Hoegh LNG says FSRU Market is Growing As Expected, Sees High Utilization Rate
Generating value through operational excellence
With all units operating in accordance with their long-term contracts, Höegh LNG Holdings Ltd. (the Company) and its subsidiaries (together Höegh LNG or the Group)2 delivered another quarter with stable operating results. As additional FSRUs are delivered and commence operations, there will be a step-by- step growth in the operating result.
With ample supply of LNG being available at competitive prices, the utilisation of the Group’s fleet of FSRUs under long-term contract continues to increase. The regas average send-out rate of Höegh LNG’s fleet more than doubled during the first nine months of this year compared with the same period last year, a development which further reinforces the economic attractiveness of FSRUs.
The Colombian FSRU project entered its start-up phase when Höegh Grace arrived in Cartagena early November 2016 and subsequently loaded its commissioning cargo. Commercial operation is expected to commence in early December 2016. Subject to MLP equity market conditions, a drop-down to HMLP could take place shortly after commercial start up. As part of the ongoing preparations for a potential partial or full drop-down, HMLP has made a shelf registration filing with the SEC.
Höegh LNG reported an EBITDA of USD 26.5 million for the third quarter of 2016, compared with USD 27.0 million for the previous quarter. The stable operating result reflects the fact that all units operated in accordance with their long-term contracts during the quarter. Höegh Grace concluded its short-term charter with Trafigura during the quarter and therefore had limited impact on the results ahead of the expected commencement of its long-term FSRU contract in December 2016.
Depreciation totalled USD 9.2 million in the quarter and was in line with previous quarter. Net financial expenses were USD 12.8 million, compared with USD 13.7 million for the second quarter 2016, leading to a profit after tax of USD 3.3 million in the quarter, which also was in line with the previous quarter.
Net cash flows for the quarter were positive at USD 0.9 million, compared with a negative USD 41.8 million in the previous period. Uses during the quarter primarily comprised capital expenditure, debt service and dividend payments, while sources consisted mainly of net cash generated from operating activities as well as redemption of marketable securities.As of 30 September 2016, Höegh LNG had USD 269.0 million in current cash and marketable securities (USD 294.7 million) and a net interest-bearing debt of USD 663.0 million (USD 650.5 million). Book equity after adjusting for the mark-to-market of interest rate swaps was USD 576.4 million as of 30 September 2016 (USD 584.6 million), which is equivalent to an adjusted book equity ratio of 35.7% (35.6%).
FSRU
All the FSRUs in Höegh LNG’s fleet operated in accordance with contract during the quarter and the Group’s technical availability continues to be close to 100%. Our clients’ utilisation of Höegh LNG’s FSRU fleet continues to increase, driven by their access to competitively priced LNG. Compared with the same period of last year, the send-out rate over the first nine months has more than doubled.
The FSRU project in Colombia entered the commissioning phase when Höegh Grace berthed in Cartagena on 1 November 2016 and subsequently received the commissioning cargo. Höegh Grace has the capacity to cover around 40% of Colombia’s natural gas demand and will facilitate the import of energy needed to meet increasing demand for electricity in the country. The FSRU will also ensure security of supply for Colombia during periods of drought, when the country has limited hydropower. When Höegh Grace has completed the commissioning phase, the vessel will commence commercial operations and start generating cash flows under the long-term contract.
Depending on MLP equity market conditions, Höegh Grace may be dropped down to HMLP in one or more transactions. HMLP has made preparations for an efficient drop-down transaction by making a shelf registration filing with the SEC.
The Penco LNG FSRU project in Chile reached important milestones when all permits were issued by the regulatory authorities during the third quarter of 2016. The Penco LNG contract will be serviced by FSRU#8, currently under construction at HHI. Höegh LNG has initiated the debt financing process for this FSRU and plans to have the financing in place by the middle of 2017.
Höegh LNG is making progress on securing employment for FSRU#7, on schedule for delivery in March 2017, as well as for additional FSRU’s from its planned newbuild orders and/or conversion project. Höegh LNG is participating in several tender and bi-lateral processes and has entered into a MoU for exclusive negotiations for one project under development. The level of business development activity is currently high. Several new FSRU projects have been proposed lately, most of which have a start-up date in 2017 and 2018.
Höegh LNG is currently in the final round of evaluating bids received from shipyards for its next FSRU newbuilding series. The terms and conditions of the offers received are very competitive, reflecting the current shipbuilding market. Given strong FSRU market fundamentals, Höegh LNG is considering taking advantage of the current yard terms to further strengthen its competitive position as the leading provider of FSRU services.
The FSRU Conversion Project is well advanced and on schedule, with the regasification plant on firm order with Wärtsila, the tender launched for selecting the conversion yard, ongoing negotiations for purchasing an LNGC, and ongoing commercial negotiations with potential FSRU clients.
LNGC
The two Arctic LNGCs were operated in accordance with their long-term contracts.
Market
The oversupplied LNG market and competitive LNG prices have led to high utilisation of new importing facilities, the majority of which are FSRUs. In addition, many new importers have an energy deficit which exceeds the capacity of one FSRU. Because their first FSRU project has been a success the threshold for committing to a second or third FSRU is low. Consequently, a large number of the projects currently being pursued by the Group are located in countries that already have at least one FSRU in operation.
Around 100 MTPA of additional LNG liquefaction capacity will enter the market between 2017 and 2020. The LNG market should therefore continue to see ample additional supplies as the remaining LNG liquefaction projects commence operations. Coupled with the expectations for continued low LNG prices, this will support continued growth in the FSRU segment.
The LNGC spot and short-term market remains weak but with some signs of improvement, albeit, from a very low base. With both its LNGCs on long-term contracts, Höegh LNG currently has no exposure to the LNGC spot market.
Outlook
Höegh LNG continues to focus on operational excellence, expressed by a technical availability close to 100% across its fleet. This forms the basis for the Group’s stable operating results generated from long- term contracts. The potential Höegh Grace drop-down will be a value-generating transaction and allow the Group to utilise an attractive financial source, which enables it to recycle its equity capital and continue its strong growth performance. With a solid operational and financial platform in place, the Group is well positioned to take advantage of the growing FSRU market to reach its ambition of having 12 FSRUs in operation and under construction by 2019.
