F-1 1 d701161df1.htm FORM F-1 Form F-1
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As filed with the Securities and Exchange Commission on July 3, 2014

 

Registration No. 333-            

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM F-1

 

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

HÖEGH LNG PARTNERS LP

(Exact name of Registrant as specified in its charter)

 

Republic of the Marshall Islands   4400   Not Applicable
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (IRS Employer
Identification No.)

 

2 Reid Street, Hamilton, HM 11, Bermuda +1 (441) 295-6815

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

Watson, Farley & Williams LLP

1133 Avenue of the Americas

New York, New York 10036

(212) 922-2200

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

 

Catherine S. Gallagher

Adorys Velazquez

Vinson & Elkins L.L.P.

2200 Pennsylvania Avenue NW, Suite 500W

Washington, DC 20037

Telephone: (202) 639-6500

Facsimile: (202) 639-6604

 

Joshua Davidson

Baker Botts L.L.P.

910 Louisiana Street

Houston, Texas 77002

Telephone: (713) 229-1234

Facsimile: (713) 229-1522

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

 

Proposed maximum

aggregate offering price(1)(2)

 

Amount of

registration fee(3)

Common units representing limited partner interests

  $150,000,000   $19,320

 

 

(1)   Includes common units issuable upon exercise of the underwriters’ option to purchase additional common units.
(2)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o).
(3)   To be paid in connection with the initial filing of the registration statement.

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

 

SUBJECT TO COMPLETION, DATED JULY 3, 2014

 

PRELIMINARY PROSPECTUS

 

LOGO

 

Höegh LNG Partners LP

 

Common Units

Representing Limited Partner Interests

$         per common unit

 

 

 

This is the initial public offering of our common units. We are selling              common units in this offering. Prior to this offering, there has been no public market for our common units. We anticipate that the initial public offering price will be between $         and $         per common unit. To the extent the underwriters sell more than              common units in this offering, the underwriters have an option to purchase up to              additional common units.

 

We are a Marshall Islands limited partnership formed to own, operate and acquire floating storage and regasification units (“FSRUs”), liquefied natural gas (“LNG”) carriers and other LNG infrastructure assets under long-term charters. At the closing of this offering, interests in our initial fleet of FSRUs will be contributed to us by Höegh LNG Holdings Ltd., a leading floating LNG service provider. Although we are organized as a limited partnership, we have elected to be treated as a corporation solely for U.S. federal income tax purposes. We have applied to list our common units on the New York Stock Exchange, under the symbol “HMLP.”

 

 

 

We are an “emerging growth company,” and we are eligible for reduced reporting requirements. See “Summary—Implications of Being an Emerging Growth Company.” Investing in our common units involves risks. Please read “Risk Factors” beginning on page 24.

 

These risks include the following:

 

   

Our initial fleet consists of only three vessels. Any limitation on the availability or operation of those vessels could have a material adverse effect on our business, financial condition and results of operations.

 

   

We currently derive all of our revenue from two customers, and the loss of either of these customers would result in a significant loss of revenues and cash flow.

 

   

We may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses to enable us to pay the minimum quarterly distribution on our units.

 

   

We will be required to make substantial capital expenditures to maintain and expand our fleet, which will reduce our cash available for distribution.

 

   

We depend on Höegh LNG Holdings Ltd. and its subsidiaries for the management of our fleet and to assist us in operating and expanding our business.

 

   

Unitholders have limited voting rights, and our partnership agreement restricts the voting rights of unitholders who own more than 4.9% of our common units.

 

   

Our general partner and its affiliates own a significant interest in us and have conflicts of interest and limited duties to us and our unitholders, which may permit them to favor their own interests to your detriment.

 

   

Our general partner has a limited call right that may require you to sell your common units at an undesirable time or price.

 

   

U.S. tax authorities could treat us as a “passive foreign investment company,” which would have adverse U.S. federal income tax consequences to U.S. unitholders.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

     Per Common Unit      Total  

Public Offering Price

   $                    $                

Underwriting Discount(1)

   $         $     

Proceeds to Höegh LNG Partners LP (before expenses)

   $         $     

 

(1)   Excludes an aggregate structuring fee of $         (    % of the offering proceeds) payable to Citigroup Global Markets Inc. See “Underwriting.”

 

The underwriters expect to deliver the common units to purchasers on or about                     , 2014 through the book-entry facilities of The Depository Trust Company.

 

 

 

Citigroup   BofA Merrill Lynch   Morgan Stanley
Barclays   UBS Investment Bank

 

 

 

                    , 2014


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LOGO

 

LOGO

 

LOGO


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We are responsible for the information contained in this prospectus and in any free writing prospectus we prepare or authorize. We have not authorized anyone to provide you with different information, and we take no responsibility for any other information others may give you. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date of this prospectus.

 

 

 

TABLE OF CONTENTS

 

SUMMARY

     1   

Overview

     1   

Our Relationship with Höegh LNG

     3   

Business Opportunities

     3   

Competitive Strengths

     4   

Business Strategies

     5   

Risk Factors

     6   

Implications of Being an Emerging Growth Company

     6   

Formation Transactions

     7   

Holding Entity Structure

     8   

Simplified Organizational and Ownership Structure after This Offering

     9   

Our Management

     10   

Principal Executive Offices and Internet Address; SEC Filing Requirements

     11   

Summary of Conflicts of Interest and Fiduciary Duties

     11   

The Offering

     13   

Summary Historical Financial and Operating Data

     19   

RISK FACTORS

     24   

Risks Inherent in Our Business

     24   

Risks Inherent in an Investment in Us

     45   

Tax Risks

     56   

FORWARD-LOOKING STATEMENTS

     59   

USE OF PROCEEDS

     61   

CAPITALIZATION

     62   

DILUTION

     64   

OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

     65   

General

     65   

Forecasted Results of Operations for the 12-Month Period Ending September 30, 2015

     67   

Forecast Assumptions and Considerations

     71   

Forecasted Cash Available for Distribution

     77   

HOW WE MAKE CASH DISTRIBUTIONS

     84   

Distributions of Available Cash

     84   

Operating Surplus and Capital Surplus

     85   

Subordination Period

     88   

Distributions of Available Cash From Operating Surplus During the Subordination Period

     89   

Distributions of Available Cash From Operating Surplus After the Subordination Period

     90   

General Partner Interest

     90   

Incentive Distribution Rights

     90   

Percentage Allocations of Available Cash From Operating Surplus

     91   

Höegh LNG’s Right to Reset Incentive Distribution Levels

     91   

Distributions from Capital Surplus

     94   

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

     94   

Distributions of Cash upon Liquidation

     95   

 

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SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

     96   

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

     101   

Overview

     101   

Items You Should Consider When Evaluating Our Historical Financial Performance and Assessing Our Future Prospects

     105   

Factors Affecting Our Results of Operations

     106   

Important Financial and Operational Terms and Concepts

     107   

Customers

     109   

Inflation and Cost Increases

     109   

Insurance

     109   

Results of Operations

     110   

Liquidity and Capital Resources

     124   

Contractual Obligations

     132   

Off-Balance Sheet Arrangements

     132   

Critical Accounting Estimates

     132   

Recent Accounting Pronouncements

     134   

Quantitative and Qualitative Disclosures About Market Risk

     134   

INDUSTRY

     135   

Overview of the Natural Gas Market

     135   

Introduction to Liquefied Natural Gas

     136   

LNG Supply

     137   

LNG Demand

     139   

LNG Trade

     141   

Floating Regasification Vessels

     143   

Demand for FSRUs

     144   

FSRU Market Participants

     145   

FSRU Design Trends

     145   

Floating LNG Production

     146   

LNG Carriers

     147   

Vessel Prices and Vessel Sizes

     148   

LNG Carrier Development and Propulsion

     148   

LNG Shipping Market

     149   

Safety and Security

     150   

BUSINESS

     152   

Overview

     152   

Our Relationship with Höegh LNG

     153   

Business Opportunities

     154   

Competitive Strengths

     154   

Business Strategies

     155   

Our Fleet

     156   

Customers

     159   

Vessel Time Charters

     159   

Competition

     168   

Classification, Inspection and Maintenance

     168   

Safety, Management of Ship Operations and Administration

     169   

Maritime Personnel and Competence Development

     170   

Risk of Loss, Insurance and Risk Management

     170   

Environmental and Other Regulation

     171   

Properties

     180   

Legal Proceedings

     180   

Taxation of the Partnership

     180   

 

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MANAGEMENT

     187   

Management of Höegh LNG Partners LP

     187   

Directors and Executive Officers

     188   

Reimbursement of Expenses of Our General Partner

     190   

Executive Compensation

     190   

Compensation of Directors

     190   

Richard Tyrrell Employment Agreement

     191   

Long-Term Incentive Plan

     191   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     194   

OUR JOINT VENTURES AND JOINT VENTURE AGREEMENTS

     195   

General

     195   

SRV Joint Gas Shareholders’ Agreement

     195   

Loans from Joint Venture Partners

     196   

Dividend and Distribution Policy

     196   

Restrictions on Transfer of Equity Interests; Purchase Rights

     196   

Termination

     197   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     198   

Distributions and Payments to our General Partner and Its Affiliates

     198   

Agreements Governing the Transactions

     199   

Contribution Agreement

     210   

Sponsor Credit Facility with Höegh LNG

     210   

Intercompany Note

     210   

License Agreement

     210   

Other Related Party Transactions

     211   

CONFLICTS OF INTEREST AND FIDUCIARY DUTIES

     214   

Conflicts of Interest

     214   

Fiduciary Duties

     217   

DESCRIPTION OF THE COMMON UNITS

     221   

The Units

     221   

Transfer Agent and Registrar

     221   

Transfer of Common Units

     221   

OUR PARTNERSHIP AGREEMENT

     223   

Organization and Duration

     223   

Purpose

     223   

Cash Distributions

     223   

Capital Contributions

     223   

Voting Rights

     223   

Applicable Law; Forum, Venue and Jurisdiction

     225   

Limited Liability

     226   

Issuance of Additional Interests

     226   

Tax Status

     227   

Amendment of Our Partnership Agreement

     227   

Merger, Sale, Conversion or Other Disposition of Assets

     229   

Termination and Dissolution

     230   

Liquidation and Distribution of Proceeds

     230   

Withdrawal or Removal of our General Partner

     230   

Transfer of General Partner Interest

     232   

Transfer of Ownership Interests in General Partner

     232   

Transfer of Incentive Distribution Rights

     232   

Change of Management Provisions

     232   

Limited Call Right

     233   

Board of Directors

     233   

Meetings; Voting

     234   

 

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Status as Limited Partner or Assignee

     235   

Indemnification

     235   

Reimbursement of Expenses

     235   

Books and Reports

     235   

Right to Inspect Our Books and Records

     236   

Registration Rights

     236   

UNITS ELIGIBLE FOR FUTURE SALE

     237   

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

     238   

Election to be Treated as a Corporation

     238   

U.S. Federal Income Taxation of U.S. Holders

     238   

U.S. Federal Income Taxation of Non-U.S. Holders

     243   

Backup Withholding and Information Reporting

     243   

NON-UNITED STATES TAX CONSEQUENCES

     245   

Marshall Islands Tax Consequences

     245   

Norway Tax Consequences

     245   

United Kingdom Tax Consequences

     246   

Singapore Tax Consequences

     246   

UNDERWRITING

     248   

Notice to Prospective Investors in the European Economic Area

     250   

Notice to Prospective Investors in the United Kingdom

     251   

Notice to Prospective Investors in Germany

     252   

Notice to Prospective Investors in the Netherlands

     252   

Notice to Prospective Investors in Switzerland

     252   

Notice to Prospective Investors in Hong Kong

     252   

Notice to Prospective Investors in Australia

     253   

LEGAL MATTERS

     254   

EXPERTS

     254   

INDUSTRY AND MARKET DATA

     254   

EXPENSES RELATED TO THIS OFFERING

     255   

WHERE YOU CAN FIND MORE INFORMATION

     255   

INDEX TO FINANCIAL STATEMENTS

     256   

APPENDIX A – FORM OF FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF HÖEGH LNG PARTNERS LP

     A-i   

 

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SERVICE OF PROCESS AND ENFORCEMENT OF CIVIL LIABILITIES

 

We are organized under the laws of the Marshall Islands as a limited partnership. Our general partner is organized under the laws of the Marshall Islands as a limited liability company. The Marshall Islands has a less developed body of securities laws as compared to the United States and provides protections for investors to a significantly lesser extent.

 

Most of our directors and officers and those of our subsidiaries are residents of countries other than the United States. Substantially all of our and our subsidiaries’ assets and a substantial portion of the assets of our directors and officers are located outside the United States. As a result, it may be difficult or impossible for U.S. investors to effect service of process within the United States upon us, our directors or officers, our general partner or our subsidiaries or to realize against us or them judgments obtained in U.S. courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States. However, we have expressly submitted to the jurisdiction of the U.S. federal and New York state courts sitting in the City of New York for the purpose of any suit, action or proceeding arising under the securities laws of the United States or any state in the United States, and we have appointed The Trust Company of the Marshall Islands, Inc., Trust Company Complex, Ajeltake Island, Ajeltake Road, Majuro, Marshall Islands MH96960, to accept service of process on our behalf in any such action.

 

Watson, Farley & Williams LLP, our counsel as to Marshall Islands law, has advised us that there is uncertainty as to whether the courts of the Marshall Islands would (i) recognize or enforce against us, our general partner or our directors or officers judgments of courts of the United States based on civil liability provisions of applicable U.S. federal and state securities laws or (ii) impose liabilities against us, our general partner or our directors and officers in original actions brought in the Marshall Islands, based on these laws.

 

PRESENTATION OF FINANCIAL INFORMATION

 

Predecessor and Rule 3-09 Financial Statements

 

The combined carve-out financial statements of our predecessor for accounting purposes, Höegh LNG Partners LP Predecessor (“our predecessor”), reflect interests in (i) Hoegh LNG Lampung Pte Ltd. and PT Hoegh LNG Lampung (the owner of the newbuilding FSRU, the PGN FSRU Lampung) and (ii) two joint ventures: SRV Joint Gas Ltd. (the owner of the FSRU, the GDF Suez Neptune) and SRV Joint Gas Two Ltd. (the owner of the FSRU, the GDF Suez Cape Ann). Our predecessor accounts for its equity interests in the two joint ventures as equity method investments in its combined carve-out financial statements. Rule 3-09 of Regulation S-X requires separate financial statements (“Rule 3-09 financial statements”) of 50% or less owned persons accounted for under the equity method by a registrant such as us if either the income or the investment test in Rule 1-02(w) of Regulation S-X exceeds 20%. Furthermore, Rule 3-09(c) of Regulation S-X provides for the combination of Rule 3-09 financial statements if the underlying investments are under common management. In such scenarios, the significance of investments under Rule 1-02(w) of Regulation S-X is to be measured on a combined basis. We have determined that common management exists among the joint ventures owning the GDF Suez Neptune and the GDF Suez Cape Ann, which exceed the 20% significance tests of Rule 3-09 of Regulation S-X. Accordingly, this prospectus includes audited combined financial statements as of and for the years ended December 31, 2013 and 2012 for the joint ventures owning the GDF Suez Neptune and the GDF Suez Cape Ann. Such financial statements, including related notes thereto, have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).

 

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SUMMARY

 

This summary highlights information contained elsewhere in this prospectus. Unless we otherwise specify, all references to information and data in this prospectus about our business and fleet refer to our business and interests in our initial fleet of FSRUs that will be contributed to us upon the closing of this offering. Prior to the closing of this offering, we will not own interests in any vessels. You should read the entire prospectus carefully, including the historical combined carve-out financial statements of our predecessor and the notes to those financial statements. The information presented in this prospectus assumes, unless otherwise noted, (1) an initial public offering price of $         per common unit (the midpoint of the price range set forth on the cover page of this prospectus) and (2) that the underwriters do not exercise their option to purchase additional common units. You should read “Risk Factors” for more information about important risks that you should consider carefully before buying our common units. Unless otherwise indicated, all references to “dollars” and “$” in this prospectus are to, and amounts are presented in, U.S. Dollars.

 

References in this prospectus to “Höegh LNG Partners,” “we,” “our,” “us” and “the Partnership” or similar terms when used in a historical context refer to Höegh LNG Holdings Ltd. and its vessels and the subsidiaries that hold interests in the vessels in our initial fleet. When used in the present tense or prospectively, those terms refer to Höegh LNG Partners LP or any one or more of its subsidiaries, or to all such entities unless the context otherwise indicates. Unless the context requires otherwise, references in this prospectus to our or the “joint ventures” refer to the joint ventures that own two of the vessels in our initial fleet (the GDF Suez Neptune and the GDF Suez Cape Ann). Please read “—Summary Historical Financial and Operating Data” beginning on page 19 for an overview of our predecessor’s and our joint ventures’ operating results and financial position.

