Subsidiaries of Höegh LNG provide management, accounting, bookkeeping and administrative support under administrative service agreements. These services are charged based upon the actual hours incurred for each individual as registered in the time-write system based on a rate which includes a provision for overhead and any associated travel expenses. |
| 4) | Board of Directors’ fees: Effective June 6, 2018, a total of 11,050 common units of the Partnership were awarded to non-employee directors as compensation of $200 for part of directors’ fees under the Höegh LNG Partners LP Long Term Incentive Plan. The awards were recorded as administrative expense and as an issuance of common units. Common units are recorded when issued. |
| 5) | Interest income from joint ventures: The Partnership and its joint venture partners have provided subordinated financing to the joint ventures as shareholder loans. Interest income for the Partnership’s shareholder loans to the joint ventures is recorded as interest income. |
| F-30 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
| 6) | Interest expense and commitment fees to Höegh LNG and affiliates: Höegh LNG and its affiliates provided an $85 million revolving credit facility for general partnership purposes. The Partnership incurred a commitment fee on the undrawn balance until January 29, 2018 and interest expense on the drawn balance. |
| 7) | Cash contribution from/distribution to Höegh LNG: As described under “Indemnifications” below, Höegh LNG made indemnification payments to the Partnership or received refunds of indemnification from the Partnership which were recorded as contributions or distributions to equity. |
| 8) | Other and contribution from owner: Höegh LNG granted share-based incentives to certain key employees whose services benefit the Partnership. Related expenses are recorded as administrative expenses and as a contribution from owner since the Partnership is not invoiced for this employee benefit. Effective March 21, 2019, the Partnership granted the Chief Executive Officer and Chief Financial Officer 10,917 phantom units in the Partnership. Effective March 23, 2018 and June 3, 2016, the Partnership granted the Chief Executive Officer and Chief Financial Officer 14,584 and 21,500 phantom units in the Partnership, respectively. Related expenses are recorded as an administrative expense and as increase in equity. |
| Dividends to Höegh LNG: The Partnership has declared and paid quarterly distributions totaling $7.1 million and $6.8 million to Höegh LNG for each of the three months ended March 31, 2019 and 2018, respectively. |
Receivables and payables from related parties
Amounts due from affiliates
| As of | ||||||||
| March 31, | December 31, | |||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | ||||||
| Amounts due from affiliates | $ | 4,548 | $ | 4,328 | ||||
The amount due from affiliates is a receivable for time charter hire from a subsidiary of Höegh LNG, EgyptCo, for theHöegh Gallant time charter. The time charter hire is due 18 days from the receipt of the invoice. Time charter hire is invoiced at the end of the month in arrears.
| F-31 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
Amounts due to owners and affiliates
| As of | ||||||||
| March 31, | December 31, | |||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | ||||||
| Amounts due to owners and affiliates | $ | 3,896 | $ | 2,301 | ||||
As of March 31, 2019 and December 31, 2018, amounts due to owners and affiliates principally relate to trade payables for services provided by subsidiaries of Höegh LNG.
Revolving credit facility
| As of | ||||||||
| March 31, | December 31, | |||||||
| (in thousands of U.S. dollars) | 2019 | 2018 | ||||||
| Revolving credit facility | $ | 39,960 | $ | 39,292 | ||||
In August 2014, upon the closing of the IPO, the Partnership entered into an $85 million revolving credit facility with Höegh LNG, to be used to fund acquisitions and working capital requirements of the Partnership. The credit facility is unsecured and was repayable on January 1, 2020. On May 28, 2019, the repayment date on the $85 million revolving credit facility was extended to January 1, 2023 and the terms amended for the interest rate to be LIBOR plus a margin of 1.4% in 2019, 3.0% in 2020 and 4.0% thereafter.
Related party agreements
In connection with the IPO the Partnership entered into several agreements including:
| (i) | An $85 million revolving credit facility with Höegh LNG, which was undrawn at the closing of the IPO; |
| (ii) | An omnibus agreement with Höegh LNG, the general partner, and Höegh LNG Partners Operating LLC (the “operating company”) governing, among other things: |
| a. | To what extent the Partnership and Höegh LNG may compete with each other; |
| b. | The Partnership’s rights of first offer on certain FSRUs and LNG carriers operating under charters of five or more years; and |
| c. | Höegh LNG’s provision of certain indemnities to the Partnership. |
| (iii) | An administrative services agreement with Hoegh LNG Services Ltd., UK (“Höegh UK”), pursuant to which Höegh UK provides certain administrative services to the Partnership; and |
| (iv) | Höegh UK has entered into administrative services agreements with Höegh LNG AS (“Höegh Norway”) and Leif Höegh (U.K.) Limited, pursuant to which Höegh Norway and Leif Höegh (U.K.) Limited provide Höegh UK certain administrative services. Additionally, the operating company has entered into an administrative services agreement with Leif Höegh (U.K.) Limited to allow Leif Höegh (U.K.) Limited to provide services directly to the operating company. |
| F-32 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
Existing agreements remained in place following the IPO for provision of certain services to the Partnership’s vessel owning joint ventures or entity, of which the material agreements are as follows:
| • | The joint ventures are parties to ship management agreements with Höegh LNG Fleet Management AS (“Höegh LNG Management”) pursuant to which Höegh LNG Management provides the joint ventures with technical and maritime management and crewing of theNeptune and theCape Ann, and Höegh Norway is a party to a sub-technical support agreement with Höegh LNG Management pursuant to which Höegh LNG Management provides technical support services with respect to thePGN FSRU Lampung; and |
| • | The joint ventures are parties to commercial and administration management agreements with Höegh Norway, and PT Hoegh LNG Lampung is a party to a technical information and services agreement with Höegh Norway. |
Subsequent to the IPO, the Partnership has acquired vessel owning entities. Existing agreements remained in place following the acquisition for the time charter of theHöegh Gallant and receipt of certain services, of which the material agreements are as follows:
| · | Hoegh LNG Cyprus Limited acting through its Egyptian Branch has a Lease and Maintenance Agreement (the “time charter”) with EgyptCo for the lease and maintenance of theHöegh Gallant and the provision of crew and certain ship management services for a combined daily hire rate. The time charter started in April 2015 with an expiration date in April 2020; |
| · | Hoegh LNG Cyprus Limited acting through its Egyptian Branch is party to a ship management agreement with Höegh LNG Management pursuant to which Höegh LNG Management provides the technical management of theHöegh Gallant, and Hoegh LNG Maritime Management Pte. Ltd. (“Höegh Maritime Management”) is a party to a secondment agreement, as amended, with Hoegh LNG Cyprus Limited pursuant to which Höegh Maritime Management provides qualified crew for theHöegh Gallant; and |
| · | Hoegh LNG Cyprus Limited acting through its Egyptian Branch is party to a management agreement with Höegh Norway, pursuant to which Höegh Norway provides administrative, commercial and technical management services, each as instructed from time to time by Hoegh LNG Cyprus Limited. |
Existing agreements remained in place for the time charter of theHöegh Grace following the acquisition and receipt of certain services, of which the material agreements are as follows:
| · | a ship management agreement with Höegh LNG Management pursuant to which Höegh LNG Management provides technical and maritime management services; |
| · | a manning agreement with Höegh Fleet Services Philippines Inc. to recruit and engage crew for the vessel; |
| · | a technical services agreement with Höegh Norway to provide technical services for the vessel; |
| · | a management consulting agreement with Höegh Norway to provide support related to certain management activities; |
| · | a crew recruitment consulting services agreement with Höegh Maritime Management to provide professional consulting services in connection with recruitment of crew and other employees; |
| · | an agreement for provision of professional payment services with Höegh Maritime Management to provide services in connection with the payment of monthly salaries to the crew and employees working on the vessel; and |
| · | a spare parts procurement and insurance services agreement with Höegh LNG Management to arrange for the supply of spare parts and the insurance coverage for the vessel. |
Indemnifications
Environmental indemnifications:
Under the omnibus agreement, Höegh LNG will indemnify the Partnership until August 12, 2019 against certain environmental and toxic tort liabilities with respect to the assets contributed or sold to the Partnership to the extent arising prior to the time they were contributed or sold to the Partnership. Liabilities resulting from a change in law are excluded from the environmental indemnity. There is an aggregate cap of $5.0 million on the amount of indemnity coverage provided by Höegh LNG for environmental and toxic tort liabilities. No claim may be made unless the aggregate dollar amount of all claims exceeds $0.5 million, in which case Höegh LNG is liable for claims only to the extent such aggregate amount exceeds $0.5 million.
