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, 2018

 

Commission File Number 001-36588

 

 

 

Höegh LNG Partners LP

(Translation of registrant’s name into English)

 

 

 

Wessex House, 5 th Floor

45 Reid Street

Hamilton, HM 12 Bermuda

 

(Address of principal executive office)

 

 

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

 

Form 20-F     x            Form 40-F    ¨

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1).

 

Yes    ¨            No    x

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7).

 

Yes    ¨            No    x

 

 

 

 

 

 

HÖEGH LNG PARTNERS LP

 

REPORT ON FORM 6-K FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018

 

Table of Contents

 

  Page
   
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 3
   
FORWARD LOOKING STATEMENTS 28
   
INDEX TO FINANCIAL STATEMENTS F-1
   
Unaudited Condensed Interim Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2018 and 2017 F-2
   
Unaudited Condensed Interim Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017 F-3
   
Unaudited Condensed Interim Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017 F-4
   
Unaudited Condensed Interim Consolidated Statements of Changes in Partners’ Capital for the Nine Months Ended September 30, 2018 and the Year Ended December 31, 2017 F-6
   
Unaudited Condensed Interim Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2018 and 2017 F-8
   
Notes to Unaudited Condensed Interim Consolidated Financial Statements F-10
   
EXHIBITS 30
   
SIGNATURE 31

 

 2 

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following is a discussion of our financial condition and results of operations for the three and nine months ended September 30, 2018 and 2017. References in this report to “Höegh LNG Partners,” “we,” “our,” “us” and “the Partnership” refer to Höegh LNG Partners LP or any one or more of its subsidiaries, or to all such entities unless the context otherwise indicates. References in this report to “our operating company” refer to Höegh LNG Partners Operating LLC, a wholly owned subsidiary of the Partnership. References in this report to “Höegh Lampung” refer to Hoegh LNG Lampung Pte Ltd., a wholly owned subsidiary of our operating company. References in this report to “Höegh FSRU III” refer to Höegh LNG FSRU III Ltd., a wholly owned subsidiary of our operating company. References in this report to “Höegh Cyprus” refer to Hoegh LNG Cyprus Limited including its wholly owned branch, Hoegh LNG Cyprus Limited Egypt Branch (“Egypt Branch”), a wholly owned subsidiary of Höegh FSRU III and the owner of the Höegh Gallant. References in this report to “PT Höegh” refer to PT Hoegh LNG Lampung, the owner of the PGN FSRU Lampung. References in this report to “Höegh Colombia Holding” refer to Höegh LNG Colombia Holding Ltd., a wholly owned subsidiary of our operating company. References in this report to “Höegh FSRU IV” refers to Höegh LNG FSRU IV Ltd., a wholly owned subsidiary of Höegh Colombia Holding and the owner of the Höegh Grace. References in this report to “Höegh Colombia” refer to Höegh LNG Colombia S.A.S., a wholly owned subsidiary of Höegh Colombia Holding. References in this report to our or the “joint ventures” refer to SRV Joint Gas Ltd. and/or SRV Joint Gas Two Ltd., the joint ventures that own two of the vessels in our fleet, the Neptune and the Cape Ann, respectively. References in this report to “Global LNG” refer to Global LNG Supply S.A., a subsidiary of Total S.A.. References in this Report to “PGN LNG” refer to PT PGN LNG Indonesia, a subsidiary of PT Perusahaan Gas Negara (Persero) Tbk (“PGN”). References in this report to “SPEC” refer to Sociedad Portuaria El Cayao S.A. E.S.P. References in this report to “Höegh LNG” refer, depending on the context, to Höegh LNG Holdings Ltd. and to any one or more of its direct and indirect subsidiaries, other than us. References in this Report to “EgyptCo” refer to Höegh LNG Egypt LLC, a wholly owned subsidiary of Höegh LNG.

 

You should read this section in conjunction with the unaudited condensed interim consolidated financial statements as of September 30, 2018 and for the periods ended September 30, 2018 and 2017 and the related notes thereto included elsewhere in this report, as well as our historical consolidated financial statements and related notes included in our report on Form 20-F filed with the Securities and Exchange Commission (“SEC”) on April 6, 2018 (our “2017 Form 20-F”). This discussion includes forward-looking statements which, although based on assumptions that we consider reasonable, are subject to risks and uncertainties which could cause actual events or conditions to differ materially from those currently anticipated and expressed or implied by such forward-looking statements. See also the discussion in the section entitled “Forward- Looking Statements” below.

 

Highlights

 

  · Reported total time charter revenues of $37.3 million for the third quarter of 2018 compared to $35.9 million of time charter revenues for the third quarter of 2017

 

  · Generated operating income of $28.7 million, net income of $19.9 million and partners’ interest in net income of $16.6 million for the third quarter of 2018 compared to operating income of $15.3 million, net income of $5.4 million and partners' interest in net income of $2.5 million for the third quarter of 2017

 

  · Operating income, net income and partners' interest in net income were impacted by unrealized gains on derivative instruments mainly on the Partnership's share of equity in earnings (losses) of joint ventures for the third quarter of 2018 and 2017; in addition, operating income, net income and partners' interest in net income were negatively impacted by accruals for a performance claim for exceeding historical minimum performance standards for boil-off under the time charters on the Partnership's share of equity in losses of joint ventures for the third quarter of 2017

 

  · On November 14, 2018, paid a $0.44 per unit distribution on common and subordinated units with respect to the third quarter of 2018, equivalent to $1.76 per unit on an annualized basis

 

  · On November 15, 2018, paid a cash distribution of $0.546875 per 8.75% Series A cumulative redeemable preferred unit (the "Series A preferred unit"), for the period commencing on August 15, 2018 to November 14, 2018

 

 3 

 

 

Our results of operations

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
(in thousands of U.S. dollars, except per unit amounts)  2018   2017   2018   2017 
Statement of Income Data:                    
Time charter revenues  $37,301    35,856    107,695   $105,957 
Other revenue   3        1,103     
Total revenues   37,304    35,856    108,798    105,957 
Vessel operating expenses   (5,794)   (5,909)   (17,009)   (17,714)
Construction contract expenses               (151)
Administrative expenses   (2,102)   (2,067)   (6,990)   (7,289)
Depreciation and amortization   (5,287)   (5,264)   (15,823)   (15,789)
Total operating expenses   (13,183)   (13,240)   (39,822)   (40,943)
Equity in earnings (losses) of joint ventures   4,551    (7,321)   19,031    (962)
Operating income (loss)   28,672    15,295    88,007    64,052 
Interest income   179    98    540    341 
Interest expense   (6,655)   (7,739)   (20,437)   (23,227)
Gain (loss) on derivative instruments   516    571    1,692    1,481 
Other items, net   (780)   (633)   (2,266)   (2,857)
Income (loss) before tax   21,932    7,592    67,536    39,790 
Income tax expense   (2,050)   (2,185)   (6,025)   (5,982)
Net income (loss)  $19,882    5,407    61,511   $33,808 
Non-controlling interest in income       2,899        8,455 
Preferred unitholders’ interest in net income   3,288        8,951     
Limited partners’ interest in net income (loss)  $16,594    2,508    52,560   $25,353 
                     
Basic earnings per unit                    
Common unit public  $0.49   $0.07   $1.56   $0.74 
Common unit Höegh LNG  $0.51   $0.09   $1.63   $0.80 
Subordinated unit  $0.51   $0.09   $1.63   $0.80 
Diluted earnings per unit                    
Common unit public  $0.49   $0.07   $1.55   $0.74 
Common unit Höegh LNG  $0.51   $0.09   $1.63   $0.80 
Subordinated unit  $0.51   $0.09   $1.63   $0.80 
Cash Flow Data:                    
Net cash provided by (used in) operating activities  $25,406   $23,068   $65,377   $61,667 
Net cash provided by (used in) investing activities   965    876    2,828    5,952 
Net cash provided by (used in) financing activities  $(21,887)  $(22,699)  $(66,607)  $(66,052)
Other Financial Data:                    
Segment EBITDA (1)  $36,444   $19,403   $108,224   $78,453 

 

 

 

(1)Segment EBITDA is a non-GAAP financial measure. Please read “Non-GAAP Financial Measure” for a definition of Segment EBITDA and a reconciliation of Segment EBITDA to net income, the comparable U.S. GAAP financial measure

 

 4 

 

 

Nine Months ended September 30, 2018 Compared with the Nine Months ended September 30, 2017

 

Revenues. The following table sets forth details of our revenues for the nine months ended September 30, 2018 and 2017:

 

           Positive 
   Nine months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Time charter revenues  $107,695   $105,957   $1,738 
Other revenue   1,103        1,103 
Total revenues  $108,798   $105,957   $2,841 

 

Time charter revenues for the nine months ended September 30, 2018 were $107.7 million, an increase of $1.7 million from $106.0 million for the nine months ended September 30, 2017. Time charter revenues increased due to higher time charter revenue for the PGN FSRU Lampung for the nine months ended September 30, 2018 which was partially offset by lower time charter revenue for the Höegh Grace. The increase in revenues for the PGN FSRU Lampung was mainly due to recognition of revenue in the first and third quarters of 2018 for previously constrained variable consideration for reimbursement of prior period expenses following the conclusion of the charterer's audit process which was partially offset by the reduction in revenues for the Höegh Grace mainly related to one day of off-hire. Time charter revenues for the Höegh Gallant were at the same level for the nine months ended September 30, 2018 and 2017. The Höegh Gallant had 10 days of scheduled maintenance for the nine months ended September 30, 2018 compared with approximately 11 days of scheduled maintenance resulting in several days of reduced hire for the nine months ended September 30, 2017. We were indemnified by Höegh LNG for the prior period expenses for the PGN FSRU Lampung when they were incurred, subject to repayment to the extent recovered from reimbursement by the charterer. During the fourth quarter of 2018, we expect to refund to Höegh LNG approximately $1.0 million for the previous indemnification as a result of the revenue recognized for the reimbursement in the third quarter of 2018.

 

Other revenue consists of insurance proceeds received for claims related to repairs under a warranty provision related to the Mooring (as defined below) which were completed in 2017. Refer to "Construction Contract Expenses" below.

 

Time charter revenues for the PGN FSRU Lampung consist of the lease element of the time charter, accounted for as a direct financing lease using the effective interest rate method, as well as variable consideration for providing time charter services, reimbursement for vessel operating expenses, performance warranties, if any, and withholding taxes borne by the charterer. Time charter revenues for the Höegh Gallant consist of the fixed daily hire rate which covers the operating lease and the provision of time charter services including the costs incurred to operate the vessel and performance warranties, if any. Time charter revenues for the Höegh Grace consist of a lease element accounted for as an operating lease, as well as variable consideration for providing time charter services, reimbursement of vessel operating expenses, performance warranties, if any, and certain taxes incurred. Effective January 1, 2018, we adopted the new accounting standard, Revenue from Contracts with Customers, which did not change the timing or amount of revenue recognized but requires additional qualitative and quantitative disclosures. Refer to notes 2.c. and 5 in the unaudited condensed interim consolidated financial statements.

 

Vessel Operating Expenses. The following table sets forth details of our vessel operating expenses for the nine months ended September 30, 2018 and 2017:

 

           Positive 
   Nine months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Vessel operating expenses  $(17,009)  $(17,714)  $705 

 

Vessel operating expenses for the nine months ended September 30, 2018 were $17.0 million, a decrease of $0.7 million from the nine months ended September 30, 2017. The decrease was mainly due to lower vessel operating expenses for the Höegh Gallant and the Höegh Grace as a result of a more focused purchasing strategy for supplies.

 

Construction Contract Expenses. The following table sets forth details of our construction contract expenses for the nine months ended September 30, 2018 and 2017:

 

           Positive 
   Nine months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Construction contract expenses  $   $(151)  $151 

 

 5 

 

 

Construction contract expenses relate to an offshore installation that is used to moor the PGN FSRU Lampung to offload natural gas into an offshore pipe that transports the gas to a land terminal for the charterer, PGN LNG (the “Mooring”). The Mooring was constructed on behalf of, delivered and sold to, PGN LNG in 2014. As of December 31, 2014 and June 30, 2016, the Partnership recorded provisions for a warranty allowance of $2.0 million and $0.3 million, respectively, for technical issues that required the replacement of equipment parts for the Mooring. The warranty repair work, including the installation of the replacement parts, was completed during second quarter of 2017, and the final cost exceeded the remaining warranty allowance. As a result, an additional expense of $0.2 million was recorded. Part of the costs incurred for the remaining warranty replacements, net of deductible amounts, were anticipated to be recoverable under insurance coverage. Subsequent to June 30, 2018, $1.1 million of the insurance claim was received which was recognized as Other revenue for the six months ended June 30, 2018. We were indemnified by Höegh LNG for all warranty provisions at the time the costs were incurred, subject to repayment to the extent recovered by insurance. During the third quarter of 2018, approximately $1.1 million was refunded to Höegh LNG.

 

Administrative Expenses. The following table sets forth details of our administrative expenses for the nine months ended September 30, 2018 and 2017: 

 

           Positive 
  Nine months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Administrative expenses  $(6,990)  $(7,289)  $299 

 

Administrative expenses for the nine months ended September 30, 2018 were $7.0 million, a decrease of $0.3 million from $7.3 million for the nine months ended September 30, 2017. Reduced administrative expenses related to the entities operating the PGN FSRU Lampung, the Höegh Gallant and the Höegh Grace were partly offset by higher partnership expenses.

 

Depreciation and Amortization. The following table sets forth details of our depreciation and amortization for the nine months ended September 30, 2018 and 2017:

 

           Positive 
   Nine months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Depreciation and amortization  $(15,823)  $(15,789)  $(34)

 

Depreciation and amortization was $15.8 million for each of the nine months ended September 30, 2018 and 2017.

 

Total Operating Expenses. The following table sets forth details of our total operating expenses for the nine months ended September 30, 2018 and 2017:  

 

           Positive 
   Nine months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Total operating expenses  $(39,822)  $(40,943)  $1,121 

 

Total operating expenses for the nine months ended September 30, 2018 were $39.8 million, a decrease of $1.1 million from $40.9 million for the nine months ended September 30, 2017. The decrease is mainly due to reduced vessel operating expenses and lower administrative expenses for the PGN FSRU Lampung, the Höegh Gallant and the Höegh Grace in the nine months ended September 30, 2018 compared to the corresponding period of 2017.

 

Equity in Earnings (Losses) of Joint ventures. The following table sets forth details of our equity in earnings (losses) of joint ventures for the nine months ended September 30, 2018 and 2017:

 

           Positive 
   Nine months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Equity in earnings (losses) of joint ventures  $19,031   $(962)  $19,993 

 

Equity in earnings of joint ventures for the nine months ended September 30, 2018 was $19.0 million, an increase of $20.0 million from equity in losses of joint ventures for the nine months ended September 30, 2017 of $1.0 million. Unrealized gains on derivative instruments in our joint ventures significantly impacted the equity in earnings (losses) of joint ventures for the nine months ended September 30, 2018 and 2017.  

 

 6 

 

 

Excluding the unrealized gains on derivative instruments for the nine months ended September 30, 2018 and 2017, the equity in earnings of joint ventures would have been $6.4 million for the nine months ended September 30, 2018, an increase of $10.9 million compared to equity in losses of joint ventures of $4.5 million for the nine months ended September 30, 2017. The increase was mainly due to the accruals for boil-off claims under the joint ventures' time charters for the nine months ended September 30, 2017. The Partnership's 50% share of the accruals was approximately $11.9 million for the nine months ended September 30, 2017. Refer to "Segments; Joint venture FSRUs" below and note 14 under "Joint ventures' claims and accruals" to the unaudited condensed interim consolidated financial statements contained in this Report on Form 6-K for additional information.

 

Our share of our joint ventures’ operating income was $16.2 million for the nine months ended September 30, 2018 compared to $6.0 million for the nine months ended September 30, 2017. Excluding the impact of the boil-off accruals for the nine months ended September 30, 2017, our joint ventures’ operating income decreased by $1.7 million mainly due to higher vessel operating and administrative expenses for the nine months ended September 30, 2018.

 

Our share of other income (expense), net, principally consisting of interest expense, was $9.8 million for the nine months ended September 30, 2018, a decrease of $0.7 million from $10.5 million for the nine months ended September 30, 2017, principally due to the repayment of outstanding loan balances for bank financing.

 

Our share of unrealized gain on derivative instruments was $12.6 million for the nine months ended September 30, 2018, an increase of $9.1 million from unrealized gain of $3.5 million for the nine months ended September 30, 2017.

 

There was no accrued income tax expense for the nine months ended September 30, 2018 and 2017. Our joint ventures did not pay any dividends for the nine months ended September 30, 2018 and 2017.

 

Operating Income (Loss). The following table sets forth details of our operating income (loss) for the nine months ended September 30, 2018 and 2017:

 

           Positive 
   Nine months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Operating income (loss)  $88,007   $64,052   $23,955 

 

Operating income for the nine months ended September 30, 2018 was $88.0 million, an increase of $23.9 million from operating income of $64.1 million for the nine months ended September 30, 2017. Excluding the impact of the unrealized gains on derivatives for the nine months ended September 30, 2018 and 2017 impacting the equity in earnings (losses) of joint ventures, operating income for the nine months ended September 30, 2018 would have been $75.4 million, an increase of $14.9 million from $60.5 million for the nine months ended September 30, 2017. Excluding the unrealized gains on derivatives, the increase for the nine months ended September 30, 2018 is primarily due to the recognition of revenue for reimbursement of prior period expenses, receipt of insurance proceeds related to prior periods expenses, and increased equity in earnings of our joint ventures due to the impact from the accruals for boil-off claims for the joint ventures for the nine months ended September 30, 2017.

 

Interest Income. The following table sets forth details of our interest income for the nine months ended September 30, 2018 and 2017:

 

           Positive 
   Nine months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Interest income  $540   $341   $199 

 

Interest income for the nine months ended September 30, 2018 was $0.5 million, an increase of $0.2 million from $0.3 million for the nine months ended September 30, 2017. Interest income is mainly related to cash balances and interest accrued on the advances to our joint ventures for the nine months ended September 30, 2018 and 2017, respectively. The interest rate under the shareholder loans is a fixed rate of 8.0% per year.

 

Interest Expense. The following table sets forth details of our interest expense for the nine months ended September 30, 2018 and 2017: 

 

           Positive 
   Nine months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Interest expense  $(19,862)  $(21,870)  $2,008 
Commitment fees   (37)   (728)   691 
Amortization of debt issuance cost and fair value of debt assumed   (538)   (629)   91 
Total interest expense  $(20,437)  $(23,227)  $2,790 

 

 7 

 

 

Total interest expense for the nine months ended September 30, 2018 was $20.4 million, a decrease of $2.8 million from $23.2 million for the nine months ended September 30, 2017. Interest expense consists of the interest incurred, commitment fees and amortization of debt issuance cost and fair value of debt assumed for the period.

 

The interest incurred of $19.9 million for the nine months ended September 30, 2018, decreased by $2.0 million compared to $21.9 million for the nine months ended September 30, 2017, principally due to repayment of outstanding loan balances for the loan facilities related to the PGN FSRU Lampung (the “Lampung facility”), the Höegh Gallant (the “Gallant facility”) and the Höegh Grace (the “Grace facility”) and the repayment of the seller’s credit note in October 2017. The positive impact on interest expense of the repayment of the seller’s credit note was partially offset by the increased outstanding balance on the revolving credit facility.

