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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 September 30, 2014
Commission File Number 001-36588
Höegh LNG Partners LP
(Translation of registrant’s name into English)
2 Reid Street
Hamilton, HM 11
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
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HÖEGH LNG PARTNERS LP
REPORT ON FORM 6-K FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014
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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 and nine months ended September 30, 2014 and September 30, 2013. References in this report to “Höegh LNG Partners LP,” “we,” “our,” “us” and “the Partnership” or similar terms when used for the period until the completion of the initial public offering of Höegh LNG Partners LP (the “IPO”) refer to the interests in SRV Joint Gas Ltd., SRV Joint Gas Two Ltd., Höegh LNG Lampung Pte. Ltd. and PT Höegh LNG Lampung, which were contributed by Höegh LNG Holdings Ltd. (“Höegh LNG”) to the Partnership at the IPO. When used for periods after the completion of the IPO, those terms refer to Höegh LNG Partners LP and its subsidiaries. Unless the context requires otherwise, references in this report to our or the “joint ventures” refer to the joint ventures that own two of the vessels (the GDF Suez Neptune and the GDF Suez Cape Ann).
You should read this section in conjunction with the unaudited condensed interim consolidated and combined carve-out financial statements as of and for the periods ended September 30, 2014 and 2013 and the related notes thereto included elsewhere in this report. For additional information relating to our management’s discussion and analysis of financial condition and results of operations, please see our Registration Statement on Form F-1 for the IPO which was declared effective by the United States Securities Exchange Commission on August 7, 2014 (the “Registration Statement”). 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 discussion in the section entitled “Forward-Looking Statements” below.
Highlights
• | $221 million IPO closed August 12, 2014, raising net proceeds of $203.5 million |
• | Generated total revenues of $16.52 million for the third quarter of 2014 compared to $11.64 million for the third quarter of 2013 |
• | Generated operating income of $6.94 million for the third quarter of 2014 compared to $3.92 million for the third quarter of 2013 |
• | 100% utilization on joint venture vessels, theGDF Suez Neptune and theGDF Suez Cape Ann |
• | Acceptance achieved on thePGN FSRU Lampung effective October 30, 2014 after commissioning delays |
• | Associated indemnity claims made on Höegh LNG, the owner of our general partner, to make the Partnership whole pursuant to the Omnibus Agreement entered into with Höegh LNG in connection with the IPO (the “Omnibus Agreement”) |
• | On September 24, 2014, we held our first annual meeting of unitholders at which four members of our board of directors were elected |
• | Paid a pro rata $0.1834/unit distribution for the period from August 12, 2014 to September 30, 2014, equivalent to $0.3375 per unit per quarter and $1.35 per unit on an annual basis |
Our initial public offering
On August 12, 2014, we completed our IPO. Prior to the closing of the IPO, Höegh LNG contributed to the Partnership all of its equity interests and loans and promissory notes due to it and affiliates in each of the entities owning theGDF Suez Neptune, theGDF Suez Cape Ann and thePGN FSRU Lampung. The transfer of the interests was recorded at Höegh LNG’s consolidated book values. At the closing of the IPO (including the exercise by the underwriters of the option to purchase an additional 1,440,000 common units), (i) 11,040,000 common units were sold to the public for net proceeds, after deduction of offering expenses, of $203.5 million; (ii) Höegh LNG owned 2,116,060 common units and 13,156,060 subordinated units, representing approximately 58% of the limited partner interest in the Partnership, and 100% of the incentive distribution rights (“IDRs”) and (iii) a wholly owned subsidiary of Höegh LNG owned the non-economic general partner interest in the Partnership.
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Our results of operations
Nine months ended | Three months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | 2013 | 2014 | ||||||||||||
Statement of Income Data: | ||||||||||||||||
Time Charter revenues | $ | — | 10,371 | — | $ | 10,371 | ||||||||||
Construction contract revenue | 33,992 | 42,765 | 11,636 | 6,153 | ||||||||||||
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Total revenues | 33,992 | 53,136 | 11,636 | 16,524 | ||||||||||||
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Voyage expenses | — | (798 | ) | — | (798 | ) | ||||||||||
Vessel operating expenses | — | (3,046 | ) | — | (1,901 | ) | ||||||||||
Construction contract expenses | (28,457 | ) | (37,579 | ) | (10,107 | ) | (6,845 | ) | ||||||||
Administrative expenses | (5,340 | ) | (9,280 | ) | (2,162 | ) | (2,770 | ) | ||||||||
Depreciation and amortization | — | (1,309 | ) | — | (329 | ) | ||||||||||
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Total operating expenses | (33,797 | ) | (52,012 | ) | (12,269 | ) | (12,643 | ) | ||||||||
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Equity in earnings of joint ventures | 32,309 | (738 | ) | 4,549 | 3,058 | |||||||||||
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Operating income | 32,504 | 386 | 3,916 | 6,939 | ||||||||||||
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Interest income | 1,617 | 2,443 | 526 | 1,542 | ||||||||||||
Interest expense | (34 | ) | (5,004 | ) | (11 | ) | (2,711 | ) | ||||||||
Other items, net | — | (1,321 | ) | — | (429 | ) | ||||||||||
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Income before tax | 34,087 | (3,496 | ) | 4,431 | 5,341 | |||||||||||
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Income tax expense | — | (376 | ) | — | (143 | ) | ||||||||||
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Net income | $ | 34,087 | (3,872 | ) | 4,431 | $ | 5,198 | |||||||||
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Cash Flow Data: | ||||||||||||||||
Net cash provided by (used by) operating activities | $ | (26,142 | ) | $ | 23,632 | |||||||||||
Net cash used in investing activities | (27,798 | ) | (166,420 | ) | ||||||||||||
Net cash provided by financing activities | $ | 53,940 | $ | 188,016 | ||||||||||||
Other Financial Data: | ||||||||||||||||
Adjusted EBITDA (1) | $ | 24,436 | 27,664 | 7,511 | $ | 13,125 | ||||||||||
Segment EBITDA (1) | $ | 24,436 | 27,002 | 7,511 | $ | 12,463 |
(1) | Adjusted EBITDA and Segment EBITDA are non-GAAP financial measures. Please read “Non-GAAP Financial Measures” for definitions of Adjusted EBITDA and Segment EBITDA and reconciliations of each such measure to net income, the comparable U.S. GAAP financial measure. |
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Our results for the nine and three months ended September 30, 2014 have been impacted by the start-up of operations of thePGN FSRU Lampung and the Mooring.
Following certain delays by the unrelated pipeline contractor completing the pipeline and minor damage to thePGN FSRU Lampung by a tugboat during the pipeline installation, the Notice of Readiness was issued July 21, 2014 resulting in the start of time charter hire on thePGN FSRU Lampungand commissioning. During the commissioning to test the functioning of the PGN FSRU Lampungproject (including the Mooring) and the pipeline functionality, problems were identified on August 29, 2014 with the regasification system for the FSRU. This required a temporary cease in operations so that parts of the regasification system could be disassembled and transferred to shore for repair under provision of the warranties for the vessel. The equipment was reinstalled and all commissioning completed to allow the Partnership to deliver the Certificate of Acceptance to the charterer, PT PGN LNG Indonesia (“PGN”). PGN formally accepted and signed the Certificate of Acceptance dated October 30, 2014.
We are committed to pay a day rate for delay liquidated damages to PGN up to a maximum amount of $10.7 million if thePGN FSRU Lampung is not connected to the Mooring and ready to deliver LNG by the scheduled arrival date or acceptance is not achieved by the scheduled delivery date.
During September 2014, PGN indicated concerns about requirements under the time charter contract to pay hire rates for periods the regasification system was not functioning and issued invoices for delay liquidated damages for amounts PGN believes it has claims for delays in the scheduled arrival date and the acceptance date. PGN subsequently issued an additional invoice for delay liquidated damages in October 2014. PGN has not paid its time charter hire for September or October 2014. We have an ongoing dialog with PGN to find an acceptable solution.
We have included potential delay liquidated damages due to PGN in a project contingency as part of estimated total construction contract costs for the Mooring (as the first deliverable under the contract) as the basis for computing the percentage of completion. During the third quarter of 2014, delay liquidated damages of approximately $6.1 million were recorded to construction contract expenses for claims to September 30, 2014. In addition, the project contingency was increased for additional delay liquidated damages as part of the estimated total construction contract costs. The total for actual and potential claims for delay liquidated damages included in estimated total construction costs is approximately $8.1 million. Delay liquidated damages cease on the date of the Certificate of Acceptance of October 30, 2014. The contingency for delay liquidated damages in the estimated total construction contract costs established at September 30, 2014 is adequate for all remaining direct PGN claims for delay liquidated damages.
We are indemnified by Höegh LNG under the Omnibus Agreement for delay liquidated damages. We filed indemnification claims for the delay liquidated damages invoiced from PGN of $5.5 million and $1.6 million for September and October 2014, respectively. The amounts will be paid to us by Höegh LNG prior to any amounts being paid to PGN. When the funding for indemnification is received from Höegh LNG, the amount will be recorded as a contribution to equity.
We are also indemnified for any hire rate payments not received 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. We filed indemnification claims for the September and October invoices not paid by PGN of $6.5 million and $6.7 million, respectively. The Partnership has received payments from Höegh LNG for these invoices in September and October, respectively. Indemnification for hire rate payments is accounted for consistent with the accounting policies for loss of hire insurance, and is recognized when the proceeds are received. Therefore, we recognized the September revenue and cash as of September 30, 2014. For additional information, refer to note 2 significant accounting policies on insurance claims in the audited combined carve-out financial statements for the year ended December 31, 2013 included in the Registration Statement.
For additional discussion see note 14 of the unaudited condensed interim consolidated and combined carve-out financial statements.
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Nine Months Ended September 30, 2013 Compared with the Nine Months Ended September 30, 2014
Time Charter Revenue. The following table sets forth details of our time charter revenue for the nine months ended September 30, 2014 and 2013:
Nine Months Ended September 30, | Positive (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Time charter revenues | $ | — | $ | 10,371 | $ | 10,371 |
Time charter revenue for the nine months ended September 30, 2014 was $10.4 million, an increase of $10.4 million from the nine months ended September 30, 2013. The time charter hire payments forPGN FSRU Lampung began July 21, 2014 when the project was ready to begin commissioning. We have been indemnified for the September invoice by Höegh LNG. For additional discussion see “Our results of operations” and note 14 of the unaudited condensed interim consolidated and combined carve-out financial statements
Time charter revenues consist of the lease element of the time charter, that is accounted for as a direct financing lease using the effective interest rate method, as well as fees for providing time charter services, reimbursement for vessel operating expenses and indirect and corporate income taxes borne by the charterer.
Construction Contract Revenue and Related Expenses. The following table sets forth details of our construction contract revenue and construction contract expenses for the nine months ended September 30, 2014 and 2013:
Nine Months Ended September 30, | Positive (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Construction contract revenues | $ | 33,992 | $ | 42,765 | $ | 8,773 | ||||||
Construction contract expenses | $ | (28,457 | ) | $ | (37,579 | ) | $ | (9,122 | ) | |||
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Recognized contract margin | $ | 5,535 | $ | 5,186 | $ | (349 | ) | |||||
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Construction contract revenue for the nine months ended September 30, 2014 was $42.8 million, an increase of $8.8 million from $34.0 million for the nine months ended September 30, 2013. Construction contract expenses for the nine months ended September 30, 2014 were $37.6 million, an increase of $9.1 million from $28.5 million for the nine months ended September 30, 2013.
The Mooring is an offshore installation that is being used to moor thePGN FSRU Lampung to offload the gas into an offshore pipe that transports the gas to a land terminal for the charterer. The Mooring has been constructed in China, installed in Indonesia and is being sold to the charterer. Revenue is recognized on the Mooring based upon the percentage of completion method under which construction contract revenue is recognized using the ratio of costs incurred to estimated total costs multiplied by the total estimated contract revenue to determine revenue. The increase in construction contract revenue is primarily due to progress towards completion of the project for the Mooring, which was estimated to be 94% as of September 30, 2014 compared with 37% as of September 30, 2013. During the three months ended September 30, 2014, delay liquidated damages of approximately $6.1 million were recorded as part of construction contract expenses related to claims from PGN on the project up to September 30, 2014. For additional discussion see “Our results of operations” and note 14 of the unaudited condensed interim consolidated and combined carve-out financial statements. As a result of the claims, the estimate of the total estimated construction cost was also upwardly revised based upon estimated total exposure for delay liquidated damages from PGN. As the percentage of completion method relies on the substantial use of estimates, estimates may be revised throughout the life of a construction contract. Adjustments to construction cost estimates to complete on construction contracts are revised when additional information becomes available. The impact of such changes to estimates is made on a cumulative basis in the period when such information has become known. As a result of the revision to the estimated total project costs, there was a reduction margin for the nine months ended September 30, 2014 and a negative margin for the three months ended September 30, 2014 for the cumulative impact of the change in estimates. PGN formally accepted the PGN Lampung project effective October 30, 2014. This means that there will not be further delay liquidated damages from PGN past the acceptance date. Our total estimated construction costs include adequate contingencies for the remaining delay liquidated damages which will be recorded in the fourth quarter of 2014 which will be indemnified by Höegh LNG. In addition, we will be able to invoice the final ten percent of the mooring revenue which is due as a result of the acceptance.
Voyage and Vessel Operating Expenses. The following table sets forth details of our voyage and vessel operating expenses for the nine months ended September 30, 2014 and 2013:
Nine Months Ended September 30, | Positive (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Voyage expenses | $ | — | $ | (798 | ) | $ | (798 | ) | ||||
Vessel operating expenses | $ | — | $ | (3,046 | ) | $ | (3,046 | ) |
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Voyage expenses for the nine months ended September 30, 2014 were $0.8 million, an increase of $0.8 million from the nine months ended September 30, 2013. Voyage expenses are typically paid directly by the charterer. Certain bunker fuel and use of LNG during the commissioning and testing ofPGN FSRU Lampung were borne by us. In addition, LNG quantities used in running our generators during the period where we had problems with the regasification system were for our own account. As a result, the voyage expenses are not expected to be recurring costs after October when the final testing was complete. However, if the vessel is offhire, voyage expenses, principally fuel, may also be incurred and would be paid by us.
Vessel operating expenses for the nine months ended September 30, 2014 were $3.0 million, an increase of $3.0 million from the nine months ended September 30, 2013. This reflects certain start up and crew training cost as well at the expenses from the start of the time charter hire period beginning July 21, 2014.
Administrative Expenses. The following table sets forth details of our administrative expenses for the nine months ended September 30, 2014 and 2013:
Nine Months Ended September 30, | Positive (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | Variance | |||||||||
Administrative expenses | $ | (5,340 | ) | $ | (9,280 | ) | $ | (3,940 | ) |
Administrative expenses for the nine months ended September 30, 2014 were $9.3 million, an increase of $4.0 million from $5.3 million for the nine months ended September 30, 2013. The major reasons for the increase were expenses incurred in preparation for the IPO and higher activity related to thePGN FSRU Lampung and preparation for and the start of operations. For the nine months ended September 30, 2014, expenses of $3.5 million were incurred principally related to audit fees, legal fees and charges for hours incurred by Höegh LNG’s staff working on preparation of the IPO. This was an increase of $2.2 million from $1.4 million incurred for such expenses during the nine months ended September 30, 2013.
Administrative expenses related to the PGN FSRU Lampung for the nine months ended September 30, 2014 were $4.2 million, an increase of $1.0 million from $3.2 million for the nine months ended September 30, 2013. Approximately $0.2 million relates to fees in establishing the new legal structure in conjunction with the IPO during 2014. The remaining negative variance of approximately $0.5 million relates to a combination of higher allocated and actual cost in the nine months ended September 30, 2014 compared with the allocations in the nine months ended September 30, 2013.
Depreciation and Amortization. The following table sets forth details of our depreciation and amortization for the nine months ended September 30, 2014 and 2013:
Nine Months Ended September 30, | Positive (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | Variance | |||||||||
Depreciation and amortization | $ | — | $ | (1,309 | ) | $ | (1,309 | ) |
Depreciation and amortization for the nine months ended September 30, 2014 related to the PGN FSRU Lampungand for office and IT equipment. In mid-May 2014, thePGN FSRU Lampungwas deemed substantially complete to begin the commissioning under the time charter contract. The newbuilding was transferred on the balance sheet to vessels until such time as the time charter commenced when the vessel was transferred on the balance sheet to net investment in direct financing lease. However, due to delays by the unrelated pipeline contractor completing the pipeline and minor damage to the FSRU by a tugboat during the pipeline installation, the time charter hire did not commence until July 21, 2014. As a result, the vessel was depreciated until the start of the direct financing lease. The depreciation expense for thePGN FSRU Lampungfor the nine months ended September 30, 2014 was $1,286. The remaining depreciation of $23 relates to office and IT equipment. There were no corresponding charges for the nine months ended September 30, 2013.
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Total Operating Expenses. The following table sets forth details of our total operating expenses for the nine months ended September 30, 2014 and 2013:
Nine Months Ended September 30, | Positive (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | Variance | |||||||||
Total operating expenses | $ | (33,797 | ) | $ | (52,011 | ) | $ | (18,214 | ) |
Total operating expenses for the nine months ended September 30, 2014 were $52.0 million, an increase of $18.2 million from $33.8 million for the nine months ended September 30, 2013 due to an increase in construction contract expense primarily due to the delay liquidated damages and higher voyage, vessel and administrative expenses primarily due to the start up of operations and completion of the IPO.
Equity in Earnings (Losses) of Joint Ventures. The following table sets forth details of our equity in earnings of joint ventures for the nine months ended September 30, 2014 and 2013:
Nine Months Ended September 30, | Positive (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Equity in earnings (losses) of joint ventures | $ | 32,309 | $ | (738 | ) | $ | (33,047 | ) |
Equity in losses of joint ventures for the nine months ended September 30, 2014 was $0.7 million, a decrease of $33.0 million from equity in earnings of $32.3 million for the nine months ended September 30, 2013. The reason for the decrease was an unrealized loss on derivative instruments in our joint ventures in the nine months ended September 30, 2014 compared with an unrealized gain in the nine months ended September 30, 2013.
Our share of our joint ventures’ operating income was $17.7 million for the nine months ended September 30, 2014, compared with $17.5 million for the nine months ended September 30, 2013. Our share of other income (expense), net, principally consisting of interest expense, was $12.9 million for the nine months ended September 30, 2014, a reduction of $0.7 million from $13.6 million for the nine months ended September 30, 2013. The reduction was mainly due to lower interest expense due to repayment of principal on debt between the periods.