 

References in this prospectus to “our general partner” refer to Höegh LNG GP LLC, the general partner of Höegh LNG Partners. References in this prospectus to “our operating company” refer to Höegh LNG Partners Operating LLC, a wholly owned subsidiary of the Partnership. References in this prospectus to “Höegh UK” refer to Hoegh LNG Services Ltd, a wholly owned subsidiary of our operating company. References in this prospectus to “Höegh Lampung” refer to Hoegh LNG Lampung Pte Ltd., a wholly owned subsidiary of our operating company. References in this prospectus 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 prospectus to “Höegh LNG Management” refer to Höegh LNG Fleet Management AS, a wholly owned subsidiary of Höegh LNG. References in this prospectus to “Höegh Maritime Management” refer to Hoegh LNG Maritime Management Pte. Ltd., a wholly owned subsidiary of Höegh LNG. References in this prospectus to “Höegh Norway” refer to Höegh LNG AS, a wholly owned subsidiary of Höegh LNG. References in this prospectus to “Höegh Asia” refer to Hoegh LNG Asia Pte. Ltd., a wholly owned subsidiary of Höegh LNG. References in this prospectus to “Höegh Shipping” refer to Hoegh LNG Shipping Services Pte Ltd, a wholly owned subsidiary of Höegh LNG. References in this prospectus to “Leif Höegh UK” refer to Leif Höegh (U.K.) Limited, a wholly owned subsidiary of Höegh LNG. References in this prospectus to “PT Hoegh” refer to PT Hoegh LNG Lampung, the owner of the PGN FSRU Lampung. References in this prospectus to “GDF Suez” refer to GDF Suez LNG Supply SA, a subsidiary of GDF Suez S.A. References in this prospectus to “PGN” refer to PT PGN LNG Indonesia, a subsidiary of PT Perusahaan Gas Negara (Persero) Tbk.

 

Höegh LNG Partners LP

 

Overview

 

We are a growth-oriented limited partnership formed by Höegh LNG Holdings Ltd. (Oslo Børs symbol: HLNG), a leading floating LNG service provider, to own, operate and acquire floating storage and regasification units (“FSRUs”), LNG carriers and other LNG infrastructure assets under long-term charters, which we define as charters of five or more years. At the closing of this offering, interests in our initial fleet of FSRUs will be contributed to us by Höegh LNG.

 

 

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Our initial fleet will consist of modern FSRUs that operate under long-term charters with major energy companies or utilities. We intend to grow our business in the FSRU, LNG carrier and LNG infrastructure market through acquisitions from Höegh LNG and third parties. We also believe we can grow organically by continuing to provide reliable service to our customers and leveraging Höegh LNG’s relationships, expertise and reputation.

 

Upon the closing of this offering, our initial fleet will consist of interests in the following vessels:

 

   

a 50% interest in the GDF Suez Neptune, an FSRU built in 2009 that is currently operating under a time charter with GDF Suez, a subsidiary of GDF Suez S.A., a French publicly listed, government-backed, electric utility company, and the leading LNG importer in Europe in 2012, that expires in 2029, with an option to extend for up to two additional periods of five years each;

 

   

a 50% interest in the GDF Suez Cape Ann, an FSRU built in 2010 that is currently operating under a time charter with GDF Suez that expires in 2030, with an option to extend for up to two additional periods of five years each; and

 

   

a 100% economic interest in the PGN FSRU Lampung, an FSRU built in 2014 that is expected to commence operations in July 2014 under a time charter with PGN, a subsidiary of an Indonesian publicly listed, government-controlled, gas and energy company that constructs gas pipelines and infrastructure and distributes and transmits natural gas to industrial, commercial and household users, that expires in 2034, with options to extend either for an additional 10 years or for up to two additional periods of five years each.

 

For a description of our joint venture partners and the joint venture agreements related to the vessels in our initial fleet, please read “Our Joint Ventures and Joint Venture Agreements.”

 

We intend to leverage our relationship with Höegh LNG to make accretive acquisitions, which would be expected to increase our per unit cash available for distribution, of FSRUs, LNG carriers and other LNG infrastructure assets with long-term charters from Höegh LNG and third parties. Pursuant to the omnibus agreement we will enter into with Höegh LNG, our general partner, and our operating company at the closing of this offering, we will have a right to purchase from Höegh LNG any FSRU or LNG carrier operating under a charter of five or more years. Also pursuant to the omnibus agreement, we will have the right to purchase from Höegh LNG all or a portion of its interests in the FSRU, the Independence. In addition, we expect that Höegh LNG will secure a charter of five or more years for two additional newbuilding FSRUs, the Höegh Gallant and Hull no. 2551, at which point we will have the right to purchase them from Höegh LNG pursuant to the omnibus agreement. We cannot assure you that we will make any particular acquisition or that as a consequence we will successfully grow the amount of our per unit distributions. Among other things, our ability to acquire additional FSRUs, LNG carriers and other LNG infrastructure assets will be dependent upon our ability to raise additional equity and debt financing.

 

The Independence was constructed by Hyundai Heavy Industries Co., Ltd. (“HHI”) and was delivered to Höegh LNG from the shipyard in May 2014. Beginning no later than the fourth quarter of 2014, the Independence will operate under a time charter that expires in 2024 with AB Klaipèdos Nafta (“ABKN”), a Lithuanian publicly listed, government-controlled utility. We will have the right to purchase all or a portion of Höegh LNG’s interests in the Independence within 24 months after acceptance of such vessel by her charterer, subject to reaching an agreement with Höegh LNG regarding the purchase price and other terms in accordance with the provisions of the omnibus agreement and any rights ABKN has under the related time charter. We may exercise this option at one or more times during such 24-month period. Acceptance occurs after the vessel has been delivered and all inspections and testing of the vessel have been completed in accordance with the applicable charter requirements.

 

 

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The Höegh Gallant and Hull no. 2551 also are being constructed by HHI and are scheduled for delivery to Höegh LNG from the shipyard in July 2014 and March 2015, respectively. Although the Höegh Gallant and Hull no. 2551 have not yet been chartered, Höegh LNG is involved in several tender processes for FSRU projects globally, and we expect Höegh LNG to secure a charter of five or more years for both of them.

 

Our Relationship with Höegh LNG

 

We believe that one of our principal strengths is our relationship with Höegh LNG. With a track record dating back to the delivery of the world’s first Moss-type LNG carrier in 1973, we believe that Höegh LNG is one of the most experienced operators of LNG carriers and one of only three operators of FSRUs in the world. Our affiliation with Höegh LNG gives us access to Höegh LNG’s long-standing relationships with leading oil and gas companies, utility companies, shipbuilders, financing sources and suppliers, which we believe will allow us to compete more effectively when seeking additional long-term charters for FSRUs, LNG carriers and other LNG infrastructure assets. In addition, we believe Höegh LNG’s 40-year track record of providing LNG services and its technical, commercial and managerial expertise, including its leadership in the development of floating liquefaction solutions, will enable us to continue to maintain the high utilization of our fleet to preserve our stable cash flows. We cannot assure you that our relationship with Höegh LNG will lead to high fleet utilization rates or stable cash flows in the future.

 

Business Opportunities

 

We believe the following factors create opportunities for us to successfully execute our business strategy and plan and grow our business:

 

   

Natural Gas and LNG Demand Growth.    Natural gas is projected to be the fastest growing fossil fuel due to its low carbon intensity and clean burning characteristics, an abundance of reserves, market deregulation and global economic growth. According to Fearnley Consultants AS (“Fearnley Consultants”), a provider of maritime research and data compilation, LNG production capacity based on existing construction projects is projected to increase by nearly 40% by the end of 2020, and LNG exports transported by sea are projected to grow more than twice as fast as overall natural gas consumption through 2035. The number of countries importing LNG has more than doubled from 12 in 2000 to 29 in 2013. As increasing volumes of LNG are destination flexible (versus serving long-term, dedicated, point-to-point trade), and regional price differences in gas persist, more countries find LNG imports to be an important part of their energy strategy. We cannot assure you that growth rates comparable to historical growth rates or that projected growth rates for natural gas, LNG, LNG carriers or FSRUs will be achieved. Please read “Risk Factors” and “Industry.”

 

   

Advantages of Newbuilding FSRU Solutions.    We believe that FSRUs have several advantages over traditional, onshore LNG terminals, including greater operational and market flexibility, accelerated project execution, reduced cost and more predictable capital investment requirements. The cost and flexibility of FSRU solutions have enabled certain markets to plan to import LNG to diversify supply and contribute to energy security. Newbuilding FSRUs are typically larger and more efficient than converted FSRU units. They can also compete as conventional LNG carriers when not operating as FSRUs.

 

   

Growing Demand for FSRUs.    Demand for FSRUs is driven by importers’ desire for flexible and cost-effective import schemes to meet growing LNG requirements. FSRUs are able to quickly react to demand and evolving LNG price. They also offer a unique solution for small or highly seasonal markets. We believe that these factors will increasingly motivate customers to choose FSRUs for LNG importation needs. According to Fearnley Consultants, approximately 60 plans for FSRUs are being considered, compared to 19 FSRUs in operation as of May 2014.

 

 

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High Barriers to Entry.    We believe the capital investment, regulatory and permitting and technical capabilities required to build and operate FSRUs and other LNG infrastructure act as substantial barriers to entry for potential competitors. Leading energy companies and utilities have increasingly strict pre-qualification and ongoing technical requirements for operators, and there are only three companies with experience of building and operating FSRUs. We believe that due to stringent requirements, customers will continue to look to experienced technical operators with proven track records for LNG infrastructure requirements.

 

We can provide no assurance, however, that the industry dynamics described above will continue.

 

Competitive Strengths

 

We believe that our future prospects for success are enhanced by the following aspects of our business:

 

   

Relationship with a Leader in Floating Regasification Technology.    We believe we will benefit from our relationship with Höegh LNG, a fully integrated provider of floating LNG infrastructure services, offering regasification and transportation services under long-term charters. Höegh LNG is one of only three operators of FSRUs in the world and has extensive experience in providing LNG transportation, having been operating since 1973, when it delivered the world’s first Moss-type LNG carrier. We believe that Höegh LNG’s expertise in the LNG sector, strong relationships with customers, shipyards and financial institutions, and newbuilding strategy will enable Höegh LNG to attract additional long-term charters for FSRUs, LNG carriers and other LNG infrastructure assets, which would in turn enhance our growth opportunities.

 

   

Secure Cash Flows from Long-Term Charters with Strong Counterparties.    All three of our vessels operate under fixed-rate charters with an average remaining firm contract duration of 17 years as of March 31, 2014, excluding the exercise of any options. Both of our customers, GDF Suez (France) and PGN (Indonesia), are government-backed utility companies. Under our time charters, substantially all of our vessel operating expenses, including operating and maintenance expenses such as daily running costs and drydocking, are passed through to our customers. In addition, under these charters, we have no direct exposure to commodity prices and limited exposure to foreign exchange rates as all revenues are paid in U.S. Dollars.

 

   

Built-In Growth Opportunities.    In addition to our initial fleet of three FSRUs, we will have the right to purchase from Höegh LNG additional assets on long-term charters, including the Independence. Commencing no later than the fourth quarter of 2014, the Independence will operate under a long-term, fixed-rate time charter of an initial duration of 10 years with ABKN, a Lithuanian publicly listed, government-controlled utility. We further expect Höegh LNG will secure long-term charters for two additional newbuilding FSRUs, which we would then have the right to purchase. We will also have the right to purchase any other additional FSRUs and LNG carriers in Höegh LNG’s fleet that are placed under a charter of five or more years.

 

   

Modern, Technologically Advanced Fleet.    Both our initial fleet and the three newbuilding FSRUs that Höegh LNG has on order will be equipped with the latest floating, storage and regasification technology in terms of size, onboard regasification of LNG, thermal insulation, power generation and regas systems. These vessels have all been built by leading shipyards in South Korea that have constructed much of the world’s newbuilding FSRU fleet. We believe the significant investment needed to build FSRUs and our ability to customize specifications to customers’ requirements and to provide highly trained personnel for operations create significant barriers to entry for new competitors. As a result, we believe that we are positioned to become a preferred provider of FSRUs and other LNG infrastructure assets and to secure additional long-term charters.

 

 

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Höegh LNG’s Record of Efficiency, Safety and Operational Performance.    Through its technical expertise in Höegh LNG Management, Höegh LNG has been safely and efficiently operating LNG vessels since 1973. With approximately 96 onshore employees and approximately 350 seafarers, Höegh LNG maintains global operations with in-house engineering expertise that allows us to offer our customers reliable and efficient performance, while maintaining close control over operating costs. This operational performance will also support our stable cash flow profile by maintaining high utilization of our fleet.

 

We can provide no assurance, however, that we will be able to utilize our strengths described above. For further discussion of the risks that we face, please read “Risk Factors.”

 

Business Strategies

 

Our primary business objective is to increase quarterly distributions per unit over time by executing the following strategies:

 

   

Focus on FSRU Newbuilding Acquisitions.    We intend to acquire newbuilding FSRUs on long-term charters, rather than FSRUs based on retrofitted, first-generation LNG carriers. We believe newbuilding vessels offer the greatest flexibility. Newbuilding FSRUs have superior fuel efficiency, improved storage performance and larger capacity than retrofitted, first-generation LNG carriers. Their larger capacity allows for a full cargo from a comparably sized, modern-day LNG carrier to be offloaded in a single transfer, and this streamlines logistics. In addition, Höegh LNG has strong customer relationships deriving from its ability to work alongside customers on their vessel design needs. Moreover, Höegh LNG pursues a strategy of maintaining one or more uncontracted newbuilding vessel on order so it can provide its customers an FSRU with minimum lead time. We believe that Höegh LNG’s ability to offer newbuild vessels promptly and its engineering expertise make it an operator of choice for projects that require rapid execution, complex engineering or unique specifications. This, in turn, enhances the growth opportunities available to us.

 

   

Pursue Strategic and Accretive Acquisitions of FSRUs, LNG Carriers and Other LNG Infrastructure Assets on Long-Term, Fixed-Rate Charters with Strong Counterparties.    We will seek to leverage our relationship with Höegh LNG to make strategic and accretive acquisitions. Pursuant to the omnibus agreement that we will enter into with Höegh LNG, our general partner, and our operating company, we will have the right to purchase all or a portion of Höegh LNG’s interests in the Independence, as well as any newbuilding FSRU or LNG carrier under a charter of five or more years. We also intend to take advantage of business opportunities and market trends in the LNG transportation industry to grow our assets through third-party acquisitions of FSRUs, LNG carriers and other LNG infrastructure assets under long-term charters.

 

   

Expand Global Operations in High-Growth Regions.    We will seek to capitalize on opportunities emerging from the global expansion of LNG production activity and the need to provide flexible regasification solutions in areas which require natural gas imports. According to Fearnley Consultants, growth in FSRU demand is expected to accelerate beyond 2015, and currently there are approximately 60 FSRU projects under consideration globally. We believe that Höegh LNG’s position as one of three FSRU operators in the world, 40-year operational track record and strong customer relationships will enable us to have early access to new projects worldwide.

 

   

Enhance and Diversify Customer Relationships Through Continued Operating Excellence and Technological Innovation.    We intend to maintain and grow our cash flows by focusing on strong customer relationships and actively seeking the extension and renewal of existing charters, entering into new long-term charters with current customers, and identifying new business opportunities with other creditworthy charterers. We believe our customer relationships are enhanced by our ability to provide expert technical advice to our customers through Höegh LNG’s in-house engineering department, which

 

 

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in turn enables us to be directly involved in our customers’ project development processes. In addition, we will continue to incorporate safety, health, security and environmental stewardship into all aspects of vessel design and operation in order to satisfy our customers and comply with national and international rules and regulations. We believe that Höegh LNG’s operational expertise, recognized position, and track record in floating LNG infrastructure services will position us favorably to capture additional commercial opportunities in the FSRU and LNG sectors.

 

We can provide no assurance, however, that we will be able to implement our business strategies described above or that the business strategies discussed above will increase our quarterly distributions. For further discussion of the risks that we face, please read “Risk Factors.”

 

Risk Factors

 

An investment in our common units involves risks associated with our business, our partnership structure and the tax characteristics of our common units. Please read carefully the risks described under “Risk Factors” beginning on page 24 of this prospectus.

 

Implications of Being an Emerging Growth Company

 

Our predecessor had less than $1.0 billion in revenue during its last fiscal year, which means that we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

   

the ability to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in the registration statement of its initial public offering;

 

   

exemption from the auditor attestation requirement in the assessment of the emerging growth company’s internal control over financial reporting;

 

   

exemption from new or revised financial accounting standards applicable to public companies until such standards are also applicable to private companies; and

 

   

exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and financial statements.

 

We may take advantage of these provisions until the end of the fiscal year following the fifth anniversary of our initial public offering or such earlier time that we are no longer an emerging growth company. We will cease to be an emerging growth company if we have more than $1.0 billion in annual revenues, have more than $700 million in market value of our common units held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some, but not all, of these reduced burdens. For as long as we take advantage of the reduced reporting obligations, the information that we provide unitholders may be different than information provided by other public companies. We are choosing to “opt out” of the extended transition period relating to the exemption from new or revised financial accounting standards and, as a result, we will comply with new or revised financial accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised financial accounting standards is irrevocable.

 

 

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Formation Transactions

 

We were formed on April 28, 2014 as a Marshall Islands limited partnership to own, operate and acquire FSRUs, LNG carriers and other LNG infrastructure assets under long-term charters. Prior to the closing of this offering, we will not own any vessels or other assets.

 

Prior to the closing of this offering, we and Höegh LNG will enter into transactions by which, among other things, Höegh LNG will contribute to us all of its equity interests and loans and promissory notes due to it and affiliates in each of the entities owning the GDF Suez Neptune, the GDF Suez Cape Ann and the PGN FSRU Lampung.

 

At or prior to the closing of this offering, the following transactions will occur:

 

   

we will issue to Höegh LNG              common units and all of our subordinated units, representing an aggregate                 % limited partner interest in us, and all of our incentive distribution rights, which will entitle Höegh LNG to increasing percentages of the cash we distribute in excess of $         per unit per quarter;

 

   

we will issue to Höegh LNG GP LLC, a wholly owned subsidiary of Höegh LNG, a non-economic general partner interest in us;

 

   

we will sell              common units to the public in this offering, representing a     % limited partner interest in us; and

 

   

we will apply the net proceeds of the offering as follows: (i) up to $140 million to make a loan to Höegh LNG in exchange for a note bearing interest at a rate of 5.88% per annum, which is repayable on demand or which we can elect to utilize as part of the purchase consideration in the event we purchase all or a portion of Höegh LNG’s interests in the Independence, (ii) $20 million for general partnership purposes and (iii) the remainder to make a cash distribution to Höegh LNG.