| F-33 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
Other indemnifications:
Under the omnibus agreement Höegh LNG will also indemnify the Partnership for losses:
| 1. | related to certain defects in title to the assets contributed or sold to the Partnership and any failure to obtain, prior to the time they were contributed to the Partnership, certain consents and permits necessary to conduct the business, which liabilities arise within three years after the closing of the IPO; |
| 2. | related to certain tax liabilities attributable to the operation of the assets contributed or sold to the Partnership prior to the time they were contributed or sold; |
| 3. | in the event that the Partnership did not receive hire rate payments under thePGN FSRU Lampung time charter for the period commencing on August 12, 2014 through the earlier of (i) the date of acceptance of thePGN FSRU Lampung or (ii) the termination of such time charter. The Partnership was indemnified by Höegh LNG for the September and October 2014 invoices not paid by PGN LNG in 2014 (refer to note 14); |
| 4. | with respect to any obligation to pay liquidated damages to PGN LNG under thePGN FSRU Lampung time charter for failure to deliver thePGN FSRU Lampung by the scheduled delivery date set forth in thePGN FSRU Lampung time charter; |
| 5. | with respect to any non-budgeted expenses (including repair costs) incurred in connection with thePGN FSRU Lampung project (including the construction of the Mooring) occurring prior to the date of acceptance of thePGN FSRU Lampung pursuant to the time charter; and |
| 6. | pursuant to a letter agreement dated August 12, 2015, Höegh LNG confirmed that the indemnification provisions of the omnibus agreement include indemnification for all non-budgeted, non-creditable Indonesian value added taxes and non-budgeted Indonesian withholding taxes, including any related impact on cash flow from PT Hoegh LNG Lampung and interest and penalties associated with any non-timely Indonesian tax filings related to the ownership or operation of thePGN FSRU Lampung and the Mooring whether incurred (i) prior to the closing date of the IPO, (ii) after the closing date of the IPO to the extent such taxes, interest, penalties or related impact on cash flows relate to periods of ownership or operation of thePGN FSRU Lampung and the Mooring and are not subject to prior indemnification payments or deemed reimbursable by the charterer under its audit of the taxes related to thePGN FSRU Lampung time charter for periods up to and including June 30, 2015, or (iii) after June 30, 2015 to the extent withholding taxes exceed the minimum amount of withholding tax due under Indonesian tax regulations due to lack of documentation or untimely withholding tax filings. |
No indemnification claims were filed or received for the three months ended March 31, 2019 and 2018. The Partnership received payments for filed claims for indemnification with respect to non-budgeted expenses (including the warranty provision, value added tax, withholding tax and other non-budgeted expenses) of approximately $0.9 million for the year ended December 31, 2018, which were recorded as a contribution to equity. Indemnification payments received from Höegh LNG are subject to repayment to the extent the amounts are subsequently recovered from insurance or deemed reimbursable by the charterer.
In the first quarter of 2019, insurance proceeds of approximately $0.06 million were received related to repairs under the warranty for the Mooring. The Partnership had been indemnified by Höegh LNG for all warranty provisions at the time the costs were incurred and expects to repay the amount recovered by insurance in the second quarter of 2019. For the year ended December 31, 2018, the Partnership refunded to Höegh LNG approximately $2.4 million related to insurance proceeds received related to the warranty provision and costs for previous years determined to be reimbursable by the charterer. Refer to note 14.
| F-34 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
Under the contribution, purchase and sale agreement entered into with respect to the purchase of theHöegh Gallant entities, Höegh LNG will indemnify the Partnership for:
| 1. | losses from breach of warranty; |
| 2. | losses related to certain environmental and tax liabilities attributable to the operation of theHöegh Gallant prior to the closing date; |
| 3. | all capital gains tax or other export duty incurred in connection with the transfer of theHöegh Gallant outside of Höegh LNG Cyprus Limited’s permanent establishment in a Public Free Zone in Egypt; |
| 4. | any recurring non-budgeted costs owed to Höegh LNG Management with respect to payroll taxes; |
| 5. | any non-budgeted losses suffered or incurred in connection with the commencement of services under the time charter with EgyptCo or EgyptCo’s time charter with EGAS; and |
| 6. | liabilities under the Gallant/Grace facility not attributable to theHöegh Gallant. |
Additionally, Höegh LNG has guaranteed the payment of hire by EgyptCo pursuant to the time charter for theHöegh Gallant under certain circumstances.
No indemnification claims were filed or received for the three months ended March 31, 2019 and 2018. For the year ended December 31, 2018, the Partnership filed claims of $0.5 million for indemnification of losses incurred in connection with the time charter with EgyptCo. The indemnification payment of $0.5 million received from Höegh LNG for the year ended December 31, 2018, was recorded as contributions to equity. Refer to note 14.