Our share of unrealized loss on derivative instruments was $5.5 million for the nine months ended September 30, 2014, a decrease of $34.0 million compared to unrealized gain on derivative instruments of $28.5 million for the nine months ended September 30, 2013. The variance in the unrealized gains and losses on derivative instruments is the reason for the decline in our equity in earnings of joint ventures for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. The joint ventures utilize interest rate swap contracts to exchange a receipt of floating interest for a payment of fixed interest to reduce the exposure to interest rate variability on their outstanding floating-rate debt. The interest rate swap contracts are not designated as hedges for accounting purposes. As a result, there is volatility in earnings for the unrealized exchange gains and losses on the interest rate swap contracts. Historically, the joint ventures have accumulated unrealized losses on the interest rate swap due to declining interest rates, which has resulted in liabilities for derivative financial instruments and an accumulated deficit in equity on their balance sheets.
There was no accrued income tax expense for the nine months ended September 30, 2014 and 2013. Our joint ventures did not pay any dividends for the nine months ended September 30, 2014 and 2013.
Operating Income. The following table sets forth details of our operating income for the nine months ended September 30, 2014 and 2013:
Nine Months Ended September 30, | Positive (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Operating income | $ | 32,504 | $ | 386 | $ | (32,118 | ) |
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Operating income for the nine months ended September 30, 2014 was $0.4 million, a decrease of $32.1 million from the operating income of $32.5 million for the nine months ended September 30, 2013. The decrease in operating income was primarily due to the decrease in the equity in earnings (losses) of joint ventures of $33.0 million.
Interest Income. The following table sets forth details of our interest income for the nine months ended September 30, 2014 and 2013:
Nine Months Ended September 30, | Positive (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Interest income | $ | 1,617 | $ | 2,443 | $ | 826 |
Interest income for the nine months ended September 30, 2014 was $2.4 million, an increase of $0.8 million from $1.6 million for the nine months ended September 30, 2013. Interest income of $1.1 million related to the demand note due from Höegh LNG and $1.3 million related to interest accrued on the advances to our joint ventures for the nine months ended September 30, 2014. For the nine months ended September 30, 2013, the entire balance related to interest accrued on the advances to our joint ventures. The decrease in interest income from joint ventures is due to repayment by our joint ventures of a portion of the principal due under the shareholder loans between the periods. The interest rate under the shareholder loans is a fixed rate of 8.0% per year. We lent $140 million to Höegh LNG from net proceeds of the IPO pursuant to a demand note. The note is repayable on demand or we can elect to utilize the note as part of the purchase consideration in the event all or a portion of Höegh LNG’s interests in the FSRU,Independence,are purchased by the Partnership. The note bears interest at a rate of 5.88% per annum.
Interest Expense. The following table sets forth details of our interest expense for the nine months ended September 30, 2014 and 2013:
Nine Months Ended September 30, | Positive (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Interest incurred | $ | (4,337 | ) | $ | (10,451 | ) | $ | (6,114 | ) | |||
Capitalized interest | $ | 4,303 | $ | 5,447 | $ | 1,144 | ||||||
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Interest expense | $ | (34 | ) | $ | (5,004 | ) | $ | (4,970 | ) | |||
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Interest expense for the nine months ended September 30, 2014 was $5.0 million, an increase of $5.0 million from $0.03 million for the nine months ended September 30, 2013.
Interest expense consists of the interest incurred less the interest capitalized for the period. The interest incurred, which includes amortization of deferred debt issuance cost, increased from $4.3 million for the nine months ended September 30, 2013 to $10.5 million for the nine months ended September 30, 2014 principally due to higher outstanding loan balances and higher amortization of debt issuance cost. During 2013, loans and promissory notes due to owners and affiliates financed the construction of thePGN FSRU Lampung and the construction contract expenses of the Mooring. On March 4, 2014 and April 8, 2014, we drew $96 million and $161.1 million, respectively, on the $299 million Lampung facility and subsequently $48.5 million was repaid on a promissory note to owners and affiliates. In July 3, 2014, the full principal amount of $32.1 million on the Mooring tranche and accrued interest was repaid. The deferred debt issuance cost associated with the Mooring tranche of the $299 million Lampung facility was fully amortized by the repayment date resulting in relatively high amortization charge for the nine months ended September 30, 2014. For the nine months ended September 30, 2014 and 2013, the amortization charge was $3.0 million and $0.3 million, respectively.
Most of the interest incurred was capitalized as part of thePGN FSRU Lampung newbuilding or included in the construction contract expense for the Mooring during the nine months ended September 30, 2013. Capitalization of interest ceased in the middle of May, 2014 when thePGN FSRU Lampung and the Mooring were substantially complete. Capitalized interest was $5.4 million for the nine months ended September 30, 2014 compared with $4.3 million for the nine months ended September 30, 2013.
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Other Items, Net. The following table sets forth details of our other items, net for the nine months ended September 30, 2014 and 2013:
Nine Months Ended September 30, | Positive (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Other financial items, net | $ | — | $ | (1,321 | ) | $ | (1,321 | ) |
Other items, net for the nine months ended September 30, 2014 was $1.3 million, primarily due to withholding tax that is payable on interest expense for nine months ended September 30, 2014 to parties outside of Singapore and Indonesia. There was no corresponding expense in the same period of 2013.
Income Before Tax. The following table sets forth details of our income before tax for the nine months ended September 30, 2014 and 2013:
Nine Months Ended September 30, | Positive (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Income (loss) before tax | $ | 34,087 | $ | (3,496 | ) | $ | (37,583 | ) |
Loss before tax for the nine months ended September 30, 2014 was $3.5 million, a decrease of $37.6 million from income before tax of $34.1 million for the nine months ended September 30, 2013. The decrease was largely due to the decrease in the equity in earnings (losses) of joint ventures of $33.0 million and higher total financial income (expense), net of $5.5 million. Time charter hire for thePGN FSRU Lampung commenced on July 21, 2014 while higher vessel operating expenses were incurred for crew training and start up procedures prior to the start of the time charter. In addition, higher administrative expenses were incurred in preparations for the IPO and the start of operations of thePGN FSRU Lampung.
Income Tax Expense. The following table sets forth details of our income tax expense for the nine months ended September 30, 2014 and 2013:
Nine Months Ended September 30, | Positive (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Income tax expense | $ | — | $ | (376 | ) | $ | (376 | ) |
Income tax expense for the nine months ended September 30, 2014 was $0.4 million, a negative variance of $0.4 million compared with the nine months ended September 30, 2013. We are not subject to Marshall Islands income taxes. However, we are subject to tax for earnings in Indonesia and Singapore starting in the fourth quarter of 2013. For the nine months ended September 30, 2014, the majority of income taxes related to the Singapore subsidiary primarily on net interest income.
A deferred tax benefit of $1,854 related to the unrealized losses on interest rate swaps accounted for as a cash flow hedge was recorded as a component of other comprehensive income in the unaudited interim consolidated and combined carve-out statements of comprehensive income for the nine months ended September 30, 2014.
For the nine months ended September 30, 2013, none of our activities were in jurisdictions subject to tax.
Pursuant to the terms of thePGN FSRU Lampung time charter, we will be reimbursed, as a component of time charter revenues, for income taxes arising in Indonesia related to time charter activities from the time charter commences.
Net Income. The following table sets forth details of our net income for the nine months ended September 30, 2014 and 2013:
Nine Months Ended��September 30, | Positive (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Net income (loss) | $ | 34,087 | $ | (3,872 | ) | $ | (37,959 | ) |
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As a result of the foregoing, net loss for the nine months ended September 30, 2014 was $3.9 million, a decrease of $38.0 million compared with net income of $34.1 million for the nine months ended March 31, 2013.
Segments
We have two segments, which are the “Majority Held FSRUs” and the “Joint Venture FSRUs.” In addition, unallocated corporate costs that are considered to benefit the entire organization and interest income from advances to our joint ventures are included in “Other.” As of September 30, 2014 and 2013, Majority Held FSRUs included thePGN FSRU Lampung and construction contract revenue and expenses of the Mooring under construction. The Mooring is being constructed on behalf of, and is being sold to, PGN using the percentage of completion method of accounting. As of September 30, 2014 and 2013, Joint Venture FSRUs included two 50.0%-owned FSRUs, theGDF Suez Neptune and theGDF Suez Cape Ann, each of which operates under a long-term time charter with GDF Suez.
We measure our segment profit based on Segment EBITDA. Segment EBITDA is reconciled to net income for each segment in the segment table below. Please read “Non-GAAP Financial Measures” for a definition of Segment EBITDA and a further reconciliation to net income, the comparable U.S. GAAP financial measure, for all periods presented.
Majority Held FSRUs. The following table sets forth details of segment results for the Majority Held FSRUs for the nine months ended September 30, 2014 and 2013:
Majority Held FSRUs | Nine Months Ended September 30, | Positive (negative) | ||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Time charter revenues | $ | — | $ | 10,371 | $ | 10,371 | ||||||
Construction contract revenues | 33,992 | 42,765 | 8,773 | |||||||||
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Total revenues | 33,992 | 53,136 | 19,144 | |||||||||
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Voyage & vessel operating expenses | — | (3,844 | ) | (3,844 | ) | |||||||
Administrative expenses | (3,156 | ) | (4,183 | ) | (1,027 | ) | ||||||
Construction contract expense | (28,457 | ) | (37,579 | ) | (9,122 | ) | ||||||
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Segment EBITDA | 2,379 | 7,530 | 5,151 | |||||||||
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Depreciation and amortization | — | (1,309 | ) | (1,309 | ) | |||||||
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Operating income (loss) | 2,379 | 6,221 | 3,842 | |||||||||
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Financial income (expense), net | (34 | ) | (6,163 | ) | (6,129 | ) | ||||||
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Income (loss) before tax | 2,345 | 58 | (2,287 | ) | ||||||||
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Income tax expense | — | (376 | ) | (376 | ) | |||||||
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Net income (loss) | $ | 2,345 | $ | (318 | ) | $ | (2,663 | ) | ||||
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Time charter revenues for the nine months ended September 30, 2014 were $10.4 million, an increase of $10.4 million from the nine months ended September 30, 2013 due to the start of the time charter hire forPGN FSRU Lampung. Construction contract revenues for the nine months ended September 30, 2014 were $42.8 million, an increase of $8.8 million from $34.0 million for the nine months ended September 30, 2013. As discussed in more detail above, the main reason for the increase was higher construction contract revenue for the nine months ended September 30, 2014 reflecting 94% project completion as of September 30, 2014 compared with 37% as of September 30, 2013.
Voyage and vessel operating expenses of $3.8 million for the nine months ended September 30, 2014 were incurred in preparing for the start of the time charter, for LNG used during testing and vessel operations since the time charter for thePGN FSRU Lampungcommenced July 21, 2014. There were no corresponding expenses for the same period of 2013.
Administrative expenses for the nine months ended September 30, 2014 were $4.2 million, an increase of $1.0 million from $3.2 million for the nine months ended September 30, 2013. Higher expenses were due to higher activity related to thePGN FSRU Lampung, the Mooring and preparation for the start of operations.
Construction contract expense increased by $9.1 million for the nine months ended September 30, 2014 compared with the nine months ended September 30, 2013 due to progress on the Mooring construction project and the delay liquidated damages of approximately $6.1 million incurred during the nine months ended September 30, 2014.
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Segment EBITDA for the nine months ended September 30, 2014 was $7.5 million, an increase of $5.1 million from $2.4 million for the nine months ended September 30, 2013 mainly due to the start of operations under the time charter which was partially offset by $0.4 million lower margin on the percentage of completion for nine months ended September 30, 2014 compared with the nine months ended September 30, 2013.
Joint Venture FSRUs.The following table sets forth details of segment results for the Joint Venture FSRUs for the nine months ended September 30, 2014 and 2013:
Joint Venture FSRUs | Nine Months Ended September 30, | Positive (negative) | ||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Time charter revenues | $ | 30,756 | $ | 30,731 | $ | (25 | ) | |||||
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Vessel operating expenses | (5,865 | ) | (5,473 | ) | 392 | |||||||
Administrative expenses | (651 | ) | (689 | ) | (39 | ) | ||||||
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Segment EBITDA | 24,241 | 24,569 | 328 | |||||||||
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Depreciation and amortization | (6,785 | ) | (6,861 | ) | (76 | ) | ||||||
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Operating income | 17,456 | 17,708 | 252 | |||||||||
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Gain (loss) on derivative instruments | 28,480 | (5,531 | ) | (34,011 | ) | |||||||
Other income (expense), net | (13,627 | ) | (12,915 | ) | 712 | |||||||
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Net income (loss) | $ | 32,309 | $ | (738 | ) | $ | (33,047 | ) | ||||
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The segment results for the Joint Venture FSRUs are presented using the proportionate consolidation method (which differs from the equity method used in the historical unaudited interim combined carve-out financial statements).
Total time charter revenues were $30.7 million and $30.8 million for the nine months ended September 30, 2014 and 2013, respectively.
Vessel operating expenses for the nine months ended September 30, 2014 were $5.5 million, a decrease of $0.4 million compared to $5.9 million for the nine months ended September 30, 2013. Vessel operating cost can vary between quarters depending on the stationing of the vessels and level of activity. In addition, there was a higher level of crew training in the nine months ended September 30, 2013. In addition, the insurance cost for theGDF Suez Cape Ann was lower in 2014 than 2013 due to the modifications in 2013 of the vessel to be an FSRU.
Administrative expenses for the nine months ended September 30, 2014 increased slightly compared with the nine months ended September 30, 2013.
Segment EBITDA was $24.6 million for the nine months ended September 30, 2014 compared with $24.2 million for the nine months ended September 30, 2013.
Other.The following table sets forth details of results for the nine months ended September 30, 2014 and 2013:
Other | Nine Months Ended September 30, | Positive (negative) | ||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Administrative expenses | $ | (2,184 | ) | $ | (5,097 | ) | $ | (2,913 | ) | |||
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Segment EBITDA | (2,184 | ) | (5,097 | ) | (2,913 | ) | ||||||
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Operating income (loss) | (2,184 | ) | (5,097 | ) | (2,913 | ) | ||||||
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Interest income | 1,617 | 2,281 | 664 | |||||||||
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Income (loss) before tax | (567 | ) | (2,816 | ) | (2,249 | ) | ||||||
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Income tax expense | — | — | — | |||||||||
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Net income (loss) | $ | (567 | ) | (2,816 | ) | $ | (2,249 | ) | ||||
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Administrative expenses and Segment EBITDA for the nine months ended September 30, 2014 was $5.1 million, an increase of $2.9 million from $2.2 million for the nine months ended September 30, 2013. “Other” includes unallocated corporate costs that are considered to benefit the entire organization. The major reasons for the increase were expenses incurred in preparation for the IPO. For the nine months ended September 30, 2014, expenses of $3.5 million were incurred for preparation for the IPO, an increase of $2.2 million from $1.4 million for the nine months ended September 30, 2013. Approximately $0.2 million relates to fees in establishing the new legal structure in conjunction with the IPO during the nine months ended September 30, 2014. The remaining negative variance of approximately $0.5 million relates to a combination of higher allocated and actual cost in the nine months ended September 30, 2014 compared with the allocations in the nine months ended September 30, 2013.
Interest income, which is not part of the segment measure of profits, is related to the interest accrued on the advances to our joint ventures and our $140 demand note from Höegh LNG.
Three Months Ended September 30, 2013 Compared with the Three Months Ended September 30, 2014
Time Charter Revenue. The following table sets forth details of our time charter revenue for the three months ended September 30, 2014 and 2013:
Three Months Ended September 30, | Positive (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Time charter revenues | $ | — | $ | 10,371 | $ | 10,371 |
Time charter revenue for the three months ended September 30, 2014 was $10.4 million, an increase of $10.4 million from the three months ended September 30, 2013. The time charter hire payments forPGN FSRU Lampung began July 21, 2014 when the project was ready to begin commissioning.
Construction Contract Revenue and Related Expenses. The following table sets forth details of our construction contract revenue and construction contract expenses for the three months ended September 30, 2014 and 2013:
Three Months Ended September 30, | Positive (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Construction contract revenues | $ | 11,636 | $ | 6,153 | $ | (5,483 | ) | |||||
Construction contract expenses | $ | (10,107 | ) | $ | (6,845 | ) | $ | 3,262 | ||||
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Recognized contract margin | $ | 1,529 | $ | (692 | ) | $ | (2,221 | ) | ||||
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Construction contract revenue for the three months ended September 30, 2014 was $6.2 million, a decrease of $5.4 million from $11.6 million for the three months ended September 30, 2013. Construction contract expenses for the three months ended September 30, 2014 were $6.8 million, a decrease of $3.3 million from $10.1 million for the three months ended September 30, 2013. The PGN Lampung project was nearly complete as of September 30, 2014. The major part of the construction contract expenses for the three months ended September 30, 2014 were $6.1 million of delay liquidated damages related to claims from PGN on the project up to September 30, 2014. For additional discussion see “Our results of operations” and note 14 of the unaudited condensed interim consolidated and combined carve-out financial statements. As a result of the claims, the estimate of the total estimated construction cost was also upwardly revised based upon estimated total exposure for delay liquidated damages from PGN. As the percentage of completion method relies on the substantial use of estimates, estimates may be revised throughout the life of a construction contract. Adjustments to construction cost estimates to complete on construction contracts are revised when additional information becomes available.
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The impact of such changes to estimates is made on a cumulative basis in the period when such information has become known. As a result of the revision to the estimated total estimated construction costs, there was a negative margin of $0.7 million for the three months ended September 30, 2014 for the cumulative impact of the change in estimates. This was a decrease of $2.2 million compared with the positive margin of $1.5 million for the three months ended September 30, 2013. PGN formally accepted the PGN Lampung project effective October 30, 2014. This means that there will not be further delay liquidated damages from PGN past the acceptance date. Our total estimated construction costs include approximately $2.0 million of contingencies that are adequate for the remaining delay liquidated damages. The final delay liquidated damages will be recorded in the fourth quarter of 2014 which will be indemnified by Höegh LNG. In addition, we will be able to invoice the final ten percent of the mooring revenue as a result of the acceptance.
Voyage and Vessel Operating Expenses. The following table sets forth details of our voyage and vessel operating expenses for the three months ended September 30, 2014 and 2013:
Positive (negative) variance | ||||||||||||
Three Months Ended September 30, | ||||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | ||||||||||
Voyage expenses | $ | — | $ | (798 | ) | $ | (798 | ) | ||||
Vessel operating expenses | $ | — | $ | (1,901 | ) | $ | (1,901 | ) |
Voyage expenses for the three months ended September 30, 2014 were $0.8 million, an increase of $0.8 million from the three months ended September 30, 2013. Voyage expenses are typically paid directly by the charterer. Certain bunker fuel and use of LNG during the commissioning and testing ofPGN FSRU Lampung were borne by us. In addition, LNG quantities used in running our generators during the period where we had problems with the regasification system were for our own account. As a result, the voyage expenses are not expected to be recurring costs after October when the final testing was complete. However, if the vessel is offhire, voyage expenses, principally fuel, may also be incurred and would be paid by us.