 

In addition, at or prior to the closing of this offering:

 

   

the shareholder loans made by Höegh LNG to each of our joint ventures, in part to finance the operations of such joint ventures, will be transferred to our operating company. As of March 31, 2014, our 50.0% share of the outstanding balance of the shareholder loans was $22.9 million. For a description of the shareholder loans, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources—Borrowing Activities—Loans and Promissory Notes Due to Owners and Affiliates” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Borrowing Activities—Joint Ventures Debt—Loans Due to Owners (Shareholder Loans).”

 

   

the receivable for the $40 million promissory note due to Höegh LNG relating to Höegh Lampung will be transferred from Höegh LNG to our operating company. As of March 31, 2014, the outstanding balance including interest was $40.7 million.

 

   

we will enter into a new $85 million revolving credit facility with Höegh LNG, which we refer to as the sponsor credit facility and which will be undrawn at the closing of this offering;

 

   

we will enter into an omnibus agreement with Höegh LNG, our general partner, and our operating company governing, among other things:

 

   

to what extent we and Höegh LNG may compete with each other;

 

   

our right to purchase from Höegh LNG all or a portion of its interests in an additional newbuilding FSRU, the Independence, within 24 months after acceptance of such vessel by her charterer, subject to reaching an agreement with Höegh LNG regarding the purchase price and other terms in accordance with the provisions of the omnibus agreement and any rights ABKN has under the related time charter, which option we may exercise at one or more times during such 24-month period;

 

 

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certain rights of first offer on FSRUs and LNG carriers operating under charters of five or more years as described under “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement;” and

 

   

Höegh LNG’s provision of certain indemnities to us;

 

   

we and our operating company have entered into an administrative services agreement with Höegh UK, pursuant to which Höegh UK will provide us and our operating company certain administrative services (the “Höegh UK Administrative Services Agreement”);

 

   

Höegh UK has entered into an administrative services agreement with Höegh Norway, pursuant to which Höegh Norway will provide Höegh UK certain administrative services (the “Höegh Norway Administrative Services Agreement,” and together with the Höegh UK Administrative Services Agreement, the “Administrative Services Agreements”);

 

   

our joint ventures will remain parties to ship management agreements with Höegh LNG Management pursuant to which Höegh LNG Management provides our joint ventures with technical and maritime management and crewing of the GDF Suez Neptune and the GDF Suez Cape Ann, and Höegh Norway will remain 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

 

   

our joint ventures will remain parties to commercial and administration management agreements with Höegh Norway, and the owner of the PGN FSRU Lampung will remain party to a technical information and services agreement with Höegh Norway.

 

For further details on our agreements with Höegh LNG and its affiliates, including amounts involved, please read “Certain Relationships and Related Party Transactions.”

 

Holding Entity Structure

 

We are a holding entity and will conduct our operations and business through subsidiaries, as is common with publicly traded limited partnerships, to maximize operational flexibility. We believe that conducting our operations through a publicly traded limited partnership will offer us the following advantages:

 

   

access to the public equity and debt capital markets;

 

   

a lower cost of capital for expansion and acquisitions; and

 

   

an enhanced ability to use equity securities as consideration in future acquisitions.

 

 

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Simplified Organizational and Ownership Structure after This Offering

 

The following diagram depicts our simplified organizational and ownership structure after giving effect to the offering and related transactions described above, assuming no exercise of the underwriters’ option to purchase additional common units:

 

     Number of Units    Percentage Ownership  

Public Common Units(1)(2)

                    

Höegh LNG Common Units(1)

     

Höegh LNG Subordinated Units

     
  

 

  

 

 

 
        100.0
  

 

  

 

 

 

 

LOGO

 

(1)  

If the underwriters exercise any part of their option to purchase additional common units, the number of common units shown to be owned by Höegh LNG will be reduced by the number of common units purchased in connection with any such exercise and will be sold to the public instead of being issued to

 

 

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Höegh LNG. Any such common units issued to Höegh LNG will be issued for no additional consideration. The exercise of the underwriters’ option will not affect the total number of units outstanding. If the underwriters’ option is exercised in full, then Höegh LNG would own     % of the common units, and the public would own     % of the common units.

(2)   Includes up to              common units that may be purchased by certain of our directors, officers, employees and related persons pursuant to a directed unit program, as described in more detail in “Underwriting.”
(3)   Represents a 100% economic interest. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—PGN FSRU Lampung Agreements.”

 

Our Management

 

Our partnership agreement provides that our general partner will irrevocably delegate to our board of directors the authority to oversee and direct our operations, management and policies on an exclusive basis. Certain of our directors will also serve as directors of Höegh LNG or its affiliates. Our Chief Executive Officer and Chief Financial Officer, whose primary responsibility will be to our business, will be employed by one of our subsidiaries. Immediately prior to such employment, he was employed by a subsidiary of Höegh LNG, with his primary responsibility being preparation for this offering. In the future, he will work with Höegh LNG to develop opportunities for us. For example, our Chief Executive Officer and Chief Financial Officer may work to charter new vessels for Höegh LNG, which, pursuant to the omnibus agreement, we may have a right to purchase. For more information about these directors and officers, please read “Management—Directors and Executive Officers.”

 

Our wholly owned subsidiary, Höegh UK, will provide certain administrative services to us. Höegh UK has entered into the Höegh Norway Administrative Services Agreement, pursuant to which Höegh Norway, which is wholly owned by Höegh LNG, will provide Höegh UK certain administrative services. Höegh UK will reimburse Höegh Norway for its reasonable costs and expenses incurred in connection with the provision of these services. We project that Höegh UK will reimburse Höegh Norway approximately $1.0 million in total under such administrative services agreement for the 12-month period ending September 30, 2015.

 

Our joint ventures are parties to ship management agreements with Höegh LNG Management, which is wholly owned by Höegh LNG, pursuant to which Höegh LNG Management provides technical and maritime management and crewing of the vessels. Furthermore, Höegh Norway is 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. Pursuant to the ship management agreements and the sub-technical support agreement, our joint ventures and Höegh Norway, respectively, pay Höegh LNG Management fees for providing these services.

 

Our joint ventures are parties to commercial and administration management agreements with Höegh Norway pursuant to which Höegh Norway provides commercial and administrative services. The owner of the PGN FSRU Lampung is party to a technical information and services agreement with Höegh Norway, a master spare parts supply agreement with Höegh Asia and a master maintenance agreement with Höegh Shipping, pursuant to which Höegh Norway provides commercial, administration and support services.

 

Each of our joint ventures pays Höegh Norway an annual management fee equal to costs incurred plus 3% pursuant to their respective commercial and administration management agreement. In addition, each month, PT Hoegh pays Höegh Norway a fee for the provision of the technical information, including the intellectual property rights, and the services. The monthly fee includes a service fee, which consists of a pro rata payment of the estimated annual costs incurred by Höegh Norway under the technical information and services agreement plus a 5.0% fee on such payment, and a licensing fee. In addition, Höegh LNG Management is paid an annual management fee of approximately $672,000, $672,000 and $600,000 under the ship management agreements or sub-technical support agreement with each of SRV Joint Gas Ltd., SRV Joint Gas Two Ltd. and Höegh Norway,

 

 

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respectively. Pursuant to the master spare parts supply agreement, PT Hoegh will pay Höegh Asia for the actual cost of any supplied services plus a 5.0% fee on the cost of such supplied services. Pursuant to the master maintenance agreement, PT Hoegh will pay Höegh Shipping for the actual costs of any supplied services plus a 5.0% fee on the cost of such supplied services.

 

For a more detailed description of these agreements, please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Joint Venture Commercial and Administration Management Agreements,” “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—PGN FSRU Lampung Agreements” and “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Ship Management Agreements and Sub-Technical Agreement.”

 

Principal Executive Offices and Internet Address; SEC Filing Requirements

 

Our registered and principal executive offices are located at 2 Reid Street, Hamilton, HM 11, Bermuda, and our phone number is +1 (441) 295-6815. We expect to make our periodic reports and other information filed with or furnished to the United States Securities and Exchange Commission (the “SEC”) available, free of charge, through our website at www.hoeghlngpartners.com, which will be operational after this offering, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Please read “Where You Can Find More Information” for an explanation of our reporting requirements as a foreign private issuer.

 

Summary of Conflicts of Interest and Fiduciary Duties

 

Our general partner and our directors will have a legal duty to manage us in a manner beneficial to our unitholders, subject to the limitations described under “Conflicts of Interest and Fiduciary Duties.” This legal duty is commonly referred to as a “fiduciary duty.” Our directors also will have fiduciary duties to manage us in a manner beneficial to us, our general partner and our limited partners. As a result of these relationships, conflicts of interest may arise between us and our unaffiliated limited partners on the one hand, and Höegh LNG and its affiliates, including our general partner, on the other hand. The resolution of these conflicts may not be in the best interest of us or our unitholders. In particular:

 

   

certain of our directors will also serve as directors or executive officers of Höegh LNG or its affiliates and as such will have fiduciary duties to Höegh LNG or its affiliates that may cause them to pursue business strategies that disproportionately benefit Höegh LNG or its affiliates or which otherwise are not in the best interests of us or our unitholders;

 

   

our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner, which entitles our general partner to consider only the interests and factors that it desires, and it has no duty or obligations to give any consideration to any interest of or factors affecting us, our affiliates or any unitholder; when acting in its individual capacity, our general partner may act without any fiduciary obligation to us or the unitholders whatsoever;

 

   

Höegh LNG and its affiliates may compete with us, subject to the restrictions contained in the omnibus agreement, and could own and operate FSRUs and LNG carriers under charters of five or more years that may compete with our vessels if we do not purchase such vessels from Höegh LNG;

 

   

any agreement between us, on the one hand, and our general partner and its affiliates, on the other, will not grant to the unitholders, separate and apart from us, the right to enforce the obligations of our general partner and its affiliates in our favor;

 

   

borrowings by us and our affiliates will not constitute a breach of any duty owed by our general partner or our directors to our unitholders, including borrowings that have the purpose or effect of: (i) enabling our general partner or its affiliates to receive distributions on any subordinated units held by them or the incentive distribution rights or (ii) hastening the expiration of the subordination period;

 

 

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the holder or holders of our incentive distribution rights, which initially will be Höegh LNG, will have the right to reset the minimum quarterly distribution and the cash target distribution levels upon which the incentive distributions payable to such holder or holders are based without the approval of unitholders or the conflicts committee of our board of directors at any time when there are no subordinated units outstanding and we have made cash distributions to the holders of the incentive distribution rights at the highest level of incentive distribution for each of the prior four consecutive fiscal quarters; in connection with such resetting and the corresponding relinquishment by such holder or holders of incentive distribution payments based on the cash target distribution levels prior to the reset, such holder or holders will be entitled to receive a number of newly issued common units based on a predetermined formula described under “How We Make Cash Distributions—Höegh LNG’s Right to Reset Incentive Distribution Levels”; and

 

   

in connection with the offering, we will enter into agreements, and may enter into additional agreements, with Höegh LNG and certain of its subsidiaries, relating to the purchase of additional vessels, the provision of certain services to us by Höegh LNG and its affiliates and other matters. In the performance of their obligations under these agreements, Höegh LNG and its subsidiaries, other than our general partner, are not held to a fiduciary duty standard of care to us, our general partner or our limited partners, but rather to the standard of care specified in these agreements.

 

For a more detailed description of our management structure, please read “Management—Directors and Executive Officers” and “Certain Relationships and Related Party Transactions.”

 

Although a majority of our directors will be elected by our common unitholders at our 2014 annual meeting, our general partner will have influence on decisions made by our board of directors. Our board of directors will have a conflicts committee composed solely of independent directors. Our board of directors may, but is not obligated to, seek approval of the conflicts committee for resolutions of conflicts of interest that may arise as a result of the relationships between Höegh LNG and its affiliates, on the one hand, and us and our unaffiliated limited partners, on the other. There can be no assurance that a conflict of interest will be resolved in favor of the Partnership.

 

For a more detailed description of the conflicts of interest and fiduciary duties of our general partner and its affiliates, please read “Conflicts of Interest and Fiduciary Duties.” For a description of our other relationships with our affiliates, please read “Certain Relationships and Related Party Transactions.”

 

In addition, our partnership agreement contains provisions that reduce the standards to which our general partner and our directors would otherwise be held under Marshall Islands law. For example, our partnership agreement limits the liability and reduces the fiduciary duties of our general partner and our directors to our unitholders. Our partnership agreement also restricts the remedies available to unitholders. By purchasing a common unit, you are treated as having agreed to the modified standard of fiduciary duties and to certain actions that may be taken by our general partner, its affiliates or our directors, all as set forth in our partnership agreement. Please read “Conflicts of Interest and Fiduciary Duties” for a description of the fiduciary duties that would otherwise be imposed on our general partner, its affiliates and our directors under Marshall Islands law, the material modifications of those duties contained in our partnership agreement and certain legal rights and remedies available to our unitholders under Marshall Islands law.

 

 

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The Offering

 

Common units offered to the public

             common units.

 

               common units if the underwriters exercise in full their option to purchase additional common units.

 

Units outstanding after this offering

             common units and              subordinated units, representing a     % and     % limited partner interest in us, respectively. If the underwriters do not exercise their option to purchase additional common units, we will issue              common units to Höegh LNG upon the option’s expiration for no additional consideration. Accordingly, the exercise of the underwriters’ option will not affect the total number of common units outstanding. In addition, our general partner will own a non-economic general partner interest in us.

 

Use of proceeds

We intend to use the net proceeds from this offering (approximately $         million, after deducting the underwriting discounts, structuring fees and estimated offering expenses payable by us) as follows: (i) up to $140 million to make a loan to Höegh LNG in exchange for a note bearing interest at a rate of 5.88% per annum, which is repayable on demand or which we can elect to utilize as part of the purchase consideration in the event we purchase all or a portion of Höegh LNG’s interests in the Independence, (ii) $20 million for general partnership purposes and (iii) the remainder to make a cash distribution to Höegh LNG.

 

  The net proceeds from any exercise of the underwriters’ option to purchase additional common units (approximately $         million, if exercised in full, after deducting the underwriting discounts, structuring fees and estimated offering expenses payable by us) will be used to make an additional cash distribution to Höegh LNG.

 

Cash distributions

We intend to make minimum quarterly distributions of $         per unit ($         per unit on an annualized basis) to the extent we have sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to our general partner. In general, we will pay any cash distributions we make each quarter in the following manner:

 

   

first, 100.0% to the holders of common units, until each common unit has received a minimum quarterly distribution of $         plus any arrearages from prior quarters;

 

   

second, 100.0% to the holders of subordinated units, until each subordinated unit has received a minimum quarterly distribution of $         ; and

 

   

third, 100.0% to all unitholders, until each unit has received an aggregate distribution of $        .

 

 

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  Within 45 days after the end of each fiscal quarter (beginning with the quarter ending                     , 2014), we will distribute all of our available cash to unitholders of record on the applicable record date. We will adjust the minimum quarterly distribution for the period from the closing of the offering through                     , 2014 based on the actual length of the period. Our ability to pay our minimum quarterly distribution is subject to various restrictions and other factors described in more detail under the caption “Our Cash Distribution Policy and Restrictions on Distributions.”

 

  If cash distributions to our unitholders exceed $         per unit in a quarter, holders of our incentive distribution rights (initially, Höegh LNG) will receive increasing percentages, up to 50.0%, of the cash we distribute in excess of that amount. We refer to these distributions as “incentive distributions.” We must distribute all of our cash on hand at the end of each quarter, less reserves established by our board of directors to provide for the proper conduct of our business, to comply with any applicable debt instruments or to provide funds for future distributions. We refer to this cash as “available cash,” and we define its meaning in our partnership agreement. The amount of available cash may be greater than or less than the aggregate amount of the minimum quarterly distribution to be distributed on all units.

 

  We believe, based on the estimates contained in and the assumptions listed under “Our Cash Distribution Policy and Restrictions on Distributions—Forecasted Cash Available for Distribution,” that we will have sufficient cash available for distribution to enable us to pay the minimum quarterly distribution of $         on all of our common and subordinated units for each quarter through September 30, 2015. However, we do not have a legal obligation to pay quarterly distributions at our minimum quarterly distribution rate or at any other rate. There is no guarantee that we will distribute quarterly cash distributions to our unitholders in any quarter. Unanticipated events may occur that could adversely affect the actual results we achieve during the forecast period. Consequently, our actual results of operations, cash flows and financial condition during the forecast period may vary from the forecast, and such variations may be material. Prospective investors are cautioned to not place undue reliance on the forecast and should make their own independent assessment of our future results of operations, cash flows and financial condition.

 

  Please read “Our Cash Distribution Policy and Restrictions on Distributions—Forecasted Cash Available for Distribution.”

 

Subordinated units

Höegh LNG will initially own all of our subordinated units. The principal difference between our common units and subordinated units is that in any quarter during the subordination period the subordinated units are entitled to receive the minimum quarterly distribution of $         per unit only after the common units have

 

 

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received the minimum quarterly distribution and arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units will not accrue arrearages. The subordination period generally will end if we have earned and paid at least $         on each outstanding common and subordinated unit for any three consecutive four-quarter periods ending on or after June 30, 2019.