Under the contribution, purchase and sale agreements entered into with respect to the acquisitions of the 51% and 49% ownership interests in theHöegh Grace entities, Höegh LNG will indemnify the Partnership for:
| 1. | losses from breach of warranty; |
| 2. | losses related to certain environmental liabilities, damages or repair costs and tax liabilities attributable to the operation of theHöegh Grace prior to the closing date; |
| 3. | any recurring non-budgeted costs owed to tax authorities with respect to payroll taxes, taxes related to social security payments, corporate income taxes (including income tax for equality and surcharge on income tax for equality), withholding tax, port associations, local Cartagena tax, and financial transaction tax, including any penalties associated with taxes to the extent not reimbursed by the charterer; and |
| 4. | any non-budgeted losses suffered or incurred in connection with commencement of services under theHöegh Grace charter with SPEC. |
On September 27, 2017, the Partnership entered into an indemnification agreement with Höegh LNG with respect to the boil-off claims under theNeptune andCape Ann time charters, pursuant to which Höegh LNG will, among other things, indemnify the Partnership for its share of any losses and expenses related to or arising from the failure of eitherNeptune orCape Ann to meet the performance standards related to the daily boil-off of LNG under their respective time charters (including any cash impact that may result from any settlement with respect to such claims, including any reduction in the hire rate under either time charter.) No indemnification claims have been made or received by the Partnership for the three months ended March 31, 2019 and 2018. For the year ended December 31, 2018 the Partnership filed claims of $0.3 million and received indemnification payments of $0.3 million from Höegh LNG. Refer to note 14.
| F-35 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
12. Financial Instruments
Fair value measurements
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash and cash equivalents, restricted cash and cash designated for acquisition – The fair value of the cash, cash equivalents, restricted cash and cash designated for acquisition approximates its carrying amounts reported in the consolidated balance sheets.
Amounts due from (to) owners and affiliates – The fair value of the non-interest bearing receivables or payables approximates their carrying amounts reported in the consolidated balance sheets since the receivables or payables are to be settled consistent with trade receivables and payables.
Derivative instruments – The fair values of the interest rate swaps are estimated based on the present value of cash flows over the term of the instruments based on the relevant LIBOR interest rate curves, adjusted for the subsidiary’s credit worthiness given the level of collateral provided and the credit worthiness of the counterparty to the derivative.
Advances (shareholder loans) to joint ventures – The fair values of the fixed rate subordinated shareholder loans are estimated using discounted cash flow analyses based on rates currently available for debt with similar terms and remaining maturities and the current credit worthiness of the joint ventures.
Lampung, Gallant, Grace and $385 million facilities – The fair values of the variable rate debt are estimated based on the present value of cash flows over the term of the instruments based on the estimated currently available margins and LIBOR interest rates as of the balance sheet date for debt with similar terms and remaining maturities and the current credit worthiness of the Partnership.
Revolving credit due to owners and affiliates – The fair value of the fixed rate debt is estimated using discounted cash flow analyses based on rates currently available for debt with similar terms and remaining maturities and the current credit worthiness of the Partnership.
The fair value estimates are categorized by a fair value hierarchy based on the inputs used to measure fair value. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
| F-36 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
The following table includes the estimated fair value and carrying value of those assets and liabilities that are measured at fair value on a recurring and non-recurring basis, as well as the estimated fair value of the financial instruments that are not accounted for at a fair value on a recurring basis. Trade payables and receivables for which the estimated fair values are equivalent to carrying values are not specified below.
| As of | As of | |||||||||||||||||||
| March 31, 2019 | December 31, 2018 | |||||||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||||||
| amount | value | amount | value | |||||||||||||||||
| Asset | Asset | Asset | Asset | |||||||||||||||||
| (in thousands of U.S. dollars) | Level | (Liability) | (Liability) | (Liability) | (Liability) | |||||||||||||||
| Recurring: | ||||||||||||||||||||
| Cash and cash equivalents | 1 | $ | 34,245 | 34,245 | 26,326 | $ | 26,326 | |||||||||||||
| Restricted cash | 1 | 20,028 | 20,028 | 19,128 | 19,128 | |||||||||||||||
| Amounts due from owners and affiliates | 2 | 4,548 | 4,548 | 4,328 | 4,328 | |||||||||||||||
| Derivative instruments | 2 | (8,040 | ) | (8,040 | ) | (1,498 | ) | (1,498 | ) | |||||||||||
| Other: | ||||||||||||||||||||
| Advances (shareholder loans) to joint ventures | 2 | 3,606 | 3,690 | 3,536 | 3,579 | |||||||||||||||
| Current amounts due to owners and affiliates | 2 | (3,896 | ) | (3,896 | ) | (2,301 | ) | (2,301 | ) | |||||||||||
| Lampung facility | 2 | (125,897 | ) | (136,884 | ) | (130,275 | ) | (142,087 | ) | |||||||||||
| Gallant facility | 2 | — | — | (140,812 | ) | (141,538 | ) | |||||||||||||
| Grace facility | 2 | — | — | (164,458 | ) | (164,210 | ) | |||||||||||||
| $385 million facility | 2 | (314,375 | ) | (321,345 | ) | — | — | |||||||||||||
| Revolving credit facility from Höegh LNG | 2 | $ | (39,960 | ) | (38,927 | ) | (39,292 | ) | $ | (38,999 | ) | |||||||||
Financing Receivables
The following table contains a summary of the loan receivables by type of borrower and the method by which the credit quality is monitored on a quarterly basis:
| As of | ||||||||||||||
| Class of Financing Receivables | Credit Quality | March 31, | December 31, | |||||||||||
| (in thousands of U.S. dollars) | Indicator | Grade | 2019 | 2018 | ||||||||||
| Trade receivable and long-term receivable | Payment activity | Performing | $ | 5,442 | $ | 1,228 | ||||||||
| Amounts due from owners and affiliates | Payment activity | Performing | 4,548 | 4,328 | ||||||||||
| Advances/ loans to joint ventures | Payment activity | Performing | $ | 3,606 | $ | 3,536 | ||||||||
The shareholder loans to joint ventures are classified as advances to joint ventures in the consolidated balance sheet. Refer to note 10.
| F-37 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
13. Risk management, derivative instruments and concentrations of risk
Derivative instruments can be used in accordance with the overall risk management policy.