  

Commitment fees were $0.04 million for the nine months ended September 30, 2018, a decrease of $0.69 million for the nine months ended September 30, 2017. The commitment fees relate to the undrawn balance of the $85 million revolving credit facility. On January 29, 2018, the revolving credit facility was amended to eliminate the requirement to pay a commitment fee on the undrawn balance of the facility as of that date.

 

Amortization of debt issuance cost and fair value of debt assumed was $0.5 million for the nine months ended September 30, 2018 compared to $0.6 million for the nine months ended September 30, 2017.

 

Gain (Loss) on Derivative Instruments. The following table sets forth details of our gain (loss) on derivative instruments for the nine months ended September 30, 2018 and 2017:

 

           Positive 
   Nine months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Gain (loss) on derivative instruments  $1,692   $1,481   $211 

 

Gain on derivative instruments for the nine months ended September 30, 2018 was $1.7 million, an increase of $0.2 million from $1.5 million for the nine months ended September 30, 2017. Gain on derivative instruments for the nine months ended September 30, 2018 and 2017 related to the interest rate swaps for the Lampung facility, the Gallant facility and the Grace facility. The increase is mainly due to a higher loss on the ineffective portion of the cash flow hedges for the nine months ended September 30, 2017.

 

Other Items, Net. The following table sets forth details of our other items, net for the nine months ended September 30, 2018 and 2017:

 

           Positive 
   Nine months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Foreign exchange gain (loss)  $(238)  $(920)  $682 
Bank charges, fees and other   (109)   (68)   (41)
Withholding tax on interest expense and other   (1,919)   (1,869)   (50)
Total other items, net  $(2,266)  $(2,857)  $591 

 

Other items, net, were $2.3 million for the nine months ended September 30, 2018, a decrease of $0.6 million from $2.9 million for the nine months ended September 30, 2017. The decrease is mainly due to reduced foreign exchange loss.

 

Income (Loss) Before Tax. The following table sets forth details of our income (loss) before tax for the nine months ended September 30, 2018 and 2017:

 

           Positive 
   Nine months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Income (loss) before tax  $67,536   $39,790   $27,746 

 

Income before tax for the nine months ended September 30, 2018 was $67.5 million, an increase of $27.7 million from $39.8 million for the nine months ended September 30, 2017. The income before tax for both periods was impacted by unrealized gains on derivative instruments mainly on the Partnership’s share of equity in earnings (losses) of joint ventures. Excluding all the unrealized gains on derivative instruments, income before tax for the nine months ended September 30, 2018 was $53.2 million, an increase of $18.4 million from $34.8 million for the nine months ended September 30, 2017. Excluding the unrealized gain on derivative instruments, the increase is primarily due to higher revenues related to recovery of prior period expenses, lower total operating expenses and interest expense and increased equity in earnings (losses) of our joint ventures. 

 

 8 

 

 

Income Tax Expense. The following table sets forth details of our income tax expense for the nine months ended September 30, 2018 and 2017:

 

           Positive 
   Nine months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Income tax expense  $(6,025)  $(5,982)  $(43)

 

Income tax expense was $6.0 million for each of the nine months ended September 30, 2018 and 2017. We are not subject to Marshall Islands income taxes. However, we are subject to tax for earnings of our subsidiaries incorporated in Singapore, Indonesia, Colombia, Cyprus and the UK and certain Colombian source income. For the nine months ended September 30, 2018 and 2017, the income tax expense largely related to activities in Indonesia, Colombia and Singapore. The Singapore subsidiary’s taxable income mainly arises from internal interest income. The charterer in Colombia pays certain taxes directly to the Colombian tax authorities on behalf of the Partnership’s subsidiaries that own and operate the Höegh Grace ("the Höegh Grace entities"). The tax payments are a mechanism for advance collection of income taxes for the Colombian subsidiary and a final income tax on Colombian source income for the non-Colombian subsidiary. We concluded these third-party payments to the tax authorities represent income taxes that must be accounted for under the guidance for income taxes. The amount of non-cash income tax expense was $0.6 million for both the nine months ended September 30, 2018 and 2017.

 

Benefits of uncertain tax positions are recognized when it is more-likely-than-not that a tax position taken in a tax return will be sustained upon examination based on the technical merits of the position. For the nine months ended September 30, 2018 and 2017, the estimated generation of taxable income resulted in the utilization of $1.5 million and $0.3 million of tax loss carryforward in Indonesia which was not recognized due to the uncertainty of this tax position. As a result, an income tax payable of $1.5 million and $0.3 million was recorded for the uncertain tax position for the nine months ended September 30, 2018 and 2017, respectively. The Indonesian subsidiary is currently undergoing a tax examination for the fiscal years of 2013 and 2014. Tax examinations may lead to ordinary course adjustments or proposed adjustments to the Partnership's taxes or tax loss carryforwards with respect to years under examination. Such an examination may or may not result in changes to the Partnership’s provisions on tax filings from 2013 through 2017. Refer to note 14 to the unaudited condensed interim consolidated financial statements contained herein.

 

Net Income (Loss). The following table sets forth details of our net income (loss) for the nine months ended September 30, 2018 and 2017:

 

           Positive 
   Nine months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Net income (loss)  $61,511   $33,808   $27,703 
Non-controlling interest in net income       8,455    (8,455)
Preferred unitholders' interest in net income   8,951        8,951 
Limited partners’ interest in net income (loss)  $52,560   $25,353   $27,207 

 

As a result of the foregoing, net income for the nine months ended September 30, 2018 was $61.5 million, an increase of $27.7 million from net income of $33.8 million for the nine months ended September 30, 2017. For the nine months ended September 30, 2017, net income of $8.5 million was attributable to non-controlling interest for the 49% interest in Höegh Colombia Holding, the owner of the Höegh Grace entities, not owned by us in the period from January 1, 2017 to September 30, 2017. On December 1, 2017, we acquired the remaining 49% ownership interest in the Höegh Grace entities and, as of that date, there was no longer a non-controlling interest in the Höegh Grace. For the nine months ended September 30, 2018, net income of $8.9 million was attributable to the holders of the Series A preferred units due the issuance of Series A preferred units on October 5, 2017 and subsequently as part of our at-the-market ("ATM") program. Our limited partners' interest in net income for the nine months ended September 30, 2018 was $52.6 million, an increase of $27.2 million from net income of $25.4 million for the nine months ended September 30, 2017.

 

Segments

 

There are two operating segments. The segment profit measure is Segment EBITDA, which is defined as earnings before interest, taxes, depreciation, amortization and other financial items (gains and losses on derivative instruments and other items, net) less the non-controlling interest in Segment EBITDA. 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, interest income from advances to joint ventures and interest expense related to the seller’s credit note and the outstanding balance on the $85 million revolving credit facility are included in “Other.”

 

 9 

 

 

For the nine months ended September 30, 2018 and 2017, Majority held FSRUs includes the direct financing lease related to the PGN FSRU Lampung and the operating leases related to the Höegh Gallant and the Höegh Grace. For the nine months ended September 30, 2018 and 2017, Joint Venture FSRUs include two 50% owned FSRUs, the Neptune and the Cape Ann, that operate under long-term time charters with one charterer.

 

The accounting policies applied to the segments are the same as those applied in the financial statements, except that i) Joint Venture FSRUs are presented under the proportional consolidation method for the segment note and in the tables below, and under equity accounting for the consolidated financial statements and ii) non-controlling interest in Segment EBITDA is subtracted in the segment note and the tables below to reflect the Partnership’s interest in Segment EBITDA as the Partnership’s segment profit measure, Segment EBITDA. 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. On January 1, 2017, the Partnership began consolidating its acquired 51% interest in the Höegh Grace entities. Since the Partnership obtained control of the Höegh Grace entities, it consolidated 100% of the revenues, expenses, assets and liabilities of the Höegh Grace entities and the interest not owned by the Partnership was reflected as non-controlling interest in net income and non-controlling interest in total equity under US GAAP. Management monitored the results of operations of the Höegh Grace entities based on the Partnership’s 51% interest in Segment EBITDA of such entities and, therefore, subtracted the non-controlling interest in Segment EBITDA to present Segment EBITDA. The adjustment to non-controlling interest in Segment EBITDA is reversed to reconcile to operating income and net income in the segment presentation. On December 1, 2017, the Partnership acquired the remaining 49% ownership interest in the Höegh Grace entities and, as of that date, there is no longer a non-controlling interest in the Höegh Grace entities.

 

Majority held FSRUs. The following table sets forth details of segment results for the Majority held FSRUs for the nine months ended September 30, 2018 and 2017:

 

   Nine months ended   Positive 
Majority Held FSRUs  September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Time charter revenues  $107,695   $105,957   $1,738 
Other revenues   1,103        1,103 
Total revenues   108,798    105,957    2,841 
Vessel operating expenses   (17,009)   (17,714)   705 
Construction contract expense       (151)   151 
Administrative expenses   (2,419)   (2,913)   494 
Less: Non-controlling interest in Segment EBITDA       (15,772)   15,772 
Segment EBITDA   89,370    69,407    19,963 
Add: Non-controlling interest in Segment EBITDA       15,772    (15,772)
Depreciation and amortization   (15,823)   (15,789)   (34)
Operating income (loss)   73,547    69,390    4,157 
Gain (loss) on derivative instruments   1,692    1,481    211 
Other financial income (expense), net   (20,060)   (22,611)   2,551 
Income (loss) before tax   55,179    48,260    6,919 
Income tax expense   (5,975)   (5,980)   5 
Net income (loss)  $49,204   $42,280   $6,924 
Non-controlling interest in net income       8,455    (8,455)
Limited partners' interest in net income (loss)  $49,204   $33,825   $15,379 

 

Time charter revenues for the nine months ended September 30, 2018 were $107.7 million, an increase of $1.7 million from the nine months ended September 30, 2017. As discussed in more detail above, the main reason for higher time charter revenues was higher revenues recognized for reimbursement of prior period expenses for the PGN FSRU Lampung following the conclusion of the charterer's audit process which was partially offset by lower revenues for the Höegh Grace mainly related to one day of off-hire. The Höegh Gallant had off-hire or reduced hire days principally related to scheduled maintenance for both the nine months ended September 30, 2018 and 2017. The PGN FSRU Lampung was on-hire for the nine months ended September 30, 2018 and 2017.

 

Other revenue consists of insurance proceeds received for claims related to repairs under a warranty provision related to the Mooring which were completed in 2017. The Partnership was indemnified by Höegh LNG for the cost of the repairs, subject to repayment to the extent recovered from insurance proceeds. During the third quarter of 2018, approximately $1.1 million was refunded to Höegh LNG which was recorded as cash distribution in equity. 

 

Vessel operating expenses for the nine months ended September 30, 2018 were $17.0 million compared to $17.7 million for the nine months ended September 30, 2017. The decrease reflects reduced vessel operating expenses for the Höegh Gallant and the Höegh Grace.

 

 10 

 

 

Construction contract expenses were $0.2 million for the nine months ended September 30, 2017. As discussed in more detail above, the expenses were for installation of replacement parts under a warranty related to the Mooring. 

 

Administrative expenses for the nine months ended September 30, 2018 were $2.4 million, a decrease of $0.5 million from $2.9 million for the nine months ended September 30, 2017, reflecting lower expenses for all the entities owning the vessels.

 

Segment EBITDA for the nine months ended September 30, 2018 was $89.4 million, an increase of $20.0 million from $69.4 million for the nine months ended September 30, 2017. The increase was mainly due to no longer having a non-controlling interest in Segment EBITDA because of the acquisition of the remaining 49% interest in the Höegh Grace entities, which closed on December 1, 2017. In addition, Segment EBITDA was positively impacted by the higher revenues related to prior periods expenses and lower vessel operating expenses.

 

Joint venture FSRUs. The following table sets forth details of segment results for the Joint venture FSRUs for the nine months ended September 30, 2018 and 2017:

 

   Nine months ended   Positive 
Joint Venture FSRUs  September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Time charter revenues  $32,033   $31,608   $425 
Accruals historical boil-off claim       (11,850)   11,850 
Total revenues   32,033    19,758    12,275 
Vessel operating expenses   (7,400)   (5,848)   (1,552)
Administrative expenses   (1,208)   (488)   (720)
Segment EBITDA   23,425    13,422    10,003 
Depreciation and amortization   (7,199)   (7,379)   180 
Operating income (loss)   16,226    6,043    10,183 
Gain (loss) on derivative instruments   12,633    3,513    9,120 
Other income (expense), net   (9,828)   (10,518)   690 
Income (loss) before tax   19,031    (962)   19,993 
Income tax expense            
Net income (loss)  $19,031   $(962)  $19,993 

 

Total time charter revenues for the nine months ended September 30, 2018 were $32.0 million, an increase of $0.4 million compared to $31.6 million for the nine months ended September 30, 2017. Higher time charter revenues for the nine months ended September 30, 2018 mainly reflects reimbursements of costs incurred for a new project for the charterer related to the Cape Ann.

 

For the nine months ended September 30, 2017, the joint ventures recorded accruals for boil-off claims made by the charterer under the Neptune and the Cape Ann time charters. The charterer and the joint ventures have referred the claim to arbitration. The charterer and the joint ventures have asked the arbitration panel for a partial award on certain key contractual interpretations and these proceedings commenced in November 2018. The joint ventures will continue to monitor this issue and adjust accruals, as might be required, based upon additional information and further developments. The Partnership's 50% share of the accruals was approximately $11.9 million which was recorded as a reduction of time charter revenues for the three months ended September 30, 2017, and as of September 30, 2018, the accruals were unchanged. Refer to note 14 under "Joint ventures' claims and accruals" to the unaudited condensed interim consolidated financial statements contained in this Report on Form 6-K for additional information.

 

Total revenues for the nine months ended September 30, 2018 were $32.0 million compared to $19.8 million for the nine months ended September 30, 2017. The increase in total revenue is mainly due to the accruals for the historical boil-off claim impacting the revenues negatively for the nine months ended September 30, 2017.

 

Vessel operating expenses were $7.4 million for the nine months ended September 30, 2018, an increase of $1.6 million compared to $5.8 million as of September 30, 2017. Lower on-going vessel operating expenses related to the operations of the Neptune in Turkey were offset by higher vessel operating expenses related to the Cape Ann for the nine months ended September 30, 2018 compared with the nine months ended September 30, 2017. The Cape Ann commenced drydock and modifications work in August 2018 and left the shipyard close to the end of September 2018 resulting in increased maintenance expenses for the nine months ended September 30, 2018. The Cape Ann was on-hire during the drydock period.

 

Administrative expenses for the nine months ended September 30, 2018 were $1.2 million, an increase of $0.7 million compared to $0.5 million for the nine months ended September 30, 2017. The higher administrative expenses were mainly due to a new project for the charterer related to the Cape Ann.

 

 11 

 

 

Segment EBITDA was $23.4 million for the nine months ended September 30, 2018 compared with $13.4 million for the nine months ended September 30, 2017. The main reason for the increase was the accruals for historical boil-off recorded in the nine months ended September 30, 2017. Excluding the impact of the boil-off accruals for the nine months ended September 30, 2017, Segment EBITDA decreased by $1.9 million mainly due to higher vessel operating and administrative expenses for the nine months ended September 30, 2018.

 

Other. The following table sets forth details of other results for the nine months ended September 30, 2018 and 2017:

 

   Nine months ended   Positive 
Other  September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Administrative expenses  $(4,571)  $(4,376)  $(195)
Segment EBITDA   (4,571)   (4,376)   (195)
Operating income (loss)   (4,571)   (4,376)   (195)
Other financial income (expense), net   (2,103)   (3,132)   1,029 
Income (loss) before tax   (6,674)   (7,508)   834 
Income tax expense   (50)   (2)   (48)
Net income (loss)  $(6,724)  $(7,510)  $786 

 

Administrative expenses and Segment EBITDA for the nine months ended September 30, 2018 were $4.6 million, an increase of $0.2 million from $4.4 million for the nine months ended September 30, 2017.

 

Other financial income (expense), net, which is not part of the segment measure of profits, is related to the interest income accrued on the advances to our joint ventures and bank accounts and interest expense for a seller’s credit note, which was fully repaid in October 2017, and the $85 million revolving credit facility.

 

Other financial income (expense), net was an expense of $2.1 million for the nine months ended September 30, 2018, a decrease of $1.0 million from $3.1 million for the nine months ended September 30, 2017. The decrease is mainly due to reduced interest expense incurred on the revolving credit facility principally due to repayment and reduced outstanding loan balance on the revolving credit facility.

 

Three Months Ended September 30, 2018 Compared with the Three Months Ended September 30, 2017

 

Revenues. The following table sets forth details of our revenues for the three months ended September 30, 2018 and 2017:

 

           Positive 
   Three months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Time charter revenues  $37,301   $35,856   $1,445 
Other revenue   3        3 
Total revenues  $37,304   $35,856   $1,448 

 

Time charter revenues for the three months ended September 30, 2018 were $37.3 million, an increase of $1.4 million from the three months ended September 30, 2017. The increase was mainly due to higher time charter revenue for the PGN FSRU Lampung for the three months ended September 30, 2018 which was partially offset by reduced time charter revenue for the Höegh Grace due to one day of off-hire. The increase in revenues for the PGN FSRU Lampung was mainly due to recognition of revenue in the third quarter of 2018 for previously constrained variable consideration for the reimbursement of prior period expenses as a result of concluding an audit for the charterer. We were indemnified by Höegh LNG for the period expenses when they were incurred, subject to repayment to the extent recovered from reimbursement by the charterer. During the fourth quarter of 2018, we expect to refund to Höegh LNG approximately $1.0 million for the previous indemnification. The Höegh Gallant was on-hire for the entire three months ended September 30, 2018. During the three months ended September 30, 2017, there were several days of reduced hire equivalent to approximately one day of off-hire for the Höegh Gallant.

 

 12 

 

 

Vessel Operating Expenses. The following table sets forth details of our vessel operating expenses for the three months ended September 30, 2018 and 2017:

 

           Positive 
   Three months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Vessel operating expenses  $(5,794)  $(5,909)  $115 

 

Vessel operating expenses for the three months ended September 30, 2018 were $5.8 million, a decrease of $0.1 million from the $5.9 million for the three months ended September 30, 2017. The decrease is mainly due to lower vessel operating expenses for the Höegh Gallant which is partially offset by increased vessel operating expenses for PGN FSRU Lampung.

 

Administrative Expenses. The following table sets forth details of our administrative expenses for the three months ended September 30, 2018 and 2017:

 

           Positive 
   Three months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Administrative expenses  $(2,102)  $(2,067)  $(35)

 

Administrative expenses were $2.1 million for each of the three months ended September 30, 2018 and 2017.

 

Depreciation and Amortization. The following table sets forth details of our depreciation and amortization for the three months ended September 30, 2018 and 2017:

 

           Positive 
   Three months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Depreciation and amortization  $(5,287)  $(5,264)  $(23)

 

Depreciation and amortization was $5.3 million for each of the three months ended September 30, 2018 and 2017.