 

  For purposes of determining whether the subordination period will end, the three consecutive four-quarter periods for which the determination is being made may include one or more quarters with respect to which arrearages in the payment of the minimum quarterly distribution on the common units have accrued, provided that all such arrearages have been repaid prior to the end of each such four-quarter period.

 

  The subordination period will also end upon the removal of our general partner other than for cause if units held by our general partner and its affiliates are not voted in favor of such removal.

 

  When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, the common units will no longer be entitled to arrearages and the converted units will then participate pro rata with the other common units in distributions of available cash.

 

  Please read “How We Make Cash Distributions—Subordination Period.”

 

Höegh LNG’s right to reset the target distribution levels

Höegh LNG, as the initial holder of all of our incentive distribution rights, has the right, at a time when there are no subordinated units outstanding and it has received incentive distributions at the highest level to which it is entitled (50.0%) for each of the prior four consecutive fiscal quarters, to reset the initial cash target distribution levels at higher levels based on the distribution at the time of the exercise of the reset election. If Höegh LNG transfers all or a portion of the incentive distribution rights it holds in the future, then the holder or holders of a majority of our incentive distribution rights will be entitled to exercise this right. Following a reset election by Höegh LNG, the minimum quarterly distribution amount will be reset to an amount equal to the average cash distribution per common unit for the two fiscal quarters immediately preceding the reset election (we refer to such amount as the “reset minimum quarterly distribution amount”), and the target distribution levels will be reset to correspondingly higher levels based on the same percentage increases above the reset minimum quarterly distribution amount as our current target distribution levels.

 

 

In connection with resetting these target distribution levels, Höegh LNG will be entitled to receive a number of common units equal to

 

 

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that number of common units whose aggregate quarterly cash distributions equaled the average of the distributions to it on the incentive distribution rights in the prior two quarters. For a more detailed description of Höegh LNG’s right to reset the target distribution levels upon which the incentive distribution payments are based and the concurrent right of Höegh LNG to receive common units in connection with this reset, please read “How We Make Cash Distributions—Höegh LNG’s Right to Reset Incentive Distribution Levels.”

 

Issuance of additional units

Our partnership agreement authorizes us to issue an unlimited number of additional units, including units that are senior to the common units in rights of distribution, liquidation and voting, on the terms and conditions determined by our board of directors, without the consent of our unitholders. Please read “Units Eligible for Future Sale” and “Our Partnership Agreement—Issuance of Additional Interests.”

 

Board of directors

We will hold a meeting of the limited partners every year to elect one or more members of our board of directors and to vote on any other matters that are properly brought before the meeting. Our general partner has the right to appoint three of the seven members of our board of directors who will serve as directors for terms determined by our general partner. At our 2014 annual meeting, the common unitholders will elect four of our directors. The four directors elected by our common unitholders at our 2014 annual meeting will be divided into four classes to be elected by our common unitholders annually on a staggered basis to serve for four-year terms. The majority of our directors will be non-United States citizens or residents.

 

Limited voting rights

Except as otherwise described herein, each outstanding common unit is entitled to one vote on matters subject to a vote of common unitholders. However, to preserve our ability to claim an exemption from U.S. federal income tax under Section 883 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), if at any time, any person or group owns beneficially more than 4.9% of any class of units then outstanding, any such units owned by that person or group in excess of 4.9% may not be voted on any matter and will not be considered to be outstanding when sending notices of a meeting of unitholders, calculating required votes (except for purposes of nominating a person for election to our board of directors), determining the presence of a quorum or for other similar purposes under our partnership agreement, unless otherwise required by law. The voting rights of any such unitholders in excess of 4.9% will effectively be redistributed pro rata among the other common unitholders holding less than 4.9% of the voting power of all classes of units entitled to vote. Our general partner, its affiliates and persons who acquired common units with the prior approval of our board of directors will not be subject to this 4.9% limitation except with respect to voting their common units in the election of the elected directors.

 

 

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  You will have no right to elect our general partner on an annual or other continuing basis. Our general partner may not be removed except by a vote of the holders of at least 75% of the outstanding units, including any units owned by our general partner and its affiliates, voting together as a single class. Upon consummation of this offering, Höegh LNG will own approximately     % of our common units and all of our subordinated units, representing an aggregate     % limited partner interest in us. If the underwriters’ option to purchase additional common units is exercised in full, Höegh LNG will own approximately     % of our common units and will own all of our subordinated units, representing an aggregate     % limited partner interest in us. As a result, you will initially be unable to remove our general partner without its or Höegh LNG’s consent, because Höegh LNG will own sufficient units upon completion of this offering to be able to prevent the general partner’s removal. Please read “Our Partnership Agreement—Voting Rights.”

 

Limited call right

If at any time our general partner and its affiliates own more than 80.0% of the outstanding common units, our general partner has the right, but not the obligation, to purchase all, but not less than all, of the remaining common units at a price equal to the greater of (x) the average of the daily closing prices of the common units over the 20 trading days preceding the date three days before the notice of exercise of the call right is first mailed and (y) the highest price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed. Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon the exercise of this limited call right. Please read “Our Partnership Agreement—Limited Call Right.”

 

U.S. federal income tax considerations

Although we are organized as a limited partnership, we have elected to be treated as a corporation solely for U.S. federal income tax purposes. Consequently, all or a portion of the distributions you receive from us will constitute dividends for such purposes. The remaining portion of such distributions will be treated first as a non-taxable return of capital to the extent of your tax basis in your common units and, thereafter, as capital gain. We estimate that if you hold the common units that you purchase in this offering through the period ending December 31, 2016, the distributions you receive, on a cumulative basis, that will constitute dividends for U.S. federal income tax purposes will be approximately     % of the total cash distributions you receive during that period. Please read “Material U.S. Federal Income Tax Considerations—U.S. Federal Income Taxation of U.S. Holders—Ratio of Dividend Income to Distributions” for the basis of this estimate. Please also read “Material U.S. Federal Income Tax Considerations—U.S. Federal Income Taxation of U.S. Holders—U.S. Federal Taxation of Distributions” for a discussion relating to the taxation of dividends.

 

 

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For a discussion of other material U.S. federal income tax consequences that may be relevant to prospective unitholders, please read “Material U.S. Federal Income Tax Considerations.”

 

Non-U.S. tax considerations

For a discussion of material non-United States income tax considerations that may be relevant to prospective unitholders, please read “Non-United States Tax Consequences.” Please also read “Risk Factors— Tax Risks” for a discussion of the risk that unitholders may be attributed the activities we undertake in various jurisdictions for taxation purposes.

 

Exchange listing

We have applied to list our common units on the New York Stock Exchange, under the symbol “HMLP.”

 

 

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Summary Historical Financial and Operating Data

 

The following table presents summary historical financial and operating data of (i) Höegh Lampung, (ii) PT Hoegh (the owner of the PGN FSRU Lampung and the tower yoke mooring system (the “Mooring”)), (iii) interests in SRV Joint Gas Ltd. (the joint venture owning the GDF Suez Neptune) and (iv) interests in SRV Joint Gas Two Ltd. (the joint venture owning the GDF Suez Cape Ann). The transfer of the entities and the joint venture interests will be recorded at Höegh LNG’s consolidated book values. Höegh Lampung and PT Hoegh and our 50% interests in SRV Joint Gas Ltd. and SRV Joint Gas Two Ltd. are, collectively, referred to herein as our predecessor. Two of the vessels in our initial fleet (the GDF Suez Neptune and the GDF Suez Cape Ann) are owned by our joint ventures, each of which is owned 50% by us. Under applicable accounting rules, we do not consolidate the financial results of these two joint ventures into our predecessor’s financial results. Our predecessor accounts for its 50% equity interests in these two joint ventures as equity method investments in its combined carve-out financial statements. We derive cash flows from the operations of these two joint ventures from principal and interest payments on our shareholder loans to our joint ventures.

 

We have two segments, which are the “Majority Held FSRUs” and the “Joint Venture FSRUs.” As of March 31, 2014 and December 31, 2013 and 2012, Majority Held FSRUs included the PGN FSRU Lampung and construction contract revenue and expenses of the Mooring under construction. The Mooring will be sold to the charterer of the PGN FSRU Lampung. As of March 31, 2014 and December 31, 2013 and 2012, Joint Venture FSRUs included two 50%-owned FSRUs, the GDF Suez Neptune and the GDF Suez Cape Ann. We measure our segment profit based on segment EBITDA. Segment EBITDA is reconciled to operating income and net income for each segment in the segment table below. The accounting policies applied to the segments are the same as those applied in the historical combined carve-out financial statements, except that Joint Venture FSRUs are presented under the proportional consolidation method for the segment reporting and under the equity method in our predecessor’s historical combined carve-out financial statements. Under the proportional consolidation method, 50% of the Joint Venture FSRUs’ revenues, expenses and assets are reflected in the segment reporting. Management monitors the results of operations of our joint ventures under the proportional consolidation method and not the equity method.

 

You should read the following summary financial and operating data in conjunction with “Presentation of Financial Information,” “Selected Historical Financial and Operating Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” as well as the historical combined carve-out financial statements of our predecessor, the historical combined financial statements of the two joint ventures that own the GDF Suez Neptune and the GDF Suez Cape Ann and the related notes thereto included elsewhere in this prospectus. The financial information included in this prospectus may not be indicative of our future results of operations, financial condition and cash flows.

 

Set forth below is summary historical financial data of our predecessor and summary historical financial data for our Joint Venture FSRUs segment as of March 31, 2014 and for the three months ended March 31, 2014 and 2013 and as of and for the years ended December 31, 2013 and 2012. The summary historical financial data as of and for the years ended December 31, 2013 and 2012 have been derived from the audited historical combined carve-out financial statements of our predecessor prepared in accordance with U.S. GAAP included elsewhere in this prospectus. The summary historical financial data as of March 31, 2014 and for the three months ended March 31, 2014 and 2013 have been derived from the unaudited historical condensed interim combined carve-out financial statements of our predecessor prepared in accordance with U.S. GAAP included elsewhere in this prospectus.

 

Our predecessor’s consolidated results of operations for the three months ended March 31, 2014 and 2013 and the years ended December 31, 2013 and December 31, 2012 reflect investments made in the PGN FSRU Lampung during the period of her construction, including the construction of the Mooring on behalf of PGN. However, such results do not reflect the operations of the PGN FSRU Lampung, as her time charter is expected to start in July 2014.

 

 

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     Predecessor Historical  
     Year Ended
December  31,
    Three Months Ended
March 31,
 
(in thousands of U.S. Dollars, except fleet data)    2012     2013         2013             2014      

Statement of Income Data:

        

Construction contract revenue

   $ 5,512      $ 50,362      $ 8,638      $ 29,127   

Other revenue

     —          511        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     5,512        50,873        8,638        29,127   
  

 

 

   

 

 

   

 

 

   

 

 

 

Construction contract expenses

     (5,512     (43,272     (8,638     (24,661

Administrative expenses

     (3,185     (8,043     (1,325     (4,148

Depreciation and amortization

     —          (8     —          (8
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (8,697     (51,323     (9,963     (28,817
  

 

 

   

 

 

   

 

 

   

 

 

 

Equity in earnings of joint ventures

     5,007        40,228        8,916        (1,671
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,822        39,778        7,591        (1,361
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

     2,481        2,122        554        466   

Interest expense

     (114     (352     (12     (81

Other items, net

     (1     (1,021     —          (380
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before tax

     4,188        40,527        8,133        (1,356
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     —          —          —          (408
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 4,188      $ 40,527      $ 8,133      $ (1,764
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance Sheet Data (at end of period):

        

Assets:

        

Cash and cash equivalents

   $ 100      $ 108        $ 4,957   

Restricted cash

     10,700        10,700          —     

Newbuilding

     86,067        122,517          126,165   

Advances to joint ventures

     28,671        24,510          22,944   

Total assets

     135,125        226,730          261,855   

Liabilities and Equity:

        

Accumulated losses of joint ventures

     94,528        54,300          55,971   

Amount, loans and promissory notes due to owners and affiliates

     91,585        208,637          52,578   

Owner’s equity

     (53,229     (48,035       39,333   

Total liabilities and equity

     135,125        226,730          261,855   

Cash Flow Data:

        

Net cash used by operating activities

   $ (7,635   $ (42,083   $ (4,547   $ (18,696

Net cash used in investing activities

     (61,709     (30,726     (25,952     10,279   

Net cash provided by financing activities

     69,444        72,817        30,499        13,266   

Fleet Data:

        

Number of vessels(1)

     2        2        2        2   

Average age (in years)

     2.9        3.9        3.1        4.1   

Average charter length remaining excluding options (in years)

     17.1        16.1        16.9        15.9   

Average charter length remaining including options (in years)

     27.1        26.1        26.9        25.9   

Average off-hire days per vessel

     0        0        0        0   

Other Financial Data:

        

Segment EBITDA(2)

   $ 29,239      $ 31,905      $ 6,668      $ 8,422   

Capital expenditures:

        

Expenditures for vessels and equipment

     58,138        36,450          3,648   

 

 

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     Predecessor Historical  
     Year Ended
December 31,
     Three Months Ended
March 31,
 
(in thousands of U.S. Dollars)    2012      2013      2013      2014  

Selected Segment Data:

           

Joint Venture FSRUs (proportional consolidation)(3)

           

Segment Statement of Income Data:

           

Time charter revenues

   $ 41,076       $ 41,110       $ 10,004       $ 10,249   

Segment EBITDA(2)

     32,424         32,347         7,993         8,104   

Operating income

     23,364         23,294         5,733         5,819   

Segment Balance Sheet Data (at end of period):

           

Vessels, net of accumulated depreciation

   $ 294,993       $ 286,460          $ 284,762   

Total assets

     315,566         307,335            305,013   

Segment Capital Expenditures:

           

Expenditures for vessels and equipment

   $ 1,435       $ 522          $ 587   

Expenditures for drydocking

     722         —              —     

 

(1)   Includes vessels in our joint ventures but does not include the PGN FSRU Lampung, which will begin operations in July 2014.
(2)   Please read “Non-GAAP Financial Measures” below.
(3)   Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Results of Operations—Predecessor—Year Ended December 31, 2012 Compared with the Year Ended December 31, 2013—Segments” and “Predecessor—Three Months Ended March 31, 2013 Compared with the Three Months Ended March 31, 2014—Segments” for information on the basis of presentation of the Joint Venture FSRUs segment.

 

Non-GAAP Financial Measures

 

Segment EBITDA and Adjusted EBITDA. EBITDA is defined as earnings before interest, depreciation and amortization and taxes. Segment EBITDA is defined as earnings before interest, depreciation and amortization, taxes and other financial items. Other financial items consist of gains and losses on derivative instruments and other items, net (including foreign exchange gains and losses and withholding tax on interest expenses). Adjusted EBITDA is defined as earnings before interest, depreciation and amortization, taxes, other financial items and cash collections on direct financial lease investments. Cash collections on direct finance lease investments consist of the difference between the payments under the time charter and the revenues recognized as a financial lease (representing the repayment of the principal recorded as a receivable). Segment EBITDA and Adjusted EBITDA are used as supplemental financial measures by management and external users of financial statements, such as our lenders, to assess our financial and operating performance. We believe that Segment EBITDA assists our management and investors by increasing the comparability of our performance from period to period and against the performance of other companies in our industry that provide Segment EBITDA information. This increased comparability is achieved by excluding the potentially disparate effects between periods or companies of interest, other financial items, depreciation and amortization and taxes, which items are affected by various and possibly changing financing methods, capital structure and historical cost basis and which items may significantly affect net income between periods. We believe that including Segment EBITDA as a financial and operating measure benefits investors in (a) selecting between investing in us and other investment alternatives and (b) monitoring our ongoing financial and operational strength in assessing whether to continue to hold common units. We believe Adjusted EBITDA benefits investors in comparing our results to other investment alternatives that account for time charters as operating leases rather than financial leases.