Vessel operating expenses for the three months ended September 30, 2014 were $1.9 million, an increase of $1.9 million from the three months ended September 30, 2013. This reflects certain start up and crew training cost as well at the expenses from the start of the time charter hire period beginning July 21, 2014.
Administrative Expenses. The following table sets forth details of our administrative expenses for the three months ended September 30, 2014 and 2013:
Positive | ||||||||||||
Three Months Ended September 30, | (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Administrative expenses | $ | (2,162 | ) | $ | (2,770 | ) | $ | (608 | ) |
Administrative expenses for the three months ended September 30, 2014 were $2.8 million, an increase of $0.6 million from $2.2 million for the three months ended September 30, 2013. The major reasons for the increase were expenses related to the higher activity associated with thePGN FSRU Lampung and preparation for the start of operations. Administrative expenses related to the PGN FSRU Lampung for the three months ended September 30, 2014 were $1.4 million, an increase of $0.3 million from $1.1 million for the three months ended September 30, 2013. For the three months ended September 30, 2014, expenses of $0.6 million incurred for preparation for the IPO, a decrease of $0.2 million from $0.8 million for the three months ended September 30, 2013. The remaining increase in administrative expenses between the periods of approximately $0.5 million relates to a combination of higher allocated and actual cost in the three months ended September 30, 2014 compared with the allocations in the three months ended September 30, 2013.
Depreciation and Amortization. The following table sets forth details of our depreciation and amortization for the three months ended September 30, 2014 and 2013:
Positive | ||||||||||||
Three Months Ended September 30, | (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Depreciation and amortization | $ | — | $ | (329 | ) | $ | (329 | ) |
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Depreciation and amortization for the three months ended September 30, 2014 related to the PGN FSRU Lampungand for office and IT equipment. The time charter hire did not commence until July 21, 2014. The FSRU was depreciated from the time it was substantially complete until the start of the direct financing lease. The depreciation expense for thePGN FSRU Lampungfor the three months ended September 30, 2014 was $322. The remaining depreciation for the period related to office and IT equipment. There were no corresponding charges for the three months ended September 30, 2013.
Total Operating Expenses. The following table sets forth details of our total operating expenses for the three months ended September 30, 2014 and 2013:
Positive | ||||||||||||
Three Months Ended September 30, | (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Total operating expenses | $ | (12,267 | ) | $ | (12,643 | ) | $ | (376 | ) |
Total operating expenses for the three months ended September 30, 2014 were $12.6 million, an increase of $0.4 million from $12.2 million for the three months ended September 30, 2013 due to an increase in voyage, vessel operating and administrative expenses that were largely offset by the reduction in the construction contract expenses between the periods.
Equity in Earnings of Joint Ventures. The following table sets forth details of our equity in earnings of joint ventures for the three months ended September 30, 2014 and 2013:
Positive | ||||||||||||
Three Months Ended September 30, | (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Equity in earnings of joint ventures | $ | 4,549 | $ | 3,058 | $ | (1,491 | ) |
Equity in earnings of joint ventures for the three months ended September 30, 2014 was $3.1 million, a decrease of $1.5 million from $4.6 million for the three months ended September 30, 2013. The reason for the decrease was a lower unrealized gain on derivative instruments in our joint ventures in the third quarter of 2014 compared with the unrealized gain in the third quarter of 2013.
Our share of our joint ventures’ operating income was $6.0 million for the three months ended September 30, 2014, compared with $5.9 million for the three months ended September 30, 2013. Our share of other income (expense), net, principally consisting of interest expense, was $4.3 million for the three months ended September 30, 2014, a reduction of $0.2 million from $4.5 million for the three months ended September 30, 2013. The reduction was mainly due to lower interest expense due to repayment of principal on debt between the periods.
Our share of the unrealized gain on derivative instruments was $1.4 million for the three months ended September 30, 2014, a decrease of $1.8 million compared to unrealized gain on derivative instruments of $3.2 million for the three months ended September 30, 2013. The variance in the unrealized gains and losses on derivative instruments is the reason for the decline in our equity in earnings of joint ventures for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. The joint ventures utilize interest rate swap contracts to exchange a receipt of floating interest for a payment of fixed interest to reduce the exposure to interest rate variability on their outstanding floating-rate debt. The interest rate swap contracts are not designated as hedges for accounting purposes. As a result, there is volatility in earnings for the unrealized exchange gains and losses on the interest rate swap contracts. Historically, the joint ventures have accumulated unrealized losses on the interest rate swap due to declining interest rates, which has resulted in liabilities for derivative financial instruments and an accumulated deficit in equity on their balance sheets.
There was no accrued income tax expense for the three months ended September 30, 2014 and 2013. Our joint ventures did not pay any dividends for the three months ended September 30, 2014 and 2013.
Operating Income. The following table sets forth details of our operating income for the three months ended September 30, 2014 and 2013:
Positive | ||||||||||||
Three Months Ended September 30, | (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Operating income (loss) | $ | 3,916 | $ | 6,939 | $ | 3,023 |
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Operating income for the three months ended September 30, 2014 was $6.9 million, an increase of $3.0 million from $3.9 million for the three months ended September 30, 2013. The increase in operating income was primarily due to the start of operations of thePGN FSRU Lampung. The positive variance from start of operations was partially offset by the decrease in the equity in earnings of joint ventures of $1.5 million and the lower margin on the construction contract for the Mooring of $2.2 million.
Interest Income. The following table sets forth details of our interest income for the three months ended September 30, 2014 and 2013:
Positive | ||||||||||||
Three Months Ended September 30, | (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Interest income | $ | 526 | $ | 1,542 | $ | 1,016 |
Interest income for the three months ended September 30, 2014 was $1.5 million, an increase of $1.0 million from $0.5 million for the three months ended September 30, 2013. Interest income is related to the interest accrued on the advances to our joint ventures and, starting in the third quarter of 2014, interest income on the demand note due from Höegh LNG. The increase was due to interest income on the demand note of $1.1 million which was partially offset by the decrease in interest income of $0.1 million on the shareholder loans compared with the same period of 2013. The decrease related to joint ventures is due to repayment by our joint ventures of a portion of the principal due under the shareholder loans between the periods. The interest rate under the shareholder loans is a fixed rate of 8.0% per year. We lent $140 million to Höegh LNG from net proceeds of the IPO pursuant to a demand note. The note is repayable on demand or we can elect to utilize the note as part of the purchase consideration in the event all or a portion of Höegh LNG’s interests in the FSRU,Independence, are purchased by the Partnership. The note bears interest at a rate of 5.88% per annum.
Interest Expense. The following table sets forth details of our interest expense for the three months ended September 30, 2014 and 2013:
Positive | ||||||||||||
Three Months Ended September 30, | (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Interest incurred | $ | (1,612 | ) | $ | (2,711 | ) | $ | (1,099 | ) | |||
Capitalized interest | $ | 1,601 | $ | — | $ | (1,601 | ) | |||||
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Interest expense | $ | (11 | ) | $ | (2,711 | ) | $ | (2,700 | ) | |||
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Interest expense for the three months ended September 30, 2014 was $2.7 million, an increase of $1.1 million from $1.6 million for the three months ended September 30, 2013. Interest expense consists of the interest incurred less the interest capitalized for the period. The interest incurred increased from $1.6 million for the three months ended September 30, 2013 to $2.7 million for the three months ended September 30, 2014 principally due to higher outstanding loan balances and higher amortization of deferred debt issuance costs. During 2013, loans and promissory notes due to owners and affiliates financed the construction of thePGN FSRU Lampung and the construction contract expenses of the Mooring. On March 4, 2014 and April 8, 2014, we drew $96 million and $161.1million, respectively, on the $299 million Lampung facility and subsequently $48.5 million was repaid on a promissory note to owners and affiliates. In July 3, 2014, the full principal amount of $32.1 million on the Mooring tranche and accrued interest was repaid. The deferred debt issuance cost associated with the Mooring tranche of the $299 million Lampung facility was fully amortized by the repayment date resulting in relatively high amortization charge for the three months ended September 30, 2014. For the three months ended September 30, 2014 and 2013, the amortization charge was $0.9 million and $0.1 million, respectively.
Most of the interest incurred was capitalized as part of the PGN FSRU Lampung newbuilding or included in the construction contract expense for the Mooring during the three months ended September 30, 2013. Capitalization of interest ceased in the middle of May 2014 when thePGN FSRU Lampung and the Mooring were substantially complete and therefore there was no interest capitalized for the three months ended September 30, 2014. Capitalized interest was $1.6 million for the three months ended September 30, 2013.
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Other Items, Net. The following table sets forth details of our other items for the three months ended September 30, 2014 and 2013:
Positive | ||||||||||||
Three Months Ended September 30, | (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Other items, net | $ | — | $ | (429 | ) | $ | (429 | ) |
Other items, net for the three months ended September 30, 2014 was $0.4 million, primarily due to withholding tax that is payable on interest expense for three months ended September 30, 2014 to parties outside of Singapore and Indonesia.
Income Before Tax. The following table sets forth details of our income before tax for the three months ended September 30, 2014 and 2013:
Positive | ||||||||||||
Three Months Ended September 30, | (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Income (loss) before tax | $ | 4,431 | $ | 5,341 | $ | 910 |
Income before tax for the three months ended September 30, 2014 was $5.3 million, an increase of $0.9 million from income before tax of $4.4 million for the three months ended September 30, 2013. The increase was primarily due to the start of operations of thePGN FSRU Lampung. The positive variance from start of operations was partially offset by the decrease in the equity in earnings of joint ventures of $1.5 million, the lower margin on the construction contract for the Mooring of $2.2 million and negative variance on total financial income (expense), net of $2.2 million.
Income Tax Expense. The following table sets forth details of our income tax expense for the three months ended September 30, 2014 and 2013:
Positive | ||||||||||||
Three Months Ended September 30, | (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Income tax expense | $ | — | $ | (143 | ) | $ | (143 | ) |
Income tax expense for the three months ended September 30, 2014 was $0.1 million, a negative variance of $0.1 million compared with the three months ended September 30, 2013. We are not subject to Marshall Islands income taxes. However, we are subject to tax for earnings in Indonesia and Singapore starting in the fourth quarter of 2013. For the three months ended September 30, 2014, the majority of income taxes related to the Singapore subsidiary primarily on net interest income.
A deferred tax benefit of $25 related to the unrealized losses on interest rate swaps accounted for as a cash flow hedge was recorded as a component of other comprehensive income in the unaudited interim consolidated combined carve-out statements of comprehensive income for the three months ended September 30, 2014.
For the three months ended September 30, 2013, none of our activities were in jurisdictions subject to tax.
Pursuant to the terms of thePGN FSRU Lampung time charter, we are reimbursed, as a component of time charter revenues, for income taxes arising in Indonesia related to time charter activities from the time charter commences.
Net Income. The following table sets forth details of our net income for the three months ended September 30, 2014 and 2013:
Positive | ||||||||||||
Three Months Ended September 30, | (negative) | |||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Net income (loss) | $ | 4,431 | $ | 5,198 | $ | 767 |
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As a result of the foregoing, net income for the three months ended September 30, 2014 was $5.2 million, an increase of $0.8 million compared with net income of $4.4 million for the three months ended September 30, 2013.
Segments
We have two segments, which are the “Majority Held FSRUs” and the “Joint Venture FSRUs.” In addition, unallocated corporate costs that are considered to benefit the entire organization and interest income from advances to our joint ventures are included in “Other.” As of September 30, 2014 and 2013, Majority Held FSRUs included thePGN FSRU Lampung and construction contract revenue and expenses of the Mooring under construction. The Mooring is being constructed on behalf of, and is being sold to, PGN using the percentage of completion method of accounting. As of September 30, 2014 and 2013, Joint Venture FSRUs included two 50.0%-owned FSRUs, theGDF Suez Neptune and theGDF Suez Cape Ann, each of which operates under a long-term time charter with GDF Suez.
We measure our segment profit based on Segment EBITDA. Segment EBITDA is reconciled to net income for each segment in the segment table below. Please read “Non-GAAP Financial Measures” for a definition of Segment EBITDA and a further reconciliation to net income, the comparable U.S. GAAP financial measure, for all periods presented.
Majority Held FSRUs. The following table sets forth details of segment results for the Majority Held FSRUs for the three months ended September 30, 2014 and 2013:
Three Months Ended | Positive | |||||||||||
Majority Held FSRUs | September 30, | (negative) | ||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Time charter revenues | $ | — | $ | 10,371 | $ | 10,371 | ||||||
Construction contract revenues | 11,636 | 6,153 | (5,483 | ) | ||||||||
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Total revenues | 11,636 | 16,524 | 4,888 | |||||||||
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Voyage & vessel operating expenses | — | (2,699 | ) | (2,699 | ) | |||||||
Administrative expenses | (1,117 | ) | (1,387 | ) | (270 | ) | ||||||
Construction contract expense | (10,107 | ) | (6,845 | ) | 3,262 | |||||||
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Segment EBITDA | 412 | 5,593 | 5,181 | |||||||||
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Depreciation and amortization | — | (329 | ) | (329 | ) | |||||||
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Operating income (loss) | 412 | 5,264 | 4,852 | |||||||||
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Financial income (expense), net | (11 | ) | (2,978 | ) | (2,967 | ) | ||||||
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Income (loss) before tax | 401 | 2,286 | 1,885 | |||||||||
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Income tax expense | — | (143 | ) | (143 | ) | |||||||
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Net income (loss) | $ | 401 | $ | 2,143 | $ | 1,742 | ||||||
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Time charter revenues for the three months ended September 30, 2014 were $10.4 million, an increase of $10.4 million from the three months ended September 30, 2013 due to the start of the time charter hire forPGN FSRU Lampung. Construction contract revenues for the three months ended September 30, 2014 were $6.2 million, a decrease of $5.4 million from $11.6 million for the three months ended September 30, 2013. The main reason for the decrease in construction contract revenue for the three months ended September 30, 2014 was less activity reflecting 94% project completion as of September 30, 2014 compared with 37% as of September 30, 2013.
Voyage and vessel operating expenses of $2.7 million for the three months ended September 30, 2014 were incurred in preparing for the start of the time charter, for LNG used during testing and vessel operations since the time charter commenced July 21, 2014. There were no corresponding expenses for the same period of 2013.
Administrative expenses for the three months ended September 30, 2014 were $1.4 million, an increase of $0.3 million from $1.1 million for the three months ended September 30, 2013. Higher expenses were due to higher activity related to thePGN FSRU Lampung, the Mooring and preparation for the start of operations.
Construction contract expense decreased by $3.3 million for the three months ended September 30, 2014 compared with the three months ended September 30, 2013 due to the advanced stage of completion of the Mooring construction project and the delay liquidated damages of approximately $6.1 million incurred during the three months ended September 30, 2014.
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Segment EBITDA for the three months ended September 30, 2014 was $5.6 million, an increase of $5.2 million from $0.4 million for the three months ended September 30, 2013 primarily to the start of time charter hire.
Joint Venture FSRUs. The following table sets forth details of segment results for the Joint Venture FSRUs for the three months ended September 30, 2014 and 2013:
Three Months Ended | Positive | |||||||||||
Joint Venture FSRUs | September 30, | (negative) | ||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Time charter revenues | $ | 10,694 | $ | 10,382 | $ | (312 | ) | |||||
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Vessel operating expenses | (2,329 | ) | (1,824 | ) | 505 | |||||||
Administrative expenses | (221 | ) | (305 | ) | (84 | ) | ||||||
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Segment EBITDA | 8,144 | 8,253 | 109 | |||||||||
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Depreciation and amortization | (2,262 | ) | (2,288 | ) | (26 | ) | ||||||
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Operating income | 5,882 | 5,965 | 83 | |||||||||
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Gain (loss) on derivative instruments | 3,200 | 1,378 | (1,822 | ) | ||||||||
Other income (expense), net | (4,533 | ) | (4,285 | ) | 248 | |||||||
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Net income (loss) | $ | 4,549 | $ | 3,058 | $ | (1,491 | ) | |||||
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The segment results for the Joint Venture FSRUs are presented using the proportionate consolidation method (which differs from the equity method used in the historical unaudited interim combined carve-out financial statements).
Total time charter revenues were $10.4 million and $10.7 million for the three months ended September 30, 2014 and 2013, respectively. The $0.3 million decrease is principally due to lower vessel operating expenses that are invoiced to the charterer on a pass through basis. Therefore, if the costs are lower, the revenue is correspondingly reduced.
Vessel operating expenses for the three months ended September 30, 2014 were $1.8 million, a decrease of $0.5 million compared to $2.3 million for the three months ended September 30, 2013. Vessel operating cost can vary between quarters depending on the stationing of the vessels and level of activity. In addition, the insurance cost for theGDF Suez Cape Ann was lower in 2014 than 2013 due to the modifications in 2013 of the vessel to be an FSRU. Administrative expenses for the three months ended September 30, 2014 increased $0.1 million compared with the three months ended September 30, 2013.
Segment EBITDA was $8.3 million for the three months ended September 30, 2014 compared with $8.1 million for the three months ended September 30, 2013.
Other.The following table sets forth details of results for the three months ended September 30, 2014 and 2013:
Three Months Ended | Positive | |||||||||||
Other | September 30, | (negative) | ||||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | variance | |||||||||
Administrative expenses | $ | (1,045 | ) | $ | (1,383 | ) | $ | (338 | ) | |||
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Segment EBITDA | (1,045 | ) | (1,383 | ) | (338 | ) | ||||||
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Operating income (loss) | (1,045 | ) | (1,383 | ) | (338 | ) | ||||||
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Interest income | 526 | 1,380 | 854 | |||||||||
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Income (loss) before tax | (519 | ) | (3 | ) | 516 | |||||||
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Income tax expense | — | — | — | |||||||||
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Net income (loss) | $ | (519 | ) | $ | (3 | ) | $ | 516 | ||||
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Administrative expenses and Segment EBITDA for the three months ended September 30, 2014 was $1.4 million, an increase of $0.3 million from $1.1 million for the three months ended September 30, 2013. “Other” includes unallocated corporate costs that are considered to benefit the entire organization. For the three months ended September 30, 2014, expenses of $0.6 million were incurred for preparation for the IPO, a decrease of $0.2 million from $0.8 million for the three months ended September 30, 2013. The remaining increase in administrative expenses of approximately $0.5 million relates to a combination of higher allocated and actual cost in the three months ended September 30, 2014 compared with the allocations in the three months ended September 30, 2013.