 

Total Operating Expenses. The following table sets forth details of our total operating expenses for the three months ended September 30, 2018 and 2017: 

 

           Positive 
   Three months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Total operating expenses  $(13,183)  $(13,240)  $57 

 

Total operating expenses were $13.2 million for each of the three months ended September 30, 2018 and 2017. 

 

 13 

 

 

Equity in Earnings (Losses) of Joint ventures. The following table sets forth details of our equity in earnings (losses) of joint ventures for the three months ended September 30, 2018 and 2017:

 

           Positive 
   Three months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Equity in earnings (losses) of joint ventures  $4,551   $(7,321)  $11,872 

 

Equity in earnings of joint ventures for the three months ended September 30, 2018 was $4.6 million, an increase of $11.9 million from equity in losses of joint ventures of $7.3 million for the three months ended September 30, 2017. Unrealized gains on derivative instruments in our joint ventures significantly impacted the equity in earnings (losses) of joint ventures for the three months ended September 30, 2018 and 2017. 

 

Excluding the unrealized gains on derivative instruments for the three months ended September 30, 2018 and 2017, the equity in earnings of joint ventures would have been $1.4 million for the three months ended September 30, 2018, an increase of $10.5 million compared to equity in losses of joint ventures of $9.1 million for the three months ended September 30, 2017. The increase was mainly due to the accruals for boil-off claims under the joint ventures' time charters for the three months ended September 30, 2017. The Partnership's 50% share of the accruals was approximately $11.9 million for the three months ended September 30, 2017. Refer to "Segments; Joint venture FSRUs" below and note 14 under "Joint ventures' claims and accruals" to the unaudited condensed interim consolidated financial statements contained in this Report on Form 6-K for additional information.

 

Our share of our joint ventures’ operating income was $4.6 million for the three months ended September 30, 2018, an increase of $10.2 million compared with our share of our joint ventures' operating loss of $5.6 million for the three months ended September 30, 2017. Excluding the impact of the boil-off accruals for the three months ended September 30, 2017, our joint ventures’ operating income decreased by $1.7 million mainly due to higher vessel operating expenses for maintenance expenses for the three months ended September 30, 2018.

 

Our share of other expense, net, principally consisting of interest expense, was $3.2 million for the three months ended September 30, 2018, a decrease of $0.3 million from $3.5 million for the three months ended September 30, 2017.

 

Our share of unrealized gains on derivative instruments was $3.1 million for the three months ended September 30, 2018, an increase of $1.3 million from unrealized gains of $1.8 million for the three months ended September 30, 2017.

 

There was no accrued income tax expense for the three months ended September 30, 2018 and 2017. Our joint ventures did not pay any dividends for the three months ended September 30, 2018 and 2017.

 

Operating Income (Loss). The following table sets forth details of our operating income (loss) for the three months ended September 30, 2018 and 2017:

 

           Positive 
   Three months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Operating income (loss)  $28,672   $15,295   $13,377 

 

Operating income for the three months ended September 30, 2018 was $28.7 million, an increase of $13.4 million from operating income of $15.3 million for the three months ended September 30, 2017. Excluding the impact of the unrealized gains on derivatives for the three months ended September 30, 2018 and 2017 impacting the equity in earnings (losses) of joint ventures, operating income for the three months ended September 30, 2018 would have been $25.5 million, an increase of $12.0 million from $13.5 million for the three months ended September 30, 2017. The increase for the three months ended September 30, 2018 was primarily due to increase in equity in earnings (losses) of joint ventures mainly due to the historical boil-off claim that had a negative impact for the three months ended September 30, 2017 with no comparable accruals for the three months ended September 30, 2018.

 

 14 

 

 

Interest Income. The following table sets forth details of our interest income for the three months ended September 30, 2018 and 2017:

 

           Positive 
   Three months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Interest income  $179   $98   $81 

 

Interest income for the three months ended September 30, 2018 was $0.2 million, an increase of $0.1 million from $0.1 million for the three months ended September 30, 2017. Interest income is mainly related to cash balances and interest accrued on the advances to our joint ventures for the three months ended September 30, 2018 and 2017, respectively. The interest rate under the shareholder loans is a fixed rate of 8.0% per year.

 

Interest Expense. The following table sets forth details of our interest expense for the three months ended September 30, 2018 and 2017:

 

           Positive 
   Three months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Interest expense  $(6,480)  $(7,309)  $829 
Commitment fees       (223)   223 
Amortization of debt issuance cost and fair value of debt assumed   (175)   (207)   32 
Total interest expense  $(6,655)  $(7,739)  $1,084 

  

Total interest expense for the three months ended September 30, 2018 was $6.7 million, a decrease of $1.0 million from $7.7 million for the three months ended September 30, 2017. Interest expense consists of the interest incurred, commitment fees and amortization of debt issuance cost and fair value of debt assumed for the period.

 

The interest incurred of $6.5 million for the three months ended September 30, 2018, decreased by $0.8 million compared to $7.3 million for the three months ended September 30, 2017, principally due to repayment of outstanding loan balances for the Lampung facility, the Gallant facility and the Grace facility and the repayment of the seller's credit note in October 2017. The positive impact on interest expense of the repayment of the seller’s credit note was partially offset by the increased outstanding balance on the revolving credit facility.

 

There were no commitment fees for the three months ended September 30, 2018 compared with $0.2 million for the three months ended September 30, 2017. The commitment fees relate to the undrawn balance of the $85 million revolving credit facility. On January 29, 2018, the revolving credit facility was amended to eliminate the requirement to pay a commitment fee on the undrawn balance of the facility as of that date.

 

Amortization of debt issuance cost and fair value of debt assumed were $0.2 million for each of the three months ended September 30, 2018 and 2017.

 

Gain (Loss) on Derivative Instruments. The following table sets forth details of our gain (loss) on derivative instruments for the three months ended September 30, 2018 and 2017:

 

           Positive 
   Three months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Gain (loss) on derivative instruments  $516   $571   $(55)

 

Gain on derivative instruments for the three months ended September 30, 2018 was $0.5 million, a decrease of $0.1 million compared to the three months ended September 30, 2017. Gain on derivative instruments for the three months ended September 30, 2018 and 2017 related to the interest rate swaps for the Lampung facility, the Gallant facility and the Grace facility. The decrease is mainly due to a lower amortization of amount excluded from hedge effectiveness for the three months ended September 30, 2018 compared with the three months ended September 30, 2017. 

 

 15 

 

 

Other Items, Net. The following table sets forth details of our other items, net for the three months ended September 30, 2018 and 2017:

 

           Positive 
   Three months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Foreign exchange gain (loss)  $(98)  $24   $(122)
Bank charges, fees and other   (37)   (16)   (21)
Withholding tax on interest expense and other   (645)   (641)   (4)
Total other items, net  $(780)  $(633)  $(147)

 

Other items, net for the three months ended September 30, 2018 were $0.8 million, an increase of $0.2 million from $0.6 million for the three months ended September 30, 2017. The increase is mainly due to the increased net foreign exchange loss and increased bank charges, fees and other.

 

Income (Loss) Before Tax. The following table sets forth details of our income (loss) before tax for the three months ended September 30, 2018 and 2017:

 

           Positive 
   Three months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Income (loss) before tax  $21,932   $7,592   $14,340 

  

Income before tax for the three months ended September 30, 2018 was $21.9 million, an increase of $14.3 million from $7.6 million for the three months ended September 30, 2017. The income before tax for both periods was impacted by the unrealized gains on derivative instruments mainly on the Partnership’s share of equity in earnings (losses) of joint ventures. Excluding all the unrealized gains on derivative instruments, income before tax for the three months ended September 30, 2018 was $18.3 million, an increase of $13.1 million from $5.2 million for the three months ended September 30, 2017. Excluding the unrealized gain on derivative instruments, the increase is primarily due to higher time charter revenues, an increase in equity in earnings (losses) of joint ventures and lower total financial expense, net, for the three months ended September 30, 2018 compared with the three months ended September 30, 2017.

 

Income Tax Expense. The following table sets forth details of our income tax expense for the three months ended September 30, 2018 and 2017:

 

           Positive 
   Three months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Income tax expense  $(2,050)  $(2,185)  $135 

 

Income tax expense for the three months ended September 30, 2018 was $2.1 million, a decrease of $0.1 million compared to $2.2 million for the three months ended September 30, 2017. We are not subject to Marshall Islands income taxes. However, we are subject to tax for earnings of our subsidiaries incorporated in Singapore, Indonesia, Colombia, Cyprus and the UK and certain Colombian source income. For the three months ended September 30, 2018 and 2017, the income tax expense largely related to activities in Singapore, Indonesia and Colombia. The charterer in Colombia pays certain taxes directly to the Colombian tax authorities on the Höegh Grace entities. The tax payments are a mechanism for advance collection of part of the income taxes for the Colombian subsidiary and a final income tax on Colombian source income for the non-Colombian subsidiary. We concluded these third party payments to the tax authorities represent income taxes that must be accounted for under the guidance for income taxes. The amount of non-cash income tax expense was $0.2 million for each of the three months ended September 30, 2018 and 2017.

 

Benefits of uncertain tax positions are recognized when it is more-likely-than-not that a tax position taken in a tax return will be sustained upon examination based on the technical merits of the position. For the three months ended September 30, 2018 and 2017, the estimated generation of taxable income resulted in the utilization of $0.7 and $0.1 million, respectively, of tax loss carryforward in Indonesia which was not recognized due to the uncertainty of this tax position. The Indonesian subsidiary is currently undergoing a tax examination for the fiscal years of 2013 and 2014. The tax examinations may lead to ordinary course adjustments or proposed adjustments to the Partnership's taxes or tax loss carryforwards with respect to years under examination. Such an examination may or may not result in changes to the Partnership’s provisions on tax filings from 2013 through 2017. Refer to note 14 to the unaudited condensed interim consolidated financial statements contained herein.

 

 16 

 

 

Net Income (Loss). The following table sets forth details of our net income (loss) for the three months ended September 30, 2018 and 2017:

 

           Positive 
   Three months ended September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Net income (loss)  $19,882   $5,407   $14,475 
Non-controlling interest in net income       2,899    (2,899)
Preferred unitholders' interest in net income   3,288        3,288 
Limited partners’ interest in net income (loss)  $16,594   $2,508   $14,086 

 

As a result of the foregoing, net income for the three months ended September 30, 2018 was $19.9 million, an increase of $14.5 million from net income of $5.4 million for the three months ended September 30, 2017. For the three months ended September 30, 2017, net income of $2.9 million was attributable to non-controlling interest for the 49% interest in Höegh Colombia Holding, the owner of the Höegh Grace entities, not owned by us in the period from July 1, 2017 to September 30, 2017. On December 1, 2017, we acquired the remaining 49% ownership interest in the Höegh Grace entities and, as of that date, there was no longer a non-controlling interest in the Höegh Grace. For the three months ended September 30, 2018, net income of $3.3 million was attributable to the holders of the Series A preferred units due the issuance of Series A preferred units on October 5, 2017 and subsequently as part of our ATM program. Our limited partners' interest in net income for the three months ended September 30, 2018 was $16.6 million, an increase of $14.1 million from net income of $2.5 million for the three months ended September 30, 2017.

   

Segments

 

Majority held FSRUs. The following table sets forth details of segment results for the Majority held FSRUs for the three months ended September 30, 2018 and 2017:

 

   Three months ended   Positive 
Majority Held FSRUs  September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Time charter revenues  $37,301   $35,856   $1,445 
Other revenues   3        3 
Total revenues   37,304    35,856    1,448 
Vessel operating expenses   (5,794)   (5,909)   115 
Administrative expenses   (718)   (763)   45 
Less: Non-controlling interest in Segment EBITDA       (5,354)   5,354 
Segment EBITDA   30,792    23,830    6,962 
Add: Non-controlling interest in Segment EBITDA       5,354    (5,354)
Depreciation and amortization   (5,287)   (5,264)   (23)
Operating income (loss)   25,505    23,920    1,585 
Gain (loss) on derivative instruments   516    571    (55)
Other financial income (expense), net   (6,650)   (7,128)   478 
Income (loss) before tax   19,371    17,363    2,008 
Income tax expense   (2,021)   (2,183)   162 
Net income (loss)  $17,350   $15,180   $2,170 
Non-controlling interest in net income       2,899    (2,899)
Limited partners' interest in net income (loss)  $17,350   $12,281   $5,069 

 

Time charter revenues for the three months ended September 30, 2018 were $37.3 million, an increase of $1.4 million from the three months ended September 30, 2017. As discussed above, higher time charter revenue for the PGN FSRU Lampung for the three months ended September 30, 2018 was partially offset by reduced time charter revenue for the Höegh Grace which was off-hire for one day.  

 

Vessel operating expenses for the three months ended September 30, 2018 were $5.8 million, a decrease of $0.1 million compared to $5.9 million for the three months ended September 30, 2017. The decrease is mainly due to lower vessel operating expenses for the Höegh Gallant which is partially offset by increased vessel operating expenses for PGN FSRU Lampung.

 

Administrative expenses for the three months ended September 30, 2018 were $0.7 million, a decrease of $0.1 million from $0.8 million for the three months ended September 30, 2017, mainly due to lower administrative expenses for the Höegh Gallant.

 

 17 

 

 

Segment EBITDA for the three months ended September 30, 2018 was $30.8 million, an increase of $7.0 million from $23.8 million for the three months ended September 30, 2017 mainly due to no longer having a non-controlling interest in Segment EBITDA because of the acquisition of the remaining 49% interest in the Höegh Grace entities, which closed on December 1, 2017. In addition, Segment EBITDA was positively impacted by higher time charter revenues.

 

Joint venture FSRUs. The following table sets forth details of segment results for the Joint venture FSRUs for the three months ended September 30, 2018 and 2017:

 

   Three months ended   Positive 
Joint Venture FSRUs  September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Time charter revenues  $10,462   $10,460   $2 
Accruals historical boil-off claim       (11,850)   11,850 
Total revenues   10,462    (1,390)   11,852 
Vessel operating expenses   (3,169)   (1,617)   (1,552)
Administrative expenses   (257)   (116)   (141)
Segment EBITDA   7,036    (3,123)   10,159 
Depreciation and amortization   (2,399)   (2,462)   63 
Operating income (loss)   4,637    (5,585)   10,222 
Gain (loss) on derivative instruments   3,151    1,802    1,349 
Other income (expense), net   (3,237)   (3,538)   301 
Income (loss) before tax   4,551    (7,321)   11,872 
Income tax expense            
Net income (loss)  $4,551   $(7,321)  $11,872 

 

Total time charter revenues were $10.5 million for each of the three months ended September 30, 2018 and 2017. Time charter revenues for the three months ended September 30, 2018 reflected lower recovery of costs incurred related to the operations of the Neptune in Turkey and certain of the project expenses incurred for the Cape Ann.

 

For the three months ended September 30, 2017, the joint ventures recorded accruals for boil-off claims made by the charterer under the Neptune and the Cape Ann time charters as described above. Refer to note 14 under "Joint ventures claims' and accruals" to the unaudited condensed interim consolidated financial statements contained in this Report on Form 6-K for additional information.

 

Total revenues for the three months ended September 30, 2018 were $10.5 million compared to a negative revenue of $1.4 million for the three months ended September 30, 2017. The increase in total revenue is due to the accruals for the historical boil-off claim impacting the revenues negatively for the three months ended September 30, 2017.

 

Vessel operating expenses were $3.2 million for the three months ended September 30, 2018 compared to $1.6 million for the three months ended September 30, 2017. On-going vessel operating expenses related to the operations of the Neptune in Turkey increased. However, the majority of the increase in vessel operating expenses related to the Cape Ann. The Cape Ann commenced the drydock and modifications work in August 2018 and left the shipyard close to the end of September 2018. Approximately $1.3 million of the expenses were incurred for normal maintenance that was completed during the drydock and other maintenance upgrades to resolve performance issues or enhance safety which were not required by class requirements. Approximately $1.0 million of the expenses incurred during the drydock are not reimbursable by the charterer. The Cape Ann was on-hire during the drydock period.

 

The other drydock and vessel modifications costs for the charterer were capitalized as components of the vessel and will be depreciated over the period to the next drydock or over the useful live for the modifications. The majority of the capitalized drydock and modification costs are reimbursable by the charterer. The revenue for such reimbursements is deferred and will be amortized over the period to the next drydock or over the remaining time charter contract life.  

 

Administrative expenses for the three months ended September 30, 2018 were $0.3 million, an increase of $0.2 million compared to $0.1 million for the three months ended September 30, 2017 reflecting higher project expenses for both the Neptune and the Cape Ann.

 

Segment EBITDA was $7.0 million for the three months ended September 30, 2018 compared with a loss of $3.1 million for the three months ended September 30, 2017. Excluding the impact of the boil-off accruals for the three months ended September 30, 2017, Segment EBITDA decreased by $1.7 million due to higher vessel operating and administrative expenses for the three months ended September 30, 2018.

 

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Other. The following table sets forth details of other results for the three months ended September 30, 2018 and 2017:

 

   Three months ended   Positive 
Other  September 30,   (negative) 
(in thousands of U.S. dollars)  2018   2017   variance 
Administrative expenses  $(1,384)  $(1,304)  $(80)
Segment EBITDA   (1,384)   (1,304)   (80)
Operating income (loss)   (1,384)   (1,304)   (80)
Other financial income (expense), net   (606)   (1,146)   540 
Income (loss) before tax   (1,990)   (2,450)   460 
Income tax expense   (29)   (2)   (27)
Net income (loss)  $(2,019)  $(2,452)  $433 

 

Administrative expenses and Segment EBITDA for the three months ended September 30, 2018 were $1.4 million, an increase of $0.1 million from $1.3 million for the three months ended September 30, 2017.

 

Other financial income (expense), net, which is not part of the segment measure of profits, is related to the interest income on cash balances and accrued on the advances to our joint ventures and interest expense for a seller’s credit note which was fully repaid in October 2017 and the $85 million revolving credit facility.

 

Other financial income (expense), net was an expense of $0.6 million for the three months ended September 30, 2018, a decrease of $0.5 million from $1.1 million for the three months ended September 30, 2017 principally due to lower interest expense, including commitment fees.

 

Liquidity and Capital Resources

 

Liquidity and Cash Needs

 

We operate in a capital-intensive industry, and we expect to finance the purchase of additional vessels and other capital expenditures through a combination of cash from operations, the utilization of borrowings from commercial banks and debt and equity financings. Our liquidity requirements relate to paying our unitholder distributions, servicing interest and quarterly repayments on our debt (“debt amortization”), funding working capital and maintaining cash reserves against fluctuations in operating cash flows. The liquidity requirements of our joint ventures relate to the servicing of debt, including repayment of shareholder loans, funding working capital, including drydocking and maintenance, and maintaining cash reserves against fluctuations in operating cash flows.