Interest rate risk, derivative instruments and cash flow hedges
Cash flow hedging strategy
The Partnership is exposed to fluctuations in cash flows from floating interest rate exposure on its long-term debt used principally to finance its vessels. Interest rate swaps are used for the management of the floating interest rate risk exposure. The interest rate swaps have the effect of converting a portion of the outstanding debt from a floating to a fixed rate over the life of the interest rate swaps. Interest rate swaps exchange a receipt of floating interest for a payment of fixed interest which reduce the exposure to interest rate variability on the Partnership’s outstanding floating-rate debt over the life of the interest rate swaps. As of March 31, 2019, there are interest rate swap agreements related to the Lampung facility ("Lampung interest rate swaps") and the commercial tranche of the $385 million facility ("$385 million interest rate swaps") floating rate debt that are designated as cash flow hedges for accounting purposes. As of March 31, 2018, there were interest rate swap agreements related to the Lampung, Gallant and Grace facilities floating rate debt that were designated as cash flow hedges for accounting purposes. As of January 31, 2019, the commercial and export credit tranches of the $385 million facility were drawn and financed the repayment of the Gallant and Grace facilities as of the same date. The interest rate swaps related to the Gallant and Grace facilities were also terminated on the same date. As of March 31, 2019, the following interest rate swap agreements were outstanding:
| Fair | ||||||||||||||||||||
| value | ||||||||||||||||||||
| Interest | carrying | Fixed | ||||||||||||||||||
| rate | Notional | amount | interest | |||||||||||||||||
| (in thousands of U.S. dollars) | index | amount | liability | Term | rate | |||||||||||||||
| LIBOR-based debt | ||||||||||||||||||||
| Lampung interest rate swaps (2) | LIBOR | $ | 131,318 | (2,066 | ) | Sept 2026 | 2.8 | % | ||||||||||||
| $385 million facility swaps (2) | LIBOR | $ | 65,000 | (1,946 | ) | Jan 2026 | 2.9 | % | ||||||||||||
| $385 million facility swaps (2) | LIBOR | $ | 65,000 | (1,614 | ) | Oct 2025 | 2.8 | % | ||||||||||||
| $385 million facility swaps (2) | LIBOR | $ | 63,826 | (1,330 | ) | Jan 2026 | 2.7 | % | ||||||||||||
| $385 million facility swaps (2) | LIBOR | $ | 63,826 | (1,084 | ) | Jan 2026 | 2.7 | % | ||||||||||||
1) Excludes the margins paid on the floating-rate debt.
2) All interest rate swaps are U.S. dollar denominated and principal amount reduces quarterly from the effective date of the interest rate swaps.
| F-38 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
The Borrower under the Lampung facility entered five forward starting swap agreements with identical terms for a total notional amount of $237.1 million with an effective date of March 17, 2014. The swaps amortize over 12 years to match the outstanding balance of the Lampung facility and exchange 3 month USD LIBOR variable interest payments for fixed rate payments at 2.8%. The interest rate swaps were designated for accounting purposes as cash flow hedges of the variable interest payments on the Lampung facility. As of December 29, 2014, a prepayment of $7.9 million on the Lampung facility occurred which resulted in an amendment of the original interest rate swaps and the hedge was de-designated for accounting purposes. The other terms of the amended interest rate swaps did not change but the nominal amount of the interest rate swaps was reduced to match the outstanding debt. The amended interest rate swaps were re-designated as a cash flow hedge for accounting purposes.
As of December 31, 2018, the Partnership had entered into forward starting interest rate swaps with a nominal amount of $130.0 million to hedge part of the interest rate risk on the floating element of the interest rate for the commercial tranches of the $385 million facility. The Partnership will make fixed payments of 2.941% and 2.838%, based on a nominal amount of $65 million for each, in exchange for floating payments. The interest rate swaps were designated for accounting purposes as cash flow hedges of the variable interest payments for $130.0 million of the commercial tranches of the $385 million facility which was expected to be drawn and was drawn on January 31, 2019. In February 2019, the Partnership entered into interest rate swaps related to the $385 million facility with a nominal amount of $127.7 million for which the Partnership will make fixed payments of 2.650% and 2.735% based on nominal amount of $63.8 million for each. The interest rate swaps were designated for accounting purposes as cash flow hedges of the variable interest payments for $127.7 million of the commercial tranches of the $385 million facility. The export credit tranches have a fixed interest rate and, therefore, no variability in cash flows as a result of changes in interest rates.
The following table presents the location and fair value amounts of derivative instruments, segregated by type of contract, on the consolidated balance sheets. All derivatives are designated as cash flow hedging instruments.
Fair value of derivative instruments
| (in thousands of U.S. dollars) | Current assets: derivative instruments | Long-term assets: derivative instruments | Current liabilities: derivative instruments | Long-term liabilities: derivative instruments | ||||||||||||
| As of March 31, 2019 | ||||||||||||||||
| Interest rate swaps | $ | — | $ | — | $ | (823 | ) | $ | (7,217 | ) | ||||||
| As of December 31, 2018 | ||||||||||||||||
| Interest rate swaps | $ | 1,199 | $ | — | $ | (259 | ) | $ | (2,438 | ) | ||||||
| F-39 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
The following effects of cash flow hedges relating to interest rate swaps are included in interest expense and income tax expense in the consolidated statements of income which are the same lines as the earnings effects of the hedged item for the three months ended March 31, 2019.
Effect of cash flow hedge accounting on the consolidated statement of income
Three months ended March 31, 2019 | ||||||||
| (in thousands of U.S. dollars) | Interest expense | Income tax benefit | ||||||
| Gain (loss) on interest rate swaps in cash flow hedging relationships: | ||||||||
| Reclassification from accumulated other comprehensive income included in hedge effectiveness | $ | 1 | $ | — | ||||
| Amortization of amounts excluded from hedge effectiveness | 244 | — | ||||||
| Reclassification discontinued hedge and initial fair value from accumulated other comprehensive income based on amortization approach | (227 | ) | 63 | |||||
| Settlement of cash flow hedge | 199 | — | ||||||
| Total gains (losses) on derivative instruments | $ | 217 | $ | 63 | ||||
The settlement of cash flow hedge related to the interest rate swaps for Gallant/Grace facility. The Gallant/Grace interest rate swaps were terminated when the facility was extinguished on January 31, 2019. Due to the termination, the counterparties of the Gallant/Grace interest rate swaps paid settlement amounts resulting in a gain on the settlement of the cash flow hedge.
The following effects of cash flow hedges relating to interest rate swaps are included in total gains (losses) on derivative instruments in the consolidated statements of income for the three months ended March 31, 2018.
| (in thousands of U.S. dollars) | Three months ended March 31, 2018 | |||
| Interest rate swaps: | ||||
| Ineffective portion of cash flow hedge | $ | 43 | ||
| Amortization of amounts excluded from hedge effectiveness | 802 | |||
| Reclassification from accumulated other comprehensive income | (214 | ) | ||
| Unrealized gains (losses) | 631 | |||
| Realized gains (losses) | — | |||
| Total gains (losses) on derivative instruments | $ | 631 | ||
| F-40 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
The effect of cash flow hedges relating to interest rate swaps and the related tax effects on other comprehensive income, changes in accumulated other comprehensive income (“OCI”) and on earnings is as follows for the three months ended and as of March 31, 2019.