 

Segment EBITDA and Adjusted EBITDA should not be considered alternatives to net income, operating income, cash flow from operating activities or any other measure of financial performance presented in accordance with U.S. GAAP. Segment EBITDA and Adjusted EBITDA exclude some, but not all, items that affect net income, and these measures may vary among other companies. Therefore, Segment EBITDA as

 

 

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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 our predecessor as a whole (combined carve-out reporting) to net income (loss), the comparable U.S. GAAP financial measure, for the periods presented:

 

     Predecessor Historical  
     Year ended December 31, 2013  
     Majority
Held
FSRUs
     Joint Venture
FSRUs
(Proportional
Consolidation)
    Other     Total
Segment
Reporting
    Combined
Carve-out
Reporting
 
(in thousands of U.S. Dollars)                                

Reconciliation to net income (loss)

           

Net income (loss)

   $ 1,730       $ 40,228      $ (1,431   $ 40,527      $ 40,527   

Interest income

     —           —          (2,122     (2,122     (2,122

Interest expense

     352                18,085        —          18,437        352   

Depreciation and amortization

     8         9,053        —          9,061        8   

Income tax (benefit) expense

     —           —          —          —          —     

Equity in earnings of joint ventures: Interest (income) expense, net

     —           —          —          —          18,085   

Equity in earnings of joint ventures: Depreciation and amortization

     —           —          —          —          9,053   

Other financial items(1)

     1,021         (35,019     —          (33,998     1,021   

Equity in earnings of joint ventures: Other financial items(1)

     —           —          —          —          (35,019
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Segment EBITDA

   $ 3,111       $ 32,347      $ (3,553   $ 31,905      $ 31,905   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

     Predecessor Historical  
     Year ended December 31, 2012  
     Majority
Held
FSRUs
    Joint Venture
FSRUs
(Proportional
Consolidation)
    Other     Total
Segment
Reporting
    Combined
Carve-out
Reporting
 
(in thousands of U.S. Dollars)                               

Reconciliation to net income (loss)

          

Net income (loss)

   $ (2,487   $ 5,007      $ 1,668      $ 4,188      $ 4,188   

Interest income

     —          (1     (2,481     (2,482     (2,481

Interest expense

     114               19,033        —          19,147        114   

Depreciation and amortization

       9,060        —          9,060        —     

Income tax (benefit) expense

     —          —          —          —          —     

Equity in earnings of joint ventures: Interest (income) expense, net

     —          —          —          —          19,033   

Equity in earnings of joint ventures: Depreciation and amortization

     —          —          —          —          9,060   

Other financial items(1)

     1        (675       (674     1   

Equity in earnings of joint ventures: Other financial items(1)

     —          —          —          —          (675
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment EBITDA

   $ (2,372   $ 32,424      $ (813   $ 29,239      $ 29,239   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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     Predecessor Historical  
     Three Months ended March 31, 2014  
     Majority
Held
FSRUs
     Joint Venture
FSRUs
(Proportional
Consolidation)
    Other     Total
Segment
Reporting
    Combined
Carve-out
Reporting
 
(in thousands of U.S. Dollars)                                

Reconciliation to net income (loss)

           

Net income (loss)

   $ 2,258       $ (1,671   $ (2,351   $ (1,764   $ (1,764

Interest income

     —           —          (466     (466     (466

Interest expense

     81         4,319        —          4,400        81   

Depreciation and amortization

     8         2,285        —          2,293        8   

Income tax (benefit) expense

     408         —          —          408        408   

Equity in earnings of joint ventures: Interest (income) expense, net

     —           —          —          —          4,319   

Equity in earnings of joint ventures: Depreciation and amortization

     —           —          —          —          2,285   

Other financial items(1)

     380         3,171        —          3,551        380   

Equity in earnings of joint ventures: Other financial items(1)

     —           —          —          —          3,171   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Segment EBITDA

   $ 3,135       $ 8,104      $ (2,817   $ 8,422      $ 8,422   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

     Predecessor Historical  
     Three Months ended March 31, 2013  
     Majority
Held
FSRUs
    Joint Venture
FSRUs
(Proportional
Consolidation)
    Other     Total
Segment
Reporting
    Combined
Carve-out
Reporting
 
(in thousands of U.S. Dollars)                               

Reconciliation to net income (loss)

          

Net income (loss)

   $ (962   $ 8,916      $ 179      $ 8,133      $ 8,133   

Interest income

     —          —          (554     (554     (554

Interest expense

     12        4,542        —          4,554        12   

Depreciation and amortization

     —          2,260        —          2,260        —     

Income tax (benefit) expense

     —          —          —          —          —     

Equity in earnings of joint ventures: Interest (income) expense, net

     —          —          —          —          4,542   

Equity in earnings of joint ventures: Depreciation and amortization

     —          —          —          —          2,260   

Other financial items(1)

     —          (7,725     —          (7,725     —     

Equity in earnings of joint ventures: Other financial items(1)

     —          —          —          —          (7,725
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment EBITDA

   $ (950   $ 7,993      $ (375   $ 6,668      $ 6,668   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)   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.

 

 

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RISK FACTORS

 

Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. You should carefully consider the following risk factors together with all of the other information included in this prospectus in evaluating an investment in our common units.

 

If any of the following risks were actually to occur, our business, financial condition, results of operations and ability to make cash distributions to our unitholders could be materially adversely affected. In that case, we might not be able to make cash distributions on our common units, the trading price of our common units could decline, and you could lose all or part of your investment.

 

Risks Inherent in Our Business

 

Our initial fleet consists of only three vessels. Any limitation on the availability or operation of those vessels could have a material adverse effect on our business, financial condition and results of operations and could significantly reduce our ability to make the minimum quarterly distribution to our unitholders.

 

Our initial fleet consists of three vessels. If any of these vessels is unable to generate revenues as a result of off-hire time, early termination of the applicable time charter, purchase of the vessel by the charterer or otherwise, our financial condition and ability to make minimum quarterly distributions to unitholders could be materially and adversely affected.

 

The charters relating to our vessels permit the charterer to terminate the charter in the event that the vessel is off-hire for any extended period. The charters also allow the charterer to terminate the charter upon the occurrence of specified defaults by us or in certain other cases, including termination without cause, due to force majeure or disruptions caused by war. The termination of any of our charters could have a material adverse effect on our business, financial condition and results of operations and could significantly reduce our ability to make cash distributions to our unitholders. For further details regarding termination of our charters, please read “Business—Vessel Time Charters—GDF Suez Neptune Time Charter—Termination” and “Business—Vessel Time Charters—PGN FSRU Lampung Time Charter—Termination.” We may be unable to charter the applicable vessel on terms as favorable to us as those of the terminated charter. Additionally, our charter with PGN permits PGN to purchase the vessel beginning in June 2017. Any compensation we receive for the purchase of the PGN FSRU Lampung may not adequately compensate us for the loss of the vessel and related time charter.

 

We are dependent on GDF Suez and PGN as the sole customers for our vessels. A deterioration of the financial viability of GDF Suez or PGN or our relationship with either GDF Suez or PGN, or the loss of either GDF Suez or PGN as a customer, would have a material adverse effect on our business, financial condition, results of operations and ability to make cash distributions to our unitholders.

 

For each of the three months ended March 31, 2014 and 2013 and the years ended December 31, 2013 and 2012, PGN accounted for all of the revenues in our combined carve-out income statement. GDF Suez accounted for all of the revenues of our joint ventures from which we derived all of our equity in earnings of joint ventures for each of the three months ended March 31, 2014 and 2013 and the years ended December 31, 2013 and 2012. Commencing in the second half of 2014, we expect PGN to account for approximately half of our annual revenues. A deterioration in the financial viability of GDF Suez or PGN or the loss of either GDF Suez or PGN as a customer, or a decline in payments under any of the related charters, would have a greater adverse effect on us than for a company with a more diverse customer base, and could have a material adverse effect on our business, financial condition, results of operations and ability to make cash distributions to our unitholders.

 

We or our joint ventures could lose a customer or the benefits of a charter as a result of a breach by the customer of a charter or other unanticipated developments, such as:

 

   

the customer failing to make charter payments because of its financial inability, disagreements with us or our joint venture partners or otherwise;

 

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the customer exercising its right to terminate the charter in certain circumstances, such as: (i) defaults of our or our joint ventures’ obligations under the applicable charter, including prolonged periods of off-hire; (ii) with respect to the GDF Suez Neptune and the GDF Suez Cape Ann, in the event of war that would materially interrupt the performance of the time charter; or (iii) with respect to the PGN FSRU Lampung, in the event of specified types of force majeure;

 

   

with respect to the GDF Suez Neptune and the GDF Suez Cape Ann, GDF Suez exercising its right to terminate the charter without cause at any time following the fourth and sixth years, respectively, of the charters’ effectiveness, in which case GDF Suez will be obligated to pay the vessel owner a previously agreed upon termination fee based on the date such charter is terminated;

 

   

the charter terminating automatically if the vessel is lost or deemed a constructive loss;

 

   

with respect to the PGN FSRU Lampung, PGN exercising its option to purchase the vessel; or

 

   

a prolonged force majeure event or a declaration of war in any location that materially interrupts the performance of the time charter.

 

Please read “Business—Vessel Time Charters—GDF Suez Neptune Time Charter—Termination” and “Business—Vessel Time Charters—PGN FSRU Lampung Time Charter—Termination.” If any charter is terminated, we or our joint ventures, as applicable, may be unable to re-deploy the related vessel on terms as favorable as the current charters or at all. In addition, any termination fee payable to us may not adequately compensate us for the loss of the charter.

 

Any event, whether in our industry or otherwise, that adversely affects a customer’s financial condition, leverage, results of operations, cash flows or demand for our services may adversely affect our ability to sustain or increase cash distributions to our unitholders. Accordingly, we are indirectly subject to the business risks of our customers, including their level of indebtedness and the economic conditions and government policies in their areas of operation.

 

The ability of each of our customers to perform its obligations under its applicable charter depends on its future financial condition and economic performance, which in turn will depend on prevailing economic conditions and financial, business and other factors, many of which are beyond its control.

 

We may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses to enable us to pay the minimum quarterly distribution on our common units.

 

We may not have sufficient cash from operations to pay the minimum quarterly distribution of $         per unit on our common units. The amount of cash we can distribute on our units principally depends upon the amount of cash we generate from our operations. We generate cash from our operations and through distributions from our joint ventures, and as such our cash from operations are dependent on our operations and the cash distributions and operations of our joint ventures, each of which may fluctuate based on the risks described in this section, including, among other things:

 

   

the hire rates we and our joint ventures obtain from charters;

 

   

the level of operating costs and other expenses, such as the cost of crews and insurance;

 

   

the continued availability of natural gas production, liquefaction and regasification facilities;

 

   

demand for LNG;

 

   

supply and capacities of FSRUs and LNG carriers;

 

   

prevailing global and regional economic and political conditions;

 

   

currency exchange rate fluctuations;

 

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interest rate fluctuations; and

 

   

the effect of governmental regulations and maritime self-regulatory organization standards on the conduct of our business.

 

In addition, the actual amount of cash we will have available for distribution will depend on other factors, including:

 

   

the level of capital expenditures we and our joint ventures make, including for maintaining or replacing vessels, building new vessels, acquiring existing vessels and complying with regulations;

 

   

the number of unscheduled off-hire days for our fleet and the timing of, and number of days required for, scheduled drydocking of our vessels;

 

   

our and our joint ventures’ debt service requirements and restrictions on distributions contained in our and our joint ventures’ current and future debt instruments;

 

   

fluctuations in interest rates;

 

   

fluctuations in working capital needs;

 

   

variable tax rates;

 

   

our ability to make, and the level of, working capital borrowings; and

 

   

the amount of any cash reserves established by our board of directors.

 

In addition, each quarter we will be required by our partnership agreement to deduct estimated maintenance and replacement capital expenditures from operating surplus, which may result in less cash available to unitholders than if actual maintenance and replacement capital expenditures were deducted. Our ability to pay distributions will also be limited to the extent that we have sufficient cash after establishment of cash reserves and payments to our general partner.

 

The amount of cash we generate from our operations and the cash distributions received from our joint ventures may differ materially from our or their profit or loss for the period, which will be affected by non-cash items. As a result of this and the other factors mentioned above, we may make cash distributions during periods when we record losses and may not make cash distributions during periods when we record net income.

 

The notice of readiness for the PGN FSRU Lampung to PGN has not yet been issued as contemplated under the time charter. We are exposed to the credit risk of Höegh LNG with respect to the indemnification Höegh LNG will provide us for the loss of the time charter hire rate until the vessel is delivered to, and accepted by, PGN and for losses in connection with the obligation to pay any delay liquidated damages that may be payable to PGN.

 

Although the PGN FSRU Lampung was delivered to us, transported to Indonesia and connected to the Mooring on schedule, the onshore connection infrastructure to be provided by PGN’s pipeline contractor has not been completed, and the notice of readiness that the total installation is ready for the delivery of LNG has not been issued. Following the notification of readiness, commissioning and testing must be completed prior to PGN’s acceptance of the PGN FSRU Lampung. We have no control over the completion of the connection infrastructure by PGN’s pipeline contractor. The notice of readiness is expected to be served in mid-July 2014. As this may be later than the scheduled arrival date pursuant to the PGN FSRU Lampung time charter, delay liquidated damages up to an aggregate of $10.7 million may become payable to PGN. In addition, PGN has the right to terminate the PGN FSRU Lampung time charter if the PGN FSRU Lampung is not delivered to and accepted by PGN within 200 days of notice of readiness being served. Höegh LNG will indemnify us for any losses resulting from any obligation to pay delay liquidated damages to PGN and for any loss of the hire rate payable under the PGN FSRU Lampung time charter from the closing date of this offering until the earlier of the acceptance by PGN of the PGN FSRU Lampung or the termination of such time charter for failure to receive acceptance of the vessel. In the event that PGN terminates the time charter, we will lose the time charter hire rate.

 

Höegh LNG’s ability to make payments to us with respect to such indemnification obligations may be affected by events beyond our and their control, including prevailing economic, financial and industry

 

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conditions. If market or other economic conditions deteriorate, Höegh LNG’s ability to meet its indemnification obligations to us may be impaired. If Höegh LNG is unable to meet its indemnification obligations to us or if the time charter is terminated, our financial condition, results of operations and ability to make cash distributions to our unitholders could be materially adversely affected.

 

The assumptions underlying our forecast of cash available for distribution are inherently uncertain and are subject to risks and uncertainties that could cause actual results to differ materially from those forecasted.

 

The forecast of cash available for distribution set forth in “Our Cash Distribution Policy and Restrictions on Distributions” is based in part on our forecasts of operating results and cash flows for us and our joint ventures for the 12-month period ending September 30, 2015. The financial forecasts have been prepared by management and we have not received opinions or reports on them from our or any other independent auditor. The assumptions underlying these forecasts and our forecast of cash available for distribution are inherently uncertain, do not reflect any acquisitions and are subject to significant business, economic, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those forecasted. If the forecasted results are not achieved, we may not be able to pay the full minimum quarterly distribution or any amount on our common units or subordinated units, in which event the market price of the common units may decline materially.

 

Our ability to grow and to meet our financial needs may be adversely affected by our cash distribution policy.

 

Our cash distribution policy, which is consistent with our partnership agreement, requires us to distribute all of our available cash (as defined in our partnership agreement) each quarter. Accordingly, our growth may not be as fast as businesses that reinvest their available cash to expand ongoing operations.

 

In determining the amount of cash available for distribution, our board of directors approves the amount of cash reserves to set aside, including reserves for future maintenance and replacement capital expenditures, working capital and other matters. We may also rely upon external financing sources, including commercial borrowings, to fund our capital expenditures. Accordingly, to the extent we do not have sufficient cash reserves or are unable to obtain financing, our cash distribution policy may significantly impair our ability to meet our financial needs or to grow.

 

We are a holding entity that has historically derived a substantial majority of our income from equity interests in our joint ventures. Neither we nor our joint venture partners exercise affirmative control over our joint ventures. Accordingly, we cannot require our joint ventures to act in our best interests. Furthermore, our joint venture partners may prevent our joint ventures from taking action that may otherwise be beneficial to us, including making cash distributions to us. A deadlock between us and our joint venture partners could result in our exchanging equity interests in one of our joint ventures for the equity interests in our other joint venture held by our joint venture counterparties or in us or our joint venture partner selling shares in a joint venture to a third party.

 

We are a holding entity and conduct our operations and businesses through subsidiaries. We have historically derived a substantial majority of our income from our 50% equity interests in our joint ventures that own the GDF Suez Neptune and the GDF Suez Cape Ann. Please read “Our Joint Ventures and Joint Venture Agreements” for a description of the Second Amended and Restated Shareholders’ Agreement, dated                , 2014 (the “SRV Joint Gas shareholders’ agreement”), among our operating company, Mitsui O.S.K. Lines, Ltd., a company incorporated under the laws of Japan (“MOL”), and Tokyo LNG Tanker Co., Ltd., a company incorporated under the laws of Japan (“TLT”), which governs the composition and procedures of the board of directors of each of our joint ventures. As a result, our ability to make cash distributions to our unitholders will depend on the performance of our joint ventures, subsidiaries and other investments. If our joint venture partners do not approve cash distributions or if they are not sufficient, we will not be able to make cash distributions unless we obtain funds from other sources. We may not be able to obtain the necessary funds from other sources on terms acceptable to us. The approval of a majority of the members of the board of directors is required to

 

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consent to any proposed action by such joint ventures and, as a result, we will be unable to cause our joint venture to act in our best interests over the objection of our joint venture partners or make cash distributions to us. Our inability to require our joint ventures to act in our best interests may cause us to fail to realize expected benefits from our equity interests and could adversely affect our business, financial condition, results of operations and ability to make cash distributions to our unitholders.

 

Our joint venture partners for our joint ventures that own the GDF Suez Neptune and the GDF Suez Cape Ann are MOL and TLT, who we refer to in this prospectus as our joint venture partners. As described above, these entities together exercise one half of the voting power on the board of directors of each joint venture. As such, our joint venture partners may prevent our joint ventures from making cash distributions to us or may act in a manner that would otherwise not be in our best interests.

 

If the directors nominated by us and our joint venture partner are unable to reach agreement on any decision or action, then the issue will be resolved in accordance with the procedures set forth in the shareholders’ agreement. After the board of directors has met a second time to consider the decision or action, if the deadlock persists, one or more of our senior executives will meet with their counterpart(s) from our joint venture partners. Should, after no more than 60 days, these efforts be unsuccessful and we and our joint venture partners, on a combined basis, each own 50% of the shares in each joint venture or, when the shareholdings in each joint venture are aggregated by party, we and our joint venture partners, on a combined basis, each own 50% of the aggregate shares, we and our joint venture partners will attempt to agree within 30 days that our shareholdings be exchanged so that we own 100% of one joint venture and our joint venture partners own 100% of the other joint venture. If, however, the shareholdings are not as described in the previous sentence or we and our joint venture partners cannot agree within the specified time, we or our joint venture partners may sell our shares, including to a third party, in accordance with the procedures set forth in the shareholders’ agreement. If any of these forms of resolution were to occur, the diversity of our fleet would be reduced, and our business, financial condition, results of operations and ability to make cash distributions to our unitholders may be adversely affected.