 

Our sources of liquidity include cash balances, cash flows from our operations, our current undrawn balance of $45.7 million as of September 30, 2018 under the $85 million revolving credit facility from Höegh LNG and net proceeds from our ATM program. Cash and cash equivalents are denominated primarily in U.S. dollars. We do not currently use derivative instruments for other purposes than managing interest rate risks. Historically, interest payments from our advances to joint ventures were a source of liquidity. The advances to our joint ventures (accrued interest from prior periods) are subordinated to the joint ventures’ long-term bank debt, consisting of the Neptune facility and the Cape Ann facility. Under terms of the shareholder loan agreements, the repayments shall be prioritized over any dividend payment to the owners of the joint ventures. As discussed in note 14 under "Joint ventures' claims and accruals" to the unaudited condensed interim consolidated financial statements, the joint ventures have recorded accruals for the probable liability for boil-off claim under the time charters. As a precaution, the joint ventures have suspended payments on the shareholder loans pending the outcome of the boil-off claim since the amounts and timing of a potential settlement are not clear. The suspension of the payments on the shareholder loans reduce cash flows available to us. In addition, as discussed in note 8, certain conditions apply to making distributions for the shareholder loans or dividends, including meeting a 1.20 historical and projected debt service ratio. As of September 30, 2018, the debt service ratio requirements were not met by either of the joint ventures. As a result, no distribution can be made unless the debt service ratio is met in future periods. Dividend distributions from our joint ventures require a) agreement of the other joint venture owners; b) fulfilment of requirements of the long-term bank loans; and c) under Cayman Islands law may be paid out of profits or capital reserves subject to the joint venture being solvent after the distribution. Dividends from Höegh Lampung may only be paid out of profits under Singapore law. Dividends from PT Höegh may only be paid if its retained earnings are positive under Indonesian law and requirements are fulfilled under the Lampung facility. In addition, PT Höegh, as an Indonesian incorporated company, is required to establish a statutory reserve equal to 20% of its paid up capital. The dividend can only be distributed if PT Höegh’s retained earnings are positive after deducting the statutory reserve. As of September 30, 2018, PT Höegh did not have adequate positive retained earnings to establish the required statutory reserves and therefore cannot make dividend payments under Indonesia law. However, subject to meeting a debt service ratio of 1.20 to 1.00, PT Höegh can distribute cash from its cash flow from operations to us as payment of intercompany accrued interest and/or intercompany debt, after quarterly payments of the Lampung facility and fulfilment of the “waterfall” provisions to meet operating requirements as defined by the Lampung facility. Under Cayman Islands law, Höegh FSRU III, Höegh FSRU IV and Höegh Colombia Holding may only pay distributions out of profits or capital reserves if the entity is solvent after the distribution. In addition, Höegh FSRU IV would also need to remain in compliance with the financial covenants under the Gallant/Grace facility. Dividends from Höegh Cyprus may only be distributed (i) out of profits and not from the share capital of the company and (ii) if after the dividend payment, Höegh Cyprus would remain in compliance with the financial covenants under the Gallant/Grace facility. Dividends from Höegh Colombia may only be distributed if after the dividend payment, Höegh Colombia would remain in compliance with the financial covenants under the Gallant/Grace facility.

 

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For a description of our credit facilities and revolving credit facility, please see notes 14 and 17 to the audited consolidated financial statements contained in our 2017 Form 20-F as well as notes 9 and 11 to the unaudited condensed interim consolidated financial statements contained in this Report on Form 6-K. 

 

As of September 30, 2018, we do not have material commitments for capital expenditures for our current business. In the third quarter of 2018, the conclusion of an audit by the charterer of the PGN FSRU Lampung resulted in the recognition of $1.0 million of revenue related to 2016 costs to be reimbursed by the charterer. The Partnership had been indemnified for these costs and expects to refund Höegh LNG for the previous indemnification in the fourth quarter of 2018. For the joint ventures, the charterer of the Cape Ann plans to use the vessel for a new project. The vessel was drydocked and fitted with certain modifications during the third quarter of 2018 which will be compensated by the charterer. Additional expenses and capital expenditure will be incurred in the fourth quarter for the deliveries of certain equipment, the competition of service deliverables, including required documentation, and the replacement of spare parts for those used in the drydock. The majority of such expenditures are expected to be compensated by the charterer. As discussed in note 14 under "Joint ventures' claims and accruals" in our unaudited condensed interim consolidated financial statements, the joint ventures have a probable liability for a boil-off claim under the time charters. Our 50% share of the accruals was approximately $11.9 million as of September 30, 2018. The joint ventures will continue to monitor this issue and adjust accruals, as might be required, based upon additional information and further developments. The parties have referred the claim to arbitration. To the extent that excess boil-off claims result in a settlement, we would be indemnified by Höegh LNG for our share of the cash impact of any settlement. However, other concessions or capital improvements, if any, would not be expected to be indemnified. In addition, the joint ventures expect to incur costs for certain capital improvements and maintenance that will not be reimbursed by the charterer or Höegh LNG for which the Partnership's 50% share is approximately $1.8 million and $1.2 million for the years ended December 31, 2018 and 2019, respectively. As of September 30, 2018, the Cape Ann had completed a drydock and the Neptune had completed certain upgrades and the Partnership's share of the capital improvements and maintenance incurred was approximately $1.5 million. The capital improvements are expected to reduce boil-off in certain modes of operation and other maintenance upgrades address safety and other performance improvements.

 

On October 15, 2018, the Partnership announced that Höegh LNG and the government-owned Egyptian Natural Gas Holding Company (“EGAS”) have agreed to amend the time charter for the Höegh Gallant between Höegh LNG Egypt LLC, a wholly owned subsidiary of Höegh LNG ("EgyptCo"), and EGAS whereby EgyptCo will charter the Höegh Gallant on an LNG carrier time charter to a third party, and EGAS will compensate for the rate difference between the original FSRU charter and the new LNG carrier time charter. The amended contract structure became effective in October 2018 and expires in April 2020, the termination date of the original FSRU charter. A subsidiary of the Partnership, as the owner of the Höegh Gallant, has a lease and maintenance agreement ("LMA") with EgyptCo until April 2020. As a result of the amendment to EgyptCo's contract with EGAS, the LMA may become subject to amendment. All existing guarantees and the option provided by Höegh LNG to the Partnership would remain in place under any amendment to the LMA. Any such amendment will be subject to approval by the Conflicts Committee of the Board of Directors of the Partnership and would not be expected to have a material effect on the Partnership.

 

In January 2018, we entered into a sales agreement with B. Riley Inc. (the "Agent"). Under the terms of the sales agreement, the Partnership may sell up to $120 million aggregate offering amount of common and Series A preferred units (the "ATM program"), from time to time, through the Agent. During the three months ended September 30, 2018, we had sold 568,200 Series A preferred units at an average gross sales price of $25.67 per unit and received net proceeds, after sales commissions, of $14.3 million. During the three months ended September 30, 2018, we had sold 81,731 common units at an average gross price of $18.34 per unit and received net proceeds, after sales commissions, of $1.5 million. The Partnership has paid an aggregate of $0.3 million in sales commissions to the Agent in connection with such sales for the three months ended September 30, 2018. As of September 30, 2018, we had sold a total of 1,356,226 Series A preferred units at an average gross sales price of $25.77 per unit and received net proceeds, after sales commissions, of $34.3 million. As of September 30, 2018, we had sold a total of 253,106 common units at an average gross price of $18.26 per unit and received net proceeds, after sales commissions, of $4.6 million. The Partnership has paid an aggregate of $0.7 million in sales commissions to the Agent in connection with all such sales as of September 30, 2018. We used the net proceeds from sales under the ATM program for general partnership purposes, including repayment of the revolving credit facility and unit distribution payments.

 

As of September 30, 2018, we had cash and cash equivalents of $24.2 million and an undrawn portion of $45.7 million of the $85 million revolving credit facility. Current restricted cash for operating obligations of the PGN FSRU Lampung was $7.4 million and long-term restricted cash required under the Lampung facility was $13.2 million as of September 30, 2018.

 

The Partnership’s book value and outstanding principal of total long-term debt was $486.0 million and $490.9 million, respectively, as of September 30, 2018, including long-term debt financing our FSRUs and the revolving credit facility due to owners and affiliates. The long-term debt is repayable in quarterly installments of $11.4 million. For a description of our credit facilities, please see notes 14 and 17 to the audited consolidated financial statements contained in our 2017 Form 20-F, as well as note 9 to the unaudited condensed interim consolidated financial statements contained in this Report on Form 6-K.

 

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As of September 30, 2018, the Partnership had outstanding interest rate swap agreements for a total notional amount of $386.0 million to hedge against the interest rate risks of its long-term debt under the Lampung, Gallant and Grace facilities. For additional information, refer to “Qualitative and Quantitative Disclosure About Market Risk” and note 13 to the unaudited condensed interim consolidated financial statements. As of September 30, 2018, the Partnership’s total current liabilities exceeded total current assets by $9.4 million. This is partly a result of the current portion of long-term debt of $45.5 million being classified current while the restricted cash of $13.2 million associated with the Lampung facility is classified as long-term. The current portion of long-term debt reflects principal payments for the next twelve months which will be funded, for the most part, by future cash flows from operations. We do not intend to maintain a cash balance to fund our next twelve months’ net liabilities. We believe our cash flows from operations, including distributions to us from PT Höegh, Höegh Cyprus, and Höegh FSRU IV as payment of intercompany interest and/or intercompany debt or dividends, will be sufficient to meet our debt amortization and working capital needs and maintain cash reserves against fluctuations in operating cash flows. In addition, we require liquidity to pay distributions to our unitholders. Our available balance on the $85 million revolving credit facility provides a source of liquidity reserve to supplement funding of our distributions and other general liquidity needs. In addition, liquidity can also be supplemented, from time to time, by net proceeds of the ATM program, depending on the market conditions. We believe our current resources, including the undrawn balance on the revolving credit facility, are sufficient to meet our working capital requirements for our current business for the next twelve months. Further as discussed below, the Partnership has commitments to refinance the Gallant/ Grace facility well in advance of its first maturity in November 2019.

 

On August 14, 2018, the Partnership paid a quarterly cash distribution with respect to the quarter ended June 30, 2018 of $0.44 per common and subordinated unit. The total amount of the distribution was $15.0 million.

 

On August 15, 2018, the Partnership paid a quarterly cash distribution of $0.546875 per Series A preferred unit. The total amount of the distribution paid on August 15, 2018, was $3.2 million

 

On August 21, 2018, we repaid $6.0 million on the revolving credit facility using part of the net proceeds of the ATM program.

 

On November 14, 2018, the Partnership paid a quarterly cash distribution with respect to the quarter ended September 30, 2018 of $0.44 per common and subordinated unit. The total amount of the distribution was $15.0 million.

 

On November 15, 2018 the Partnership paid a quarterly cash distribution of $0.546875 per Series A preferred unit. The total amount of the distribution paid on November 15, 2018 was $3.4 million.

 

For the period from October 1, 2018 to November 27, 2018, we sold 172,844 Series A preferred units under our ATM program at an average gross sales price of $25.52 per unit and received net proceeds, after sales commissions, of $4.3 million. For the period from October 1, 2018 to November 27, 2018, we sold no additional common units under our ATM program. We have paid an aggregate of $0.1 million in sales commissions to the Agent in connection with all such sales in the period from October 1, 2018 to November 27, 2018. From the commencement of the ATM program, the Partnership has sold 1,529,070 Series A preferred units and 253,106 common units, and received net proceeds of $38.7 million and $4.6 million, respectively. The compensation paid to the Agent for such sales was $0.7 million.

 

In November 2018, the Partnership received commitment letters from a syndicate of banks for refinancing of the outstanding balances of the Gallant /Grace facility. The new facility will include a senior secured term loan and revolving credit facilities of up to the lesser of $385 million and 65% of the fair market value of the Höegh Gallant and 75% of the fair market value of the Höegh Grace as of the initial borrowing date. The new facility is structured as a term loan with commercial and export credit tranches for each vessel to refinance outstanding amounts under the existing facility of approximately $320 million and a revolving credit facility for the Partnership with a drawing capacity of approximately $65 million. With respect to the export credit tranche, the new facility may be utilized by way of continuation of the export credit tranches under the existing Gallant /Grace facility. The term loan will be repayable in quarterly installments with a balloon payment at final maturity of seven years for the commercial tranches. The outstanding balance on the revolving credit facility will be payable in full at the final maturity date in seven years. The export credit tranches will be fully repaid on October 30, 2026 and March 30, 2028 for the Gallant facility and the Grace facility, respectively, assuming the balloon payments of the commercial tranches are refinanced. If not, the export credit agent can exercise a prepayment right for repayment of the outstanding balance upon maturity of the commercial tranches. The commercial tranches and revolving credit facility will bear interest at a rate of LIBOR plus a margin of 2.30%. The export credit tranche will bear interest at a fixed interest rate of 2.38% and have a guarantee commission of 1.6%. The Partnership expects to swap the floating element of the interest rate for the commercial tranches. The revolving credit facility under the new facility will be drawn to repay the outstanding balance under the revolving credit facility provided to the Partnership by Höegh LNG. The remaining balance on the revolving credit facility will be available to be drawn for general partnership purposes. The commitment fee on the undrawn portion of the revolving credit facility will be approximately 1.6%. The new facility is expected to be drawn in January 2019.

 

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Cash Flows

 

The following table summarizes our net cash flows from operating, investing and financing activities and our cash, cash equivalents and restricted cash for the periods presented:

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
(in thousands of U.S. dollars)  2018   2017   2018   2017 
Net cash provided by (used in) operating activities  $25,406    23,068    65,377   $61,667 
Net cash provided by (used in) investing activities   965    876    2,828    5,952 
Net cash provided by (used in) financing activities   (21,887)   (22,699)   (66,607)   (66,052)
Increase (decrease) in cash, cash equivalents and restricted cash   4,484    1,245    1,598    1,567 
Effect of exchange rate changes on cash and cash equivalents   (40)       (93)    
Cash, cash equivalents and restricted cash, beginning of period   40,342    41,446    43,281    41,124 
Cash, cash equivalents and restricted cash, end of period  $44,786    42,691    44,786   $42,691 

  

Nine Months ended September 30, 2018 Compared with the Nine Months ended September 30, 2017

 

Net Cash Provided by (Used in) Operating Activities

 

Net cash provided by operating activities was $65.4 million for the nine months ended September 30, 2018, an increase of $3.7 million compared with $61.7 million for the nine months ended September 30, 2017. Before changes in working capital, cash provided by operating activities was $64.2 million for the nine months ended September 30, 2018, an increase of $3.2 million compared to the $61.0 million for the nine months ended September 30, 2017 primarily due to increased earnings in the Majority held FRSU segment which was partially offset by the reduction on interest payments on advances to joint ventures for the nine months ended September 30, 2018 compared with the nine months ended September 30, 2017. Changes in working capital increased net cash provided by operating activities by $1.2 million for the nine months ended September 30, 2018, an increase of $0.5 million from a contribution of $0.7 million for the nine months ended September 30, 2017.

 

Net Cash Provided by (Used in) Investing Activities

 

Net cash provided by investing activities was $2.8 and $6.0 million for the nine months ended September 30, 2018 and 2017, respectively. The decrease in net cash provided by investing activities of $3.2 million was primarily the result of $3.8 million in cash acquired in the purchase of the initial 51% interest in the Höegh Grace entities for the nine months ended September 30, 2017 partly offset by the cash settlement of working capital adjustment for the 51% interest in the Höegh Grace entities of $0.4 million for the nine months ended September 30, 2017. For the nine months ended September 30, 2018, cash provided by investing activities included $2.8 million in receipts of repayment on principal on the direct financing lease since the PGN FSRU Lampung charter is accounted for as a financial lease compared to $2.6 million for the corresponding period of 2017. 

 

Net Cash Provided by (Used in) Financing Activities

 

Net cash used in financing activities for the nine months ended September 30, 2018 was $66.6 million compared with net cash used in financing activities of $66.1 million for the nine months ended September 30, 2017.

 

Net cash used in financing activities for the nine months ended September 30, 2018 was mainly due to the repayment of $14.3 million on the Lampung facility, $9.9 million on the Gallant facility, $9.9 million on the Grace facility and $17.5 million on the revolving credit facility, payment of $3.7 million on a customer loan for funding of VAT on import in Indonesia, payment of cash distributions to our common and subordinated unitholders of $44.4 million, payment of cash distribution to the holders of our Series A preferred units of $9.7 million and payment of a refund for indemnifications received from Höegh LNG of $1.1 million due to receipt of insurance proceeds. This was partially offset by receipt of $5.4 million under the revolving credit facility and net proceeds of $4.5 million and $34.0 million for the issuance of common units and Series A preferred units, respectively, under our ATM program.

 

Net cash used in financing activities for the nine months ended September 30, 2017 was mainly due to the repayment of $14.3 million on the Lampung facility, $9.9 million on the Gallant facility, $9.9 million on the Grace facility, payment of $1.3 million on a customer loan for funding of VAT on import in Indonesia, payment of cash distributions to our common and subordinated unitholders of $42.6 million and cash distributions to non-controlling interest of $5.9 million. This was partially offset by receipt of $15.7 million under the revolving credit facility and $2.1 million from Höegh LNG for the indemnification claimed for non-budgeted expenses and losses. 

 

As a result of the foregoing, cash and cash equivalents and restricted cash increased by $1.6 million for the nine months ended September 30, 2018 and 2017.

 

 22 

 

 

Three Months Ended September 30, 2018 Compared with the Three Months Ended September 30, 2017

 

Net Cash Provided by (Used in) Operating Activities

 

Net cash provided by operating activities was $25.4 million for the three months ended September 30, 2018, an increase of $2.3 million compared with $23.1 million for the three months ended September 30, 2017. Before changes in working capital, cash provided by operating activities was $22.7 million for the three months ended September 30, 2018, an increase of $1.5 million compared to $21.2 million for the three months ended September 30, 2017. The increase was primarily due to increased earnings in the Majority held FRSU segment which was partially offset by the reduction on interest payments on advances to joint ventures for the three months ended September 30, 2018 compared with the three months ended September 30, 2017. Changes in working capital increased net cash provided by operating activities by $2.7 million for the three months ended September 30, 2018, an increase of $0.8 million from a contribution of $1.9 million for the three months ended September 30, 2017.

 

Net Cash Provided by (Used in) Investing Activities

 

Net cash provided by investing activities was $1.0 and $0.9 million for the three months ended September 30, 2018 and 2017, respectively. The increase in net cash provided by investing activities of $0.1 million was primarily the result of increase in receipts of repayment on principal on the direct financing lease since the PGN FSRU Lampung charter is accounted for as a financial lease. 

 

Net Cash Provided by (Used in) Financing Activities

 

Net cash used in financing activities for the three months ended September 30, 2018 was $21.9 million compared with $22.7 million for the three months ended September 30, 2017.

 

Net cash used in financing activities for the three months ended September 30, 2018 was mainly due to the quarterly repayment of $4.8 million on the Lampung facility, $3.3 million on the Gallant facility and $3.3 million on the Grace facility, repayment of $6.0 million on the revolving credit facility, payment of $1.2 million on a customer loan for funding of VAT on import in Indonesia, payment of cash distributions to our common and subordinated unitholders of $15.0 million, payment of cash distribution to the holders of our Series A preferred units of $3.2 million and payment of refund for indemnifications received from Höegh LNG of $1.1 million. This was partially offset by receipt of net proceeds of $1.6 million and $14.4 million for issuance of common units and Series A preferred units, respectively, under our ATM program.