Interest income, which is not part of the segment measure of profits, is related to the interest accrued on the advances to our joint ventures and our $140 demand note from Höegh LNG.
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 borrowings from commercial banks and debt and equity financings. The liquidity requirements of our joint ventures relate to the servicing of debt, including repayment of shareholder loans, funding working capital and maintaining cash reserves against fluctuations in operating cash flows. With the start of operation of thePGN FSRU Lampung under her time charter, we believe our cash flows from operations and repayment of principal from our advances to our joint ventures will be sufficient to meet our debt amortization and working capital needs and maintain cash reserves against fluctuations in operating cash flows. In connection the IPO, we entered into an $85 million sponsor credit facility with Höegh LNG, which we believe will provide us with adequate liquidity to fund our distributions given our expected level of debt amortization. We believe our current resources, including the sponsor credit facility, are sufficient to meet our working capital requirements for our current business. Generally, our long-term source of funds will be cash from operations, long-term bank borrowings and other debt and equity financings. Because we will distribute all of our available cash, we expect that we will rely upon external financing sources, including bank borrowings and the issuance of debt and equity securities, to fund acquisitions and other expansion capital expenditures.
In addition, during the second quarter of 2014, we received a partial payment from PGN for the Mooring. This cash was used to fund certain of our obligations for funding thePGN FSRU Lampung and the Mooring such that we did not draw the remaining outstanding balance of $12.1 million on the $299 million Lampung facility. We have received acceptance from PGN for thePGN FSRU Lampung project which also entitles us to invoice for the final Mooring payment. We expect to use part of the cash from the prior Mooring payment and the final payment to: 1) fund a restricted cash account of approximately $16 million that can only be used for settlement of loan payments as required by the Lampung facility agreement such that we will not need to build up the balance of restricted cash from future cash flows from operations; and 2) repay approximately $7.9 million of outstanding debt on the Lampung facility such that our future debt service requirements will be reduced.
Cash Flows
The following table summarizes our net cash flows from operating, investing and financing activities and our cash and cash equivalents for the periods presented:
Nine months ended | ||||||||
September 30, | ||||||||
(in thousands of U.S. dollars) | 2013 | 2014 | ||||||
Net cash provided by (used in) operating activities | $ | (26,142 | ) | $ | 23,632 | |||
Net cash used in investing activities | (27,798 | ) | (166,420 | ) | ||||
Net cash provided by financing activities | 53,940 | 188,016 | ||||||
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Increase (decrease) in cash and cash equivalents | — | 45,228 | ||||||
Cash and cash equivalents, beginning of period | 100 | 108 | ||||||
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Cash and cash equivalents, end of period | $ | 100 | $ | 45,336 | ||||
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Net Cash Provided by (Used in) Operating Activities
Net cash provided by operating activities was $23.6 million for the nine months ended September 30, 2014 compared with net cash used in operating activities of $26.1 million for the nine months ended September 30, 2013. Cash flows from operating activities reflect that part of the mooring payment was received in 2014 and the time charter hire commenced for thePGN FSRU Lampung while the FSRU has not been delivered and started operations in the corresponding period of 2013.
Net Cash Used in Investing Activities
Net cash used in investing activities was $166.4 million and $27.8 million for the nine months ended September 30, 2014 and 2013, respectively. The increase in net cash used in investing activities of $138.6 million between the periods was mainly the result of the final 60.0% payment and payments for change orders in the second quarter of 2014 at delivery of thePGN FSRU Lampung.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $188.0 million and $53.9 million for the nine months ended September 30, 2014 and 2013, respectively.
Net cash provided by financing activities during the nine months ended September 30, 2014 was impacted by the closing of our IPO and the application of funds. We received net proceeds, after deduction for the underwriters’ discounts and expenses of the offering, of $203.5 million. We lent $140 million to Höegh LNG pursuant to an interest bearing demand note and distributed $43.5 million in cash from the proceeds to Höegh LNG. We kept $20 million of the IPO proceeds for general partnership purposes.
In addition, we drew $257.1 million on the $299 million Lampung facility that was used for payments for the contractual commitments for thePGN FSRU Lampung and the Mooring construction contract expenses. Part of the proceeds of the debt was use to repay $73.9 million of amounts, loans and promissory notes from owners and affiliates. Following the first Mooring payment, we also repaid the full Mooring tranche of $32.1 million on July 3, 2014.
During the nine months ended September 30, 2013, most of our funding was provided by $59.6 million drawn on loans and promissory notes from owners and affiliates.
As a result of the foregoing, cash and cash equivalents increased by $45.2 million for the nine months ended September 30, 2014 and zero for the nine months ended September 30, 2013. Approximately $18.6 million of the cash is held by our subsidiary owning thePGN FSRU Lampung and will be used to cover any remaining commitments for the FSRU and Mooring, operating commitments and to make an early repayment of approximately $7.9 million on the $299 million Lampung facility.
Qualitative and Quantitative Disclosures About Market Risk
We are exposed to various market risks, including foreign exchange risk, interest rate risk, credit risk and concentrations of risk.
Foreign exchange risk
All revenues, financing, interest expenses from financing and most expenditures for newbuildings are denominated in U.S. dollars. Certain operating expenses are denominated in currencies other than U.S. dollars. For the three and nine months ended September 30, 2014 and 2013, no derivative financial instruments have been used to manage foreign exchange risk.
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Interest rate risk
Interest rate swaps can be utilized to exchange a receipt of floating interest for a payment of fixed interest to reduce the exposure to interest rate variability on its outstanding floating-rate debt. As of September 30, 2014, there are forward starting interest rate swap agreements on the $299 million Lampung floating rate debt that are designated as cash flow hedges for accounting purposes. No derivative instruments were outstanding as of December 31, 2013. As of September 30, 2014, the following interest rate swap agreements were outstanding:
(in thousands of U.S. dollars) | Interest rate index | Notional amount | Fair value carrying amount liability | Term | Fixed interest rate (1) | |||||||||||||||
LIBOR-based debt | ||||||||||||||||||||
Interest rate swaps (2) | LIBOR | $ | 237,100 | $ | (7,416 | ) | | Sept 2026 | | 2.8 | % |
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. |
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, demand note due from Höegh LNG and interest rate swap agreements, if applicable. In order to minimize counterparty risk, bank relationships are established with counterparties with acceptable credit ratings at the time of the transactions. Vessels are generally chartered to international counterparties in the energy sector with appropriate credit ratings. Höegh LNG has incentives to honor its commitments to the Partnership given its ownership of the Partnership’s general partner, IDRs, common and subordinated units.
Concentrations 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, unbilled construction contract income, demand note from owner and derivative contracts (interest rate swaps). The maximum exposure to loss due to credit risk is the book value at the balance sheet date. 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. Credit risk related to receivables is limited by performing ongoing credit evaluations of the customers’ financial condition. In addition, some of the time charters require the payment of the time charter rates on the first banking day of the month of hire which limits the risk of non-performance. The Partnership has no significant advances for construction since thePGN FSRU Lampung and the Mooring were delivered to us in the second quarter of 2014.
Non-GAAP Financial Measures
Segment EBITDA and Adjusted 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). Adjusted EBITDA is defined as earnings before interest, depreciation and amortization, taxes, other financial items and cash collections on direct financial lease investments. Cash collections on direct finance lease investments consist of the difference between the payments under the time charter and the revenues recognized as a financial lease (representing the repayment of the principal recorded as a receivable). Segment EBITDA and Adjusted EBITDA are used as supplemental financial measures by management and external users of financial statements, such as our lenders, to assess our financial and operating performance. We believe that Segment EBITDA assists our management and investors by increasing the comparability of our performance from period to period and against the performance of other companies in our industry that provide Segment EBITDA information. This increased comparability is achieved by excluding the potentially disparate effects between
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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. We believe that including Segment EBITDA as a financial and operating measure benefits investors in (a) selecting between investing in us and other investment alternatives and (b) monitoring our ongoing financial and operational strength in assessing whether to continue to hold common units. We believe Adjusted EBITDA benefits investors in comparing our results to other investment alternatives that account for time charters as operating leases rather than financial leases. Segment EBITDA and Adjusted EBITDA should not be considered alternatives to net income, operating income, cash flow from operating activities or any other measure of financial performance presented in accordance with U.S. GAAP. Segment EBITDA and Adjusted EBITDA exclude some, but not all, items that affect net income, and these measures may vary among other companies. Therefore, Segment EBITDA and Adjusted EBITDA as presented below may not be comparable to similarly titled measures of other companies. The following tables reconcile Segment EBITDA and Adjusted EBITDA for each of the segments and the Partnership as a whole (combined carve-out reporting) to net income (loss), the comparable U.S. GAAP financial measure, for the periods presented:
Nine Months Ended September 30, 2014 | ||||||||||||||||||||
Joint venture | Consolidated | |||||||||||||||||||
Majority | FSRUs | Total | & combined | |||||||||||||||||
held | (proportional | Segment | carve-out | |||||||||||||||||
(in thousands of U.S. dollars) | FSRUs | consolidation) | Other | reporting | reporting | |||||||||||||||
Reconciliation to net income (loss) | ||||||||||||||||||||
Net income (loss) | $ | (318 | ) | (738 | ) | (2,816 | ) | (3,872 | ) | $ | (3,872 | ) | ||||||||
Interest income | — | — | (2,443 | ) | (2,443 | ) | (2,443 | ) | ||||||||||||
Interest expense, net (1) | 4,842 | 12,897 | 162 | 17,901 | 5,004 | |||||||||||||||
Depreciation and amortization | 1,309 | 6,861 | — | 8,170 | 1,309 | |||||||||||||||
Income tax (benefit) expense | 376 | — | — | 376 | 376 | |||||||||||||||
Equity in earnings of JVs: Interest (income) expense, net | — | — | — | — | 12,897 | |||||||||||||||
Equity in earnings of JVs: Depreciation and amortization | — | — | — | — | 6,861 | |||||||||||||||
Other financial items(2) | 1,321 | 5,549 | — | 6,870 | 1,321 | |||||||||||||||
Equity in earnings of JVs: Other financial items(2) | — | — | — | — | 5,549 | |||||||||||||||
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Segment EBITDA | 7,530 | 24,569 | (5,097 | ) | 27,002 | 27,002 | ||||||||||||||
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Cash collection/ principal payment on direct financing lease | 662 | — | — | 662 | 662 | |||||||||||||||
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Adjusted EBITDA | $ | 8,192 | 24,569 | (5,097 | ) | 27,664 | $ | 27,664 | ||||||||||||
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Nine Months Ended September 30, 2013 | ||||||||||||||||||||
(in thousands of U.S. dollars) | Majority held FSRUs | Joint venture FSRUs (proportional consolidation) | Other | Total Segment reporting | Combined carve-out reporting | |||||||||||||||
Reconciliation to net income (loss) | ||||||||||||||||||||
Net income (loss) | $ | 2,345 | 32,309 | (567 | ) | 34,087 | $ | 34,087 | ||||||||||||
Interest income | — | — | (1,617 | ) | (1,617 | ) | (1,617 | ) | ||||||||||||
Interest expense, net(1) | 34 | 13,608 | — | 13,642 | 34 | |||||||||||||||
Depreciation and amortization | — | 6,785 | — | 6,785 | — | |||||||||||||||
Income tax (benefit) expense | — | — | — | — | — | |||||||||||||||
Equity in earnings of JVs: Interest (income) expense, net | — | — | — | — | 13,608 | |||||||||||||||
Equity in earnings of JVs: Depreciation and amortization | — | — | — | — | 6,785 | |||||||||||||||
Other financial items(2) | — | (28,461 | ) | — | (28,461 | ) | — | |||||||||||||
Equity in earnings of JVs: Other financial items(2) | — | — | — | — | (28,461 | ) | ||||||||||||||
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Segment EBITDA | 2,379 | 24,241 | (2,184 | ) | 24,436 | 24,436 | ||||||||||||||
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Cash collection/ principal payment on direct financing lease | — | — | — | — | — | |||||||||||||||
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Adjusted EBITDA | $ | 2,379 | 24,241 | (2,184 | ) | 24,436 | 24,436 | |||||||||||||
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Three Months Ended September 30, 2014 | ||||||||||||||||||||
Joint venture | Consolidated | |||||||||||||||||||
Majority | FSRUs | Total | & combined | |||||||||||||||||
held | (proportional | Segment | carve-out | |||||||||||||||||
(in thousands of U.S. dollars) | FSRUs | consolidation) | Other | reporting | reporting | |||||||||||||||
Reconciliation to net income (loss) | ||||||||||||||||||||
Net income (loss) | $ | 2,143 | 3,058 | (3 | ) | 5,198 | $ | 5,198 | ||||||||||||
Interest income | — | — | (1,542 | ) | (1,542 | ) | (1,542 | ) | ||||||||||||
Interest expense, net (1) | 2,549 | 4,285 | 162 | 6,996 | 2,711 | |||||||||||||||
Depreciation and amortization | 329 | 2,288 | — | 2,617 | 329 | |||||||||||||||
Income tax (benefit) expense | 143 | — | — | 143 | 143 | |||||||||||||||
Equity in earnings of JVs: Interest (income) expense, net | — | — | — | — | 4,285 | |||||||||||||||
Equity in earnings of JVs: Depreciation and amortization | — | — | — | — | 2,288 | |||||||||||||||
Other financial items(2) | 429 | (1,378 | ) | — | (949 | ) | 429 | |||||||||||||
Equity in earnings of JVs: Other financial items(2) | — | — | — | — | (1,378 | ) | ||||||||||||||
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Segment EBITDA | 5,593 | 8,253 | (1,383 | ) | 12,463 | 12,463 | ||||||||||||||
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Cash collection/ principal payment on direct financing lease | 662 | — | — | 662 | 662 | |||||||||||||||
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Adjusted EBITDA | $ | 6,255 | 8,253 | (1,383 | ) | 13,125 | $ | 13,125 | ||||||||||||
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Three Months Ended September 30, 2013 | ||||||||||||||||||||
(in thousands of U.S. dollars) | Majority held FSRUs | Joint venture FSRUs (proportional consolidation) | Other | Total Segment Reporting | Combined carve-out reporting | |||||||||||||||
Reconciliation to net income (loss) | ||||||||||||||||||||
Net income (loss) | $ | 401 | 4,549 | (519 | ) | 4,431 | $ | 4,431 | ||||||||||||
Interest income | — | — | (526 | ) | (526 | ) | (526 | ) | ||||||||||||
Interest expense, net(1) | 11 | 4,533 | — | 4,544 | 11 | |||||||||||||||
Depreciation and amortization | — | 2,262 | — | 2,262 | — | |||||||||||||||
Income tax (benefit) expense | — | — | — | — | — | |||||||||||||||
Equity in earnings of JVs: Interest (income) expense, net | — | — | — | — | 4,533 | |||||||||||||||
Equity in earnings of JVs: Depreciation and amortization | — | — | — | — | 2,262 | |||||||||||||||
Other financial items(2) | — | (3,200 | ) | — | (3,200 | ) | — | |||||||||||||
Equity in earnings of JVs: Other financial items(2) | — | — | — | — | (3,200 | ) | ||||||||||||||
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Segment EBITDA | 412 | 8,144 | (1,045 | ) | 7,511 | 7,511 | ||||||||||||||
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Cash collection/ principal payment on direct financing lease | — | — | — | — | — | |||||||||||||||
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Adjusted EBITDA | $ | 412 | 8,144 | (1,045 | ) | 7,511 | $ | 7,511 | ||||||||||||
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(1) | Interest expense, net includes intercompany interest income that eliminates for the Total Segment and Consolidated and combined carve-out reporting. |
(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. |
26
Table of Contents
This report on Form 6-K 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 our 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:
• | FSRU and LNG carrier market trends, including hire rates and factors affecting supply and demand; |
• | our anticipated growth strategies; |
• | our anticipated receipt of dividends and repayment of indebtedness from joint ventures; |
• | 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 and insurance costs; |
• | our ability to make cash distributions on the units and the amount of any borrowings that may be necessary to make such distributions; |
• | our ability to comply with financing agreements and the expected effect of restrictions and covenants in such agreements; |
• | the future financial condition of our existing or future customers; |
• | our ability to make additional borrowings and to access public equity and debt capital markets; |
• | planned capital expenditures and availability of capital resources to fund capital expenditures; |
• | the exercise of purchase options by our customers; |
• | our ability to maintain long-term relationships with our customers; |
• | our ability to leverage Höegh LNG’s relationships and reputation in the shipping industry; |
• | our ability to purchase vessels from Höegh LNG in the future, including the FSRUIndependence and Höegh LNG’s two FSRU newbuildings; |
• | our continued ability to enter into long-term, fixed-rate charters; |
• | our ability to maximize the use of our vessels, including the redeployment or disposition of vessels no longer under long-term charters; |
• | expected pursuit of strategic opportunities, including the acquisition of vessels; |
• | 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 expected 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; |
• | expected demand in the LNG shipping sector in general and the demand for vessels in particular; |
• | availability of skilled labor, vessel crews and management; |
• | 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 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; |
• | potential disruption of shipping routes due to accidents, political events, piracy or acts by terrorists; |
• | future sales of our common units in the public market; |
• | our business strategy and other plans and objectives for future operations; and |
• | other factors listed from time to time in the reports and other documents that we file with the SEC, including our Registration Statement on Form F-1 for the IPO, which was declared effective on August 7, 2014. |
27
Table of Contents
All forward-looking statements included in this Report on Form 6-K are made only as of the date of this release. New factors emerge from time to time, and it is not possible for us to predict all of these factors. Further, we cannot assess the impact of each such factor on our 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. We do not intend to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with respect thereto or any change in events, conditions or circumstances on which any such statement is based.