Effect of cash flow hedge accounting on accumulated other comprehensive income (OCI) and earnings:
| Cash Flow Hedge | ||||||||||||||||||||
| Accumulated other comprehensive income | Earnings | |||||||||||||||||||
| (in thousands of U.S. dollars) | Before tax gains (losses) | Tax benefit (expense) | Accumulated OCI: Net of tax | Interest expense | Tax benefit | |||||||||||||||
| Accumulated OCI as of December 31, 2018 | $ | (5,902 | ) | 565 | $ | (5,337 | ) | |||||||||||||
| Initial value of interest rate swap to be recognized in earnings on amortization approach | (625 | ) | — | (625 | ) | |||||||||||||||
| Unrealized gain (loss) for change in fair value of interest rate swaps included in hedge effectiveness | (4,961 | ) | — | (4,961 | ) | |||||||||||||||
| Reclassification from accumulated other comprehensive income included in hedge effectiveness | (1 | ) | (1 | ) | 1 | |||||||||||||||
| Reclassification discontinued hedge and initial fair value from accumulated other comprehensive income based on amortization approach | 227 | (63 | ) | 164 | (227 | ) | 63 | |||||||||||||
| Other comprehensive income for period | (5,360 | ) | (63 | ) | (5,423 | ) | ||||||||||||||
| Accumulated OCI as of March 31, 2019 | $ | (11,262 | ) | 502 | $ | (10,760 | ) | |||||||||||||
| Gain (loss) reclassified to earnings | $ | (226 | ) | $ | 63 | |||||||||||||||
The effect of cash flow hedges relating to interest rate swaps and the related tax effects on other comprehensive income and changes in accumulated other comprehensive income (“OCI”) is as follows for the three months ended and as of March 31, 2018.
| Cash Flow Hedge | ||||||||||||||||
| (in thousands of U.S. dollars) | Before tax gains (losses) | Tax benefit (expense) | Net of tax | Accumulated OCI | ||||||||||||
| Balance as of December 31, 2017 | $ | (3,612 | ) | 864 | (2,748 | ) | $ | (2,748 | ) | |||||||
| Effective portion of unrealized gain on cash flow hedge | 3,613 | — | 3,613 | 3,613 | ||||||||||||
| Reclassification of amortization of cash flow hedge to earnings | 214 | (86 | ) | 128 | 128 | |||||||||||
| Other comprehensive income for period | 3,827 | (86 | ) | 3,741 | 3,741 | |||||||||||
| Balance as of March 31, 2018 | $ | 215 | 778 | 993 | $ | 993 | ||||||||||
As of March 31, 2019, the estimated amounts to be reclassified from accumulated other comprehensive income to earnings during the next twelve months is $2.1 million for amortization of accumulated other comprehensive income.
Foreign exchange risk
All financing, interest expenses from financing and most of the Partnership’s revenue and expenditures for vessel improvements are denominated in U.S. dollars. Certain operating expenses can be denominated in currencies other than U.S. dollars. For the years ended December 31, 2018, 2017 and 2016, no derivative instruments have been used to manage foreign exchange risk.
| F-41 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
Credit risk
Credit risk is the exposure to credit loss in the event of non-performance by the counterparties related to cash and cash equivalents, restricted cash, trade receivables and interest rate swap agreements. In order to minimize counterparty risk, bank relationships are established with counterparties with acceptable credit ratings at the time of the transactions. Credit risk related to receivables is limited by performing ongoing credit evaluations of the customers’ financial condition. In addition, Höegh LNG guarantees the payment of theHöegh Gallant time charter hire under certain circumstances. PGN also guarantees PGN LNG's obligations under thePGN FSRU Lampung time charter. The other time charters do not have parent company guarantees.
Concentrations of risk
Financial instruments, which potentially subject the Partnership to significant concentrations of credit risk, consist principally of cash and cash equivalents, restricted cash, trade receivables and derivative contracts (interest rate swaps). The maximum exposure to loss due to credit risk is the book value at the balance sheet date. The Partnership does not have a policy of requiring collateral or security. Cash and cash equivalents and restricted cash are placed with qualified financial institutions. Periodic evaluations are performed of the relative credit standing of those financial institutions. In addition, exposure is limited by diversifying among counterparties. There are three charterers so there is a concentration of risk related to trade receivables. Credit risk related to trade receivables is limited by performing ongoing credit evaluations of the customer’s financial condition. In addition, Höegh LNG guarantees the payment of theHöegh Gallant time charter hire under certain circumstances. No allowance for doubtful accounts, or impairment loss, was recorded for the three months ended March 31, 2019 and 2018 and the year ended December 31, 2018. While the maximum exposure to loss due to credit risk is the book value of trade receivables at the balance sheet date, should the time charters for thePGN FSRU Lampung, theHöegh Gallant or theHöegh Grace terminate prematurely, or the option to acquire thePGN FSRU Lampung be exercised, there could be delays in obtaining new time charters and the hire rates could be lower depending upon the prevailing market conditions.
| F-42 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
14. Commitments and contingencies
Contractual commitments
As of March 31, 2019, the Partnership has no material commitments for capital expenditures. However, during the second quarter of 2019, theHöegh Gallant will have a drydock and thePGN FSRU Lampung will complete a class renewal survey while remaining on the water. The combined expenditure is expected to be approximately $7.0 to $8.5 million which will not be covered by the respective charterers. TheHöegh Gallant and thePGN FSRU Lampung are expected to be off-hire for 10-12 days and 4 days, respectively, during the second quarter of 2019 for these procedures.
Claims and Contingencies
Joint ventures claims and accruals
Under theNeptune and theCape Ann time charters, the joint ventures undertake to ensure that the vessel meets specified performance standards at all times during the term of the time charters. The performance standards include the vessel not exceeding a maximum average daily boil-off of LNG, subject to certain contractual exclusions, as specified in the time charter. Pursuant to the charters, the hire rate is subject to deduction by the charterer by, among other things, sums due in respect of the joint ventures’ failure to satisfy the specified performance standards during the period. The charterer requested that the joint ventures calculate and present the boil-off since the beginning of the charters, compared with maximum average daily boil-off allowed under the time charter. The charters for theNeptuneandCape Ann started in 2009 and 2010, respectively. On September 8, 2017, the charterer notified the joint ventures that it was formally making a claim for compensation in accordance with the provisions of the charters for a stated quantity of LNG exceeding the maximum average daily boil-off since the beginning for the charters. The claim asserted a gross amount of compensation of $58 million for the excess boil-off volume but the claim recognized that the calculations for the amount required adjustment for allowable exclusions under the charters. Accruals are recorded for loss contingencies or claims when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. As of September 30, 2017, the joint ventures determined the liability associated with the boil-off claim was probable and could be reasonably estimated resulting in a total accrual of $23.7 million which was recorded as a reduction of time charter revenues in the third quarter of 2017. The Partnership’s 50% share of the accrual was approximately $11.9 million, which remained unchanged as of December 31, 2017. The charterer and the joint ventures referred the claim to arbitration. The charterer's claim as submitted in the arbitration request was for a gross amount of $52 million, covering a shorter time period for the time period for the first performance period as defined in the time charters, as well as interest and expenses. The charterer reserved its right to make a further claim with respect to subsequent performance periods. Subsequently, the charterer and the joint ventures asked the arbitration tribunal for a partial determination on certain key contractual interpretations and the proceedings commenced in November 2018.