 

Net cash used in financing activities for the three months ended September 30, 2017 was mainly due to the quarterly repayment of $4.8 million on the Lampung facility, $3.3 million on the Gallant facility and $3.3 million on the Grace facility, our payment of cash distributions to our common and subordinated unitholders of $14.4 million and cash distributions to non-controlling interest of $2.0 million. This was partially offset by receipt of $4.0 million under the revolving credit facility and $1.1 million from Höegh LNG for the indemnification claims.

 

As a result of the foregoing, cash and cash equivalents and restricted cash increased by $4.5 million and $1.2 million for the three months ended September 30, 2018 and 2017, respectively.

 

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.

 

 23 

 

 

Foreign Exchange Risk

 

All financing, interest expenses from financing and most of the Partnership’s revenue and expenditures for vessel improvements are denominated in U.S. dollars. Certain operating expenses can be denominated in currencies other than U.S. dollars. For the three and nine months ended September 30, 2018, and 2017, no derivative financial instruments have been used to manage foreign exchange risk. The Gallant time charter provides that revenues are denominated 90% in U.S. dollars and 10% in Egyptian pounds, or as otherwise agreed between the parties from time to time. For the three and nine months ended September 30, 2018 and 2017, the revenues from the Höegh Gallant were denominated 97% in U.S. dollars and 3% in Egyptian pounds. A limited amount of operating expenses was also denominated in Egyptian pounds. Due to restrictions in Egypt, exchangeability between Egyptian pounds and other currencies was more than temporarily lacking or limited during 2017. There are two official published rates for Egyptian pounds. The lower rate is applied in the Partnership’s consolidated financial statements for revenues, expenses, assets and liabilities. For all of 2017 and for the three and nine months ended September 30, 2018, the Partnership agreed to the payment of monthly revenues denominated in Egyptian pounds that aligned with its working capital needs for the next month which reduced its foreign exchange rate exposure and the risk of loss to a minimal amount in the event Egyptian pound was devalued.  

 

Interest Rate Risk

 

Interest rate swaps are utilized to exchange a receipt of floating interest for a payment of fixed interest to reduce the exposure to interest rate variability on our outstanding floating-rate debt. As of September 30, 2018, there are interest rate swap agreements on the Lampung, Gallant and Grace facilities floating rate debt that are designated as cash flow hedges for accounting purposes. As of September 30, 2018, the following interest rate swap agreements were outstanding: 

 

          Fair        
          value      Fixed 
   Interest      carrying      interest 
   rate  Notional   amount      rate 
(in thousands of U.S. dollars)  index  amount   assets   Term  (1) 
LIBOR-based debt                    
Lampung interest rate swaps (2)  LIBOR  $140,850    889   Sept 2026  2.8% 
Gallant interest rate swaps (2)  LIBOR   117,000    822   Sept 2019  1.9% 
Grace interest rate swaps (2)  LIBOR  $128,125    969   March 2020  2.3% 

 

 

 

  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 and interest rate swap agreements. In order to minimize counterparty risk, bank relationships are established with counterparties with acceptable credit ratings at the time of the transactions. Credit risk related to receivables is limited by performing ongoing credit evaluations of the customers’ financial condition. In addition, Höegh LNG guarantees the payment of the Höegh Gallant time charter hire by EgyptCo under certain circumstances. PGN also guarantees PGN LNG's obligations under the PGN FSRU Lampung time charter. The other time charters do not have parent company guarantees.

 

 24 

 

 

Concentrations of Risk

 

Financial instruments, which potentially subject the Partnership to significant concentrations of credit risk, consist principally of cash and cash equivalents, restricted cash, trade receivables and derivative contracts (interest rate swaps). The maximum exposure to loss due to credit risk is the book value at the balance sheet date. The Partnership does not have a policy of requiring collateral or security. Cash and cash equivalents and restricted cash are placed with qualified financial institutions. Periodic evaluations are performed of the relative credit standing of those financial institutions. In addition, exposure is limited by diversifying among counterparties. There are three charterers so there is a concentration of risk related to trade receivables. Credit risk related to trade receivables is limited by performing ongoing credit evaluations of the customer’s financial condition. In addition, Höegh LNG guarantees the payment of the Höegh Gallant time charter hire by EgyptCo under certain circumstances. No impairment loss was recorded for the three and nine months ended September 30, 2018 and 2017 and the year ended December 31, 2017. While the maximum exposure to loss due to credit risk is the book value of trade receivables at the balance sheet date, should any of the time charters for the PGN FSRU Lampung, the Höegh Gallant or the Höegh Grace terminate prematurely, there could be delays in obtaining a new time charter and the rates could be lower depending upon the prevailing market conditions.

   

Non-GAAP Financial Measure

 

Segment EBITDA. EBITDA is defined as earnings before interest, depreciation and amortization and taxes. Segment EBITDA is defined as earnings before interest, depreciation and amortization, taxes and other financial items less non-controlling interest in Segment EBITDA. 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 expense). Segment EBITDA is used as a supplemental financial measure by management and external users of financial statements, such as the Partnership's lenders, to assess its financial and operating performance. The Partnership believes that Segment EBITDA assists its management and investors by increasing the comparability of its performance from period to period and against the performance of other companies in the industry that provide Segment EBITDA information. This increased comparability is achieved by excluding the potentially disparate effects between periods or companies of interest, other financial items, depreciation and amortization and taxes, which items are affected by various and possibly changing financing methods, capital structure and historical cost basis and which items may significantly affect net income between periods. The Partnership believes that including Segment EBITDA as a financial and operating measure benefits investors in (a) selecting between investing in it and other investment alternatives and (b) monitoring its ongoing financial and operational strength in assessing whether to continue to hold common units. Segment EBITDA is a non-GAAP financial measure and should not be considered an alternative to net income, operating income or any other measure of financial performance presented in accordance with U.S. GAAP. Segment EBITDA excludes some, but not all, items that affect net income, and these measures may vary among other companies. Therefore, Segment EBITDA as presented below may not be comparable to similarly titled measures of other companies. The following tables reconcile Segment EBITDA for each of the segments and the Partnership as a whole to net income (loss), the comparable U.S. GAAP financial measure, for the periods presented:

 

   Nine months ended September 30, 2018   
       Joint venture                     
   Majority   FSRUs       Total             
   held   (proportional       Segment   Elimin-     Consolidated   
(in thousands of U.S. dollars)  FSRUs   consolidation)   Other   reporting   ations(1)     reporting   
Reconciliation to net income (loss)                                  
Net income (loss)  $49,204    19,031    (6,724)   61,511          $61,511 (3)
Interest income   (231)   (171)   (309)   (711)   171  (4)   (540)  
Interest expense   18,106    9,985    2,331    30,422    (9,985) (4)   20,437   
Depreciation and amortization   15,823    7,199        23,022    (7,199) (5)   15,823   
Other financial items (2)   493    (12,619)   81    (12,045)   12,619  (6)   574   
Income tax (benefit) expense   5,975        50    6,025           6,025   
Equity in earnings of JVs:
Interest (income) expense, net
                   9,814  (4)   9,814   

Equity in earnings of JVs:
Depreciation and amortization

                   7,199  (5)   7,199   
Equity in earnings of JVs:
Other financial items (2)
                   (12,619) (6)   (12,619)  
Segment EBITDA  $89,370    23,425    (4,571)   108,224          $108,224   

 25 

 

 

   Nine months ended September 30, 2017   
       Joint venture                     
   Majority   FSRUs       Total             
   held   (proportional       Segment   Elimin-     Consolidated   
(in thousands of U.S. dollars)  FSRUs   consolidation)   Other   reporting   ations(1)     reporting   
Reconciliation to net income (loss)                                  
Net income (loss)  $42,280    (962)   (7,510)   33,808          $33,808 (3)
Interest income       (48)   (341)   (389)   48  (4)   (341)  
Interest expense   19,789    10,548    3,438    33,775    (10,548) (4)   23,227   
Depreciation and amortization   15,789    7,379        23,168    (7,379) (5)   15,789   
Other financial items (2)   1,341    (3,495)   35    (2,119)   3,495  (6)   1,376   
Income tax (benefit) expense   5,980        2    5,982           5,982   
Equity in earnings of JVs:
Interest (income) expense, net
                   10,500  (4)   10,500   
Equity in earnings of JVs:
Depreciation and amortization
                   7,379  (5)   7,379   
Equity in earnings of JVs:
Other financial items (2)
                   (3,495) (6)   (3,495)  
Non-controlling interest in segment EBITDA   (15,772)           (15,772)          (15,772)  
Segment EBITDA  $69,407    13,422    (4,376)   78,453          $78,453   

 

   Three months ended September 30, 2018   
       Joint venture                     
   Majority   FSRUs       Total             
   held   (proportional       Segment   Elimin-     Consolidated   
(in thousands of U.S. dollars)  FSRUs   consolidation)   Other   reporting   ations(1)     reporting   
Reconciliation to net income (loss)                                  
Net income (loss)  $17,350    4,551    (2,019)   19,882          $19,882 (3)
Interest income   (75)   (71)   (104)   (250)   71  (4)   (179)  
Interest expense   5,965    3,295    690    9,950    (3,295) (4)   6,655   
Depreciation and amortization   5,287    2,399        7,686    (2,399) (5)   5,287   
Other financial items (2)   244    (3,138)   20    (2,874)   3,138  (6)   264   
Income tax (benefit) expense   2,021        29    2,050           2,050   
Equity in earnings of JVs:
Interest (income) expense, net
                   3,224  (4)   3,224   
Equity in earnings of JVs:
Depreciation and amortization
                   2,399  (5)   2,399   
Equity in earnings of JVs:
Other financial items (2)
                   (3,138) (6)   (3,138)  
Segment EBITDA  $30,792    7,036    (1,384)   36,444          $36,444   

 

 26 

 

 

   Three months ended September 30, 2017   
       Joint venture                     
   Majority   FSRUs       Total             
   held   (proportional       Segment   Elimin-     Consolidated   
(in thousands of U.S. dollars)  FSRUs   consolidation)   Other   reporting   ations(1)     reporting   
Reconciliation to net income (loss)                                  
Net income (loss)  $15,180    (7,321)   (2,452)   5,407          $5,407 (3)
Interest income       (24)   (98)   (122)   24  (4)   (98)  
Interest expense   6,507    3,562    1,232    11,301    (3,562) (4)   7,739   
Depreciation and amortization   5,264    2,462        7,726    (2,462) (5)   5,264   
Other financial items (2)   50    (1,802)   12    (1,740)   1,802  (6)   62   
Income tax (benefit) expense   2,183        2    2,185           2,185   
Equity in earnings of JVs:
Interest (income) expense, net
                   3,538  (4)   3,538   
Equity in earnings of JVs:
Depreciation and amortization
                   2,462  (5)   2,462   
Equity in earnings of JVs:
Other financial items (2)
                   (1,802) (6)   (1,802)  
Non-controlling interest in segment EBITDA   (5,354)           (5,354)          (5,354)  
Segment EBITDA  $23,830    (3,123)   (1,304)   19,403          $19,403   

 

 

 

  (1) Eliminations reverse each of the income statement reconciling line items of the proportional amounts for Joint venture FSRUs that are reflected in the consolidated net income for the Partnership's share of the Joint venture FSRUs net income (loss) on the Equity in earnings (loss) of joint ventures line item in the consolidated income statement. Separate adjustments from the consolidated net income to Segment EBITDA for the Partnership's share of the Joint venture FSRUs are included in the reconciliation lines starting with “Equity in earnings of JVs.

 

  (2) Other financial items consist of gains and losses on derivative instruments and other items, net including foreign exchange gains or losses and withholding tax on interest expense.

 

  (3) There is no adjustment between net income for Total Segment reporting and the Consolidated reporting because the net income under the proportional consolidation and equity method of accounting is the same.

 

  (4) Interest income and interest expense for the Joint venture FSRUs is eliminated from the Total Segment reporting to agree to the interest income and interest expense in the Consolidated reporting and reflected as a separate adjustment to the equity accounting on the line Equity in earnings of JVs: Interest (income) expense for the Consolidated reporting.

 

  (5) Depreciation and amortization for the Joint venture FSRUs is eliminated from the Total Segment reporting to agree to the depreciation and amortization in the Consolidated reporting and reflected as a separate adjustment to the equity accounting on the line Equity in earnings of JVs: Depreciation and amortization for the Consolidated reporting.

 

  (6) Other financial items for the Joint venture FSRUs is eliminated from the Segment reporting to agree to the Other financial items in the Consolidated reporting and reflected as a separate adjustment to the equity accounting on the line Equity in earnings of JVs: Other financial items for the Consolidated reporting.

 

 27 

 

 

FORWARD LOOKING STATEMENTS

 

This report contains certain forward-looking statements concerning future events and our operations, performance and financial condition. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “project,” “will be,” “will continue,” “will likely result,” “plan,” “intend” or words or phrases of similar meanings. These statements involve known and unknown risks and are based upon a number of assumptions and estimates that are inherently subject to significant uncertainties and contingencies, many of which are beyond 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:

 

  · market trends for FSRUs and LNG carriers, including hire rates and factors affecting supply and demand;

 

  · our distribution policy and ability to make cash distributions on our units or any increases in the quarterly distributions on our common units;

 

  · restrictions in our debt agreements and pursuant to local laws on our joint ventures' and our subsidiaries' ability to make distributions;

 

  · our ability to settle or resolve the boil-off claim for the joint ventures, including the estimated amount thereof;

 

  · the ability of Höegh LNG to satisfy its indemnification obligations to the Partnership, including in relation to the boil-off claim;

  

  · our entry into any amendment to the LMA for the Höegh Gallant;

 

  · our ability to purchase additional vessels from Höegh LNG in the future;

 

  · our ability to integrate and realize the anticipated benefits from acquisitions;

 

  · our anticipated growth strategies; including the acquisition of vessels;

 

  · our anticipated receipt of dividends and repayment of indebtedness from subsidiaries and joint ventures;

 

  · effects of volatility in global prices for crude oil and natural gas;

 

  · the effect of the worldwide economic environment;

 

  · turmoil in the global financial markets;

 

  · fluctuations in currencies and interest rates;

 

  · general market conditions, including fluctuations in hire rates and vessel values;

 

  · changes in our operating expenses, including drydocking and insurance costs;

 

  · our ability to comply with financing agreements and the expected effect of restrictions and covenants in such agreements;

 

  · the financial condition liquidity and creditworthiness of our existing or future customers and their ability to satisfy their obligations under our contracts;

 

  · our ability to replace existing borrowings, including the Gallant/Grace facility, 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 perform under our contracts and maintain long-term relationships with our customers;

 

 28 

 

 

  · our ability to leverage Höegh LNG's relationships and reputation in the shipping industry;

  

  · our continued ability to enter into long-term, fixed-rate charters and the hire rate thereof;

 

  · the operating performance of our vessels and any related claims by Total S.A. or other customers;

 

  · our ability to maximize the use of our vessels, including the redeployment or disposition of vessels no longer under long-term charters;

 

  · our ability to compete successfully for future chartering and newbuilding opportunities;

 

  · timely acceptance of our vessels by their charterers;

 

  · termination dates and extensions of charters;

 

  · the cost of, and our ability to comply with, governmental regulations and maritime self-regulatory organization standards, as well as standard regulations imposed by our charterers applicable to our business;

 

  · demand in the FSRU sector or the LNG shipping sector in general and the demand for our vessels in particular;

 

  · availability of skilled labor, vessel crews and management;
     
  · the ability of Höegh LNG to meet its financial obligations to us, including its indemnity, guarantee and option obligations;

 

  · our incremental general and administrative expenses as a publicly traded limited partnership and our fees and expenses payable under our ship management agreements, the technical information and services agreement and the administrative services agreements;

 

  · the anticipated taxation of the Partnership, its subsidiaries and affiliates and distributions to its unitholders;

 

  · estimated future maintenance and replacement capital expenditures;

 

  · our ability to retain key employees;

 

  · customers' increasing emphasis on environmental and safety concerns;

 

  · potential liability from any pending or future litigation;

 

  · potential disruption of shipping routes due to accidents, political events, piracy or acts by terrorists;

 

  · future sales of our common units and Series A preferred units in the public market;

 

  · our business strategy and other plans and objectives for future operations;

 

  · our ability to successfully remediate any material weaknesses in our internal control over financial reporting and our disclosure controls and procedures; and

 

  · other factors listed from time to time in the reports and other documents that we file with the SEC, including our Annual Report on Form 20-F for the year ended December 31, 2017 and subsequent quarterly reports on Form 6-K.

 

All forward-looking statements included in this report are made only as of the date of this report. New factors emerge from time to time, and it is not possible for the Partnership to predict all of these factors. Further, the Partnership cannot assess the impact of each such factor on its business or the extent to which any factor, or combination of factors, may cause actual results to be materially different from those contained in any forward-looking statement. The Partnership does not intend to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in its expectations with respect thereto or any change in events, conditions or circumstances on which any such statement is based.

 

 29 

 

 

HÖEGH LNG PARTNERS LP

INDEX TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

Table of Contents

 

  Page
   
Unaudited Condensed Interim Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2018 and 2017 F-2
Unaudited Condensed Interim Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017 F-3
Unaudited Condensed Interim Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017 F-4
Unaudited Condensed Interim Consolidated Statements of Changes in Partners’ Capital for the Nine Months Ended September 30, 2018 and the Year Ended December 31, 2017 F-6
Unaudited Condensed Interim Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2018 and 2017 F-8
Notes to Unaudited Condensed Interim Consolidated Financial Statements F-10

 

F-1

 

 

HÖEGH LNG PARTNERS LP

UNAUDITED CONDENSED INTERIM CONSOLIDATED
STATEMENTS OF INCOME

(in thousands of U.S. dollars, except per unit amounts)

 

      Three months ended   Nine months ended 
      September 30,   September 30, 
   Notes  2018   2017   2018   2017 
REVENUES                       
Time charter revenues  4,5  $37,301    35,856    107,695   $105,957 
Other revenue      3        1,103     
Total revenues  4,5   37,304    35,856    108,798    105,957 
OPERATING EXPENSES                       
Vessel operating expenses      (5,794)   (5,909)   (17,009)   (17,714)
Construction contract expenses                  (151)
Administrative expenses      (2,102)   (2,067)   (6,990)   (7,289)
Depreciation and amortization      (5,287)   (5,264)   (15,823)   (15,789)
Total operating expenses      (13,183)   (13,240)   (39,822)   (40,943)
Equity in earnings (losses) of joint ventures  4,10   4,551    (7,321)   19,031    (962)
Operating income (loss)  4   28,672    15,295    88,007    64,052 
FINANCIAL INCOME (EXPENSE), NET                       
Interest income      179    98    540    341 
Interest expense      (6,655)   (7,739)   (20,437)   (23,227)
Gain (loss) on derivative instruments      516    571    1,692    1,481 
Other items, net      (780)   (633)   (2,266)   (2,857)
Total financial income (expense), net  6   (6,740)   (7,703)   (20,471)   (24,262)
Income (loss) before tax      21,932    7,592    67,536    39,790 
Income tax expense  7   (2,050)   (2,185)   (6,025)   (5,982)
Net income (loss)  4  $19,882    5,407    61,511   $33,808 
Non-controlling interest in net income          2,899        8,455 
Preferred unitholders' interest in net income      3,288        8,951     
Limited partners' interest in net income (loss)     $16,594    2,508    52,560   $25,353 
                        
Basic earnings per unit                       
Common unit public  18  $0.49   $0.07   $1.56   $0.74 
Common unit Höegh LNG  18  $0.51   $0.09   $1.63   $0.80 
Subordinated unit  18  $0.51   $0.09   $1.63   $0.80 
                        
Diluted earnings per unit                       
Common unit public  18  $0.49   $0.07   $1.55   $0.74 
Common unit Höegh LNG  18  $0.51   $0.09   $1.63   $0.80 
Subordinated unit  18  $0.51   $0.09   $1.63   $0.80 

 

The accompanying notes are an integral part of the unaudited condensed interim consolidated financial statements.