 

We must make substantial capital expenditures to maintain and replace the operating capacity of our fleet, which will reduce our cash available for distribution. In addition, each quarter we will be required, pursuant to our partnership agreement, to deduct estimated maintenance and replacement capital expenditures from operating surplus, which may result in less cash available to unitholders than if actual maintenance and replacement capital expenditures were deducted.

 

We must make substantial capital expenditures to maintain and replace, over the long-term, the operating capacity of our fleet, which we estimate will average approximately $10.0 million per year. Maintenance and replacement capital expenditures include capital expenditures associated with drydocking a vessel, including costs for inspection, maintenance and repair, modifying an existing vessel, acquiring a new vessel or otherwise replacing current vessels at the end of their useful lives to the extent these expenditures are incurred to maintain or replace the operating capacity of our fleet. These expenditures could vary significantly from quarter to quarter and could increase as a result of changes in:

 

   

the cost of labor and materials;

 

   

customer requirements;

 

   

fleet size;

 

   

length of charters;

 

   

vessel useful life;

 

   

the cost of replacement vessels;

 

   

re-investment rate of return;

 

   

resale or scrap value of existing vessels;

 

   

governmental regulations and maritime self-regulatory organization standards relating to safety, security or the environment; and

 

   

competitive standards.

 

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Our partnership agreement requires our board of directors to deduct estimated maintenance and replacement capital expenditures, instead of actual maintenance and replacement capital expenditures, from operating surplus each quarter in an effort to reduce fluctuations in operating surplus as a result of significant variations in actual maintenance and replacement capital expenditures each quarter. The amount of estimated maintenance and replacement capital expenditures deducted from operating surplus is subject to review and change by our conflicts committee at least once a year. In years when estimated maintenance and replacement capital expenditures are higher than actual maintenance and replacement capital expenditures, the amount of cash available for distribution to unitholders will be lower than if actual maintenance and replacement capital expenditures were deducted from operating surplus. If our board of directors underestimates the appropriate level of estimated maintenance and replacement capital expenditures, we may have less cash available for distribution in periods when actual capital expenditures exceed our previous estimates.

 

If capital expenditures are financed through cash from operations or by issuing debt or equity securities, our ability to make cash distributions may be diminished, our financial leverage could increase or our unitholders may be diluted.

 

Use of cash from operations to expand our fleet will reduce cash available for distribution to unitholders. Our ability to obtain bank financing or to access the capital markets may be limited by our financial condition at the time of any such financing or offering as well as by adverse market conditions resulting from, among other things, general economic conditions, changes in the LNG industry and contingencies and uncertainties that are beyond our control. Our failure to obtain the funds for future capital expenditures could have a material adverse effect on our business, financial condition, results of operations and ability to make cash distributions to our unitholders. Even if we are successful in obtaining necessary funds, the terms of any debt financings could limit our ability to pay cash distributions to unitholders. In addition, incurring additional debt may significantly increase our interest expense and financial leverage, and issuing additional equity securities may result in significant unitholder dilution and would increase the aggregate amount of cash required to pay the minimum quarterly distribution to unitholders, which could have a material adverse effect on our ability to make cash distributions to our unitholders.

 

We may be unable to make or realize expected benefits from acquisitions, which could have an adverse effect on our expected plans for growth.

 

Our growth strategy includes selectively acquiring FSRUs, LNG carriers and other LNG infrastructure assets that are operating under long-term charters with stable cash flows. Any acquisition of a vessel or business may not be profitable to us at or after the time we acquire such vessel or business and may not generate cash flows sufficient to justify our investment. In addition, our acquisition growth strategy exposes us to risks that may harm our business, financial condition and results of operations, including risks that we may:

 

   

fail to realize anticipated benefits, such as new customer relationships, cost-savings or cash flows enhancements;

 

   

be unable to hire, train or retain qualified shore and seafaring personnel to manage and operate our growing business and fleet;

 

   

decrease our liquidity by using a significant portion of our available cash or borrowing capacity to finance acquisitions;

 

   

significantly increase our interest expense or financial leverage if we incur additional debt to finance acquisitions;

 

   

incur or assume unanticipated liabilities, losses or costs associated with the business or vessels acquired; or

 

   

incur other significant charges, such as impairment of goodwill or other intangible assets, asset devaluation or restructuring charges.

 

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PGN has the option to purchase the PGN FSRU Lampung beginning in June 2017. If PGN exercises this option, it could have a material adverse effect on our operating cash flows and our ability to make cash distributions to our unitholders.

 

PGN has the option to purchase the PGN FSRU Lampung beginning in June 2017, at a price specified in the time charter. If PGN exercises this option, it would significantly reduce the size of our fleet, and we may be unable to identify or acquire suitable replacement vessel(s) with the proceeds of the option exercise because, among other things that are beyond our control, there may be no replacement vessel(s) that are readily available for purchase at a price that is equal to or less than the proceeds from the option exercise and on terms acceptable to us. Even if we find suitable replacement vessel(s), the hire rate(s) of such vessel(s) may be significantly lower than the hire rate under the current PGN FSRU Lampung time charter. Our inability to find suitable replacement vessel(s) or the chartering of replacement vessel(s) at lower hire rate(s) would have a material adverse effect on our results of operations, cash flows and ability to make cash distributions to our unitholders. Please read “Business—Vessel Time Charters—PGN FSRU Lampung Time Charter—Purchase Option.”

 

Fluctuations in overall LNG supply and demand growth could adversely affect our ability to secure future long-term charters.

 

Demand for LNG depends on a number of factors, including economic growth, the cost effectiveness of LNG compared to alternative fuels, environmental policy and the perceived need to diversify fuel mix for energy security reasons. The cost effectiveness of LNG compared to alternative fuels is also dependent on supply. A change in any of the factors influencing LNG demand, or an imbalance between supply and demand, could adversely affect the need for LNG infrastructure and our ability to secure additional long-term charters.

 

Our growth depends on continued growth in demand for the services we provide.

 

Our growth strategy focuses on expansion in the floating storage and regasification sector and the maritime transportation sector, each within the LNG transportation, storage and regasification industry. The rate of LNG growth has fluctuated due to several reasons, including the global economic crisis and the continued increase in natural gas production from unconventional sources in regions such as North America. Accordingly, our growth depends on continued growth in world and regional demand for LNG, FSRUs, LNG carriers and other LNG infrastructure assets, which could be negatively affected by a number of factors, including:

 

   

increases in the cost of LNG;

 

   

increases in the production levels of low-cost natural gas in domestic, natural gas-consuming markets, which could further depress prices for natural gas in those markets and make LNG uneconomical;

 

   

decreases in the cost, or increases in the demand for, conventional land-based regasification systems, which could occur if providers or users of regasification services seek greater economies of scale than FSRUs can provide or if the economic, regulatory or political challenges associated with land-based activities improve;

 

   

decreases in the cost of alternative technologies or development of alternative technologies for vessel-based LNG regasification;

 

   

increases in the production of natural gas in areas linked by pipelines to consuming areas, the extension of existing, or the development of new, pipeline systems in markets we may serve, or the conversion of existing non-natural gas pipelines to natural gas pipelines in those markets;

 

   

decreases in the consumption of natural gas due to increases in its price relative to other energy sources or other factors making consumption of natural gas less attractive;

 

   

availability of new, alternative energy sources, including compressed natural gas; and

 

   

negative global or regional economic or political conditions, particularly in LNG consuming regions, which could reduce energy consumption or its growth.

 

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Reduced demand for LNG, FSRUs or LNG carriers would have a material adverse effect on our future growth and could harm our business, financial condition and results of operations.

 

Demand for FSRUs or LNG shipping could be significantly affected by volatile natural gas prices and the overall demand for natural gas.

 

Gas prices are volatile and affected by numerous factors beyond our control, including, but not limited to, the following:

 

   

worldwide demand for natural gas;

 

   

the cost of exploration, development, production, transportation and distribution of natural gas;

 

   

expectations regarding future energy prices for both natural gas and other sources of energy;

 

   

the level of worldwide LNG production and exports;

 

   

government laws and regulations, including but not limited to environmental protection laws and regulations;

 

   

local and international political, economic and weather conditions;

 

   

political and military conflicts; and

 

   

the availability and cost of alternative energy sources, including alternate sources of natural gas in gas importing and consuming countries.

 

Seasonality in demand, peak-load demand, and other short-term factors such as pipeline gas disruptions and maintenance schedules of utilities affect charters of less than two years and rates. In general, reduced demand for LNG, FSRUs or LNG carriers would have a material adverse effect on our future growth and could harm our business, results of operations and financial condition.

 

The debt levels of us and our joint ventures may limit our and their flexibility in obtaining additional financing, refinancing credit facilities upon maturity or pursuing other business opportunities or our paying distributions to you.

 

Upon completion of this offering and the related transactions, we estimate that our combined debt (net of unrestricted cash) will be approximately $         million. Following this offering, we will continue to have the ability to incur additional debt, and we will have the ability to borrow an additional $85 million under our sponsor credit facility, subject to certain limitations. If we acquire additional vessels or businesses, our consolidated debt may significantly increase. We may incur additional debt under this or future credit facilities. Our joint ventures’ credit facilities will mature in 2022 and require an aggregate principal repayment of approximately $330 million. A portion of the credit facility secured by the PGN FSRU Lampung will mature in 2021 and require that an aggregate principal amount of $29.2 million be refinanced. If such principal repayment is not refinanced, the export credit tranche of the PGN FSRU Lampung financing that will have an outstanding balance of $74.4 million at this time may be accelerated together with the attendant hedges. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources.”

 

Our level of debt could have important consequences to us, including the following:

 

   

our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be limited or such financing may not be available on favorable terms;

 

   

we will need a substantial portion of our cash flows to make principal and interest payments on our debt, reducing the funds that would otherwise be available for operations, future business opportunities and distributions to unitholders;

 

   

our debt level will make us more vulnerable than our competitors with less debt to competitive pressures or a downturn in our business or the economy generally;

 

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our debt level may limit our flexibility in responding to changing business and economic conditions; and

 

   

if we are unable to satisfy the restrictions included in any of our financing arrangements or are otherwise in default under any of those arrangements, as a result of our debt levels or otherwise, we will not be able to make cash distributions to you, notwithstanding our stated cash distribution policy.

 

Our ability to service or refinance our debt will depend on, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to service or refinance our current or future indebtedness, we will be forced to take actions such as reducing distributions, reducing or delaying our business activities, acquisitions, investments or capital expenditures, selling assets, restructuring our debt, or seeking additional equity capital or bankruptcy protection. We may not be able to effect any of these remedies on satisfactory terms, or at all.

 

We are lending substantially all of the net proceeds of this offering to Höegh LNG pursuant to a demand note and Höegh LNG is entering into a revolving credit facility to provide us with liquidity, and, as a result of these transactions, we will be exposed to the credit risk of Höegh LNG and other risks that could impact our liquidity.

 

Upon consummation of this offering, we expect to lend up to $140 million to Höegh LNG pursuant to a demand note. At or prior to the closing of this offering, we expect to enter into a three-year, $85 million revolving credit facility with Höegh LNG as our lender to be used to fund our general partnership purposes, including working capital and distributions. Initially, this revolving credit facility will provide our primary source of liquidity other than our cash from operations distributed to us by our subsidiaries and joint ventures and payments made to us under our shareholder loans. Höegh LNG’s ability to make loans under the revolving credit facility and to repay the demand note on demand, may be affected by events beyond our and their control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, our and their ability to comply with the terms of the revolving credit facility and the demand note may be impaired. If we make demand on the demand note, or if we request a borrowing under the revolving credit facility, Höegh LNG may not have, or be able to obtain, sufficient funds to repay the demand note or make loans under the revolving credit facility. In the event that Höegh LNG is unable to make loans to us pursuant to the revolving credit facility, or a default or other circumstance prohibits us from borrowing loans thereunder, or Höegh LNG is unable to repay the demand note upon demand, our financial condition, results of operations and ability to make cash distributions to our unitholders could be materially adversely affected.

 

The financing arrangements of us and our joint ventures are secured by our vessels and contain operating and financial restrictions and other covenants that may restrict our business and financing activities as well as our ability to make cash distributions to our unitholders.

 

The operating and financial restrictions and covenants in the financing arrangements of us and our joint ventures, including lease agreements and any future financing agreements, could adversely affect our and their ability to finance future operations or capital needs or to engage, expand or pursue our business activities. For example, the financing agreements may restrict the ability of us and our subsidiaries to:

 

   

incur or guarantee indebtedness;

 

   

change ownership or structure, including mergers, consolidations, liquidations and dissolutions;

 

   

make dividends or distributions;

 

   

make certain negative pledges and grant certain liens;

 

   

sell, transfer, assign or convey assets;

 

   

make certain investments; and

 

   

enter into a new line of business.

 

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In addition, our financing agreements require us and Höegh LNG to comply with certain financial ratios and tests, including maintaining a minimum liquidity, maintaining minimum book equity ratio and ensuring that available cash flows exceeds interest and principal payable for a nine-month test period. For more information, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources—Borrowing Activities.”

 

Our joint ventures’ and Höegh LNG’s ability to comply with covenants and restrictions contained in financing arrangements may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, our and their ability to comply with these covenants may be impaired. If restrictions, covenants, ratios or tests in debt instruments are breached, a significant portion of the obligations may become immediately due and payable, and the lenders’ commitment to make further loans may terminate. We and/or our joint ventures or Höegh LNG may not have, or be able to obtain, sufficient funds to make these accelerated payments. In addition, obligations under our and our joint ventures’ financing arrangements are secured by our vessels and, in some cases, guaranteed by Höegh LNG, and if we or they, as applicable, are unable to repay debt under our financing arrangements, the lenders could seek to foreclose on those assets. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources.”

 

Restrictions in our debt agreements may prevent us from paying distributions.

 

The payment of principal and interest on our debt will reduce our cash available for distribution. Our and our joint ventures’ financing arrangements prohibit the payment of distributions upon the occurrence of certain events, including, but not limited to:

 

   

failure to pay any principal, interest, fees, expenses or other amounts when due;

 

   

certain material environmental incidents;

 

   

breach or lapse of insurance with respect to vessels securing the facilities;

 

   

breach of certain financial covenants;

 

   

failure to observe any other agreement, security instrument, obligation or covenant beyond specified cure periods in certain cases;

 

   

default under other indebtedness (including certain hedging arrangements or other material agreements);

 

   

bankruptcy or insolvency events;

 

   

inaccuracy of any representation or warranty;

 

   

a change of ownership of the vessel-owning subsidiary, as defined in the applicable agreement; and

 

   

a material adverse change, as defined in the applicable agreement.

 

Furthermore, our financing arrangements require our subsidiaries and joint ventures to hold cash reserves that are, in certain cases, held for specifically designated uses, including working capital, operations and maintenance and debt service reserves, and are generally subject to “waterfall” provisions that allocate project revenues to specified priorities of use (such as operating expenses, scheduled debt service, targeted debt service reserves and any other reserves) and the remaining cash is distributable to us only on certain dates and subject to satisfaction of certain conditions, including meeting a 1.20 historical and projected debt service coverage ratio. None of our subsidiaries or joint ventures has been subject to blocks on the distribution of cash flows as a result of a failure to meet distribution conditions.

 

In connection with this offering, we will amend or seek consents or waivers of certain of our existing financing agreements in order to permit the transactions pursuant to which we will acquire interests in our initial fleet of FSRUs. We will also enter into the sponsor credit facility. We expect that the amended financing agreements will contain covenants and provisions relating to events of default similar to those contained in our

 

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existing financing agreements. Furthermore, we expect that our future financing agreements will contain similar provisions. For more information regarding these financing agreements, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources.”

 

Höegh LNG’s failure to comply with certain obligations under PT Hoegh’s existing financing agreement, and certain other events occurring at Höegh LNG, could result in cross-defaults or defaults under PT Hoegh’s existing credit facility, which could have a material adverse effect on us.

 

Höegh LNG guarantees the obligations of PT Hoegh, a company incorporated under the laws of the Republic of Indonesia and the owner of the PGN FSRU Lampung, under PT Hoegh’s existing credit facility. Pursuant to the terms of the PT Hoegh credit facility, Höegh LNG must, among other things, maintain minimum book equity and comply with certain minimum liquidity financial covenants. Failure by Höegh LNG to satisfy any of the covenants applicable to Höegh LNG would result in a default under the PT Hoegh credit facility. Furthermore, among other things, a default by Höegh LNG on certain of its indebtedness or the occurrence of certain other adverse events at Höegh LNG may cause a default under the PT Hoegh credit facility. Any one of these events could result in the acceleration of the maturity of the PT Hoegh credit facility and the lenders thereunder may foreclose upon any collateral securing that debt, including arrest and seizure of the PGN FSRU Lampung, even if Höegh LNG were to subsequently cure its default. In the event of such acceleration and foreclosure, PT Hoegh might not have sufficient funds or other assets to satisfy all of its obligations, which would have a material adverse effect on our business, results of operations and financial condition and would significantly reduce our ability, or make us unable, to make cash distributions to our unitholders for so long as such default is continuing. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources—Borrowing Activities.”

 

Growth of the LNG market may be limited by many factors, including infrastructure constraints and community and political group resistance to new LNG infrastructure over concerns about environmental, safety and terrorism.