| F-43 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
In March 2019, the tribunal’s determination was received. The determination did not cover all the questions of contractual interpretation on which there is disagreement between the parties. With the exception of one issue, the tribunal’s conclusions on the contractual interpretations were unambiguous. For the remaining issue related to the calculation of a deduction from the gross claim, the tribunal did not specify how the deduction should be determined. As a result, there remains significant uncertainty in the evaluation of the potential outcome of the boil-off claim. Based on the tribunal's determination, the joint ventures updated their estimates to cover the period from the start of the time charters to December 31, 2018. Accordingly, the range of estimates is not directly comparable to the $52 million gross claim initially raised by the charterer through the end of the defined performance period. Depending on interpretations of the tribunal’s determination for the deduction to the gross claim and the other disputed contractual provisions, the joint ventures estimate that their aggregate liability associated with the boil-off claim is in the millions of dollars and could range between the mid-to-upper teens to the mid-$30's, of which the Partnership’s share would be 50%. Based upon the additional information from the tribunal’s determination and updated estimates of the potential range of liability, the joint ventures concluded the existing accrual of $23.7 million continues to represent their best estimate of the probable liability as of December 31, 2018. As of March 31, 2019, there are no changes to the estimates of the potential range of liability. Accordingly, the accrual was unchanged as of December 31, 2018 and March 31, 2019. The Partnership’s 50% share of the accrual remains at approximately $11.9 million as of December 31, 2018. Refer to notes 7 and 10. As a result of the tribunal’s determination, fewer interpretative questions relating to the boil-off claim remain, narrowing the range of potential outcomes, which could facilitate a negotiated solution between the parties. However, it is also possible that the claim could ultimately be settled through further arbitration. Subsequent to receiving the tribunal's determination, the parties have initiated discussions with the objective of reaching a negotiated solution.
The joint ventures will continue to monitor this issue and adjust accruals, as might be required, based upon additional information and further developments. Höegh LNG and the other major owner guarantee the performance and payment obligations of the joint ventures under the time charters. The guarantees are joint and several for the performance obligations and several for the payment obligations. Depending on the amount and timing of the potential settlement and whether such settlement is funded by the performance guarantees by Höegh LNG and the other major owner or by the joint ventures, a settlement of the claim for boil-off with the charterer could have a material adverse effect on the joint ventures’ financial condition and results of operations. As a precaution, the joint ventures suspended payments on their shareholder loans as of September 30, 2017 pending the outcome of the boil-off claim. Refer to note 7.
To the extent that an excess boil-off claim results in a settlement, the Partnership would be indemnified by Höegh LNG for its share of the cash impact of any settlement. Refer to note 11. The ultimate outcome of the boil-off claim, on an isolated basis, is not expected to have a material adverse effect on the Partnership’s financial position. However, other concessions, if any, would not be expected to be indemnified. In addition, the joint ventures expect to incur costs for certain capital improvements to address boil-off issues and maintenance requirements that will not be reimbursed by the charterer or Hoegh LNG for which the Partnership's 50% share is approximately $0.2 million and $1.0 million for the years ended December 31, 2019 and 2020, respectively. Furthermore, the suspension of the payments of the shareholder loans reduces cash flows available to the Partnership. In addition, the increase in the accruals for, or the resolution of, the excess boil-off claim may have a material adverse effect on the Partnership’s results of operations for that period.
For the year ended December 31, 2018 the Partnership filed claims for expenses incurred of $0.3 million and received indemnification payments of $0.3 million from Höegh LNG.
Indonesian corporate income tax
Based upon the Partnership’ s experience in Indonesia, tax regulations, guidance and interpretation in Indonesia may not always be clear and may be subject to alternative interpretations or changes in interpretations over time. The Partnership’ s Indonesian subsidiary is subject to examination by the Indonesian tax authorities for up to five years following the completion of a fiscal year. The examinations may lead to ordinary course adjustments or proposed adjustments to the Partnership’s taxes with respect to years under examination. In December 2018, the examination for the years 2013 and 2014 was completed resulting in the settlement of approximately $0.9 million related to uncertain tax positions. Future examinations may or may not result in changes to the Partnership’s provisions on tax filings from 2015 through 2018.
| F-44 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
PGN LNG claims including delay liquidated damages
The Partnership was indemnified by Höegh LNG for i) any hire rate payments not received under thePGN FSRU Lampung time charter for the period commencing on August 12, 2014 through the acceptance date of thePGN FSRU Lampung and ii) non-budgeted expenses (including warranty costs associated with repairs of the Mooring) incurred in connection with thePGN FSRU Lampung project prior to the date of acceptance, and for iii) certain subsequently incurred non-budgeted costs and expenses.
No indemnification claims were filed for the three months ended March 31, 2019 and 2018. The Partnership received payments for filed claims for indemnification with respect to non-budgeted expenses (including the warranty provision, value added tax, withholding tax and other non-budgeted expenses) of approximately $0.9 million for the year ended December 31, 2018, which were recorded as a contribution to equity. Indemnification payments received from Höegh LNG are subject to repayment to the extent the amounts are subsequently recovered from insurance or deemed reimbursable by the charterer.
In the first quarter of 2019, insurance proceeds of approximately $0.06 million were received related to repairs under the warranty for the Mooring. The Partnership had been indemnified by Höegh LNG for all warranty provisions at the time the costs were incurred and expects to repay the amount recovered by insurance in the second quarter of 2019. For the year ended December 31, 2018, the Partnership refunded to Höegh LNG approximately $2.4 million related to insurance proceeds received related to the warranty provision and costs for previous years determined to be reimbursable by the charterer. Refer to note 11.
Höegh Gallant claims and indemnification
The Partnership is indemnified by Höegh LNG for losses incurred in connection with the commencement of services under theHöegh Gallant time charter (including technical issues).
No indemnification claims were filed or received for the three months ended March 31, 2019 and 2018.
For the year ended December 31, 2018, the Partnership filed claims of $0.5 million for indemnification of losses incurred in connection with the time charter. An indemnification payment of $0.5 million received from Höegh LNG for the year ended December 31, 2018, was recorded as a contribution to equity. Refer to note 11.
| F-45 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
15. Issuance of common units and Series A Preferred Units
On January 26, 2018, the Partnership entered into a sales agreement with the Agent. Under the terms of the sales agreement, the Partnership may offer and sell up to $120 million in aggregate offering amount of common units and Series A preferred units, from time to time, through the Agent, acting as agent for the Partnership. Sales of such units may be made in negotiated transactions or transactions that are deemed to be “at the market” offerings, including sales made directly on the New York Stock Exchange or through a market marker other than on an exchange.