 

F-2

 

 

HÖEGH LNG PARTNERS LP

UNAUDITED CONDENSED INTERIM CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME

(in thousands of U.S. dollars)

 

      Three months ended   Nine months ended 
      September 30,   September 30, 
   Notes  2018   2017   2018   2017 
Net income (loss)     $19,882    5,407    61,511   $33,808 
Unrealized gains (losses) on cash flow hedge  13   305    872    4,877    983 
Income tax benefit (expense)  13   (77)   (84)   (242)   (259)
Other comprehensive income (loss)      228    788    4,635    724 
Comprehensive income (loss)     $20,110    6,195    66,146   $34,532 
Non-controlling interest in comprehensive income          3,020        8,561 
Preferred unitholders' interest in net income      3,288        8,951     
Limited partners' interest in comprehensive income (loss)     $16,822    3,175    57,195   $25,971 

 

The accompanying notes are an integral part of the unaudited condensed interim consolidated financial statements.

 

F-3

 

 

HÖEGH LNG PARTNERS LP

UNAUDITED CONDENSED INTERIM CONSOLIDATED
BALANCE SHEETS

(in thousands of U.S. dollars)

 

      As of 
      September 30,   December 31, 
   Notes  2018   2017 
ASSETS             
Current assets             
Cash and cash equivalents  12  $24,174   $22,679 
Restricted cash  12   7,378    6,962 
Trade receivables      4,449    7,563 
Amounts due from affiliates  11,12   3,968    4,286 
Inventory      641    668 
Current portion of net investment in direct financing lease      4,078    3,806 
Derivative instruments  12,13   1,341     
Prepaid expenses and other receivables      4,591    462 
Total current assets      50,620    46,426 
Long-term assets             
Restricted cash  12   13,234    13,640 
Vessels, net of accumulated depreciation      663,462    679,041 
Other equipment      521    604 
Intangibles and goodwill      21,654    24,370 
Advances to joint ventures  8,12   3,466    3,263 
Net investment in direct financing lease      279,981    282,820 
Long-term deferred tax asset  7   120    204 
Derivative instruments  12,13   1,440    228 
Other long-term assets      918    8,363 
Total long-term assets      984,796    1,012,533 
Total assets     $1,035,416   $1,058,959 

 

The accompanying notes are an integral part of the unaudited condensed interim consolidated financial statements.

 

F-4

 

 

HÖEGH LNG PARTNERS LP

UNAUDITED CONDENSED INTERIM CONSOLIDATED
BALANCE SHEETS

(in thousands of U.S. dollars)

 

      As of 
      September 30,   December 31, 
   Notes  2018   2017 
LIABILITIES AND EQUITY             
Current liabilities             
Current portion of long-term debt  9,12  $45,458   $45,458 
Trade payables      499    381 
Amounts due to owners and affiliates  11,12   2,075    1,417 
Value added and withholding tax liability      951    1,511 
Derivative instruments  12,13   101    2,015 
Accrued liabilities and other payables      10,910    13,042 
Total current liabilities      59,994    63,824 
Long-term liabilities             
Accumulated losses of joint ventures  10   1,715    20,746 
Long-term debt  9,12   401,290    434,845 
Revolving credit due to owners and affiliates  11,12   39,292    51,832 
Derivative instruments  12,13       2,102 
Long-term deferred tax liability  7   8,081    5,158 
Other long-term liabilities      72    5,793 
Total long-term liabilities      450,450    520,476 
Total liabilities      510,444    584,300 
EQUITY             
8.75% Series A Preferred Units      146,926    113,404 
Common units public      326,432    317,149 
Common units Höegh LNG      6,908    6,513 
Subordinated units      42,819    40,341 
Accumulated other comprehensive income (loss)      1,887    (2,748)
Total partners' capital      524,972    474,659 
Total equity      524,972    474,659 
Total liabilities and equity     $1,035,416   $1,058,959 

 

The accompanying notes are an integral part of the unaudited condensed interim consolidated financial statements.

 

F-5

 

 

HÖEGH LNG PARTNERS LP

UNAUDITED CONDENSED INTERIM CONSOLIDATED

STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL

(in thousands of U.S. dollars)

 

   Partners’ Capital         
             
   8.75%
Series A
Preferred
Units
   Common
Units
Public
   Common
Units
Höegh
LNG
   Subordi-
nated

Units
   Accumulated
Other
Comprehensive
Income
   Non-
controlling
interest
   Total
Equity
 
Consolidated balance as of December 31, 2016  $    321,091    6,849    42,586    (5,736)      $364,790 
Non-controlling interest acquired from the purchase of the Höegh Grace entities                       88,561    88,561 
Net income   2,480    24,217    3,055    19,030        10,408    59,190 
Cash distributions to unitholders       (30,039)   (3,741)   (23,257)           (57,037)
Cash distributions to non-controlling interest                       (9,457)   (9,457)
Cash contribution from Höegh LNG           315    1,760            2,075 
Cash distribution to Höegh LNG           (213)   (1,321)           (1,534)
Other comprehensive income                   2,602    386    2,988 
Net proceeds from issuance of Series A Preferred Units   110,924                        110,924 
Acquisition of non-controlling interest of the Höegh Grace entities                       (89,898)   (89,898)
Difference between net book value of acquired non-controlling interest and consideration paid       1,528    183    1,139    386        3,236 
Issuance of units for Board of Directors' fees       189                    189 
Contributions from owners       163    65    404            632 
Consolidated balance as of December 31, 2017  $113,404    317,149    6,513    40,341    (2,748)      $474,659 

 

The accompanying notes are an integral part of the unaudited condensed interim consolidated financial statements.

 

F-6

 

 

HÖEGH LNG PARTNERS LP

UNAUDITED CONDENSED INTERIM CONSOLIDATED

STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL

(in thousands of U.S. dollars)

 

   Partners' Capital         
             
   8.75%
Series A
Preferred
Units
   Common
Units
Public
   Common
Units
Höegh
LNG
   Subordinated
Units
   Accumulated
Other
Comprehensive
Income
   Non-
controlling
interest
   Total
Equity
 
Consolidated balance as of December 31, 2017  $113,404    317,149    6,513    40,341    (2,748)      $474,659 
Net income   8,951    27,727    3,420    21,413            61,511 
Cash distributions to unitholders   (9,755)   (23,319)   (2,902)   (18,166)           (54,142)
Cash distribution to Höegh LNG           (146)   (910)           (1,056)
Other comprehensive income                   4,635        4,635 
Net proceeds from issuance of common units       4,563                    4,563 
Net proceeds from issuance of Series A Preferred Units   34,326                        34,326 
Issuance of units for Board of Directors' fees       200                    200 
Other and contributions from owners       112    23    141            276 
Consolidated balance as of September 30, 2018  $146,926    326,432    6,908    42,819    1,887       $524,972 

 

The accompanying notes are an integral part of the unaudited condensed interim consolidated financial statements.

 

F-7

 

 

HÖEGH LNG PARTNERS LP

UNAUDITED CONDENSED INTERIM CONSOLIDATED

STATEMENTS OF CASH FLOWS

(in thousands of U.S. dollars)

 

   Three months ended
September 30,
   Nine months ended
September 30,
 
   2018   2017   2018   2017 
OPERATING ACTIVITIES                    
Net income (loss)  $19,882    5,407    61,511   $33,808 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:                    
Depreciation and amortization   5,287    5,264    15,823    15,789 
Equity in losses (earnings) of joint ventures   (4,551)   7,321    (19,031)   962 
Changes in accrued interest income on advances to joint ventures   (69)   1,425    (203)   4,020 
Amortization of deferred debt issuance cost and fair value of debt assumed   175    207    538    629 
Amortization in revenue for above market contract   916    915    2,716    2,716 
Changes in accrued interest expense   13    (17)   (509)   (113)
Net currency exchange losses (gains)   119    (6)   260    915 
Unrealized loss (gain) on derivative instruments   (516)   (571)   (1,692)   (1,481)
Non-cash revenue: tax paid directly by charterer   (204)   (200)   (615)   (632)
Non-cash income tax expense: tax paid directly by charterer   204    200    615    632 
Deferred tax expense and provision for tax uncertainty   1,333    1,082    4,264    3,060 
Issuance of units for Board of Directors' fees   40        200    189 
Other adjustments   113    156    276    466 
Changes in working capital:                    
Trade receivables   (31)   (918)   3,125    (1,103)
Inventory   8    17    27    48 
Prepaid expenses and other receivables   967    (452)   (137)   (451)
Trade payables   (92)   78    158    (796)
Amounts due to owners and affiliates   1,783    573    976    (740)
Value added and withholding tax liability   1,100    1,063    2,814    2,972 
Accrued liabilities and other payables   (1,071)   1,524    (5,739)   777 
Net cash provided by (used in) operating activities   25,406    23,068    65,377    61,667 
                     
INVESTING ACTIVITIES                    
Expenditure for purchase of Höegh Grace entities               (92,175)
Cash acquired in the purchase of the Höegh Grace entities               3,793 
Decrease (increase) in restricted cash designated for purchase of the Höegh Grace entities               91,768 
Expenditure for vessel and other equipment       (5)       (19)
Receipts from repayment of principal on direct financing lease   965    881    2,828    2,585 
Net cash provided by (used in) investing activities  $965    876    2,828   $5,952 

 

The accompanying notes are an integral part of the unaudited condensed interim consolidated financial statements. 

 

F-8

 

 

HÖEGH LNG PARTNERS LP

UNAUDITED CONDENSED INTERIM CONSOLIDATED

STATEMENTS OF CASH FLOWS

(in thousands of U.S. dollars)

 

   Three months ended
September 30,
   Nine months ended
September 30,
 
   2018   2017   2018   2017 
FINANCING ACTIVITIES                    
Proceeds from loans and promissory notes due to owners and affiliates  $    4,000    5,400   $15,700 
Repayment of long-term debt   (11,365)   (11,365)   (34,094)   (34,094)
Repayment of amounts due to owners and affiliates   (6,000)       (17,500)    
Repayment of customer loan for funding of value added liability on import   (1,240)       (3,699)   (1,258)
Net proceeds from issuance of common units   1,617        4,499     
Net proceeds from issuance of 8.75% Series A Preferred Units   14,369        33,985     
Cash distributions to limited partners and preferred unitholders   (18,212)   (14,440)   (54,142)   (42,595)
Cash distributions to non-controlling interest       (1,960)       (5,880)
Proceeds from indemnifications received from Höegh LNG       1,066        2,075 
Repayment of indemnifications received from Höegh LNG   (1,056)       (1,056)    
Net cash provided by (used in) financing activities   (21,887)   (22,699)   (66,607)   (66,052)
                     
Increase (decrease) in cash, cash equivalents and restricted cash   4,484    1,245    1,598    1,567 
Effect of exchange rate changes on cash and cash equivalents   (40)       (93)    
Cash, cash equivalents and restricted cash, beginning of period   40,342    41,446    43,281    41,124 
Cash, cash equivalents and restricted cash, end of period  $44,786    42,691    44,786   $42,691 

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the unaudited condensed interim consolidated balance sheets.

 

   As of
September 30,
   As of
December 31,
 
   2018   2017   2017   2016 
Cash and cash equivalents   $24,174    18,566    22,679   $18,915 
Restricted cash - current asset   7,378    10,203    6,962    8,055 
Restricted cash - non-current asset   13,234    13,922    13,640    14,154 
Total cash, cash equivalents and restricted cash shown in the statement of cash flows  $44,786    42,691    43,281   $41,124 

  

The accompanying notes are an integral part of the unaudited condensed interim consolidated financial statements.

 

F-9

 

 

HÖEGH LNG PARTNERS LP

NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of U.S. dollars, unless otherwise indicated)

 

1. Description of business

 

Höegh LNG Partners LP (the “Partnership”) is a publicly traded Marshall Islands limited partnership initially formed for the purpose of acquiring from Höegh LNG Holdings Ltd. (“Höegh LNG”) their interests in Hoegh LNG Lampung Pte. Ltd., PT Hoegh LNG Lampung (the owner of the PGN FSRU Lampung and the Tower Yoke Mooring System), SRV Joint Gas Ltd. (the owner of the Neptune), and SRV Joint Gas Two Ltd. (the owner of the Cape Ann) in connection with the Partnership’s initial public offering of its common units (the “IPO”) which was completed in August 2014. As of September 30, 2018, the Partnership has a fleet of five floating storage regasification units (“FSRUs”).

 

Under the partnership agreement, the general partner has irrevocably delegated to the Partnership’s board of directors the power to oversee and direct the operations of, manage and determine the strategies and policies of the Partnership. Four of the seven board members were elected by the common unitholders at the Partnership’s first annual meeting of unitholders held on September 24, 2014. As a result, Höegh LNG, as the owner of the general partner, does not have the power to control the Partnership’s board of directors or the Partnership, and the Partnership is not considered to be under the control of Höegh LNG for US GAAP purposes. Therefore, the sale of a business from Höegh LNG to the Partnership is a change of control. As a result, the Partnership accounts for acquisitions of businesses under the purchase method of accounting and not as transfers of entities under common control.

 

On January 26, 2018, the Partnership entered into sales agreement with B. Riley FBR Inc. (the “Agent”). Under the terms of the sales agreement, the Partnership may offer and sell up to $120 million aggregate offering amount of common units and 8.75% Series A cumulative redeemable preferred units (“Series A preferred units”), from time to time, through the Agent, acting as agent for the Partnership (the “ATM Program”). Sales of such units may be made in negotiated transactions or transactions that are deemed to be “at the market” offerings, including sales made directly on the New York Stock Exchange or through a market marker other than on an exchange. Refer to note 16.

 

The Partnership’s 50% interests in SRV Joint Gas Ltd. and SRV Joint Gas Two Ltd., collectively, are referred to as the “joint ventures” and the remaining entities owned by the Partnership, as reflected in the table below are, collectively, referred to as the “subsidiaries” in these consolidated financial statements. The PGN FSRU Lampung, the Höegh Gallant, the Höegh Grace, the Neptune and the Cape Ann are FSRUs and, collectively, referred to in these consolidated financial statements as the vessels or the FSRUs. The Tower Yoke Mooring System (the “Mooring”) is an offshore installation that is used to moor the PGN FSRU Lampung to offload the gas into an offshore pipe that transports the gas to a land terminal. PT Hoegh LNG Lampung, Hoegh LNG Cyprus Limited, the owner of the Höegh Gallant, Höegh LNG FSRU IV Ltd., the owner of the Höegh Grace, and the two joint ventures, SRV Joint Gas Ltd. and SRV Joint Gas Two Ltd., are collectively referred to as the “FSRU-owning entities.”

 

The Neptune and the 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, Global LNG Supply S.A., a subsidiary of Total S.A. (“Total”), to extend for up to two additional periods of five years each. The PGN 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 one additional period of ten years or two additional periods of five years each) and uses the Mooring that was constructed and installed and sold to the charterer, PT PGN LNG Indonesia (“PGN LNG”), a subsidiary of PT Perusahaan Gas Negara (Persero) Tbk (“PGN”). The Höegh Gallant operates under a long-term time charter which started in April 2015 with an expiration date in April 2020 with Hoegh LNG Egypt LLC (“EgyptCo”), a subsidiary of Höegh LNG. Refer to note 19 for more information on EgyptCo's charter. Pursuant to an option agreement, the Partnership has the right to cause Höegh LNG to charter the Höegh Gallant from the expiration or termination of the EgyptCo charter until July 2025. The Höegh Grace operates under a long-term time charter which started in December 2016 with Sociedad Portuaria El Cayao S.A. E.S.P. (“SPEC”). The non-cancellable charter period is 10 years. The initial term of the charter is 20 years. However, each party has an unconditional option to cancel the charter after 10 and 15 years without a penalty. However, if SPEC waives its right to terminate in year 10 within a certain deadline, the Partnership will not be able to exercise its right to terminate in year 10.

 

F-10

 

 

HÖEGH LNG PARTNERS LP

NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of U.S. dollars, unless otherwise indicated)

 

The following table lists the entities included in these consolidated financial statements and their purpose as of September 30, 2018.

 

    Jurisdiction of    
    Incorporation    
Name   or Registration   Purpose
Höegh LNG Partners LP   Marshall Islands   Holding Company
Höegh LNG Partners Operating LLC (100% owned)   Marshall Islands   Holding Company
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   Owns PGN FSRU Lampung
SRV Joint Gas Ltd. (50% owned) (2)   Cayman Islands   Owns Neptune
SRV Joint Gas Two Ltd. (50% owned) (2)   Cayman Islands   Owns Cape Ann
Höegh LNG FSRU III Ltd. (100% owned) (3)   Cayman Islands   Owns 100% of Hoegh LNG Cyprus Limited
Hoegh LNG Cyprus Limited (100% owned) (3)   Cyprus   Owns Höegh Gallant
Hoegh LNG Cyprus Limited Egypt Branch (100% owned) (3)   Egypt   Branch of Hoegh LNG Cyprus Limited
Höegh LNG Colombia Holding Ltd. (100% owned) (4)   Cayman Islands   Owns 100% of Höegh LNG FSRU IV Ltd. and Höegh LNG Colombia S.A.S.
Höegh LNG FSRU IV Ltd. (100% indirectly owned) (4)   Cayman Islands   Owns Höegh Grace
Höegh LNG Colombia S.A.S. (100% indirectly owned) (4)   Colombia   Operating Company

 

 

 

(1) PT Hoegh LNG Lampung is a variable interest entity, which is controlled by Hoegh LNG Lampung Pte. Ltd. and is, therefore, 100% consolidated in the consolidated financial statements.

(2) The remaining 50% interest in each joint venture is owned by Mitsui O.S.K. Lines, Ltd. and Tokyo LNG Tanker Co.

(3) The ownership interests were acquired on October 1, 2015.

(4) The 51% of the ownership interests were acquired on January 3, 2017, and the remaining 49% of the ownership interests were acquired on December 1, 2017.

 

2. Significant accounting policies

 

a.Basis of presentation

 

The accompanying unaudited condensed interim consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (“US GAAP”) for interim financial information. In the opinion of Management, all adjustments considered necessary for a fair presentation, which are of a normal recurring nature, have been included. All inter-company balances and transactions are eliminated. The footnotes are condensed and do not include all of the disclosures required for a complete set of financial statements. Therefore, the unaudited condensed interim consolidated financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2017, included in the Partnership’s Annual Report on Form 20-F (the “Annual Report”).