28
Table of Contents
HÖEGH LNG PARTNERS LP
INDEX TO UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED
CARVE- OUT FINANCIAL STATEMENTS
Page | ||||
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-6 | ||||
F-7 | ||||
Notes to the Unaudited Condensed Interim Consolidated and Combined Carve-Out Financial Statements | F-9 |
F-1
Table of Contents
HÖEGH LNG PARTNERS LP
UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED CARVE-OUT
STATEMENTS OF INCOME
(in thousands of U.S. dollars except per unit amounts)
Three months ended | Nine months ended | |||||||||||||||||
September 30, | September 30, | |||||||||||||||||
Notes | 2014 | 2013 | 2014 | 2013 | ||||||||||||||
REVENUES | ||||||||||||||||||
Time charter revenues | 13,14 | $ | 10,371 | — | 10,371 | $ | — | |||||||||||
Construction contract revenues | 5 | 6,153 | 11,636 | 42,765 | 33,992 | |||||||||||||
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Total revenues | 4 | 16,524 | 11,636 | 53,136 | 33,992 | |||||||||||||
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OPERATING EXPENSES | ||||||||||||||||||
Voyage expenses | (798 | ) | — | (798 | ) | — | ||||||||||||
Vessel operating expenses | (1,901 | ) | — | (3,046 | ) | — | ||||||||||||
Construction contract expenses | 5,13,14 | (6,845 | ) | (10,107 | ) | (37,579 | ) | (28,457 | ) | |||||||||
Administrative expenses | (2,770 | ) | (2,162 | ) | (9,280 | ) | (5,340 | ) | ||||||||||
Depreciation and amortization | 10 | (329 | ) | — | (1,309 | ) | — | |||||||||||
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Total operating expenses | (12,643 | ) | (12,269 | ) | (52,012 | ) | (33,797 | ) | ||||||||||
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Equity in earnings (losses) of joint ventures | 4,12 | 3,058 | 4,549 | (738 | ) | 32,309 | ||||||||||||
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Operating income (loss) | 4 | 6,939 | 3,916 | 386 | 32,504 | |||||||||||||
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FINANCIAL INCOME (EXPENSES), NET | ||||||||||||||||||
Interest income | 13 | 1,542 | 526 | 2,443 | 1,617 | |||||||||||||
Interest expense | 13 | (2,711 | ) | (11 | ) | (5,004 | ) | (34 | ) | |||||||||
Other items, net | (429 | ) | — | (1,321 | ) | — | ||||||||||||
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Total financial income (expense), net | 6 | (1,598 | ) | 515 | (3,882 | ) | 1,583 | |||||||||||
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Income (loss) before tax | 5,341 | 4,431 | (3,496 | ) | 34,087 | |||||||||||||
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Income tax expense | 7 | (143 | ) | — | (376 | ) | — | |||||||||||
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Net income (loss) | 4 | $ | 5,198 | 4,431 | (3,872 | ) | $ | 34,087 | ||||||||||
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Earnings per unit | 19 | |||||||||||||||||
Common unit public (basic and diluted) | $ | 0.2628 | — | — | — | |||||||||||||
Common unit Höegh LNG (basic and diluted) | $ | 0.2628 | — | — | — | |||||||||||||
Subordinated unit (basic and diluted) | $ | 0.2628 | — | — | — |
The accompanying notes are an integral part of the unaudited condensed interim consolidated and combined
carve-out financial statements.
F-2
Table of Contents
HÖEGH LNG PARTNERS LP
UNAUDITED CONDENSED INTERIM COMBINED CONSOLIDATED AND CARVE-OUT
STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of U.S. dollars)
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Net income (loss) | $ | 5,198 | 4,431 | (3,872 | ) | $ | 34,087 | |||||||||
Unrealized gains (losses) on cash flow hedge | (100 | ) | — | (7,416 | ) | — | ||||||||||
Income tax benefit | 25 | — | 1,854 | — | ||||||||||||
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Other comprehensive income (loss) | (75 | ) | — | (5,562 | ) | — | ||||||||||
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Comprehensive income (loss) | $ | 5,123 | 4,431 | (9,434 | ) | $ | 34,087 | |||||||||
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The accompanying notes are an integral part of the unaudited condensed interim consolidated and combined
carve-out financial statements.
F-3
Table of Contents
HÖEGH LNG PARTNERS LP
UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED CARVE-OUT
BALANCE SHEETS
(in thousands of U.S. dollars)
As of | ||||||||||
September 30, | December 31, | |||||||||
Notes | 2014 | 2013 | ||||||||
ASSETS | ||||||||||
Current assets | ||||||||||
Cash and cash equivalents | 15 | $ | 45,336 | $ | 108 | |||||
Restricted cash | 15 | 21,905 | — | |||||||
Trade receivables | 7,383 | — | ||||||||
Unbilled construction contract income | 5 | 3,864 | 54,473 | |||||||
Demand note due from owner | 13,15 | 141,120 | — | |||||||
Advances to joint ventures | 8,15 | 6,975 | 7,112 | |||||||
Deferred debt issuance cost | 2,644 | 2,725 | ||||||||
Bunkers | 2,670 | — | ||||||||
Current portion of net investment in direct financing lease | 4,9 | 2,807 | — | |||||||
Current deferred tax asset | 7 | 1,306 | — | |||||||
Prepaid expenses and other receivables | 2,659 | 705 | ||||||||
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Total current assets | 238,669 | 65,123 | ||||||||
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Long-term assets | ||||||||||
Restricted cash | 15 | — | 10,700 | |||||||
Newbuildings | 4,10,13 | — | 122,517 | |||||||
Other equipment | 62 | 85 | ||||||||
Advances to joint ventures | 8,15 | 13,637 | 17,398 | |||||||
Deferred debt issuance cost | 13,172 | 6,931 | ||||||||
Deferred charges | — | 3,912 | ||||||||
Net investment in direct financing lease | 4,9 | 291,516 | — | |||||||
Long-term deferred tax asset | 7 | 548 | 64 | |||||||
Other long-term assets | 26,333 | — | ||||||||
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Total long-term assets | 345,268 | 161,607 | ||||||||
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Total assets | 4 | $ | 583,937 | $ | 226,730 | |||||
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The accompanying notes are an integral part of the unaudited condensed interim consolidated and combined
carve-out financial statements.
F-4
Table of Contents
HÖEGH LNG PARTNERS LP
UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED CARVE-OUT
BALANCE SHEETS
(in thousands of U.S. dollars)
As of | ||||||||||
September 30, | December 31, | |||||||||
Notes | 2014 | 2013 | ||||||||
LIABILITIES AND EQUITY | ||||||||||
Current liabilities | ||||||||||
Current portion of long-term debt | 11 | $ | 21,503 | $ | — | |||||
Trade payables | 6,969 | — | ||||||||
Amounts due to owners and affiliates | 13,15 | 4,940 | 15,207 | |||||||
Loans and promissory notes due to owners and affiliates | 2a,3,13,15 | 812 | 193,430 | |||||||
Value added and withholding tax liability | — | 2,987 | ||||||||
Derivative financial instruments | 15,16 | 5,473 | — | |||||||
Current deferred tax liability | 7 | — | 64 | |||||||
Accrued liabilities and other payables | 18,651 | 7,843 | ||||||||
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Total current liabilities | 58,348 | 219,531 | ||||||||
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Long-term liabilities | ||||||||||
Accumulated losses of joint ventures | 4,12 | 55,038 | 54,300 | |||||||
Long-term debt | 11 | 203,496 | — | |||||||
Derivative financial instruments | 15,16 | 1,943 | — | |||||||
Prepaid and deferred revenue | — | 934 | ||||||||
Other long-term liabilities | 26,298 | — | ||||||||
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Total long-term liabilities | 286,775 | 55,234 | ||||||||
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Total liabilities | 345,123 | 274,765 | ||||||||
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EQUITY | ||||||||||
Owner’s equity | — | (48,035 | ) | |||||||
Common units public | 206,368 | — | ||||||||
Common units Höegh LNG | 5,266 | — | ||||||||
Subordinated units | 32,742 | — | ||||||||
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Total Partners’ capital | 244,376 | — | ||||||||
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Accumulated other comprehensive income | (5,562 | ) | — | |||||||
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Total equity | 2a,3 | 238,814 | (48,035 | ) | ||||||
| �� |
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Total liabilities and equity | $ | 583,937 | $ | 226,730 | ||||||
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The accompanying notes are an integral part of the unaudited condensed interim consolidated and combined
carve-out financial statements.
F-5
Table of Contents
HÖEGH LNG PARTNERS LP
UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED CARVE-OUT
STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL/OWNER’S EQUITY
(in thousands of U.S. dollars)
Owner’s Equity | Common Units Public | Common Units Höegh LNG | Sub- ordinated Units | Accumulated Other Comprehensive Income | Total Partners’ Capital/ Owner’s Equity | |||||||||||||||||||
Combined carve-out balance as of January 1, 2013 | $ | (53,229 | ) | — | — | — | — | $ | (53,229 | ) | ||||||||||||||
Carve-out net income | 40,527 | — | — | — | — | 40,527 | ||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | ||||||||||||||||||
Carve-out distributions to owner, net | (35,333 | ) | — | — | — | — | (35,333 | ) | ||||||||||||||||
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Combined carve-out balance as of December 31, 2013 | (48,035 | ) | — | — | — | — | (48,035 | ) | ||||||||||||||||
Carve-out net loss (January 1- August 12, 2014) | (10,786 | ) | — | — | — | — | (10,786 | ) | ||||||||||||||||
Other comprehensive loss | — | — | — | — | (5,900 | ) | (5,900 | ) | ||||||||||||||||
Conversion of promissory note to equity | 101,500 | — | — | — | — | 101,500 | ||||||||||||||||||
Carve-out distributions to owner, net | (11,039 | ) | — | — | — | — | (11,039 | ) | ||||||||||||||||
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Combined carve-out balance as of August 12, 2014 | 31,640 | — | — | — | (5,900 | ) | 25,740 | |||||||||||||||||
Elimination of equity (note 2) | 45,799 | — | — | — | — | 45,799 | ||||||||||||||||||
Allocation of partnership capital to unitholders August 12, 2014 | (77,439 | ) | — | 10,730 | 66,709 | — | — | |||||||||||||||||
Net proceeds from IPO net of underwriters’ discounts, fees and expenses of offering (note 3) | — | 203,467 | — | — | — | 203,467 | ||||||||||||||||||
Cash distribution of initial public offering proceeds to Höegh LNG | — | — | (6,023 | ) | (37,444 | ) | — | (43,467 | ) | |||||||||||||||
Post-initial public offering net income | 2,901 | 556 | 3,457 | — | 6,914 | |||||||||||||||||||
Other comprehensive income | — | — | — | — | 338 | 338 | ||||||||||||||||||
Contribution to equity | — | — | 3 | 20 | — | 23 | ||||||||||||||||||
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Consolidated balance as of September 30, 2014 | $ | — | 206,368 | 5,266 | 32,742 | (5,562 | ) | $ | 238,814 | |||||||||||||||
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The accompanying notes are an integral part of the unaudited condensed interim consolidated and combined
carve-out financial statements.
F-6
Table of Contents
HÖEGH LNG PARTNERS LP
UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED CARVE-OUT
STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars)
Nine months ended | ||||||||
September 30, | ||||||||
2014 | 2013 | |||||||
OPERATING ACTIVITIES | ||||||||
Net income (loss) | $ | (3,872 | ) | $ | 34,087 | |||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
Depreciation and amortization | 1,309 | — | ||||||
Equity in earnings of joint ventures | 738 | (32,309 | ) | |||||
Accrued interest income on advances to joint ventures and demand note | (1,975 | ) | (1,054 | ) | ||||
Amortization of deferred debt issuance cost | 3,048 | 285 | ||||||
Accrued interest expense on loans from owners | 774 | 11 | ||||||
Refundable value added tax liability on import | (26,298 | ) | — | |||||
Changes in working capital: | ||||||||
Restricted cash | (8,512 | ) | — | |||||
Trade receivables | (7,383 | ) | — | |||||
Unbilled construction contract income | 50,609 | (33,992 | ) | |||||
Bunkers | (2,670 | ) | — | |||||
Prepaid expenses and other receivables | (2,106 | ) | (114 | ) | ||||
Trade payables | 6,969 | 2,824 | ||||||
Amounts due to owners and affiliates | 4,940 | — | ||||||
Value added and withholding tax liability | (3,293 | ) | — | |||||
Accrued liabilities and other payables | 11,354 | 4,120 | ||||||
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Net cash provided by (used in) operating activities | 23,632 | (26,142 | ) | |||||
|
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| |||||
INVESTING ACTIVITIES | ||||||||
Expenditure for newbuildings and other equipment | (169,143 | ) | (31,760 | ) | ||||
Receipts from repayment of principal on advances to joint ventures | 4,753 | 3,962 | ||||||
Receipts from repayment of principal on direct financing lease | 663 | — | ||||||
(Increase) decrease in restricted cash | (2,693 | ) | — | |||||
|
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| |||||
Net cash used in investing activities | (166,420 | ) | (27,798 | ) | ||||
|
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|
|
The accompanying notes are an integral part of the unaudited condensed interim consolidated and combined
carve-out financial statements.
F-7
Table of Contents
HÖEGH LNG PARTNERS LP
UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED CARVE-OUT
STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars)
Nine months ended | ||||||||
September 30, | ||||||||
2014 | 2013 | |||||||
FINANCING ACTIVITIES | ||||||||
Proceeds from long-term debt | $ | 257,099 | $ | — | ||||
Proceeds from amounts due to owners and affiliates | 10,193 | — | ||||||
Proceeds from loans and promissory notes due to owners and affiliates | 650 | 59,585 | ||||||
Repayment of long-term debt | (32,100 | ) | — | |||||
Repayment of amounts due to owners and affiliates | (25,400 | ) | — | |||||
Repayment of loans and promissory notes due to owners and affiliates | (48,500 | ) | — | |||||
Contributions from (distributions to) owner | (11,016 | ) | (4,028 | ) | ||||
Customer loan for funding of value added liability on import | 26,298 | — | ||||||
Payment of debt issuance cost | (9,208 | ) | (1,617 | ) | ||||
Proceeds from initial public offering, net of underwriters’ discounts and expenses of offering (note 3) | 203,467 | — | ||||||
Cash from proceeds of initial public offering distributed to Höegh LNG | (43,467 | ) | — | |||||
Payment of demand note due from Höegh LNG | (140,000 | ) | — | |||||
|
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|
| |||||
Net cash provided by financing activities | 188,016 | 53,940 | ||||||
|
|
|
| |||||
Increase (decrease) in cash and cash equivalents | 45,228 | — | ||||||
Cash and cash equivalents, beginning of period | 108 | 100 | ||||||
|
|
|
| |||||
Cash and cash equivalents, end of period | $ | 45,336 | $ | 100 | ||||
|
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|
|
The accompanying notes are an integral part of the unaudited condensed interim consolidated and combined
carve-out financial statements.
F-8
Table of Contents
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED
CARVE-OUT FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
1. Description of business
Höegh LNG Partners LP (the “Partnership”) was formed under the laws of the Marshall Islands on April 28, 2014 as an indirect 100% owned subsidiary of Höegh LNG Holdings Ltd. (“Höegh LNG”) for the purpose of acquiring Höegh LNG’s interests in Hoegh LNG Lampung Pte. Ltd., PT Hoegh LNG Lampung (the owner of thePGN FSRU Lampung and the Tower Yoke Mooring System), SRV Joint Gas Ltd. (the owner of theGDF Suez Neptune), and SRV Joint Gas Two Ltd. (the owner of theGDF Suez Cape Ann) in connection with the Partnership’s initial public offering of its common units (the “IPO”).
On August 12, 2014, the Partnership completed its IPO. Prior to the closing of the IPO, Höegh LNG contributed to the Partnership all of its equity interests and loans and promissory notes due to it and affiliates in each of the entities owning theGDF Suez Neptune, theGDF Suez Cape Ann and thePGN FSRU Lampung. The transfer of the interests was recorded at Höegh LNG’s consolidated book values. At the closing of the IPO (including the exercise by the underwriters of the option to purchase an additional 1,440,000 common units), (i) 11,040,000 common units were sold to the public for net proceeds, after deduction of offering expenses, of $203.5 million; (ii) Höegh LNG owned 2,116,060 common units and 13,156,060 subordinated units, representing approximately 58% of the limited partner interest in the Partnership, and 100% of the incentive distribution rights (“IDRs”) and (iii) a wholly owned subsidiary of Höegh LNG owned the non-economic general partner interest in the Partnership, as further described in note 3.
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 and combined carve-out financial statements. The joint ventures and the subsidiaries are, collectively, referred to as the “Combined Entities” in the combined carve-out financial statements. ThePGN FSRU Lampung, theGDF Suez Neptune and theGDF Suez Cape Ann are floating storage regasification units (“FSRUs”) and, collectively, referred to in these consolidated and combined carve-out 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 will transport the gas to a land terminal. PT Hoegh LNG Lampung and the two joint ventures, SRV Joint Gas Ltd. and SRV Joint Gas Two Ltd., are collectively referred to as the “FSRU-owning entities.”
TheGDF Suez Neptune and theGDF Suez Cape 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 to extend for up to 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 will use the Mooring that was constructed and installed for the charterer and is being sold to PT PGN LNG, a subsidiary of Perusahaan Gas Negara (Persero) Tbk (“PGN”).
The following table lists the entities included in these consolidated and combined carve-out financial statements and their purpose as of September 30, 2014.
Name | Jurisdiction of Incorporation | Purpose | ||
Höegh LNG Partners LP | Marshall Islands | Holding Company | ||
Höegh LNG Partners Operating LLC (100% owned) | Marshall Islands | Holding Company | ||
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 | OwnsGDF Suez Neptune | ||
SRV Joint Gas Two Ltd. (50% owned) (2) | Cayman Islands | OwnsGDF Suez Cape Ann |
(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 and combined carve-out 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. |
F-9
Table of Contents
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED
CARVE-OUT FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
2. Significant accounting policies
a. | Basis of presentation |
The accompanying condensed consolidated and combined carve-out 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 and combined carve-out financial statements should be read in conjunction with the audited combined carve-out financial statements for the year ended December 31, 2013, included in the Partnership’s Registration Statement on Form F-1 declared effective by the SEC on August 7, 2014 (the “Registration Statement”).
As of August 13, 2014, financial statements of the Partnership are consolidated since it was a separate legal entity owning the interests in the subsidiaries and joint ventures. Prior to that date, the income statement, balance sheet and cash flows, as converted to US GAAP, have been carved out of the consolidated financial statements of Höegh LNG and are presented on a combined carve-out basis for the Combined Entities. The combined carve-out financial statements include the related assets, liabilities, revenues, expenses and cash flows directly attributable to Hoegh LNG Lampung Pte. Ltd. and PT Hoegh LNG Lampung. In addition, the investment in 50% of the joint ventures using the equity method of accounting, and the related advances to joint ventures and interest income on the advances, are included in the combined carve-out financial statements. The combined carve-out financial statements prior to August 13, 2014, also include allocations of certain administrative expenses. The basis for the allocations are described in note 2 of the audited combined carve-out financial statements for the year ended December 31, 2013, included in the Registration Statement. Movements in carve-out balances, interest income and allocated cost have been accounted for as net contributions or distributions to owner in equity in the combined carve-out balance sheet. Refer to note 13 for a specification of allocated administrative expenses for the three and nine months ended September 30, 2014 and 2013.