 

A complete LNG project includes production, liquefaction, regasification, storage and distribution facilities and FSRUs or LNG carriers. Existing LNG projects and infrastructure are limited, and new or expanded LNG projects are highly complex and capital intensive, with new projects often costing several billion dollars. Many factors could negatively affect continued development of LNG infrastructure and related alternatives, including floating storage and regasification, or disrupt the supply of LNG, including:

 

   

the availability of sufficient financing for LNG projects on commercially reasonable terms;

 

   

decreases in the price of LNG, which might decrease the expected returns relating to investments in LNG projects;

 

   

the inability of project owners or operators to obtain governmental approvals to construct or operate LNG facilities;

 

   

local community resistance to proposed or existing LNG facilities based on safety, environmental or security concerns;

 

   

any significant explosion, spill or similar incident involving an LNG facility or vessel involved in the LNG transportation, storage and regasification industry, including an FSRU or LNG carrier; and

 

   

labor or political unrest affecting existing or proposed areas of LNG production and regasification.

 

We expect that, in the event any of the factors discussed above negatively affect us, some of the proposals to expand existing or develop new LNG liquefaction and regasification facilities may be abandoned or significantly delayed. If the LNG supply chain is disrupted or does not continue to grow, or if a significant explosion, spill or similar incident occurs within the LNG transportation, storage and regasification industry, it could have a material adverse effect on our business, financial condition, results of operations and ability to make cash distributions to our unitholders.

 

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Our growth depends on our ability to expand relationships with existing customers and obtain new customers, for which we will face substantial competition.

 

One of our principal objectives is to enter into additional long-term time charters for FSRUs, LNG carriers and other LNG infrastructure assets. The process of obtaining long-term charters for FSRUs, LNG carriers and other LNG infrastructure assets is competitive and generally involves an intensive screening process and competitive bids, and often extends for several months. We believe FSRU and LNG carrier time charters are awarded based upon a variety of factors relating to the vessel operator, including:

 

   

FSRU and LNG carrier experience and quality of ship operations;

 

   

quality of vessels;

 

   

cost effectiveness;

 

   

shipping industry relationships and reputation for customer service and safety;

 

   

technical ability and reputation for operation of highly specialized vessels;

 

   

quality and experience of seafaring crew;

 

   

safety record;

 

   

the ability to finance vessels at competitive rates and financial stability generally;

 

   

relationships with shipyards and the ability to get suitable berths;

 

   

construction management experience, including the ability to obtain on-time delivery of new FSRUs, LNG carriers and other LNG infrastructure assets according to customer specifications;

 

   

willingness to accept operational risks pursuant to the charter, such as allowing termination of the charter for force majeure events; and

 

   

competitiveness of the bid in terms of overall price.

 

We expect substantial competition for providing floating storage and regasification services and marine transportation services for potential LNG projects from a number of experienced companies, including state-sponsored entities and major energy companies. Many of these competitors have significantly greater financial resources and larger fleets than do we or Höegh LNG. We anticipate that an increasing number of marine transportation companies—including many with strong reputations and extensive resources and experience—will enter the FSRU or LNG carrier markets. This increased competition may cause greater price competition for time charters. As a result of these factors, we may be unable to expand our relationships with existing customers or to obtain new customers on a profitable basis, if at all, which would have a material adverse effect on our financial condition, results of operations and ability to make cash distributions to our unitholders.

 

We may have more difficulty entering into long-term time charters in the future if an active short-term market for FSRUs develops or the spot LNG transportation market for LNG carriers continues to develop.

 

One of our principal strategies is to enter into additional FSRU and LNG carrier time charters of five or more years. While the initial term of each of the time charters for the FSRUs in our initial fleet is 20 years, some recent awards of FSRU time charters have been for an initial period of 10 years or less. If a market for short-term time charters for FSRUs develops, we may have increased difficulty entering into long-term time charters upon expiration or early termination of the time charters for the FSRUs in our initial fleet or for any vessels that we acquire in the future. As a result, our cash flows may be less stable.

 

In the LNG carrier market, awards of LNG carrier time charters have historically been for five or more years, though the use of spot voyages and short-term time charters has grown in the past few years. This may impact our ability to identify attractive acquisition candidates in the LNG carrier market.

 

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An increase in the global supply or aggregate capacities of FSRUs or LNG carriers, including conversion of existing tonnage, without a commensurate increase in demand may have an adverse effect on hire rates and the values of our vessels, which could have a material adverse effect on our business, financial condition, results of operations and ability to make cash distributions to our unitholders.

 

The supply of FSRUs, LNG carriers and other LNG infrastructure assets in the industry is affected by, among other things, assessments of the demand for these vessels by charterers. Any over-estimation of demand for vessels may result in an excess supply of new vessels. This may, in the long term when existing contracts expire, result in lower hire rates and depress the values of our vessels. If hire rates are lower when we are seeking new time charters upon expiration or early termination of our current time charters, or for any new vessels we acquire beyond our contracted newbuildings, our business, financial condition, results of operations and ability to make cash distributions to our unitholders may be adversely affected.

 

During periods of high utilization and high hire rates, industry participants may increase the supply of FSRUs and/or LNG carriers by ordering the construction of new vessels. This may result in an over-supply and may cause a subsequent decline in utilization and hire rates when the vessels enter the market. Lower utilization and hire rates could adversely affect revenues and profitability. Prolonged periods of low utilization and hire rates could also result in the recognition of impairment charges on our vessels if future cash flow estimates, based upon information available at the time, indicate that the carrying value of these vessels may not be recoverable. Such impairment charges may cause lenders to accelerate loan payments under our or our joint ventures’ financing agreements, which could adversely affect our business, financial condition, results of operations and ability to make cash distributions to our unitholders.

 

Due to an increase in LNG production capacity, the market supply of FSRUs and LNG carriers has been increasing as a result of the construction of new vessels. According to Fearnley Consultants, the world fleet of FSRUs has grown from one in 2003 to 19 in May, 2014, with another 7 that are currently under construction. With respect to LNG carriers, according to Fearnley Consultants, the world fleet of LNG carriers with a cargo capacity above 50,000 cubic meters (“cbm”) has grown from approximately 110 in 2000 to 368 by the end of 2013, and the world fleet of LNG carriers with a cargo capacity above 100,000 cbm has grown from approximately 300 in 2008 to an expected 400 in 2014.

 

Hire rates for FSRUs are not readily available and may fluctuate substantially. If rates are lower when we are seeking a new charter, our earnings and ability to make cash distributions to our unitholders may decline.

 

Hire rates for FSRUs are not readily available and may fluctuate over time as a result of changes in the supply demand balance relating to current and future FSRU and capacity. This supply demand relationship largely depends on a number of factors outside our control. The LNG market is closely connected to world natural gas prices and energy markets, which we cannot predict. A substantial or extended decline in natural gas prices could adversely affect our ability to recharter our vessels at acceptable rates or to acquire and profitably operate new FSRUs. Our ability from time to time to charter or re-charter any vessel at attractive rates will depend on, among other things, the prevailing economic conditions in the LNG industry. Hire rates for newbuilding FSRUs are correlated with the price of FSRU newbuildings. Hire rates at a time when we may be seeking a new charter may be lower than the hire rates at which our vessels are currently chartered. If rates are lower when we are seeking a new charter, our earnings and ability to make cash distributions to our unitholders may decline.

 

Vessel values may fluctuate substantially, and, if these values are lower at a time when we are attempting to dispose of vessels, we may incur a loss.

 

Vessel values for FSRUs and LNG carriers can fluctuate substantially over time due to a number of different factors, including:

 

   

prevailing economic conditions in the natural gas and energy markets;

 

   

a substantial or extended decline in demand for LNG;

 

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increases in the supply of vessel capacity;

 

   

the size and age of a vessel;

 

   

the remaining term on existing time charters; and

 

   

the cost of retrofitting or modifying existing vessels, as a result of technological advances in vessel design or equipment, changes in applicable environmental or other regulations or standards, customer requirements or otherwise.

 

As our vessels age, the expenses associated with maintaining and operating them are expected to increase, which could have an adverse effect on our business and operations if we do not maintain sufficient cash reserves for maintenance and replacement capital expenditures. Moreover, the cost of a replacement vessel would be significant.

 

If a charter terminates, we may be unable to re-deploy the affected vessel at attractive rates and, rather than continue to incur costs to maintain and finance her, we may seek to dispose of her. Our inability to dispose of a vessel at a reasonable value could result in a loss on her sale and adversely affect our ability to purchase a replacement vessel, financial condition, results of operations and ability to make cash distributions to our unitholders.

 

We depend on Höegh LNG and its subsidiaries for the management of our fleet and to assist us in operating and expanding our business.

 

Our ability to enter into new charters and expand our customer relationships will depend largely on our ability to leverage our relationship with Höegh LNG and its reputation and relationships in the shipping industry. If Höegh LNG suffers material damage to its reputation or relationships, it may harm our ability to:

 

   

renew existing charters upon their expiration;

 

   

obtain new charters;

 

   

successfully interact with shipyards;

 

   

obtain financing on commercially acceptable terms;

 

   

maintain access to capital under the sponsor credit facility; or

 

   

maintain satisfactory relationships with suppliers and other third parties.

 

In addition, each of the GDF Suez Neptune and the GDF Suez Cape Ann is subject to a ship management agreement with Höegh LNG Management, and the PGN FSRU Lampung is subject to a sub-technical support agreement with Höegh LNG Management. Both the GDF Suez Neptune and the GDF Suez Cape Ann are subject to commercial and administration management agreements with Höegh Norway, and the PGN FSRU Lampung is subject to a technical information and services agreement with Höegh Norway, a master spare parts supply agreement with Höegh Asia and a master maintenance agreement with Höegh Shipping. Pursuant to the commercial and administration management agreements, Höegh LNG Management provides significant commercial and technical management services with respect to the GDF Suez Neptune and the GDF Suez Cape Ann. Pursuant to the technical information and services agreement, the master spare parts supply agreement and the master maintenance agreement, Höegh Norway, Höegh Asia and Höegh Shipping provide significant commercial, administration and support services with respect to the PGN FSRU Lampung. In addition, pursuant to an administrative services agreement among us, our operating company and Höegh UK, Höegh UK will provide us and our operating company with certain administrative, financial and other support services. Höegh UK may subcontract some of these services to Höegh Norway pursuant to a separate administrative services agreement. Our operational success and ability to execute our growth strategy will depend significantly upon the satisfactory performance of these services. Our business will be harmed if our service providers fail to perform these services satisfactorily, if they cancel their agreements with us or if they stop providing these services to us. Please read “Certain Relationships and Related Party Transactions.”

 

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The operation of FSRUs, LNG carriers and other LNG infrastructure assets is inherently risky, and an incident involving significant loss of life or property or environmental consequences involving any of our vessels could harm our reputation, business and financial condition.

 

Our vessels and their cargoes are at risk of being damaged or lost because of events such as:

 

   

marine disasters;

 

   

piracy;

 

   

environmental accidents;

 

   

bad weather;

 

   

mechanical failures;

 

   

grounding, fire, explosions and collisions;

 

   

human error; and

 

   

war and terrorism.

 

An accident involving any of our vessels could result in any of the following:

 

   

death or injury to persons, loss of property or environmental damage, and associated costs;

 

   

delays in taking delivery of cargo or discharging LNG or regasified LNG, as applicable;

 

   

loss of revenues from or termination of time charters;

 

   

governmental fines, penalties or restrictions on conducting business;

 

   

higher insurance rates; and

 

   

damage to our reputation and customer relationships generally.

 

Any of these results could have a material adverse effect on our business, financial condition and results of operations.

 

If our vessels suffer damage, they may need to be repaired. The costs of vessel repairs are unpredictable and can be substantial. We may have to pay repair costs that our insurance policies do not cover, for example, due to insufficient coverage amounts or the refusal by our insurance provider to pay a claim. The loss of earnings while these vessels are being repaired, as well as the actual cost of these repairs not otherwise covered by insurance, would decrease our results of operations. If any of our vessels are involved in an accident with the potential risk of environmental consequences, the resulting media coverage could have a material adverse effect on our business, our results of operations and cash flows, weaken our financial condition and negatively affect our ability to make cash distributions to our unitholders.

 

Our insurance may be insufficient to cover losses that may occur to our property or result from our operations.

 

The operating of FSRUs, LNG carriers and other LNG infrastructure assets is inherently risky. Although we carry protection and indemnity insurance consistent with industry standards, all of the risks associated with operating FSRUs, LNG carriers and other LNG infrastructure assets may not be adequately insured against, and any particular claim may not be paid. Any claims covered by insurance would be subject to deductibles, and since it is possible that a large number of claims may be brought, the aggregate amount of these deductibles could be material. Certain of our insurance coverage is maintained through mutual protection and indemnity associations, and as a member of such associations we may be required to make additional payments over and above budgeted premiums if member claims exceed association reserves.

 

We may be unable to procure adequate insurance coverage at commercially reasonable rates in the future. For example, more stringent environmental regulations have led in the past to increased costs for, and in the future may result in the lack of availability of, insurance against risks of environmental damage or pollution. A marine disaster could exceed our insurance coverage, which could harm our business, financial condition, results of operations, cash flows and ability to make cash distributions to our unitholders. Any uninsured or

 

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underinsured loss could harm our business and financial condition. In addition, our insurance may be voidable by the insurers as a result of certain of our actions, such as our ships failing to maintain certification with applicable maritime self-regulatory organizations.

 

Changes in the insurance markets attributable to terrorist attacks may also make certain types of insurance more difficult for us to obtain. In addition, upon renewal or expiration of our current policies, the insurance that may be available to us may be significantly more expensive than our existing coverage.

 

The required drydocking of our vessels could be more expensive and time consuming than we anticipate, which could adversely affect our cash available for distribution.

 

The drydocking of our vessels could require us to expend capital if the vessels are drydocked for longer than the allowable period under the time charters. Although each of our time charters requires the charterer to pay the hire rate for up to a specified number of days of scheduled drydocking and reimburse us for anticipated drydocking costs, any significant increase in the number of days of drydocking beyond the specified number of days during which the hire rate remains payable could have a material adverse effect on our ability to make cash distributions to our unitholders. A significant increase in the cost of repairs during drydocking could also adversely affect our cash available for distribution. We may underestimate the time required to drydock any of our vessels or unanticipated problems may arise. If more than one of our vessels is required to be out of service at the same time, if a vessel is drydocked longer than the permitted duration or if the cost of repairs during drydocking is greater than budgeted, our cash available for distribution could be adversely affected.

 

An increase in operating expenses could adversely affect our financial performance.

 

Our operating expenses and drydock capital expenditures depend on a variety of factors including crew costs, provisions, deck and engine stores and spares, lubricating oil, insurance, maintenance and repairs and shipyard costs, many of which are beyond our control and affect the entire shipping industry. While many of these costs are borne by the charterers under our time charters, there are some circumstance where this is not the case. For example, while we do not bear the cost of fuel (bunkers) under our time charters, fuel is a significant expense in our operations when our vessels are, for example, moving to or from drydock or when off-hire. The price and supply of fuel is unpredictable and fluctuates based on events outside our control, including geopolitical developments, supply and demand for oil and gas, actions by the Organization of the Petroleum Exporting Countries and other oil and gas producers, war and unrest in oil-producing countries and regions, regional production patterns and environmental concerns. These may increase vessel operating costs further. If costs continue to rise, they could materially and adversely affect our results of operations.

 

A shortage of qualified officers and crew could have an adverse effect on our business and financial condition.

 

FSRUs and LNG carriers require a technically skilled officer staff with specialized training. As the global FSRU fleet and LNG carrier fleet continues to grow, the demand for technically skilled officers and crew has been increasing, which has led to a more competitive recruiting market. Increases in our historical vessel operating expenses have been attributable primarily to the rising costs of recruiting and retaining officers for our fleet. Furthermore, each key officer crewing an FSRU or LNG carrier must receive specialized training related to the operation and maintenance of the regasification equipment. If Höegh LNG Management and Höegh Maritime Management are unable to employ technically skilled staff and crew, they will not be able to adequately staff our vessels. A material decrease in the supply of technically skilled officers or an inability of Höegh LNG Management or Höegh Maritime Management to attract and retain such qualified officers could impair our ability to operate or increase the cost of crewing our vessels, which would materially adversely affect our business, financial condition and results of operations and significantly reduce our ability to make cash distributions to our unitholders.

 

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We may be unable to attract and retain key management personnel, which may negatively impact our growth, the effectiveness of our management and our results of operations.

 

Our success depends to a significant extent upon the abilities and the efforts of our senior executives. While we believe that we have an experienced management team, the loss or unavailability of one or more of our senior executives for any extended period of time could have an adverse effect on our growth, business and results of operations.

 

Exposure to currency exchange rate fluctuations could result in fluctuations in our cash flows and operating results.

 

Currency exchange rate fluctuations and currency devaluations could have an adverse effect on our results of operations from quarter to quarter. Historically, our revenue has been generated in U.S. Dollars, but we incur a minority of our operating expenses in other currencies. Fluctuations in exchange rates could affect our cash flows and operating results. If the U.S. Dollar weakens significantly, we would be required to convert more U.S. Dollars to other currencies to satisfy our obligations, which would cause us to have less cash available for distribution.

 

Acts of piracy on any of our vessels or on oceangoing vessels could adversely affect our business, financial condition and results of operations.

 

Acts of piracy have historically affected oceangoing vessels trading in regions of the world such as the South China Sea and the Gulf of Aden off the coast of Somalia. If such piracy attacks result in regions in which our vessels are deployed being named on the Joint War Committee Listed Areas, war-risk insurance premiums payable for such insurance coverage could increase significantly and such insurance coverage might become more difficult to obtain. In addition, crew costs, including costs that may be incurred to the extent we employ onboard security guards, could increase in such circumstances. We may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on us. In addition, hijacking as a result of an act of piracy against our vessels, or an increase in cost or unavailability of insurance for our vessels, could have a material adverse impact on our business, financial condition and results of operations.