No units were sold during the three months ended March 31, 2019.
During the three months ended March 31, 2018, the Partnership sold 154,500 common units at an average gross sales price of $18.22 per unit and received net proceeds, after sales commissions, of $2.8 million. During the three months ended March 31, 2018, the Partnership had sold 309,152 Series A preferred units at an average gross sales price of $26.14 per unit and received net proceeds, after sales commissions, of $7.9 million. The Partnership has paid an aggregate of $0.2 million in sales commissions to the Agent in connection with such sales as of March 31, 2018.
| Three months ended March 31, 2018 | ||||||||||||
| (in thousands of U.S. dollars) | Common units | Series A Preferred Units | Total | |||||||||
| Gross proceeds for units issued | $ | 2,814 | 8,080 | $ | 10,894 | |||||||
| Less: Commissions | (36 | ) | (145 | ) | (181 | ) | ||||||
| Net proceeds for units issued | $ | 2,778 | 7,935 | $ | 10,713 | |||||||
| F-46 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
16. Common, subordinated and preferred units
The following table shows the movements in the number of common units, subordinated units and preferred units from December 31, 2017 until March 31, 2019:
| (in units) | Common Units Public | Common Units Höegh LNG | Subordinated | 8.75% Series A Preferred Units | ||||||||||||
| December 31, 2017 | 17,648,844 | 2,116,060 | 13,156,060 | 4,600,000 | ||||||||||||
| June 6, 2018; Awards to non-employee directors as compensation for directors' fees | 8,840 | — | — | — | ||||||||||||
| July 5, 2018; Awards to non-employee directors as compensation for directors' fees | 2,210 | — | — | — | ||||||||||||
| Units issued to staff at Höegh LNG during 2018 | 14,622 | (14,622 | ) | — | — | |||||||||||
| Phantom units issued to CEO/CFO during 2018 | 17,079 | — | — | — | ||||||||||||
| ATM program (from January 26, 2018 to December 31, 2018) | 253,106 | — | — | 1,529,070 | ||||||||||||
| December 31, 2018 | 17,944,701 | 2,101,438 | 13,156,060 | 6,129,070 | ||||||||||||
| March 31, 2019 | 17,944,701 | 2,101,438 | 13,156,060 | 6,129,070 | ||||||||||||
As of March 31, 2019 and December 31, 2018, Höegh LNG owned 2,101,438 common units and 13,156,060 subordinated units. As of December 31, 2017, Höegh LNG owned 2,116,060 common units and 13,156,060 subordinated units. Subordinated units are not entitled to vote for the four elected directors to the Partnership’s board of directors. The general partner has a non-economic interest and has no units.
Refer to note 17 for information on distributions to common and subordinated unitholders.
The Series A preferred units represent perpetual equity interests in the Partnership and, unlike the Partnership's debt, do not give rise to a claim for payment of a principal amount at a particular date. The Series A preferred units rank senior to the Partnership's common units and subordinated units as to the payment of distributions and amounts payable upon liquidation, dissolution or winding up but junior to all of the Partnership's debt and other liabilities. The Series A preferred units have a liquidation preference of $25.00 per unit. At any time on or after October 5, 2022, the Partnership may redeem, in whole or in part, the Series A preferred units at a redemption price of $25.00 per unit plus an amount equal to all accumulated and unpaid distributions thereon to the date of redemption. The distribution rate on the Series A preferred units is 8.75% per annum of the $25.00 per unit value (equivalent to $2.1875 per annum per unit). The distributions are cumulative and recorded when declared. However, since the Series A preferred units rank senior to the Partnership's common and subordinated units, the portion of net income, equivalent to the Series A preferred units' paid and undeclared distributions for that period, is reflected as Preferred unitholders' interest in net income on the consolidated statement of income. Distributions are payable quarterly, when, and if declared by the Partnership's board of directors out of legally available funds for such purpose. Holders of the Series A preferred units generally have no voting rights. However, if and whenever distributions payable on the Series A preferred units are in arrears for six or more quarterly periods, whether or not consecutive, holders of Series A Preferred Units will be entitled to replace one of the members of the Partnership’s board of directors appointed by the general partner with a person nominated by such holders.
| F-47 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
17. Earning per unit and cash distributions
The calculation of basic and diluted earnings per unit are presented below:
| Three months ended March 31, | ||||||||
| (in thousands of U.S. dollars, except per unit numbers) | 2019 | 2018 | ||||||
| Net income | $ | 14,134 | $ | 21,686 | ||||
| Adjustment for: | ||||||||
| Preferred unitholders’ interest in net income | 3,364 | 2,660 | ||||||
| Limited partners' interest in net income | 10,770 | 19,026 | ||||||
| Less: Dividends paid or to be paid (1) | (15,031 | ) | (14,954 | ) | ||||
| Under (over) distributed earnings | (4,261 | ) | 4,072 | |||||
| Under (over) distributed earnings attributable to: | ||||||||
| Common units public | (2,303 | ) | 2,194 | |||||
| Common units Höegh LNG | (270 | ) | 259 | |||||
| Subordinated units Höegh LNG | (1,688 | ) | 1,619 | |||||
| (4,261 | ) | 4,072 | ||||||
| Basic weighted average units outstanding (in thousands) | ||||||||
| Common units public | 17,945 | 17,752 | ||||||
| Common units Höegh LNG | 2,101 | 2,102 | ||||||
| Subordinated units Höegh LNG | 13,156 | 13,156 | ||||||
| Diluted weighted average units outstanding (in thousands) | ||||||||
| Common units public | 17,959 | 17,772 | ||||||
| Common units Höegh LNG | 2,101 | 2,102 | ||||||
| Subordinated units Höegh LNG | 13,156 | 13,156 | ||||||
| Basic earnings per unit (2): | ||||||||
| Common unit public | $ | 0.31 | $ | 0.57 | ||||
| Common unit Höegh LNG (3) | $ | 0.34 | $ | 0.59 | ||||
| Subordinated unit Höegh LNG (3) | $ | 0.34 | $ | 0.59 | ||||
| Diluted earnings per unit (2): | ||||||||
| Common unit public | $ | 0.31 | $ | 0.56 | ||||
| Common unit Höegh LNG (3) | $ | 0.34 | $ | 0.59 | ||||
| Subordinated unit Höegh LNG (3) | $ | 0.34 | $ | 0.59 | ||||
| (1) | Includes all distributions paid or to be paid in relationship to the period, regardless of whether the declaration and payment dates were prior to the end of the period, and is based the number of units outstanding at the period end. |
| (2) | Effective March 21, 2019, granted 10,917 phantom units to the CEO/CFO of the Partnership. One-third of such phantom units vest as of November 30, 2019, 2020 and 2021, respectively. Effective March 23, 2018, the Partnership granted 14,584 phantom units to the then-serving CEO/CFO of the Partnership. One-third of such phantom units vest as of November 30, 2019, 2020 and 2021, respectively. Effective June 3, 2016, the Partnership granted 21,500 phantom units to the then-serving CEO/CFO of the Partnership. One-third of such phantom units vest as of December 31, 2017, November 30, 2018 and November 30, 2019, respectively. On September 14, 2018, the plan was amended for to extend the terms and conditions of such unvested units for the grants effective March 23, 2017 and June 3, 2016 of the then-serving CEO/CFO that resigned as CEO/CFO of the Partnership and was appointed to the Board of the Partnership. The phantom units impact the diluted weighted average units outstanding; however, the increase in weighted average number of units was not significant enough to change the earnings per unit. Therefore, the basic and diluted earnings per unit are the same for the period ended March 31, 2019. |
| F-48 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
| (3) | Includes total amounts attributable to incentive distributions rights of $399 and $397 for the three months ended March 31, 2019 and 2018, respectively, of which $55 and $55 was attributed to common units owned by Höegh LNG and $344 and $342 was attributed to subordinated units owned by Höegh LNG, for the three months ended March 31, 2019 and 2018, respectively. |
Earnings per unit is calculated by dividing net income by the weighted average number of common and subordinated units outstanding during the applicable period.