Management has deemed the allocations reasonable to present the interim financial position, results of operations and cash flows of the Combined Entities on a stand-alone basis for periods prior to August 13, 2014. However, the financial position, results of operations and cash flows of the Combined Entities may differ from those that would have been achieved had the Partnership operated autonomously for all periods presented as the Partnership would have had additional administrative expenses, including legal, accounting, treasury and regulatory compliance and other costs normally incurred by a listed public entity. Accordingly, the unaudited condensed interim consolidated and combined carve-out financial statements for the three and nine months ended September 30, 2014 do not purport to be indicative of the future financial position, results of operations or cash flows of the Partnership.
Included in the combined carve-out equity as of August 12, 2014, are amounts related to promissory notes and related accrued interest due to Höegh LNG. Höegh LNG’s receivables for the promissory notes and related accrued interest of the Partnership’s subsidiaries were contributed to the Partnership as part of the Formation transactions. Refer to note 3 for additional discussion of the contribution. As a result, the liabilities of the Partnership’s subsidiaries are eliminated in consolidation since there are no longer external liabilities to the Partnership. Accordingly, this is equivalent to not transferring the subsidiaries’ liabilities to the Partnership. Therefore, the corresponding amounts have been eliminated for the Partnership’s opening equity position as of August 12, 2014. Details of the liabilities eliminated are as follows:
F-10
Table of Contents
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED
CARVE-OUT FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
As of | ||||
(in thousands of U.S. dollars) | August 12, 2014 | |||
Accrued interest on $48.5 million Promissory note due to Höegh LNG transferred to Partnership | $ | (1,684 | ) | |
Accrued interest on $101.5 million Promissory note due to Höegh LNG transferred to Partnership | (2,947 | ) | ||
$40.0 million Promissory note and accrued interest due to Höegh LNG transferred to Partnership | (41,168 | ) | ||
|
| |||
Elimination to equity August 12, 2014 | $ | 45,799 | ||
|
|
b. | Significant accounting policies |
The accounting policies used in the preparation of the unaudited condensed interim consolidated and combined carve-out financial statements are consistent with those applied in the audited combined carve-out financial statements for the year ended December 31, 2013 included in the Registration Statement.
c. | New accounting standards |
In May 2014, a new accounting standard, Revenue from Contracts with Customers, was issued by the FASB. Under the new standard, revenue for most contracts with customers will be recognized when promised goods or services are transferred to customers in an amount that reflects consideration that the entity expects to be entitled, subject to certain limitations. The scope of this guidance does not apply to leases, financial instruments, guarantees and certain non-monetary transactions. The standard is effective for annual periods beginning after December 15, 2016 and early adoption is not permitted. The Partnership is currently assessing the impact the adoption this standard will have on the consolidated financial statements.
3. Formation transactions and Initial Public Offering
During August 2014, the following transactions in connection with the transfer of equity interests, shareholder loans and promissory notes and accrued interest to the Partnership and the subsequent IPO occurred:
Capital contribution
Höegh LNG contributed the following to the Partnership:
(i) | Its interests in Hoegh LNG Lampung Pte. Ltd., PT Hoegh LNG Lampung (the owner of thePGN FSRU Lampung and the Mooring), SRV Joint Gas Ltd. (the owner of theGDF Suez Neptune), and SRV Joint Gas Two Ltd. (the owner of theGDF Suez Cape Ann); |
(ii) | Its shareholder loans made by Höegh LNG to each of SRV Joint Gas Ltd. and SRV Joint Gas Two Ltd., in part to finance the operations of such joint ventures; |
(iii) | Its receivables for the $40 million promissory note due to Höegh LNG as well as accrued interest on such note and two other promissory notes relating to Hoegh Lampung; |
(iv) | These transactions have been accounted for as a capital contribution by Höegh LNG to the Partnership. However, for purposes of the combined carve-out financial statements, the (i) net assets of the entities and the (ii) shareholder loans to the joint ventures are included in the carve-out balance sheet as of December 31, 2013 and June 30, 2014; |
Recapitalization of the Partnership
(i) | The Partnership issued to Höegh LNG 2,116,060 common units and 13,156,060 subordinated units and 100% of incentive distribution rights (“IDRs”), which will entitle Höegh LNG to increasing percentages of the cash the Partnership distributes in excess of $0.388125 per unit per quarter; |
(ii) | The Partnership issued to Höegh LNG GP LLC, a wholly owned subsidiary of Höegh LNG, a non-economic general partner interest in the Partnership; and |
F-11
Table of Contents
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED
CARVE-OUT FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
Initial Public Offering
(i) | The Partnership issued and sold through the underwriters to the public 11,040,000 common units (including 1,440,000 common units exercised pursuant to the underwriters agreement option to purchase additional common units reducing the number of common units owned by Höegh LNG by the corresponding number of units), representing approximately 42% limited partnership interest in the Partnership. The common units were sold for $20.00 per unit resulting in gross proceeds of $220.8 million. The net proceeds of the offering were approximately $203.5 million. Net proceeds is after deduction of underwriter’s discounts, structuring fees and reimbursements and the incremental direct costs attributable to the IPO that were deferred and charged against the proceeds of the offering. |
(ii) | The Partnership applied the net proceeds of the offering as follows: (i) $140 million to make a loan to Höegh LNG in exchange for a note bearing interest at a rate of 5.88% per annum, which is repayable on demand or which the Partnership can elect to utilize as part of the purchase consideration in the event the Partnership purchases all or a portion of Höegh LNG’s interests in theIndependence, (ii) $20 million for general partnership purposes and (iii) the remainder of approximately $43.5 million to make a cash distribution to Höegh LNG. |
Proceeds from IPO and application of funds | ||||
(in thousands of U.S. dollars) | ||||
Gross proceeds from IPO | $ | 220,800 | ||
Underwriters’ discounts, structuring fees and incremental direct IPO expenses | (17,333 | ) | ||
|
| |||
Net proceeds from IPO | 203,467 | |||
|
| |||
Loan of initial public offering proceeds to Höegh LNG for Demand note | (140,000 | ) | ||
Cash distribution of initial public offering proceeds to Höegh LNG | (43,467 | ) | ||
|
| |||
Cash retained for general partnership purposes | $ | 20,000 | ||
|
|
At the completion of the IPO, Höegh LNG owned 2,116,060 common units and 13,156,060 subordinated units, representing an approximate 58% limited partnership interest in the Partnership.
Agreements
In connection with the IPO the Partnership entered into several agreements including:
(i) | A $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 governing, among other things: |
a. | To what extent the Partnership and Höegh LNG may compete with each other; |
b. | The Partnership’s option to purchase from Höegh LNG all or a portion of its interests in an additional FSRU, theIndependence, within 24 months after acceptance of such vessel by her charterer, subject to reaching an agreement with Höegh LNG regarding the purchase price and other terms in accordance with the provisions of the omnibus agreement and any rights AB Klaipèdos Nafta has under the related time charter, which the Partnership may exercise at one or more times during such 24-month period; |
c. | The Partnership’s rights of first offer on certain FSRUs and LNG carriers operating under charters of five or more years; and |
d. | Höegh LNG’s provision of certain indemnities to the Partnership. |
(iii) | An administrative services agreement with Höegh LNG Services Ltd., UK (“Höegh UK”), pursuant to which Höegh UK will provide certain administrative services to the Partnership; and |
(iv) | Höegh UK has entered into an administrative services agreement with Höegh LNG AS (“Höegh Norway”), pursuant to which Höegh Norway will provide Höegh UK certain administrative services. |
F-12
Table of Contents
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED
CARVE-OUT FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
Existing agreements remain in place for provision of certain services to the Partnership’s vessel owning joint ventures or entity 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 theGDF Suez Neptune and theGDF Suez Cape 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 the owner of thePGN FSRU Lampung is a party to a technical information and services agreement with Höegh Norway. |
4. 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 that are considered to benefit the entire organization and interest income from advances to joint ventures are included in “Other.”
As of September 30, 2014, Majority held FSRUs includes the direct financing lease of thePGN FSRU Lampung, and construction contract revenues and expenses of the Mooring under construction. ThePGN FSRU Lampung has a long-term time charter with PGN. The Mooring is being constructed on behalf of, and is being sold to, PGN using the percentage of completion method of accounting. Following the acceptance date in the fourth quarter of 2014, the final invoice for the Mooring can be issued. As of September 30, 2013 and December 31, 2013, thePGN FSRU Lampungwas under construction and was classified as a newbuilding.
As of September 30, 2014 and 2013, Joint venture FSRUs include two 50% owned FSRUs, theGDF Suez Neptune and theGDF Suez Cape Ann, that operate under long-term time charters with one charterer, GDF Suez Global LNG Supply SA.
The accounting policies applied to the segments are the same as those applied in the audited consolidated and combined carve-out financial statements, except that Joint venture FSRUs are presented under the proportional consolidation method for the segment note and under equity accounting for the consolidated and combined carve-out financial statements. 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.
The following tables include the results for the segments for the three and nine months ended September 30, 2014 and 2013 and selected balance sheet information as of September 30, 2014 and December 31, 2013.
F-13
Table of Contents
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED
CARVE-OUT FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
Three months ended September 30, 2014 | ||||||||||||||||||||||||
Joint venture | Consolidated | |||||||||||||||||||||||
Majority | FSRUs | Total | & combined | |||||||||||||||||||||
held | (proportional | Segment | carve-out | |||||||||||||||||||||
(in thousands of U.S. dollars) | FSRUs | consolidation) | Other | reporting | Eliminations | reporting | ||||||||||||||||||
Time charter revenues | $ | 10,371 | 10,382 | — | 20,753 | (10,382 | ) | $ | 10,371 | |||||||||||||||
Construction contract revenues | 6,153 | — | — | 6,153 | — | 6,153 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total revenues | 16,524 | 10,382 | — | 26,906 | 16,524 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Operating expenses | (4,086 | ) | (2,129 | ) | (1,383 | ) | (7,598 | ) | 2,129 | (5,469 | ) | |||||||||||||
Construction contract expenses | (6,845 | ) | — | — | (6,845 | ) | — | (6,845 | ) | |||||||||||||||
Equity in earnings of joint ventures | — | — | — | — | 3,058 | 3,058 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Segment EBITDA | 5,593 | 8,253 | (1,383 | ) | 12,463 | |||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Depreciation and amortization | (329 | ) | (2,288 | ) | — | (2,617 | ) | 2,288 | (329 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Operating income (loss) | 5,264 | 5,965 | (1,383 | ) | 9,846 | 6,939 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Gain (loss) on derivative instruments | — | 1,378 | — | 1,378 | (1,378 | ) | — | |||||||||||||||||
Other financial income (expense), net | (2,978 | ) | (4,285 | ) | 1,380 | (5,883 | ) | 4,285 | (1,598 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Income (loss) before tax | 2,286 | 3,058 | (3 | ) | 5,341 | — | 5,341 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Income tax expense | (143 | ) | — | — | (143 | ) | — | (143 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net income (loss) | $ | 2,143 | 3,058 | (3 | ) | 5,198 | — | $ | 5,198 | |||||||||||||||
|
|
|
|
|
|
|
|
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|
F-14
Table of Contents
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED
CARVE-OUT FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
Three months ended September 30, 2013 | ||||||||||||||||||||||||
Joint venture | ||||||||||||||||||||||||
Majority | FSRUs | Total | Combined | |||||||||||||||||||||
held | (proportional | Segment | carve-out | |||||||||||||||||||||
(in thousands of U.S. dollars) | FSRUs | consolidation) | Other | reporting | Eliminations | reporting | ||||||||||||||||||
Time charter revenues | $ | — | 10,694 | 10,694 | (10,694 | ) | $ | — | ||||||||||||||||
Construction contract revenues | 11,636 | — | — | 11,636 | — | 11,636 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total revenues | 11,636 | 10,694 | — | 22,330 | 11,636 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Operating expenses | (1,117 | ) | (2,550 | ) | (1,045 | ) | (4,712 | ) | 2,550 | (2,162 | ) | |||||||||||||
Construction contract expenses | (10,107 | ) | — | — | (10,107 | ) | — | (10,107 | ) | |||||||||||||||
Equity in earnings of joint ventures | — | — | — | — | 4,549 | 4,549 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Segment EBITDA | 412 | 8,144 | (1,045 | ) | 7,511 | |||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Depreciation and amortization | — | (2,262 | ) | — | (2,262 | ) | 2,262 | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Operating income (loss) | 412 | 5,882 | (1,045 | ) | 5,249 | 3,916 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Gain (loss) on derivative instruments | — | 3,200 | — | 3,200 | (3,200 | ) | — | |||||||||||||||||
Other financial income (expense), net | (11 | ) | (4,533 | ) | 526 | (4,018 | ) | 4,533 | 515 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Income (loss) before tax | 401 | 4,549 | (519 | ) | 4,431 | — | 4,431 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Income tax expense | — | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net income (loss) | $ | 401 | 4,549 | (519 | ) | 4,431 | — | $ | 4,431 | |||||||||||||||
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F-15
Table of Contents
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED
CARVE-OUT FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
Nine months ended September 30, 2014 | ||||||||||||||||||||||||
Joint venture | Consolidated | |||||||||||||||||||||||
Majority | FSRUs | Total | & combined | |||||||||||||||||||||
held | (proportional | Segment | carve-out | |||||||||||||||||||||
(in thousands of U.S. dollars) | FSRUs | consolidation) | Other | reporting | Eliminations | reporting | ||||||||||||||||||
Time charter revenues | $ | 10,371 | 30,731 | — | 41,102 | (30,731 | ) | $ | 10,371 | |||||||||||||||
Construction contract revenues | 42,765 | — | — | 42,765 | — | 42,765 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total revenues | 53,136 | 30,731 | — | 83,867 | 53,136 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Operating expenses | (8,027 | ) | (6,162 | ) | (5,097 | ) | (19,286 | ) | 6,162 | (13,124 | ) | |||||||||||||
Construction contract expenses | (37,579 | ) | — | — | (37,579 | ) | — | (37,579 | ) | |||||||||||||||
Equity in earnings of joint ventures | — | — | — | — | (738 | ) | (738 | ) | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Segment EBITDA | 7,530 | 24,569 | (5,097 | ) | 27,002 | |||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Depreciation and amortization | (1,309 | ) | (6,861 | ) | — | (8,170 | ) | 6,861 | (1,309 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Operating income (loss) | 6,221 | 17,708 | (5,097 | ) | 18,832 | 386 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Gain (loss) on derivative instruments | — | (5,531 | ) | — | (5,531 | ) | 5,531 | — | ||||||||||||||||
Other financial income (expense), net | (6,163 | ) | (12,915 | ) | 2,281 | (16,797 | ) | 12,915 | (3,882 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Income (loss) before tax | 58 | (738 | ) | (2,816 | ) | (3,496 | ) | — | (3,496 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Income tax expense | (376 | ) | — | — | (376 | ) | — | (376 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net income (loss) | $ | (318 | ) | (738 | ) | (2,816 | ) | (3,872 | ) | — | $ | (3,872 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
As of September 30, 2014 | ||||||||||||||||||||||||
Joint venture | Consolidated | |||||||||||||||||||||||
Majority | FSRUs | Total | & combined | |||||||||||||||||||||
held | (proportional | Segment | carve-out | |||||||||||||||||||||
(in thousands of U.S. dollars) | FSRUs | consolidation) | Other | reporting | Eliminations | reporting | ||||||||||||||||||
Newbuildings | $ | — | — | — | — | — | $ | — | ||||||||||||||||
Vessels, net of accumulated depreciation | — | 281,153 | — | 281,153 | (281,153 | ) | — | |||||||||||||||||
Net investment in direct financing lease | 294,323 | — | — | 294,323 | — | 294,323 | ||||||||||||||||||
Advances to joint ventures | — | — | 20,612 | 20,612 | — | 20,612 | ||||||||||||||||||
Total assets | 395,730 | 302,363 | 188,207 | 886,300 | (302,363 | ) | 583,937 | |||||||||||||||||
Accumulated losses of joint ventures | — | — | 50 | 50 | (55,088 | ) | (55,038 | ) | ||||||||||||||||
Expenditures for newbuildings, vessels & equipment | 170,660 | 1,629 | — | 172,289 | (1,629 | ) | 170,660 | |||||||||||||||||
Expenditures for drydocking | — | — | — | — | — | — | ||||||||||||||||||
Principal repayment direct financing lease | $ | 662 | — | — | 662 | — | $ | 662 |
F-16
Table of Contents
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED
CARVE-OUT FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
Nine months ended September 30, 2013 | ||||||||||||||||||||||||
Joint venture | ||||||||||||||||||||||||
Majority | FSRUs | Total | Combined | |||||||||||||||||||||
held | (proportional | Segment | carve-out | |||||||||||||||||||||
(in thousands of U.S. dollars) | FSRUs | consolidation) | Other | reporting | Eliminations | reporting | ||||||||||||||||||
Time charter revenues | $ | — | 30,756 | — | 30,756 | (30,756 | ) | $ | — | |||||||||||||||
Construction contract revenues | 33,992 | — | — | 33,992 | — | 33,992 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total revenues | 33,992 | 30,756 | — | 64,748 | 33,992 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Operating expenses | (3,156 | ) | (6,515 | ) | (2,184 | ) | (11,855 | ) | 6,515 | (5,340 | ) | |||||||||||||
Construction contract expenses | (28,457 | ) | — | — | (28,457 | ) | — | (28,457 | ) | |||||||||||||||
Equity in earnings of joint ventures | — | — | — | — | 32,309 | 32,309 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Segment EBITDA | 2,379 | 24,241 | (2,184 | ) | 24,436 | |||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Depreciation and amortization | — | (6,785 | ) | — | (6,785 | ) | 6,785 | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Operating income (loss) | 2,379 | 17,456 | (2,184 | ) | 17,651 | 32,504 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Gain (loss) on derivative instruments | — | 28,480 | — | 28,480 | (28,480 | ) | — | |||||||||||||||||
Other financial income (expense), net | (34 | ) | (13,627 | ) | 1,617 | (12,044 | ) | 13,627 | 1,583 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Income (loss) before tax | 2,345 | 32,309 | (567 | ) | 34,087 | — | 34,087 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Income tax expense | — | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net income (loss) | $ | 2,345 | 32,309 | (567 | ) | 34,087 | — | $ | 34,087 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
As of December 31, 2013 | ||||||||||||||||||||||||
Joint venture | ||||||||||||||||||||||||
Majority | FSRUs | Total | Combined | |||||||||||||||||||||
held | (proportional | Segment | carve-out | |||||||||||||||||||||
(in thousands of U.S. dollars) | FSRUs | consolidation) | Other | reporting | Eliminations | reporting | ||||||||||||||||||
Newbuildings | $ | 122,517 | — | — | 122,517 | — | $ | 122,517 | ||||||||||||||||
Vessels, net of accumulated depreciation | — | 286,460 | — | 286,460 | (286,460 | ) | — | |||||||||||||||||
Advances to joint ventures | — | — | 24,510 | 24,510 | — | 24,510 | ||||||||||||||||||
Total assets | 202,220 | 307,335 | 24,510 | 534,065 | (307,335 | ) | 226,730 | |||||||||||||||||
Accumulated losses of joint ventures | — | — | 50 | 50 | (54,350 | ) | (54,300 | ) | ||||||||||||||||
Expenditures for newbuildings, vessels & equipment | 36,450 | 522 | — | 36,972 | (522 | ) | 36,450 | |||||||||||||||||
Expenditures for drydocking | $ | — | — | — | — | — | $ | — |
F-17
Table of Contents
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED
CARVE-OUT FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
5. Construction contract revenues and unbilled construction contract income
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands of U.S. dollars) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Construction contract revenue | $ | 6,153 | 11,636 | 42,765 | $ | 33,992 | ||||||||||
Construction contract expenses | (6,845 | ) | (10,107 | ) | (37,579 | ) | (28,457 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Recognized contract margin (loss) | $ | (692 | ) | 1,529 | 5,186 | $ | 5,535 | |||||||||
|
|
|
|
|
|
|
|
As part of its agreement with PGN, the Partnership’s subsidiary is responsible for the construction and installation of the Mooring for PGN. As of September 30, 2014 and 2013, the Mooring project is estimated to be 94% and 37% completed, respectively. During the third quarter of 2014, delay liquidated damages of approximately $6.1 million were recorded as part of construction contract expenses related to claims from PGN on the project up to September 30, 2014. For additional discussion see note 14. As a result of the claims, the estimate of the total project cost was also upwardly revised based upon estimated total exposure for delay liquidated damages from PGN. As a result of the revision to the estimated total project costs, there was a negative recognized contract margin for the three months ended September 30, 2014.