 

It has been determined that PT Hoegh LNG Lampung, Höegh LNG FSRU III Ltd., Höegh LNG Colombia Holding Ltd., SRV Joint Gas Ltd. and SRV Joint Gas Two Ltd. are variable interest entities. A variable interest entity (“VIE”) is defined by US GAAP as a legal entity where either (a) the voting rights of some investors are not proportional to their rights to receive the expected residual returns of the entity, their obligations to absorb the expected losses of the entity, or both, and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights, or (b) the equity holders have not provided sufficient equity investment to permit the entity to finance its activities without additional subordinated financial support, or (c) equity interest holders as a group lack the characteristics of a controlling financial interest, including decision making ability and an interest in the entity’s residual risks and rewards. The guidance requires a VIE to be consolidated if any of its interest holders are entitled to a majority of the entity’s residual returns or are exposed to a majority of its expected losses.

 

F-11

 

 

HÖEGH LNG PARTNERS LP

NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of U.S. dollars, unless otherwise indicated)

 

Based upon the criteria set forth in US GAAP, the Partnership has determined that PT Hoegh LNG Lampung is a VIE, as the equity holders, through their equity investments, may not participate fully in the entity’s expected residual returns and substantially all of the entity's activities either involve, or are conducted on behalf of, the Partnership. The Partnership is the primary beneficiary, as it has the power to make key operating decisions considered to be most significant to the VIE and receives all the expected benefits or expected losses. Therefore, 100% of the assets, liabilities, revenues and expenses of PT Hoegh LNG Lampung are included in the consolidated financial statements. Dividends may only be paid if the retained earnings are positive and a statutory reserve has been established equal to 20% of its paid up capital under Indonesian law. As of September 30, 2018, PT Hoegh LNG Lampung did not have adequate positive retained earnings to establish the required statutory reserves and therefore cannot make dividend payments under Indonesia law. Under the Lampung facility, there are limitations on cash dividends and loan distributions that can be made to the Partnership. Refer to note 9.

 

The Partnership has also determined that Höegh LNG FSRU III Ltd. is a VIE, as the equity investment does not provide sufficient equity to permit the entity to finance its activities without financial guarantees. The Partnership is the primary beneficiary, as it has the power to make key operating decisions considered to be most significant to the VIE and receives all the expected benefits or expected losses. Therefore, 100% of the assets, liabilities, revenues and expenses of Höegh LNG FSRU III Ltd. are included in the consolidated financial statements. Under Cayman Islands law, dividends may only be paid out of profits or capital reserves if the entity is solvent after the distribution. Under the Gallant/Grace facility, there are limitations on dividends and loans distributions that can be made to the Partnership. Refer to note 9. The Partnership is a guarantor of the Gallant/Grace facility.

 

Höegh LNG Colombia Holding Ltd. is a VIE since the entity would not be able to finance its activities without financial guarantees under its subsidiary’s facility to finance the Höegh Grace. The Partnership is the primary beneficiary, as it has the power to make key operating decisions considered to be most significant to the VIE and, as of December 1, 2017, receives all of the expected benefits or expected losses. Therefore, 100% of the assets, liabilities, revenues and expenses of Höegh LNG Colombia Holding Ltd., and subsidiaries, are included in the consolidated financial statements with a non-controlling interest reflected for the minority share until fully acquired by the Partnership on December 1, 2017. Under Cayman Islands law, dividends may only be paid out of profits or capital reserves if the entity is solvent after the distribution. Under the Gallant/Grace facility, there are limitations on dividends and loan distributions that can be made to the Partnership. Refer to note 9. The Partnership is a guarantor of the Gallant/Grace facility.

 

In addition, the Partnership has determined that the two joint ventures, SRV Joint Gas Ltd. and SRV Joint Gas Two Ltd., are VIEs since each entity did not have a sufficient equity investment to permit the entity to finance its activities without additional subordinated financial support at the time of its initial investment. The entities have been financed with third party debt and subordinated shareholders loans. The Partnership is not the primary beneficiary, as the Partnership cannot make key operating decisions considered to be most significant to the VIEs, but has joint control with the other equity holders. Therefore, the joint ventures are accounted for under the equity method of accounting as the Partnership has significant influence. The Partnership’s carrying value is recorded in advances to joint ventures and accumulated losses of joint ventures in the consolidated balance sheets. For SRV Joint Gas Ltd., the Partnership had a receivable for the advances of $2.7 million and $2.6 million, respectively, and the Partnership’s accumulated losses or its share of net liabilities were $0.4 million and $10.7 million, respectively, as of September 30, 2018 and December 31, 2017. The Partnership’s carrying value for SRV Joint Gas Two Ltd. consists of a receivable for the advances of $0.7 million and $0.7 million, respectively, and the Partnership’s accumulated losses or its share of net liabilities were $1.3 million and $10.0 million, respectively, as of September 30, 2018 and December 31, 2017. The Partnership’s accumulated losses in the joint ventures are net liabilities largely due to the fair value adjustments for the interest rate swaps recorded as liabilities on the combined balance sheets of SRV Joint Gas Ltd. and SRV Joint Gas Two Ltd and eliminations for consolidation to the balance sheet. The maximum exposure to loss is the carrying value of the receivables, which is subordinated to the joint ventures’ long-term bank debt, the investments in the joint ventures (accumulated losses), as the shares are pledged as security for the joint ventures’ long-term bank debt and Höegh LNG’s commitment under long-term bank loan agreements to fund its share of drydocking costs and remarketing efforts in the event of an early termination of the charters. Dividend distributions require a) agreement of the other joint venture owners; b) fulfilment of requirements of the long-term bank loans; c) and under Cayman Islands law may be paid out of profits or capital reserves subject to the joint venture being solvent after the distribution. Refer to note 8.

 

b.Significant accounting policies

 

The accounting policies used in the preparation of the unaudited condensed interim consolidated financial statements are consistent with those applied in the audited financial statements for the year ended December 31, 2017 included in the Partnership’s Annual Report.

 

F-12

 

 

HÖEGH LNG PARTNERS LP

NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of U.S. dollars, unless otherwise indicated)

 

c.Recent accounting pronouncements

 

Recently adopted accounting pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard, Revenue from Contracts with Customers, as subsequently updated by the FASB (“ASC 606”). Under the new standard, an entity must identify performance obligations and the transaction price in a contract and allocate the transaction price to specific performance obligations to recognize revenue when the obligations are completed. 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. However, the scope of the guidance does apply to the allocation of the transaction price to lease elements and non-lease elements. Effective January 1, 2018, the Partnership adopted the requirements of ASC 606 to new and existing contracts not yet completed as of January 1, 2018, using the modified retrospective approach where the cumulative effect of initially applying the standard is recorded as an adjustment to the opening balance of equity. There were no changes to the timing or amount of revenue recognized and, therefore, no cumulative effect of initially applying the standard. Additional qualitative and quantitative disclosures are required and have been implemented for reporting periods beginning as of January 1, 2018, while prior periods are not adjusted and continue to be reported under the previous accounting standards. Refer to note 5.

 

Changes to the Partnership’s accounting policies as a result of adopting ASC 606 are discussed below:

 

Time charter revenues and related contract balances

 

The Partnership’s consolidated revenue and the revenue of the joint ventures are derived from long-term time charter contracts for the provision of an FSRU including the management and operation of the FSRU at the direction of the charterer.

 

Revenue recognition:

The Partnership is required to evaluate whether two or more contracts should be combined and accounted for as a single contract, whether the contract promises to deliver more than one distinct good or service, or performance obligations, and/or a lease, determine the transaction price under the contract, allocate the transaction price to the lease and the performance obligations and recognize revenue as the performance obligation is satisfied.

 

Performance obligations:

The Partnership determined that its time charter contracts contain a lease and a performance obligation for the provision of time charter services. The lease of the vessel, representing the use of the vessel without any associated performance obligations or warranties, is accounted for in accordance with the provisions of ASC 840; Leases.

 

The provision of time charter services, including guarantees for the level of performance provided by the time charter contracts, is considered a distinct service and is accounted for in accordance with the provision of ASC 606, Revenue from Contracts with Customers. The Partnership determined that the nature of the time charter services promised, represents a single performance obligation, to stand ready over a 24-hour interval to accept LNG cargos, to regasify the LNG and discharge the resulting gas into a pipeline in accordance with the charterer’s instructions and requirements.

 

Time charter services revenue can be recognized as the performance obligation is satisfied over the 24-hour interval to the performance standards specified under the time charter contract. If the performance standards are not met, off-hire, reduced hire, liquidated damages or other performance payments may result.

 

Contract terms, determination of transaction price and allocation to performance obligations:

The Partnership’s time charter contracts for all FSRUs, except the Höegh Gallant, include day rates or hire rates and warranty provisions with the following components:

 

F-13

 

 

HÖEGH LNG PARTNERS LP

NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of U.S. dollars, unless otherwise indicated)

 

  · Fixed element: The fixed element is a fixed per day fee intended to cover remuneration for use of the vessel and the provision of time charter services.
  · Operating expense reimbursement element: The operating expense reimbursement element is a rate per day intended to cover the operating costs of the vessel, including the crew, insurance, consumables, miscellaneous services, spares and maintenance and repairs costs and management services and fees. The amount of the operating expense reimbursement element may be based on actual cost incurred, or fees subject to indexing or other adjustments after a defined period, or a combination of both.
  · Tax reimbursement element: The tax reimbursement element may be a rate per day, based on the estimated liability for the year divided by the number of days in the year, subject to adjustment for actual taxes incurred, or a reimbursement of the costs as the taxes are incurred. The tax reimbursement element may cover withholding taxes, payroll taxes, other local taxes and current income tax expense for the jurisdiction in which the vessel operates as defined by the provisions of the individual time charter contract.
  · Performance warranties element: The performance warranties element includes defined operational capacity and standards that can result in the FSRUs being off-hire or require compensation to the charterer through provision of reduced hire, liquidated damages or performance payments. Examples of performance warranties include the ability to discharge regasified LNG at specified performance rates, guaranteed minimum fuel consumption, guaranteed minimum boil-off rates and the ability to accept cargos.

 

The Höegh Gallant has a single day rate intended to cover all of the elements listed above. In addition, the time charter contract for the Höegh Gallant includes a provision for 15 days of off-hire for scheduled maintenance. The joint ventures’ time charter contracts also provide for upfront payments for variable costs for certain vessel modifications, drydocking costs, other additions to equipment or spare parts.

 

The hire rates for the PGN FSRU Lampung are invoiced at the beginning of the month. The Höegh Gallant and the Höegh Grace invoice time charter revenues monthly in arrears.

 

The transaction price is estimated as the standalone selling price for the lease and the time charter services components of the fixed day rate element. Variable consideration per day for operating expense and tax reimbursements is estimated at the most likely amount to which the Partnership is expected to be entitled to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty related to the variable consideration is resolved. When there is significant uncertainty related to that amount of variable consideration to be received, that variable consideration is considered constrained. Typically, variable reimbursements and performance warranties are known at the end of each 24-hour interval, or as subsequently reassessed at the end of the reporting period. However, to the extent interpretations of contractual provisions are complex and/or disputed with the customer, this could give rise to constrained variable consideration. Constrained variable consideration is not estimated.

 

Variable consideration is allocated entirely to one performance obligation when the variable day rate relates specifically to the efforts to satisfy the signal performance obligation. The default method of the relative standalone selling price method was used to allocate the remaining transaction price, principally the fixed element, between the lease and the time charter services. The total estimated transaction price for time charter services is considered variable consideration because it may be reduced by performance warranties.

 

The Partnership has made a policy election to exclude from the measurement of the transaction price all taxes assessed by a government entity on revenues and collected on behalf of that government entity from customers, such as sales or value added taxes.

 

Lease revenue recognition:

Leases are classified based upon defined criteria either as direct financing leases or operating leases. A lease that transfers substantially all of the benefits and risks of the FSRU to the charterer is accounted for as a financing lease by the lessor. All other leases that do not meet the criteria are classified as operating leases.

 

F-14

 

 

HÖEGH LNG PARTNERS LP

NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of U.S. dollars, unless otherwise indicated)

 

The lease component of time charters that are accounted for as operating leases is recognized on a straight line basis over the term of the charter. The Höegh Gallant’s time charter, which had a five-year lease term at inception, is accounted for as an operating lease. The Höegh Grace's time charter contracts, which have a non-cancellable charter period of ten years, are accounted for as an operating lease. Under one of the time charter contracts, the contract provides for additional variable payments, including a finance component, over the initial term depending upon the actual commencement date of the contract within a defined window of potential commencement dates. The variable payments are considered directly related to the lease performance obligation. The revenue, excluding the financing component, is recognized over the initial 10-year term. Payments made by the charterer directly to the tax authorities on behalf of the subsidiaries for final income tax directly related to the provision of the lease is recorded as a component of lease revenues. The amount of non-cash revenue is disclosed separately in the consolidated statement of cash flows.

 

The lease component of time charters that are accounted for as direct financing leases is recognized over the lease term using the effective interest rate method and is included in time charter revenues. Origination costs related to the time charter are a component of the net investment in direct financing lease and amortized over the lease term using the effective interest method. Direct financing leases are reflected on the consolidated balance sheets as net investments in direct financing leases. The PGN FSRU Lampung time charter, which had a 20-year lease term at inception, meets the criteria of transferring substantially all of the benefits and risks to the charterer and is accounted for as a direct financing lease.

 

Time charter services revenue recognition:

Variable consideration for the time charter services performance obligation, including amounts allocated to time charter services, estimated reimbursements for vessel operating expenses and estimated reimbursements of certain types of costs and taxes, are recognized as revenues as the performance obligation for the 24-hour interval is fulfilled, subject to adjustment for off-hire and performance warranties. Constrained variable consideration is recognized as revenue on a cumulative catch-up basis when the significant uncertainty related to that amount of variable consideration to be received is resolved. Estimates for variable consideration, including constrained variable consideration, are reassessed at the end of each period. Payments made by the charterer directly to the tax authorities on behalf of the subsidiaries for advance collection of income taxes directly related to the provision of the time charter services are recorded as a component of time charter service revenues. The amount of non-cash revenue is disclosed separately in the consolidated statement of cash flows.

 

Joint venture FSRUs lease and time charter services revenue recognition:

The Partnership’s interest in the Joint venture FSRU’s net income is included in the consolidated financial statements under the equity method of accounting, however, the Joint venture FSRU’s results are presented under the proportional consolidation method for the segment note (note 4) and the time charter revenue note (note 5). The Neptune and the Cape Ann’s time charters, which had a twenty-year lease term at inception, are accounted for as operating leases. The joint ventures’ time charters include provisions for the charterer to make upfront payments to compensate for variable cost for certain vessel modifications, drydocking costs, other additions to equipment or spare parts. The expenditures are considered costs required to fulfil the lease component of the contract. Payments for modifications are deferred and amortized over the shorter of the remaining charter period or the useful life of the additions. Payments for reimbursement of drydocking costs are deferred and recognized on a straight line basis over the period to the next drydocking.

 

The accounting policy for time charter services for the joint ventures is the same as described above.  

 

Significant judgments in revenue recognition:

The Partnership does not provide stand-alone bareboat leases or time charter services for FSRUs. As a result, observable stand-alone transaction prices for the performance obligations are not available. The estimation of the transaction price for the lease and the time charter service performance obligation is complex, subject to a number of input factors, such as market conditions when the contract is entered into, internal return objectives and pricing policies, and requires substantial judgment. Significant changes in the transaction price between the two performance obligations could impact conclusions on the accounting for leases as financing or operating leases. In addition, variable consideration is estimated at the most likely amount that the Partnership expects to be entitled to. Variable consideration is reassessed at the end of the reporting period taking into account performance warranties. The time charter contracts include provisions for performance guarantees that can result in off-hire, reduced hire, liquidated damages or other payments for performance warranties. Measurement of some of the performance warranties can be complex and require properly calibrated equipment on the vessel, complex conversions and computations based on substantial judgment in the interpretation of the contractual provisions. Conclusions on compliance with performance warranties impacts the amount of variable consideration recognized for time charter services.

 

F-15

 

 

HÖEGH LNG PARTNERS LP

NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of U.S. dollars, unless otherwise indicated)

 

Contract assets:

Revenue recognized in excess of the monthly invoiced amounts, or accrued revenue, is recorded as contract assets on the consolidated balance sheet. The contract assets are reported in the consolidated balance sheet as a component of prepaid expenses and other receivables.

 

Contract liabilities:

Advance payments in excess of revenue recognized, or prepayments, and deferred revenue are recorded as contract liabilities on the consolidated balance sheet. Contract assets and liabilities are reported in a net position for each customer contract or combined contracts at the end of each reporting period. Contract liabilities are classified as current or non-current based on the expected timing of recognition of the revenue. Current and non-current contract liabilities are reported in the consolidated balance sheet as components of accrued liabilities and other payables and other long-term liabilities, respectively.

 

Refund liabilities:

Amounts invoiced or paid by the customer that are expected to be refunded to the customer are recorded as refund liabilities on the consolidated balance sheet. Refund liabilities may include invoiced amounts for estimated reimbursable operating expenses or other costs and taxes that exceeded the actual costs incurred, or off-hire, reduced hire, liquidated damages, or other payments for performance warranties. Refund liabilities are reported in the consolidated balance sheet as components of accrued liabilities and other payables.

 

Remaining performance obligations:

Remaining performance obligations represent the transaction price of contracts with customers under the scope of ASC 606 for which work has not been performed excluding unexercised contract options to extend the term. The Partnership qualifies for and has elected to apply the exemption to disclose the aggregate amount of remaining transaction price allocated to unsatisfied performance obligations at the end of the reporting period as consideration for time charter services is variable and allocated entirely to wholly satisfied performance obligations. As described in note 1, the Partnership’s FSRUs operate under long-term time charter contracts which terminate between April 2020 for the Höegh Gallant and 2034 for the PGN FSRU Lampung. As a result, the time service revenue for the period reflected in note 5, as adjusted for off-hire and warranty provision, when applicable, would be expected to be indicative of the of the future time charter service revenue until April 2020.

 

Statement of cash flows: In August 2016, the FASB issued revised guidance for Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The guidance clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The Partnership implemented this guidance on January 1, 2018. The Partnership's adoption of this standard did not have a material impact on the Partnership's consolidated statement of cash flows or related disclosures.