The common unitholders’ and subordinated unitholders’ interest in net income are calculated as if all net income were distributed according to terms of the Partnership’s Second Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”), regardless of whether those earnings would or could be distributed. The Partnership Agreement does not provide for the distribution of net income; rather, it provides for the distribution of available cash. Available cash, a contractual defined term, generally means all cash on hand at the end of the quarter after deduction for cash reserves established by the board of directors and the Partnership’s subsidiaries to i) provide for the proper conduct of the business (including reserves for future capital expenditures and for the anticipated credit needs); ii) comply with applicable law, any of the debt instruments or other agreements; iii) provide funds for payments on the Series A preferred units; and iv) provide funds for distributions to the unitholders for any one or more of the next four quarters. Therefore, the earnings per unit are not indicative of future cash distributions that may be made. Unlike available cash, net income is affected by non-cash items, such as depreciation and amortization, unrealized gains or losses on derivative instruments and unrealized gains or losses on foreign exchange transactions.
During the subordination period, the common units will have the right under the Partnership Agreement to receive distributions of available cash from operating surplus in an amount equal to the minimum quarterly distribution of $0.3375 per unit, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. Distribution arrearages do not accrue on the subordinated units.
Distributions of available cash from operating surplus are to be made in the following manner for any quarter during the subordination period:
| • | first, 100.0% to the common unitholders, pro rata, until the Partnership distributes for each outstanding common unit an amount equal to the minimum quarterly distribution of $0.3375 for that quarter; |
| • | second, 100.0% to the common unitholders, pro rata, until the Partnership distributes for each outstanding common unit an amount equal to any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period; and |
| • | third, 100.0% to the subordinated unitholders, pro rata, until the Partnership distributes for each subordinated unit an amount equal to the minimum quarterly distribution of $0.3375 for that quarter. |
In addition, Höegh LNG currently holds all of the IDRs in the Partnership. IDRs represent the rights to receive an increasing percentage of quarterly distributions of available cash for operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved.
If for any quarter during the subordination period:
| • | the Partnership has distributed available cash from operating surplus to the common and subordinated unitholders in an amount equal to the minimum quarterly distribution; and |
| • | the Partnership has distributed available cash from operating surplus on outstanding common units in an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly distribution; |
| F-49 |
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
then, the Partnership will distribute any additional available cash from operating surplus for that quarter among the unitholders and the holders of the IDRs in the following manner:
| • | first, 100.0% to all common and subordinated unitholders, pro rata, until each such unitholder receives a total of $0.388125 per unit for that quarter (the “first target distribution”); |
| • | second, 85.0% to all common and subordinated unitholders, pro rata, and 15.0% to the holders of the IDRs, pro rata, until each such unitholder receives a total of $0.421875 per unit for that quarter (the “second target distribution”); |
| • | third, 75.0% to all common and subordinated unitholders, pro rata, and 25.0% to the holders of the IDRs, pro rata, until each such unitholder receives a total of $0.50625 per unit for that quarter (the “third target distribution”); and |
| • | thereafter, 50.0% to all common and subordinated unitholders, pro rata, and 50.0% to the holders of the IDRs, pro rata. |
In each case, the amount of the target distribution set forth above is exclusive of any distributions to common unitholders to eliminate any cumulative arrearages in payment of the minimum quarterly distribution. The percentage interests set forth above assume that the Partnership does not issue additional classes of equity securities.
18. Subsequent events
On May 13, 2019, the Partnership drew $3.5 million on the $85 million revolving credit facility from Höegh LNG.
On May 15, 2019, the Partnership paid a cash distribution of $15.0 million, or $0.44 per common and subordinated unit, with respect to the first quarter of 2019, equivalent to $1.76 per unit on an annualized basis.
On May 15, 2019, the Partnership paid a cash distribution of $3.4 million, or $0.546875 per Series A preferred unit, for the period commencing on February 15, 2019 to May 15, 2019.
On May 28, 2019, the Partnership's and Höegh LNG’s boards of directors approved the agreement to extend the revolving credit with Höegh LNG until January 1, 2023.
For the period April 1, 2019 to May 27, 2019, the Partnership had sold 48,630 Series A preferred units under the ATM program at an average gross sales price of $26.16 per unit and received net proceeds, after sales commissions, of $1.2 million. For the period from April 1, 2019 to May 27, 2019, the Partnership had sold 53,060 common units under the ATM program at an average sales price of $19.60 per unit and received net proceeds, after sales commissions, of $1.0 million. The Partnership has paid an aggregate of $0.04 million in sales commissions to the Agent in connection with such sales in the period from April 1, 2019 to May 27, 2019. From the commencement of the ATM program in January 2018, the Partnership has sold 1,577,700 Series A preferred units and 306,166 common units, and received net proceeds of $39.9 million and $5.6 million, respectively. The compensation paid to the Agent for such sales was $0.8 million.
| F-50 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| HÖEGH LNG PARTNERS LP | |||
| Date: May 29, 2019 | |||
| By: | /s/ Steffen Føreid | ||
| Name: | Steffen Føreid | ||
| Title: | Chief Executive Officer and Chief Financial Officer | ||
This report on Form 6-K is hereby incorporated by reference into the Registration Statements on Form F-3 (333-213781) and Form S-8 (333-211840) of the Registrant.
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