The unbilled construction contract income of $3,864 and $54,473 for the periods ended September 30, 2014 and December 31, 2013, respectively, relate to the construction of the Mooring for PGN. The unbilled construction contract income represents the excess of contract costs and profits recognized to date on the percentage of completion accounting method over the amount of contract billings to date.
6. Financial income (expenses)
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands of U.S. dollars) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Interest income | $ | 1,542 | 526 | 2,443 | $ | 1,617 | ||||||||||
Interest expense: | ||||||||||||||||
Interest expense | (1,730 | ) | (1,006 | ) | (6,099 | ) | (2,680 | ) | ||||||||
Commitment fees | (84 | ) | (510 | ) | (1,304 | ) | (1,372 | ) | ||||||||
Amortization of debt issuance cost | (897 | ) | (96 | ) | (3,048 | ) | (285 | ) | ||||||||
Capitalized interest | — | 1,601 | 5,447 | 4,303 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total interest expense | (2,711 | ) | (11 | ) | (5,004 | ) | (34 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Other items, net: | ||||||||||||||||
Foreign exchange gain (loss) | 20 | — | (43 | ) | — | |||||||||||
Bank charges and fees | (20 | ) | — | (21 | ) | — | ||||||||||
Withholding tax on interest expense and other | (429 | ) | — | (1,257 | ) | — | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total other items, net | (429 | ) | — | (1,321 | ) | — | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total financial income (expense), net | $ | (1,598 | ) | 515 | (3,882 | ) | $ | 1,583 | ||||||||
|
|
|
|
|
|
|
|
Interest income for the three and nine months ended September 30, 2014 consists of interest income on the advances to the joint ventures and interest income on the demand note due from Höegh LNG. For the corresponding periods of 2013, all interest income relates to advances to the joint ventures.
F-18
Table of Contents
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED
CARVE-OUT FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
7. Income tax
The Partnership is not subject to Marshall Islands corporate income taxes. The Partnership is subject to tax for earnings of its subsidiary incorporated in Singapore and its FSRU-owing entity incorporated in Indonesia. The income tax expense recorded in the consolidated combined carve-out income statements was $143 and $376 for the three and nine months ended September 30, 2014, respectively. During the same periods of 2013, all of the activities were organized in jurisdictions not subject to corporate income taxes.
A deferred tax benefit of $25 and $1,854 related to the unrealized losses on interest rate swaps accounted for as a cash flow hedge was recorded as a component of other comprehensive income on the unaudited interim condensed combined carve-out statements of comprehensive income for the three and nine months ended September 30, 2014.
8. Advances to joint ventures
As of | ||||||||
September 30, | December 31, | |||||||
(in thousands of U.S. dollars) | 2014 | 2013 | ||||||
Current portion of advances to joint ventures | $ | 6,975 | $ | 7,112 | ||||
Long-term advances to joint ventures | 13,637 | 17,398 | ||||||
|
|
|
| |||||
Advances/shareholder loans to joint ventures | $ | 20,612 | $ | 24,510 | ||||
|
|
|
|
The Partnership had advances of $10.7 million and $12.6 million due from SRV Joint Gas Ltd. as of September 30, 2014 and December 31, 2013, respectively. The Partnership had advances of $9.9 million and $11.9 million due from SRV Joint Gas Two Ltd. as of September 30, 2014 and December 31, 2013, respectively.
9. Net investment in direct financing lease
The time charter for the PGN FSRU Lampung is accounted for as a direct financing lease. The lease element of time charter hire 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 balance sheets as net investments in direct financing leases, a receivable, as follows:
As of | ||||
September 30, | ||||
(in thousands of U.S. dollars) | 2014 | |||
Minimum lease payments | $ | 591,242 | ||
Unguaranteed residual value | 146,000 | |||
Unearned income | (445,352 | ) | ||
Initial direct cost, net | 3,095 | |||
|
| |||
Net investment in direct financing lease at inception | 294,985 | |||
|
| |||
Principal repayment and amortization for July 21 to September 30, 2014 | (662 | ) | ||
|
| |||
Net investment in direct financing lease at September 30, 2014 | 294,323 | |||
|
| |||
Less: Current portion | (2,807 | ) | ||
|
| |||
Long term net investment in direct financing lease | $ | 291,516 | ||
|
|
There was no allowance for doubtful accounts as of September 30, 2014.
F-19
Table of Contents
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED
CARVE-OUT FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
10. Newbuildings
As of | ||||||||
September 30, | December 31, | |||||||
(in thousands of U.S. dollars) | 2014 | 2013 | ||||||
Newbuilding beginning of period | $ | 122,517 | $ | 86,067 | ||||
Additions | 167,368 | 29,519 | ||||||
Capitalized interest | 3,292 | 6,931 | ||||||
Transfer to vessel/ net investment in direct financing lease | (293,177 | ) | — | |||||
|
|
|
| |||||
Newbuilding end of period | $ | — | $ | 122,517 | ||||
|
|
|
|
In mid-May 2014, thePGN FSRU Lampungwas deemed substantially complete to begin the commissioning under the time charter contract. The newbuilding was transferred on the balance sheet to vessels until such time as the time charter commenced when the vessel was transferred on the balance sheet to net investment in direct financing lease. However, due to delays by the unrelated pipeline contractor completing the pipeline and minor damage to the FSRU by a tugboat during the pipeline installation, the time charter hire did not commence until July 21, 2014. As a result, the vessel was depreciated until the start of the direct financing lease. The depreciation expense for thePGN FSRU Lampungfor the three and nine months ended September 30, 2014 was $321 and $1,286, respectively.
11. Long-term debt
As of | ||||||||
September 30, | December 31, | |||||||
(in thousands of U.S. dollars) | 2014 | 2013 | ||||||
$ 299 million Lampung facility: | ||||||||
$ 178.6 million Export credit tranche | $ | 178,634 | $ | — | ||||
$ 58.5 million FSRU tranche | 46,365 | — | ||||||
$ 61.9 million Mooring tranche | — | — | ||||||
|
|
|
| |||||
Total debt | 224,999 | — | ||||||
|
|
|
| |||||
Less: Current portion of long-term debt | (21,503 | ) | — | |||||
|
|
|
| |||||
Long-term debt | $ | 203,496 | $ | — | ||||
|
|
|
|
$299 million Lampung facility
In September 2013, PT Hoegh LNG Lampung (the “Borrower”) entered into a secured $299 million term loan facility and $10.7 million standby letter of credit facility (the “Lampung facility”) with a syndicate of banks and an export credit agency for the purpose of financing a portion of the construction of thePGN FSRU Lampung and the Mooring. The undrawn $10.7 million standby letter of credit facility supports guarantees to PGN for delivery obligations of the FSRU and Mooring under the lease, operation and maintenance agreement (the “LOM”). Höegh LNG is the guarantor for the facility. On March 4, 2014, the Borrower drew $96 million of the $299 million Lampung facility, of which $28.4 million, $32.1 million and $35.5 million were drawn on the FSRU tranche, the Mooring tranche and the export credit tranche, respectively. On April 8, 2014, the Borrower drew $161.1 million of the $299 million Lampung facility, of which $18.0 million and $143.1 million were drawn on the FSRU tranche and export credit tranche, respectively. On July 3, 2014, the full principal amount of $32.1 million on the Mooring tranche and accrued interest was repaid.
12. Accumulated losses of joint ventures
As of | ||||||||
September 30, | December 31, | |||||||
(in thousands of U.S. dollars) | 2014 | 2013 | ||||||
Accumulated losses of joint ventures | $ | 55,038 | $ | 54,300 | ||||
|
|
|
|
F-20
Table of Contents
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED
CARVE-OUT FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
The Partnership has a 50% interest in each of SRV Joint Gas Ltd. (owner ofGDF Suez Neptune) and SRV Joint Gas Two Ltd. (owner ofGDF Suez Cape Ann). The following table presents the summarized financial information for 100% of the combined joint ventures on an aggregated basis.
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands of U.S. dollars) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Total revenues | $ | 20,763 | 21,388 | 61,462 | $ | 61,512 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating expenses | (4,257 | ) | (5,099 | ) | (12,324 | ) | (13,030 | ) | ||||||||
Depreciation and amortization | (4,729 | ) | (4,679 | ) | (14,183 | ) | (14,031 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income | 11,777 | 11,610 | 34,955 | 34,451 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Unrealized gain (loss) on derivative instruments | 2,755 | 6,400 | (11,063 | ) | 56,957 | |||||||||||
Other financial expense, net | (8,570 | ) | (9,066 | ) | (25,829 | ) | (27,253 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net income (loss) | $ | 5,962 | 8,944 | (1,937 | ) | $ | 64,155 | |||||||||
|
|
|
|
|
|
|
| |||||||||
Share of joint ventures owned | 50 | % | 50 | % | 50 | % | 50 | % | ||||||||
|
|
|
|
|
|
|
| |||||||||
Share of joint ventures net income (loss) before eliminations | 2,981 | 4,472 | (969 | ) | 32,078 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Eliminations | 77 | 77 | 231 | 231 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Equity in earnings (losses) of joint ventures | $ | 3,058 | 4,549 | (738 | ) | $ | 32,309 | |||||||||
|
|
|
|
|
|
|
|
F-21
Table of Contents
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED
CARVE-OUT FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
As of | ||||||||
September 30, | December 31, | |||||||
(in thousands of U.S. dollars) | 2014 | 2013 | ||||||
Cash and cash equivalents | $ | 12,489 | $ | 11,578 | ||||
Other current assets | 2,562 | 2,530 | ||||||
|
|
|
| |||||
Total current assets | 15,051 | 14,108 | ||||||
|
|
|
| |||||
Restricted cash | 25,104 | 25,104 | ||||||
Vessels, net of accumulated depreciation | 581,016 | 592,092 | ||||||
Other long-term assets | 2,265 | 2,538 | ||||||
|
|
|
| |||||
Total long-term assets | 608,385 | 619,734 | ||||||
|
|
|
| |||||
Current portion of long-term debt | 19,514 | 19,522 | ||||||
Amounts and loans due to owners and affiliates | 14,162 | 15,246 | ||||||
Derivative financial instruments | 24,259 | 26,274 | ||||||
Other current liabilities | 9,756 | 8,270 | ||||||
|
|
|
| |||||
Total current liabilities | 67,691 | 69,312 | ||||||
|
|
|
| |||||
Long-term debt | 507,617 | 522,136 | ||||||
Loans due to owners and affiliates | 27,274 | 34,795 | ||||||
Derivate financial liabilities | 88,843 | 75,766 | ||||||
Other long-term liabilities | 23,376 | 21,261 | ||||||
|
|
|
| |||||
Total long-term liabilities | 647,110 | 653,958 | ||||||
|
|
|
| |||||
Net liabilities | $ | (91,365 | ) | $ | (89,428 | ) | ||
|
|
|
| |||||
Share of joint ventures owned | 50 | % | 50 | % | ||||
|
|
|
| |||||
Share of joint ventures net liabilities before eliminations | (45,683 | ) | (44,714 | ) | ||||
|
|
|
| |||||
Eliminations | (9,355 | ) | (9,586 | ) | ||||
|
|
|
| |||||
Accumulated losses of joint ventures | $ | (55,038 | ) | $ | (54,300 | ) | ||
|
|
|
|
13. Related party transactions
Income (expenses) from related parties
Prior to the closing of the IPO, the Combined Entities were an integrated part of Höegh LNG. As such, Höegh LNG has provided general and corporate management services to the Combined Entities based on actual hours incurred. In addition, management allocated remaining administrative expenses and Höegh LNG management’s share based payment costs until August 12, 2014 based on the number of vessels, newbuildings and business development projects of Höegh LNG. A subsidiary of Höegh LNG has provided the building supervision of the newbuilding and Mooring. Following the completion of the IPO, certain Höegh LNG subsidiaries continue to provide administrative and ship management services based upon agreements with the Partnership. Amounts included in the consolidated and combined carve-out statements of income for the three and nine months ended September 30, 2014 and 2013 or capitalized in the unaudited interim consolidated and condensed combined carve-out balance sheets as of September 30, 2014 and December 31, 2013 are as follows:
F-22
Table of Contents
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED
CARVE-OUT FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
Three months ended | Nine months ended | |||||||||||||||
Statement of income: | September 30, | September 30, | ||||||||||||||
(in thousands of U.S. dollars) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Revenues | ||||||||||||||||
Time charter revenues indemnified by Höegh LNG (1) | $ | 6,526 | $ | — | $ | 6,526 | $ | — | ||||||||
Operating expenses | ||||||||||||||||
Vessel operating expenses (2) | (1,901 | ) | — | (3,046 | ) | — | ||||||||||
Hours and overhead (3) | (436 | ) | (513 | ) | (1,815 | ) | (1,443 | ) | ||||||||
Allocated administrative expenses (4) | (838 | ) | (1,243 | ) | (4,881 | ) | (2,724 | ) | ||||||||
Construction contract expense: supervision cost (5) | (167 | ) | (267 | ) | (761 | ) | (560 | ) | ||||||||
Construction contract expense: capitalized interest (6) | — | (189 | ) | (690 | ) | (364 | ) | |||||||||
Financial (income) expense | ||||||||||||||||
Interest income from joint ventures and demand note (7) | 1,542 | 526 | 2,443 | 1,617 | ||||||||||||
Interest expense and commitment fees from Höegh LNG (8) | (363 | ) | (11 | ) | (689 | ) | (34 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 4,363 | $ | (1,697 | ) | $ | (2,913 | ) | $ | (3,508 | ) | |||||
|
|
|
|
|
|
|
|
As of | ||||||||
Balance sheet | September 30, | December 31, | ||||||
(in thousands of U.S. dollars) | 2014 | 2013 | ||||||
Newbuilding | ||||||||
Newbuilding supervision cost (6) | $ | 1,142 | $ | 4,935 | ||||
Interest expense capitalized from Höegh LNG (5) | 1,464 | 4,579 | ||||||
|
|
|
| |||||
Total | $ | 2,606 | $ | 9,514 | ||||
|
|
|
|
1) | Time charter revenues indemnified by Höegh LNG:Höegh LNG has made payment of $6.5 million for hire rate payments not received for thePGN FSRU Lampung pursuant to its agreement to indemnify the Partnership under the omnibus agreement. Refer toIndemnifications below and note 14. |
2) | Vessel operating expenses:A subsidiary of Höegh LNG provides ship management of vessels, including crews and the provision of all other services and supplies. |
3) | Hours, travel expenses and overhead: A subsidiary of Höegh LNG provides management, accounting, bookkeeping and administrative support. These services are charges 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) | Allocated administrative expenses: Administrative expenses of Höegh LNG that cannot be attributed to a specific vessel or project based upon the time-write system have been allocated to the unaudited interim condensed combined carve-out income statement based on the number of vessels, newbuildings and certain business development projects of Höegh LNG prior to the completion of the IPO. For the three and nine months ended September 30, 2014 and 2013, the allocated expenses also include cost incurred in preparation for the IPO. |
5) | Supervision cost:A subsidiary of Höegh LNG manages the newbuilding process including site supervision including manning for the services and direct accommodation and travel cost. Manning costs are based upon actual hours expended. Such costs, excluding overhead charges, are capitalized as part of the cost of the newbuilding and included in the construction contract expense for the Mooring. |
F-23
Table of Contents
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED
CARVE-OUT FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
6) | Interest expense capitalized from Höegh LNG and affiliates: As described under 8) below, Höegh LNG and its affiliates have provided funding for thePGN FSRU Lampung and the Mooring (a component of the construction contract expense), which qualify under US GAAP as capitalized interest for the construction in progress. |
7) | 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. In the consolidated and combined carve-out statements of cash flows, the interest paid is treated as a return on investment and included in net cash flows from operating activities. |
8) | Interest expense from Höegh LNG and affiliates:Höegh LNG and its affiliates have provided loans and promissory notes (seeReceivables and payables from related parties below) and intercompany funding for the construction of thePGN FSRU Lampung and the construction contract expense of the Mooring. Prior to transfer of the newbuilding and contracts to PT Hoegh LNG Lampung and the establishment of the promissory notes in October 2013, the carve-out financial statements include an allocation of debt and interest expense from Höegh LNG for the funding of construction of thePGN FSRU Lampung and the construction contract expense of the Mooring. Refer to 6) above which describes the interest expense, which was capitalized. |
Receivables and payables from related parties
Demand note due from owner
As of | ||||||||
September 30, | December 31, | |||||||
(in thousands of U.S. dollars) | 2014 | 2013 | ||||||
Demand note due from owner | $ | 141,120 | $ | — | ||||
|
|
|
|
The Partnership lent $140 million to Höegh LNG from net proceeds of the IPO. The note is repayable on demand or the Partnership can elect to utilize the note as part of the purchase consideration in the event all or a portion of Höegh LNG’s interests in the Independence are purchased by the Partnership. The note bears interest at a rate of 5.88% per annum. The balances in the table above include outstanding principal and accrued interest outstanding.
Refer to note 8 for advances to joint ventures.