 

In November 2016, the FASB issued revised guidance for Statement of Cash Flows: Restricted Cash. The amendments require that the statement of cash flows explain the change during the period in the total cash, cash equivalents and amounts generally described as restricted cash when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. The Partnership implemented the revised guidance on January 1, 2018 using a retrospective transition method to all periods presented. The adoption changed how restricted cash is reported in the consolidated statement of cash flows as follows for the three and nine months ended September 30, 2017:

 

      As of September 30, 2017 
      Three months ended 
      Balance Prior
to
   Adjustments   As 
(in thousands of U.S. dollars)  Cash Flow Line Items  Adoption   Increase/(Decrease)   Adjusted 
                
OPERATING ACTIVITIES  Restricted cash  $1,715    (1,715)  $ 
FINANCING ACTIVITIES  Restricted cash   154    (154)    
                   
Increase (decrease) in cash, cash equivalents and restricted cash   3,114    (1,869)   1,245 
Cash, cash equivalents and restricted cash, beginning of period   15,452    25,994    41,446 
Cash, cash equivalents and restricted cash, end of period  $18,566    24,125   $42,691 

 

F-16

 

 

HÖEGH LNG PARTNERS LP

NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of U.S. dollars, unless otherwise indicated)

 

      As of September 30, 2017 
      Nine months ended 
(in thousands of U.S. dollars)  Cash Flow Line Items  Balance
Prior to
Adoption
   Adjustments
Increase/(Decrease)
   As
Adjusted
 
                
OPERATING ACTIVITIES  Restricted cash  $(2,129)   2,129   $ 
INVESTING ACTIVITIES   Cash acquired in the purchase of the Höegh Grace entities   3,774    19    3,793 
FINANCING ACTIVITIES  Restricted cash   232    (232)    
                   
Increase (decrease) in cash, cash equivalents and restricted cash   (349)   1,916    1,567 
Cash, cash equivalents and restricted cash, beginning of period   18,915    22,209    41,124 
Cash, cash equivalents and restricted cash, end of period  $18,566    24,125   $42,691 

 

Amounts included in restricted cash represent balances deposited with a bank as required under debt facilities to settle withholding and other tax liabilities and other current obligations of the entity, principal and interest payments as required by the debt facilities. Restricted cash is classified as long-term when the settlement is more than 12 months from the balance sheet date.

 

Recently issued accounting pronouncements

In February 2016, the FASB issued revised guidance for leasing, Leases. The objective is to establish the principles that lessors and lessees shall apply to report useful information to users of financial statements about the amount, timing and uncertainty of cash flows arising from a lease. The Partnership is the lessor for the time charters for its FSRUs. Accounting by a lessor is largely unchanged from the previous standard. The Partnership does not have any material leased assets. A lessee will be required to recognize in its balance sheet a lease liability to make lease payments and a right-of-use asset. The standard provides for optional practical expedients in implementing the standard under the modified retrospective approach. The practical expedients will, if elected, allow an entity to continue to account for leases that commence before the effective date in accordance with the previous standard, unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases. In July 2018, the FASB issued targeted improvements to the leasing guidance allowing for an additional optional transition method that allow entities to initially apply the new lease standard and its disclosures at the transition date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. The standard is effective for annual periods beginning after December 15, 2018. The Partnership expects to apply the additional optional transition method by applying the new standard at the transition date. Based upon preliminary assessments performed to date, the Partnership does not expect material effects on the accounting for existing leases applied in the consolidated financial statements. The Partnership will implement the revised guidance as of January 1, 2019.

 

Refer to note 2 of the audited financial statements for the year ended December 31, 2017 included in the Partnership’s Annual Report for additional recently issued accounting pronouncements expected to impact the Partnership.

 

F-17

 

 

HÖEGH LNG PARTNERS LP

NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of U.S. dollars, unless otherwise indicated)

 

3. Formation transactions, Initial Public Offering and related party agreements

 

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 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, SRV Joint Gas Ltd. and SRV Joint Gas Two Ltd.;

 

(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 LNG Lampung Pte. Ltd.;

 

These transactions have been accounted for as a capital contribution by Höegh LNG to the Partnership.

 

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 the 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.

 

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’ option to purchase additional common 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 underwriters’ 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, (ii) $20 million for general partnership purposes and (iii) the remainder of approximately $43.5 million to make a cash distribution to Höegh LNG.

 

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.

 

F-18

 

 

HÖEGH LNG PARTNERS LP

NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of U.S. dollars, unless otherwise indicated)

 

Related Party Agreements

 

In connection with the IPO the Partnership entered into several agreements including:

 

(i)An $85 million revolving credit facility with Höegh LNG, which was undrawn at the closing of the IPO;

 

(ii)An omnibus agreement with Höegh LNG, the general partner, and Höegh LNG Partners Operating LLC governing, among other things:

 

a.To what extent the Partnership and Höegh LNG may compete with each other;

 

b.The Partnership’s rights of first offer on certain FSRUs and LNG carriers operating under charters of five or more years; and

 

c.Höegh LNG’s provision of certain indemnities to the Partnership.

 

(iii)An administrative services agreement with Höegh LNG Services Ltd., UK (“Höegh UK”), pursuant to which Höegh UK provides certain administrative services to the Partnership; and

 

(iv)Höegh UK has entered into administrative services agreements with Höegh LNG AS (“Höegh Norway”) and Leif Höegh (U.K.) Limited, pursuant to which Höegh Norway and Leif Höegh (U.K.) Limited provide Höegh UK certain administrative services. Additionally, the operating company has entered into an administrative services agreement with Leif Höegh (U.K.) Limited to allow Leif Höegh (U.K.) Limited to provide services directly to Höegh LNG Partners Operating LLC.

 

Existing agreements remained in place following the IPO for the provision of certain services to the Partnership’s vessel owning joint ventures or entity, of which the material agreements are as follows:

 

·The joint ventures are parties to ship management agreements with Höegh LNG Fleet Management AS (“Höegh LNG Management”) pursuant to which Höegh LNG Management provides the joint ventures with technical and maritime management and crewing of the Neptune and the 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 the PGN FSRU Lampung; and

 

·The joint ventures are parties to commercial and administration management agreements with Höegh Norway, and PT Hoegh LNG Lampung is a party to a technical information and services agreement with Höegh Norway.

 

Subsequent to the IPO, the Partnership has acquired vessel owning entities. Existing agreements remained in place following the acquisition for the time charter of the Höegh Gallant and receipt of certain services, of which the material agreements are as follows:

 

·Hoegh LNG Cyprus Limited acting through its Egyptian Branch has a Lease and Maintenance Agreement (the “time charter”) with EgyptCo for the lease and maintenance of the Höegh Gallant and the provision of crew and certain ship management services for a combined daily hire rate. The time charter started in April 2015 with an expiration date in April 2020; and

 

·Hoegh LNG Cyprus Limited acting through its Egyptian Branch is party to a ship management agreement with Höegh LNG Management pursuant to which Höegh LNG Management provides the technical management of the Höegh Gallant, and Hoegh LNG Maritime Management Pte. Ltd. (“Höegh Maritime Management”) is a party to a secondment agreement, as amended, with Hoegh LNG Cyprus Limited pursuant to which Höegh Maritime Management provides qualified crew for the Höegh Gallant;

 

·Hoegh LNG Cyprus Limited acting through its Egyptian Branch is party to a management agreement with Höegh Norway, pursuant to which Höegh Norway provides administrative, commercial and technical management services, each as instructed from time to time by Hoegh LNG Cyprus Limited.

 

F-19

 

 

HÖEGH LNG PARTNERS LP

NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of U.S. dollars, unless otherwise indicated)

 

Existing agreements remained in place for the time charter of the Höegh Grace following the acquisition and receipt of certain services, of which the material agreements are as follows:

 

·a ship management agreement with Höegh LNG Management pursuant to which Höegh LNG Management provides technical and maritime management services;

 

·a manning agreement with Höegh Fleet Services Philippines Inc. to recruit and engage crew for the vessel;

 

·a technical services agreement with Höegh Norway to provide technical services for the vessel;

 

·a management consulting agreement with Höegh Norway to provide support related to certain management activities;

 

·a crew recruitment consulting services agreement with Höegh Maritime Management to provide professional consulting services in connection with recruitment of crew and other employees;

 

·an agreement for provision of professional payment services with Höegh Maritime Management to provide services in connection with the payment of monthly salaries to the crew and employees working on the vessel; and

 

·a spare parts procurement and insurance services agreement with Höegh LNG Management to arrange for the supply of spare parts and the insurance coverage for the vessel.

 

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) less the non-controlling interest in Segment EBITDA. 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, interest income from advances to joint ventures and interest expense related to the seller’s credit note and the outstanding balance on the $85 million revolving credit facility are included in “Other.”

 

For the three and nine months ended September 30, 2018 and 2017, Majority held FSRUs includes the direct financing lease related to the PGN FSRU Lampung and the operating leases related to the Höegh Gallant and the Höegh Grace.

 

For the three and nine months ended September 30, 2018 and 2017, Joint venture FSRUs include two 50% owned FSRUs, the Neptune and the Cape Ann, that operate under long-term time charters with one charterer.

 

The accounting policies applied to the segments are the same as those applied in the financial statements, except that i) Joint Venture FSRUs are presented under the proportional consolidation method for the segment note and in the tables below, and under equity accounting for the consolidated financial statements and ii) non-controlling interest in Segment EBITDA is subtracted in the segment note to reflect the Partnership’s interest in Segment EBITDA as the Partnership’s segment profit measure, Segment EBITDA. 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. On January 1, 2017, the Partnership began consolidating its acquired 51% interest in Höegh LNG Colombia Holding Ltd., the owner of the entities that own and operate the FSRU Höegh Grace (the “Höegh Grace entities”). Since the Partnership obtained control of the Höegh Grace entities, it consolidated 100% of the revenues, expenses, assets and liabilities of the Höegh Grace entities and the interest not owned by the Partnership was reflected as non-controlling interest in net income and non-controlling interest in total equity under US GAAP. Management monitored the results of operations of the Höegh Grace entities based on the Partnership’s 51% interest in Segment EBITDA of such entities and, therefore, subtracted the non-controlling interest in Segment EBITDA to present Segment EBITDA. The adjustment to non-controlling interest in Segment EBITDA is reversed to reconcile to operating income and net income in the segment presentation. On December 1, 2017, the Partnership acquired the remaining 49% ownership interest in the Höegh Grace entities and, as of that date, there is no longer a non-controlling interest in the Höegh Grace entities.

 

F-20

 

 

HÖEGH LNG PARTNERS LP

NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of U.S. dollars, unless otherwise indicated)

 

In time charters, the charterer, not the Partnership, controls the choice of locations or routes the FSRUs serve. Accordingly, the presentation of information by geographical region is not meaningful. The following tables include the results for the segments for the three and nine months ended September 30, 2018 and 2017.

 

   Three months ended September 30, 2018 
       Joint venture                   
   Majority   FSRUs       Total           
   held   (proportional       Segment   Elimin-     Consolidated 
(in thousands of U.S. dollars)  FSRUs   consolidation)   Other   reporting   ations     reporting 
Time charter revenues  $37,301    10,462        47,763    (10,462) (1)  $37,301 
Other revenue   3            3      (1)   3 
Total revenues   37,304    10,462        47,766           37,304 
Operating expenses   (6,512)   (3,426)   (1,384)   (11,322)   3,426  (1)   (7,896)
Equity in earnings (losses) of joint ventures                   4,551  (1)   4,551 
Segment EBITDA   30,792    7,036    (1,384)   36,444             
Depreciation and amortization   (5,287)   (2,399)       (7,686)   2,399  (1)   (5,287)
Operating income (loss)   25,505    4,637    (1,384)   28,758           28,672 
Gain (loss) on derivative instruments   516    3,151        3,667    (3,151) (1)   516 
Other financial income (expense), net   (6,650)   (3,237)   (606)   (10,493)   3,237  (1)   (7,256)
Income (loss) before tax   19,371    4,551    (1,990)   21,932          21,932 
Income tax benefit (expense)   (2,021)       (29)   (2,050)         (2,050)
Net income (loss)  $17,350    4,551    (2,019)   19,882         $19,882 
Preferred unitholders’ interest in net income                   3,288  (2)   3,288 
Limited partners' interest in net income (loss)  $17,350    4,551    (2,019)   19,882    (3,288) (2)  $16,594 

 

(1) Eliminations reverse each of the income statement line items of the proportional amounts for Joint venture FSRUs and record the Partnership's share of the Joint venture FSRUs net income (loss) to Equity in earnings (loss) of joint ventures.
(2) Allocates the preferred unitholders’ interest in net income to the preferred unitholders.

 

F-21

 

 

HÖEGH LNG PARTNERS LP

NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of U.S. dollars, unless otherwise indicated)

 

   Three months ended September 30, 2017       
       Joint venture                   
   Majority   FSRUs       Total           
   held   (proportional       Segment   Elimin-     Consolidated 
(in thousands of U.S. dollars)  FSRUs   consolidation)   Other   reporting   ations     reporting 
Time charter revenues  $35,856    10,460        46,316    (10,460) (1)  $35,856 
Accruals historical boil-off claim       (11,850)       (11,850)   11,850  (1)    
Total revenues   35,856    (1,390)       34,466           35,856 
Operating expenses   (6,672)   (1,733)   (1,304)   (9,709)   1,733  (1)   (7,976)
Equity in earnings (losses) of joint ventures                   (7,321) (1)   (7,321)
Less: Non-controlling interest in Segment EBITDA   (5,354)           (5,354)   5,354  (2)    
Segment EBITDA   23,830    (3,123)   (1,304)   19,403             
Add: Non-controlling interest in Segment EBITDA   5,354            5,354    (5,354) (2)    
Depreciation and amortization   (5,264)   (2,462)       (7,726)   2,462  (1)   (5,264)
Operating income (loss)   23,920    (5,585)   (1,304)   17,031           15,295 
Gain (loss) on derivative instruments   571    1,802        2,373    (1,802) (1)   571 
Other financial income (expense), net   (7,128)   (3,538)   (1,146)   (11,812)   3,538  (1)   (8,274)
Income (loss) before tax   17,363    (7,321)   (2,450)   7,592          7,592 
Income tax expense   (2,183)       (2)   (2,185)         (2,185)
Net income (loss)  $15,180    (7,321)   (2,452)   5,407         $5,407 
Non-controlling interest in net income   2,899            2,899           2,899 
Limited partners' interest in net income (loss)  $12,281    (7,321)   (2,452)   2,508         $2,508 

 

(1) Eliminations reverse each of the income statement line items of the proportional consolidation amounts for Joint venture FSRUs and record the Partnership’s share of the Joint venture FSRUs’ net income (loss) to Equity in earnings (loss) of joint ventures.

(2) Eliminations reverse the adjustment to Non-controlling interest in Segment EBITDA included for Segment EBITDA and the adjustment to reverse the Non-controlling interest in Segment EBITDA to reconcile to operating income and net income.

 

F-22

 

 

HÖEGH LNG PARTNERS LP

NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of U.S. dollars, unless otherwise indicated)

 

   Nine months ended September 30, 2018 
         Joint venture                   
   Majority     FSRUs       Total           
   held     (proportional       Segment   Elimin-     Consolidated 
(in thousands of U.S. dollars)  FSRUs     consolidation)   Other   reporting   Ations     reporting 
Time charter revenues  $107,695      32,033        139,728    (32,033) (1)  $107,695 
Other revenue   1,103 (3)           1,103      (1)   1,103 
Total revenues   108,798      32,033        140,831           108,798 
Operating expenses   (19,428)    (8,608)   (4,571)   (32,607)   8,608  (1)   (23,999)
Equity in earnings (losses) of joint ventures                     19,031  (1)   19,031 
Segment EBITDA   89,370      23,425    (4,571)   108,224             
Depreciation and amortization   (15,823)     (7,199)       (23,022)   7,199  (1)   (15,823)
Operating income (loss)   73,547      16,226    (4,571)   85,202           88,007 
Gain (loss) on derivative instruments   1,692      12,633        14,325    (12,633) (1)   1,692 
Other financial income (expense), net   (20,060)     (9,828)   (2,103)   (31,991)   9,828  (1)   (22,163)
Income (loss) before tax   55,179      19,031    (6,674)   67,536          67,536 
Income tax expense   (5,975)         (50)   (6,025)         (6,025)
Net income (loss)  $49,204      19,031    (6,724)   61,511         $61,511 
Preferred unitholders’ interest in net income                     8,951  (2)   8,951 
Limited partners' interest in net income (loss)  $49,204      19,031    (6,724)   61,511    (8,951) (2)  $52,560 

 

(1) Eliminations reverse each of the income statement line items of the proportional amounts for Joint venture FSRUs and record the Partnership's share of the Joint venture FSRUs net income (loss) to Equity in earnings (loss) of joint ventures.
(2) Allocates the preferred unitholders’ interest in net income to the preferred unitholders.
(3) Other revenue consists of insurance proceeds received for claims related to repairs under the Mooring warranty. The Partnership was indemnified by Höegh LNG for the cost of the repairs, subject to repayment to the extent recovered from insurance proceeds. The amount was refunded to Höegh LNG during the third quarter of 2018. Refer to notes 5 and 14.

 

F-23

 

 

HÖEGH LNG PARTNERS LP

NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of U.S. dollars, unless otherwise indicated)

 

   As of September 30, 2018       
       Joint venture                   
   Majority   FSRUs       Total           
   held   (proportional       Segment   Elimin-     Consolidated 
(in thousands of U.S. dollars)  FSRUs   consolidation)   Other   reporting   ations     reporting 
Vessels, net of accumulated depreciation    $663,462    264,104        927,566    (264,104) (1)  $663,462 
Net investment in direct financing lease   284,059            284,059          284,059 
Goodwill     251            251          251 
Advances to joint ventures             3,466    3,466          3,466 
Total assets   1,017,000    288,327    18,416    1,323,743    (288,327) (1)   1,035,416 
Accumulated losses of joint ventures           50    50    (1,765) (1)   (1,715)
Expenditures for vessels & equipment   161    3,230        3,391    (3,230) (2)   161 
Expenditures for drydocking       2,529        2,529    (2,529) (2)    
Principal repayment direct financing lease      2,828            2,828          2,828 
Amortization of above market contract  $2,716            2,716         $2,716 

 

(1) Eliminates the proportional share of the Joint venture FSRUs’ Vessels, net of accumulated depreciation and Total assets and reflects the Partnership’s share of net assets (assets less liabilities) of the Joint venture FSRUs as Accumulated losses of joint ventures.

(2) Eliminates the Joint venture FSRUs’ Expenditures for vessels & equipment and drydocking to reflect the consolidated expenditures of the Partnership.

 

F-24

 

 

HÖEGH LNG PARTNERS LP

NOTES TO THE UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of U.S. dollars, unless otherwise indicated)

 

   Nine months ended September 30, 2017 
       Joint venture                   
   Majority   FSRUs       Total           
   held   (proportional       Segment   Elimin-     Consolidated 
(in thousands of U.S. dollars)  FSRUs   consolidation)   Other   reporting   ations     reporting 
Time charter revenues  $105,957    31,608        137,565    (31,608) (1)  $105,957 
Accruals historical boil-off claim       (11,850)       (11,850)   11,850  (1)    
Total revenues   105,957    19,758        125,715           105,957 
Operating expenses   (20,627)   (6,336)   (4,376)   (31,339)   6,336  (1)   (25,003)
Construction contract expenses   (151)           (151)          (151)
Equity in earnings (losses) of joint ventures                   (962) (1)   (962)
Less: Non-controlling interest in Segment EBITDA   (15,772)           (15,772)   15,772  (2)    
Segment EBITDA   69,407    13,422    (4,376)   78,453             
Add: Non-controlling interest in Segment EBITDA   15,772            15,772    (15,772) (2)    
Depreciation and amortization   (15,789)   (7,379)       (23,168)   7,379  (1)   (15,789)
Operating income (loss)   69,390    6,043    (4,376)   71,057           64,052 
Gain (loss) on derivative instruments