Amounts, loans and promissory note due to owners and affiliates and debt facilities
As of | ||||||||
September 30, | December 31, | |||||||
(in thousands of U.S. dollars) | 2014 | 2013 | ||||||
Amounts due to owners and affiliates | $ | 4,940 | $ | 15,207 | ||||
|
|
|
|
Amounts due to owners and affiliates principally relate to short term funding and trade payables of operating activities as of September 30, 2014 and capital expenditures as of December 31, 2013 by a subsidiary of Höegh LNG. The balance does not bear interest. When the $299 million Lampung facility was drawn (note 11), the outstanding amount related to short-term funding of capital expenditures of $25.4 million was repaid on March 5, 2014.
F-24
Table of Contents
HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED
CARVE-OUT FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
Loans and promissory notes due to owners and affiliates consist of the following:
As of | ||||||||
September 30, | December 31, | |||||||
(in thousands of U.S. dollars) | 2014 | 2013 | ||||||
$48.5 million Promissory note due to H��egh LNG | $ | — | $ | 49,507 | ||||
$101.5 million Promissory note due to Höegh LNG | — | 103,606 | ||||||
$40.0 million Promissory note due to Höegh LNG | — | 40,317 | ||||||
$85.0 million Revolving credit facility due to Höegh LNG | 162 | — | ||||||
Loan due to affiliate | 650 | — | ||||||
|
|
|
| |||||
Loans and promissory notes due to owners and affiliates | $ | 812 | $ | 193,430 | ||||
|
|
|
|
In the fourth quarter of 2013, promissory notes due to Höegh LNG in the amounts of $48.5 million, $101.5 million and $40.0 million were entered into as a result of the transfer of thePGN FSRU Lampung project to PT Hoegh LNG Lampung. All of the promissory notes and accrued interest were payable on demand. The balances in the table above include outstanding principal and accrued interest outstanding. On February 3, 2014, the $101.5 million Promissory note, excluding accrued interest, was converted to equity. On March 5, 2014, the principal on the $48.5 million promissory note was repaid, excluding accrued interest.
In August 2014, upon the closing of the IPO, Höegh LNG’s receivables for the $40 million promissory note and related accrued interest and the outstanding accrued interest on the $ 48.5 million and $101.5 million promissory notes of the Partnership’s subsidiaries were contributed to the Partnership as part of the Formation transactions. Refer to notes 2a and 3 for additional discussion of the contribution. As a result, the liabilities of the Partnership’s subsidiaries eliminate in consolidation since there are no longer external liabilities to the Partnership.
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 for a term of three years and is unsecured. Interest on drawn amounts is payable quarterly at LIBOR plus a margin of 4.0%. Additionally, a 1.4% quarterly commitment fee is due to Höegh LNG on undrawn available amounts. The balance as of September 30, 2014, relates to accrued commitment fees. No amount was drawn on the revolving credit facility.
The loan due to an affiliate was repaid in November 2014.
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 $500,000, in which case Höegh LNG is liable for claims only to the extent such aggregate amount exceeds $500,000.
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; |
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HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED
CARVE-OUT FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
3. | in the event that the Partnership does 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 invoice of $6.5 million (refer to note 14); |
4. | with respect to any obligation to pay liquidated damages to PGN 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. The Partnership filed a claim for indemnification for PGN’s September claim for delayed liquidated damages of $5.5 million (refer to note 14); and |
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. |
14. Commitments and contingencies
Contractual commitments
On December 12, 2012, a contract with Hyundai Heavy Industries Co Ltd (“HHI”) was entered for the construction of thePGN FSRU Lampung. Separate contracts related to the construction of the Mooring and the installation of the Mooring were entered into on November 16, 2012 and December 12, 2013, respectively. ThePGN FSRU Lampung and the Mooring were delivered to the Partnership’s subsidiary in the second quarter of 2014. As of September 30, 2014, the remaining contractual commitments required to be made in 2014 under the shipbuilding and Mooring contracts are $2.7 million.
Claims and Contingencies
PGN claims including delay liquidated damages
Following certain delays by the unrelated pipeline contractor completing the pipeline and minor damage to the FSRU by a tugboat during the pipeline installation, the time charter hire on the PGN FSRU Lampung commenced July 21, 2014 for the start of commissioning. During the commissioning to test the functioning of the PGN FSRU Lampungproject (including the Mooring) and the pipeline functionality, problems were identified on August 29, 2014 with the regasification system for the FSRU. This required that the parts of the regasification system were disassembled and transferred to shore for repair under provision of the warranties for the vessel. The equipment was reinstalled and all commissioning completed to allow the Partnership to deliver the Certificate of Acceptance to PGN. PGN formally accepted and signed the Certificate of Acceptance dated October 30, 2014.
The Partnership’s subsidiary is committed to pay a day rate for delay liquidated damages to PGN up to a maximum amount of $10.7 million if thePGN FSRU Lampung is not connected to the Mooring and ready to deliver LNG by the scheduled arrival date or acceptance is not achieved by the scheduled delivery date.
During September 2014, PGN indicated concerns about requirements under the time charter contract to pay hire rates for periods the regasification system was not functioning and issued invoices for delay liquidated damages for amounts PGN believes it has claims for delays in the scheduled arrival date and the acceptance date. PGN subsequently issued an additional invoice for delay liquidated damages in October 2014. PGN has not paid its time charter hire for September or October 2014. The Partnership and PGN have an ongoing dialog to find an acceptable solution.
The Partnership has included potential delay liquidated damages due to PGN in its project contingency as part of estimated total construction contract costs for the Mooring (as the first deliverable under the contract) as the basis for computing the percentage of completion. During the third quarter of 2014, delay liquidated damages of approximately $6.1 million were recorded to construction contract expenses for claims to September 30, 2014. In addition, the contingency for additional delay liquidated damages as part of the project contingency included in estimated total construction contract costs was increased. The total for actual and potential claims for delay liquidated damages included in estimated total costs is approximately $8.1 million. Delay liquidated damages cease on the date of the Certificate of Acceptance of October 30, 2014. The contingency for delay liquidated damages in the estimated total construction contract costs established at September 30, 2014 is adequate for all remaining delay liquidated damages from PGN. The remaining delay liquidated damages will be included in construction contract expenses for the fourth quarter of 2014.
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HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED
CARVE-OUT FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
The Partnership is indemnified under the omnibus agreement for delay liquidated damages from Höegh LNG. The Partnership has filed indemnification claims for the invoiced delay liquidated damages invoiced from PGN of $5.5 million and $1.6 million for September and October 2014, respectively. The amounts will be paid to the Partnership by Höegh LNG prior to any amounts being paid to PGN. When the funding for indemnification is received from Höegh LNG, the amount will be recorded as a contribution to equity.
The Partnership is also indemnified for any hire rate payments not received 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 has filed indemnification claims for the September and October invoices not paid by PGN of $6.5 million and $6.7 million, respectively. The Partnership has received payments from Höegh LNG for these invoices in September and October, respectively. Indemnification for hire rate payments is accounted for consistent with the accounting policies for loss of hire insurance, and is recognized when the proceeds are received. Therefore, the Partnership has recognized the September revenue and cash as of September 30, 2014. For additional information, refer to note 2 significant accounting policies on insurance claims in the audited combined carve-out financial statements for the year ended December 31, 2013 included in the Registration Statement.
The Partnership’s subsidiary is jointly and severally liable for the delay liquidated damages of the pipeline contractor to the extent the required bank letter of credit of the pipeline contractor or the contractor itself fails to perform. Similarly, the pipeline contractor is jointly and severally liable for the Partnership’s delay liquidated damages. The Partnership’s maximum exposure for the pipeline contractor’s delay liquidated damages is approximately $11.5 million. Further, the Partnership’s subsidiary and the pipeline contractor have an agreement to cover the other party’s delay liquidated damages to the extent caused by the other party’s scope of work. The Partnership has not received any claims from PGN or the pipeline contractor related to the contractor’s delay liquidated damages. The Partnership is indemnified by Höegh LNG for any potential delay liquidated damages, net of any recoveries, arising for or from claims of the pipeline contractor.
As of December 31, 2013, cash collateral of $10.7 million, classified as restricted cash in the combined carve-out balance sheet, was provided for in a letter of credit arrangement for this amount. As part of the $299 million Lampung facility, a $10.7 million letter of credit facility replaced the original letter of credit arrangement and the restricted cash was released in the first quarter of 2014. No amounts have been drawn on the letter of credit facility as of September 30, 2014.
15. 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 and restricted cash– The fair value of the cash and cash equivalents and restricted cash approximates its carrying amounts reported in the consolidated and combined carve-out balance sheets.
Demand note due to owner – The fair values of the note approximates their carrying amounts of the liabilities and accrued interest reported in the consolidated and combined carve-out balance sheets since the note is payable on demand. Refer to
note 13.
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. Refer to note 8.
Amounts due to owners and affiliates– The fair value of the non-interest bearing payable approximates its carrying amounts reported in the consolidated and combined carve-out balance sheets since it is to be settled consistent with trade payables. Refer to note 13.
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HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED
CARVE-OUT FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
Loans and promissory notes due to owners and affiliates – The fair values of the variable-rate and the fixed rate loans and promissory notes approximates their carrying amounts of the liabilities and accrued interest reported in the consolidated and combined carve-out balance sheets since the amounts are payable on demand. Refer to note 13.
Derivative financial instruments – The fair values of the interest rates swaps is estimated based on the present value of cash flows over the term of the instrument based on the relevant LIBOR interest rate curves.
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 are little or no market data, which require the reporting entity to develop its own assumptions.
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 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.
As of | As of | |||||||||||||||||||
September 30, 2014 | December 31, 2013 | |||||||||||||||||||
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 | $ | 45,336 | 45,336 | 108 | $ | 108 | |||||||||||||
Restricted cash | 1 | 21,905 | 21,905 | 10,700 | 10,700 | |||||||||||||||
Demand note due from owner | 2 | 141,120 | 141,120 | — | — | |||||||||||||||
Derivative financial instruments | 2 | (7,416 | ) | (7,416 | ) | — | — | |||||||||||||
Other: | ||||||||||||||||||||
Advances (shareholder loans) to joint ventures | 2 | 20,612 | 20,873 | 24,510 | 25,242 | |||||||||||||||
Current amounts due to owners and affiliates | 2 | (4,940 | ) | (4,940 | ) | (15,207 | ) | (15,207 | ) | |||||||||||
Loans and promissory notes due to owners and affiliates | 2 | $ | (812 | ) | (812 | ) | (193,430 | ) | $ | (193,430 | ) |
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HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED
CARVE-OUT FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
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:
Credit | As of | |||||||||||||||
Class of Financing Receivables | quality | September 30, | December 31, | |||||||||||||
(in thousands of U.S. dollars) | indicator | Grade | 2014 | 2013 | ||||||||||||
Shareholder loans to joint ventures | Payment activity | Performing | $ | 20,612 | $ | 24,510 |
The shareholder loans to joint ventures are classified as advances to joint ventures in the unaudited condensed interim consolidated and combined carve-out balance sheet as of September 30, 2014 and December 31, 2013. See note 8.
16. Risk management and concentrations of risk
Derivative instruments can be used in accordance with the overall risk management policy.
Foreign exchange risk
All revenues, financing, interest expenses from financing and most expenditures for newbuildings are denominated in U.S. dollars. Certain operating expenses are denominated in currencies other than U.S. dollars. For the three and nine months ended September 30, 2014 and 2013, no derivative financial instruments have been used to manage foreign exchange risk.
Interest rate risk
Interest rate swaps can be utilized to exchange a receipt of floating interest for a payment of fixed interest to reduce the exposure to interest rate variability on its outstanding floating-rate debt. As of September 30, 2014, there are forward starting interest rate swap agreements on the $299 million Lampung floating rate debt that are designated as cash flow hedges for accounting purposes. No derivative instruments were outstanding as of December 31, 2013. As of September 30, 2014, the following interest rate swap agreements were outstanding:
(in thousands of U.S. dollars) | Interest rate index | Notional amount | Fair value carrying amount liability | Term | Fixed interest rate (1) | |||||||||||||||
LIBOR-based debt | ||||||||||||||||||||
Interest rate swaps (2) | LIBOR | $ | 237,100 | $ | (7,416 | ) | | Sept 2026 | | 2.8 | % |
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. |
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HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED
CARVE-OUT FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
The following table presents the location and fair value amounts of derivative instruments, segregated by type of contract, on the combined carve-out balance sheets.
(in thousands of U.S. dollars) | Current liabilities: derivative financial instruments | Long-term liabilities: derivative financial instruments | ||||||
As of September 30, 2014 | ||||||||
Interest rate swaps | $ | (5,473 | ) | $ | (1,943 | ) | ||
|
|
|
| |||||
As of December 31, 2013 | ||||||||
Interest rate swaps | $ | — | $ | — | ||||
|
|
|
|
Unrealized and realized gains (losses) of the interest rate swap and related income tax (benefits) expenses are recognized in other comprehensive income in the unaudited condensed interim combined carve-out statements of comprehensive income for cash flow hedges. As of September 30, 2014, the unrealized loss and the related income tax benefit related to the interest rate swap recorded in other comprehensive income were $7,416 and $1,854, respectively.
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, demand note due from Höegh LNG and interest rate swap agreements, if applicable. In order to minimize counterparty risk, bank relationships are established with counterparties with acceptable credit ratings at the time of the transactions. Vessels are generally chartered to international counterparties in the energy sector with appropriate credit ratings. Höegh LNG has incentives to honor its commitments to the Partnership given its investment in common and subordinated units.
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, unbilled construction contract income, demand note from owner and derivative contracts (interest rate swaps). The maximum exposure to loss due to credit risk is the book value at the balance sheet date. 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. Credit risk related to receivables is limited by performing ongoing credit evaluations of the customers’ financial condition. In addition, some of the time charters require the payment of the time charter rates on the first banking day of the month of hire which limits the risk of non-performance. The Partnership has no significant advances for construction since thePGN FSRU Lampung and the Mooring were delivered to the Partnership in the second quarter of 2014.
18. Supplemental cash flow information
Nine months ended | ||||||||
September 30, | ||||||||
(in thousands of U.S. dollars) | 2014 | 2013 | ||||||
Supplemental disclosure of non-cash financing activities: | ||||||||
Non-cash capital contribution from conversion of debt | $ | 101,500 | $ | — | ||||
Non-cash elimination to equity August 13, 2014 (note 2) | 45,799 | — |
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HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED
CARVE-OUT FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
19. Earnings per unit and cash distributions
The calculation of basic and diluted earnings per unit are presented below:
August 12 to September 30, | ||||
(in thousands of U.S. dollars, except per unit numbers) | 2014 | |||
Post IPO net income attributable to the unitholders of Höegh LNG Partners LP | $ | 6,914 | ||
Less: Dividends paid or to be paid (1) | 4,826 | |||
|
| |||
Over (under) distributed earnings | 2,088 | |||
|
| |||
Over (under) distributed earnings attributable to: | ||||
Common units public | 876 | |||
Common units Höegh LNG | 168 | |||
Subordinated units Höegh LNG | 1,044 | |||
|
| |||
2,088 | ||||
|
| |||
Basic and diluted weighted average units outstanding (in thousands) | ||||
Common units public | 11,040 | |||
Common units Höegh LNG | 2,116 | |||
Subordinated units Höegh LNG | 13,156 | |||
Basic and diluted earnings per unit: | ||||
Common units public | $ | 0.2628 | ||
Common units Höegh LNG | $ | 0.2628 | ||
Subordinated units Höegh LNG | $ | 0.2628 | ||
Cash distributions declared and paid during the period per unit | — | |||
Subsequent event: Cash distributions declared and paid per unit subsequent to period end | $ | 0.1834 |
(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. |
Earnings per unit information for the period ended September 30, 2014 is for the period from August 12, 2014 (the date of the Partnership’s IPO) to September 30, 2014. Earnings per unit information has not been presented for any period prior to the Partnership’s IPO as the information is not comparable due to changes in the basis of preparation of the financial statements (refer to note 2) and the Partnership’s structure (refer to note 3).
As of September 30, 2014, the total number of units outstanding was 26,312,120. Common units outstanding were 13,156,060 of which 11,040,000 common units were held by the public and 2,116,060 common units were held by Höegh LNG. Höegh LNG owned 13,156,060 subordinated units. The General Partner has a non-economic interest and has no units.
Earnings per unit is calculated by dividing net income by the weighted average number of units outstanding during the applicable period.
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HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED
CARVE-OUT FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
The common unitholders’ and subordinated unitholders’ interest in net income are calculated as if all net income were distributed according to terms of the Partnerships’ First 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; and iii) provide funds for distributions to the unitholders for any one or more of the next four quarters. Therefore, the earnings per unit is 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 financial 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.
The amount of minimum distributions is $0.3375 per unit per quarter, or $1.35 per unit on an annual basis, and is made during the subordination period in the following manner:
• | 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:
• | 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; |
then, the Partnership will distribute any additional available cash from operating surplus for that quarter among the unitholders in the following manner:
• | first, 100.0% to all unitholders, pro rata, until each unitholder receives a total of $0.388125 per unit for that quarter (the “first target distribution”); |
• | second, 85.0% to all unitholders, pro rata, and 15.0% to the holders of the incentive distribution rights, pro rata, until each unitholder receives a total of $0.421875 per unit for that quarter (the “second target distribution”); |
• | third, 75.0% to all unitholders, pro rata, and 25.0% to the holders of the incentive distribution rights, pro rata, until each unitholder receives a total of $0.50625 per unit for that quarter (the “third target distribution”); and |
• | thereafter, 50.0% to all unitholders, pro rata, and 50.0% to the holders of the incentive distribution rights, pro rata. |
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HÖEGH LNG PARTNERS LP
NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED AND COMBINED
CARVE-OUT FINANCIAL STATEMENTS
(in thousands of U.S. dollars, unless otherwise indicated)
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.
20. Subsequent events
On November 14, 2014, the Partnership paid a prorated quarterly cash distribution with respect to the quarter ended September 30, 2014 of $0.1834 per unit. The distribution was prorated for the period beginning on August 12, 2014, which was the closing date of the IPO, and ending on September 30, 2014, and corresponds to a quarterly distribution of $0.3375 per outstanding unit, or $1.35 per outstanding unit on an annualized basis. The cash distribution totalled $4.8 million.
PGN accepted thePGN FSRU Lampung following the successful completion of the acceptance tests after thePGN FSRU Lampung resumed operations after resolving problems with the regasification system. The signed Certificate of Acceptance is effective October 30, 2014.
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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: November 25, 2014 | ||||||
By: | /s/ Richard Tyrrell | |||||
| ||||||
Name: Richard Tyrrell | ||||||
Title: Chief Executive Officer and Chief Financial Officer |