 

Terrorist attacks, increased hostilities, piracy or war could lead to further economic instability, increased costs and disruption of business.

 

Terrorist attacks may adversely affect our business, financial condition, results of operations, ability to raise capital and future growth. Continuing hostilities in the Middle East may lead to additional armed conflicts or to further acts of terrorism and civil disturbance in the United States or elsewhere, which may contribute further to economic instability and disruption of production and distribution of LNG, which could result in reduced demand for our services.

 

Terrorist attacks on vessels, such as the October 2002 attack on the m.v. Limburg and the July 2010 attack allegedly by Al-Qaeda on the m. Star, both very large crude carriers not related to us, may in the future adversely affect our business, financial condition and results of operation. In addition, LNG facilities, shipyards, vessels, pipelines and natural gas fields could be targets of future terrorist attacks. Any such attacks could lead to, among other things, bodily injury or loss of life, vessel or other property damage, increased vessel operational costs, including insurance costs, and the inability to transport LNG to or from certain locations. Terrorist attacks, piracy, war or other events beyond our control that adversely affect the distribution, production or transportation of LNG to be shipped by us could entitle customers to terminate our charters, which would harm our cash flows and business. Terrorist attacks, or the perception that LNG facilities, FSRUs and LNG carriers are potential terrorist targets, could materially and adversely affect expansion of LNG infrastructure and the continued supply of LNG. Concern that LNG facilities may be targeted for attack by terrorists has contributed to a community and environmental resistance to the construction of a number of LNG facilities. In addition, the loss of a vessel as a result of terrorism or piracy would have a material adverse effect on our business, financial condition and results of operations.

 

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We could be exposed to political, governmental and economic instability that could harm our operations.

 

Economic, political and governmental conditions in the countries where we are engaged in business or where our vessels are registered could affect our operations. Any disruption caused by these factors could harm our business. In particular, we derive a substantial portion of our revenues from shipping and regasifying LNG from politically unstable regions. Past political conflicts in these regions have included attacks on ships and other efforts to disrupt shipping in the area. In addition to acts of terrorism, vessels trading in these and other regions have also been subject, in limited instances, to piracy. Future hostilities or other political instability where we operate or may operate could have a material adverse effect on the growth of our business, financial condition, results of operations and ability to make cash distributions to our unitholders. In addition, tariffs, trade embargoes and other economic sanctions by Brazil, the United States or other countries against countries in the Middle East, Southeast Asia or elsewhere as a result of terrorist attacks, hostilities or otherwise may limit trading activities with those countries, which could also harm our business and ability to make cash distributions to our unitholders.

 

The LNG transportation, storage and regasification industry is subject to substantial environmental and other regulations, which may significantly limit our operations or increase our expenses.

 

Our operations are materially affected by extensive and changing international, national and local environmental protection laws, regulations, treaties, conventions and standards in force in international waters, the jurisdictional waters of the countries in which our vessels operate, as well as the countries of our vessels’ registration, including those relating to equipping and operating FSRUs and LNG carriers, providing security and minimizing the potential for impacts to the environment from their operations. We have incurred, and expect to continue to incur, substantial expenses in complying with these laws and regulations, including expenses for vessel modifications and changes in operating procedures. Additional laws and regulations may be adopted that could limit our ability to do business or further increase costs, which could harm our business. In addition, failure to comply with applicable laws and regulations may result in administrative and civil penalties, criminal sanctions or the suspension or termination of operations. We may become subject to additional laws and regulations if we enter new markets or trades.

 

These requirements can affect the resale value or useful lives of our vessels, require a reduction in cargo capacity, ship modifications or operational changes or restrictions, lead to decreased availability of insurance coverage for environmental matters or result in the denial of access to certain jurisdictional waters or ports or detention in certain ports.

 

The design, construction and operation of FSRUs and interconnecting pipelines and the transportation of LNG are subject to governmental approvals and permits. The length of time it takes to receive regulatory approval for offshore LNG operations is one factor that has affected our industry, including through increased expenses.

 

Our vessels operating in international waters, now or in the future, will be subject to various international conventions and flag state laws and regulations relating to protection of the environment.

 

Our vessels traveling in international waters are subject to various existing regulations published by the International Maritime Organization (the “IMO”), as well as marine pollution and prevention requirements imposed by the IMO International Convention for the Prevention of Pollution from Ships of 1975, as from time to time may be amended (the “MARPOL Convention”). In addition, our FSRUs may become subject to the International Convention on Liability and Compensation for Damage in Connection with the Carriage of Hazardous and Noxious Substances by Sea, as amended by the April 2010 Protocol to the HNS Convention (the “2010 HNS Convention”), if it is entered into force. If the 2010 HNS Convention were to enter into force, we cannot estimate with any certainty at this time the costs that may be needed to comply with any such requirements that may be adopted.

 

Please read “Business—Environmental and Other Regulation—International Maritime Regulations of FSRUs and LNG Carriers” and “—Other Regulations” for a more detailed discussion on these topics.

 

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Our vessels operating in U.S. waters now or in the future will be subject to various federal, state and local laws and regulations relating to protection of the environment.

 

Our vessels operating in U.S. waters now or in the future will be subject to various federal, state and local laws and regulations relating to protection of the environment, including the Oil Pollution Act of 1990 (“OPA 90”), the U.S. Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), the U.S. Clean Water Act (the “CWA”) and the U.S. Clean Air Act of 1970, as amended. In some cases, these laws and regulations require us to obtain governmental permits and authorizations before we may conduct certain activities. These environmental laws and regulations may impose substantial penalties for noncompliance and substantial liabilities for pollution. Failure to comply with these laws and regulations may result in substantial civil and criminal fines and penalties. As with the industry generally, our operations will entail risks in these areas, and compliance with these laws and regulations, which may be subject to frequent revisions and reinterpretation, may increase our overall cost of business.

 

Please read “Business—Environmental and Other Regulation—U.S. Environmental Regulation of FSRUs and LNG Carriers” for a more detailed discussion on these topics.

 

Our operations are subject to substantial environmental and other regulations, which may significantly increase our expenses.

 

Our operations are affected by extensive and changing international, national and local environmental protection laws, regulations, treaties and conventions in force in international waters, the jurisdictional waters of the countries in which our vessels operate, as well as the countries of our vessels’ registration, including those governing oil spills, discharges to air and water, and the handling and disposal of hazardous substances and wastes. These regulations include OPA 90, the CWA, the U.S. Maritime Transportation Security Act of 2002 and regulations of the IMO, including the International Convention on Civil Liability for Oil Pollution Damage of 1969, as from time to time amended, the MARPOL Convention, the International Convention for the Prevention of Marine Pollution of 1973, the IMO International Convention for the Safety of Life at Sea of 1974, as from time to time amended (“SOLAS”), the IMO International Convention on Load Lines of 1966, as from time to time amended, and the International Management Code for the Safe Operation of Ships and for Pollution Prevention (the “ISM Code”).

 

Many of these requirements are designed to reduce the risk of oil spills and other pollution. In addition, we believe that the heightened environmental, quality and security concerns of insurance underwriters, regulators and charterers will lead to additional regulatory requirements, including enhanced risk assessment and security requirements and greater inspection and safety requirements on vessels. We expect to incur substantial expenses in complying with these laws and regulation, including expenses for vessel modifications and changes in operating procedures.

 

These requirements can affect the resale value or useful lives of our vessels, require ship modifications or operational changes or restrictions, lead to decreased availability of insurance coverage for environmental matters or result in the denial of access to certain jurisdictional waters or ports, or detention in, certain ports. Under local, national and foreign laws, as well as international treaties and conventions, we could incur material liabilities, including cleanup obligations, in the event that there is a release of hazardous substances from our vessels or otherwise in connection with our operations. We could also become subject to personal injury or property damage claims relating to the release of or exposure to hazardous materials associated with our operations. In addition, failure to comply with applicable laws and regulations may result in administrative and civil penalties, criminal sanctions or the suspension or termination of our operations, including, in certain instances, seizure or detention of our vessels.

 

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Further changes to existing environmental legislation that is applicable to international and national maritime trade may have an adverse effect on our business.

 

We believe that the heightened environmental, quality and security concerns of insurance underwriters, regulators and charterers will generally lead to additional regulatory requirements, including enhanced risk assessment and security requirements and greater inspection and safety requirements on all vessels in the marine LNG transportation markets and offshore LNG terminals. These requirements are likely to add incremental costs to our operations and the failure to comply with these requirements may affect the ability of our vessels to obtain and, possibly, collect on insurance or to obtain the required certificates for entry into the different ports where we operate.

 

Further legislation, or amendments to existing legislation, applicable to international and national maritime trade are expected over the coming years in areas such as ship recycling, sewage systems, emission control (including emissions of greenhouse gases) and ballast treatment and handling. The United States has recently enacted legislation and regulations that require more stringent controls of air and water emissions from oceangoing vessels. Such legislation or regulations may require additional capital expenditures or operating expenses (such as increased costs for low-sulfur fuel) in order for us to maintain our vessels’ compliance with international and/or national regulations.

 

Climate change and greenhouse gas restrictions may adversely impact our operations and markets.

 

Due to concern over the risk of climate change, a number of countries and the IMO have adopted, or are considering the adoption of, regulatory frameworks to reduce greenhouse gas emission from vessel emissions. These regulatory measures may include, among others, adoption of cap and trade regimes, carbon taxes, increased efficiency standards and incentives or mandates for renewable energy. Although the emissions of greenhouse gases from international shipping currently are not subject to the Kyoto Protocol to the United Nations Framework Convention on Climate Change (the “Kyoto Protocol”) for now, a new treaty may be adopted in the future that includes restrictions on shipping emissions. Compliance with changes in laws and regulations relating to climate change could increase our costs of operating and maintaining our vessels and could require us to make significant financial expenditures that we cannot predict with certainty at this time.

 

Adverse effects upon the oil and gas industry relating to climate change, including growing public concern about the environmental impact of climate change, may also have an effect on demand for our services. For example, increased regulation of greenhouse gases or other concerns relating to climate change may reduce the demand for oil and gas in the future or create greater incentives for use of alternative energy sources. Any long-term material adverse effect on the oil and gas industry could have a significant financial and operational adverse impact on our business that we cannot predict with certainty at this time.

 

Maritime claimants could arrest our vessels, which could interrupt our cash flows.

 

Crew members, suppliers of goods and services to our vessels, owners of cargo or other parties may be entitled to a maritime lien against one or more of our vessels for unsatisfied debts, claims or damages. In many jurisdictions, a maritime lien holder may enforce its lien by arresting a vessel through foreclosure proceedings. In a few jurisdictions, claimants could try to assert “sister ship” liability against one vessel in our fleet for claims relating to another of our vessels. The arrest or attachment of one or more of our vessels could interrupt our cash flows and require us to pay to have the arrest lifted.

 

Governments could requisition our vessels during a period of war or emergency, resulting in loss of earnings.

 

The government of a jurisdiction where one or more of our vessels are registered could requisition for title or seize our vessels. Requisition for title or seizure occurs when a government takes control of a vessel and becomes her owner. Also, a government could requisition our vessels for hire. Requisition for hire occurs when a government takes control of a vessel and effectively becomes the charterer at dictated hire rates. Generally,

 

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requisitions occur during a period of war or emergency, although governments may elect to requisition vessels in other circumstances. Although we would expect to be entitled to government compensation in the event of a requisition of one or more of our vessels, the amount and timing of payments, if any, would be uncertain. A government requisition of one or more of our vessels would result in off-hire days under our time charters and may cause us to breach covenants in certain of our credit facilities. Furthermore, a requisition for title of either the GDF Suez Neptune or the GDF Suez Cape Ann constitutes a total loss under the terms of the related facility agreements, in which case we would have to repay all loans. If a government requisition of one or more of our vessels were to occur, it could have a material adverse effect on our business, financial condition, results of operations and cash flows, including cash available for distribution to our unitholders.

 

Compliance with safety and other vessel requirements imposed by classification societies may be very costly and may adversely affect our business.

 

The hull and machinery of every large, oceangoing commercial vessel must be classed by a classification society authorized by her country of registry. The classification society certifies that a vessel is safe and seaworthy in accordance with the applicable rules and regulations of the country of registry of the vessel and SOLAS. Each of our vessels is certified by Det Norske Veritas GL, compliant with the ISM Code and “in class.”

 

As part of the certification process, a vessel must undergo annual surveys, renewal surveys, intermediate surveys and special surveys. In lieu of a special survey, a vessel’s machinery may be on a continuous survey cycle, under which the machinery would be surveyed periodically over a five-year period. Each of the vessels in our initial fleet is on a planned maintenance system approval, and as such the classification society attends onboard once every year to verify that the maintenance of the equipment onboard is done correctly. For each of the GDF Suez Neptune and the GDF Suez Cape Ann, a renewal survey is conducted every five years and an intermediate survey is conducted every two to three years after a renewal survey. Until these vessels are 15 years old, they only are drydocked at each renewal survey, with the intermediate surveys occurring while they are afloat, using an approved diving company in the presence of a surveyor from the classification society. After these vessels are 15 years old, they are drydocked both at each renewal survey and each intermediate survey, resulting in drydocking approximately every 30 months. We do not anticipate drydocking the PGN FSRU Lampung for at least 20 years as certain inspections can be done without drydocking.

 

If any vessel does not maintain her class or fails any annual survey, renewal survey, intermediate survey or special survey, the vessel will be unable to trade between ports and will be unemployable. We would lose revenue while the vessel was off-hire and incur costs of compliance. This would negatively impact our revenues and reduce our cash available for distribution to unitholders.

 

Failure to comply with the U.S. Foreign Corrupt Practices Act, the UK Bribery Act, the anti-corruption provisions in the Norwegian Criminal Code and other anti-bribery legislation in other jurisdictions could result in fines, criminal penalties, contract termination and an adverse effect on our business.

 

We may operate in a number of countries throughout the world, including countries known to have a reputation for corruption. We are committed to doing business in accordance with applicable anti-corruption laws and have adopted a code of business conduct and ethics which is consistent and in full compliance with the U.S. Foreign Corrupt Practices Act of 1977 (the “FCPA”), the Bribery Act 2010 of the Parliament of the United Kingdom (the “UK Bribery Act”) and the anti-corruption provisions of the Norwegian Criminal Code of 1902 (the “Norwegian Criminal Code”), respectively. We are subject, however, to the risk that we, our affiliated entities or our or their respective officers, directors, employees and agents may take actions determined to be in violation of such anti-corruption laws, including the FCPA, the UK Bribery Act and the Norwegian Criminal Code. Any such violation could result in substantial fines, sanctions, civil and/or criminal penalties, curtailment of operations in certain jurisdictions, and might adversely affect our business, results of operations or financial condition. In addition, actual or alleged violations could damage our reputation and ability to do business. Furthermore, detecting, investigating, and resolving actual or alleged violations is expensive and can consume significant time and attention of our senior management.

 

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If in the future our business activities involve countries, entities and individuals that are subject to restrictions imposed by the U.S. or other governments, we could be subject to enforcement action and our reputation and the market for our common units could be adversely affected.

 

The tightening of U.S. sanctions in recent years has affected non-U.S. companies. In particular, sanctions against Iran have been significantly expanded. In 2012 the U.S. signed into law the Iran Threat Reduction and Syria Human Rights Act of 2012 (‘‘TRA’’), which placed further restrictions on the ability of non-U.S. companies to do business or trade with Iran and Syria. A major provision in TRA is that issuers of securities must disclose to the SEC in their annual and quarterly reports filed after February 6, 2013 if the issuer or ‘‘any affiliate’’ has ‘‘knowingly’’ engaged in certain activities involving Iran during the timeframe covered by the report. This disclosure obligation is broad in scope in that it requires the reporting of activity that would not be considered a violation of U.S. sanctions as well as violative conduct, and is not subject to a materiality threshold. The SEC publishes these disclosures on its website and the President must initiate an investigation in response to all disclosures.

 

In addition to the sanctions against Iran, the U.S. also has sanctions that target other countries, entities and individuals. These sanctions have certain extraterritorial effects that need to be considered by non-U.S. companies. It should also be noted that other governments have implemented versions of U.S. sanctions. We believe that we are in compliance with all applicable sanctions and embargo laws and regulations imposed by the U.S., the United Nations or European Union countries and intend to maintain such compliance. However, there can be no assurance that we will be in compliance in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations. Any such violation could result in fines or other penalties and could result in some investors deciding, or being required, to divest their interest, or not to invest, in our common units. Additionally, some investors may decide to divest their interest, or not to invest, in our common units simply because we may do business with companies that do business in sanctioned countries. Investor perception of the value of our common units may also be adversely affected by the consequences of war, the effects of terrorism, civil unrest and governmental actions in these and surrounding countries.

 

We may not be able to redeploy our FSRUs on terms as favorable as our or our joint venture’s current FSRU time charters or at all.

 

Due to the limitations on demand for FSRUs, in the event that any of the time charters on our vessels are terminated, we may be unable to recharter such vessel as an FSRU. While we may be able to employ such vessel as a traditional LNG carrier, the hire rates and/or other charter terms may not be as favorable to us as those in the existing time charter. If we acquire additional FSRUs and they are not, as a result of time charter termination or otherwise, subject to a long-term, profitable time charter, we may be required to bid for projects at unattractive rates in order to reduce our losses relating to the vessels.

 

Due to our lack of diversification, adverse developments in our LNG transportation, storage and regasification businesses could reduce our ability to make cash distributions to our unitholders.

 

We rely exclusively on the cash flows generated from our FSRUs, LNG carriers and other LNG infrastructure assets. Due to our lack of diversification, an adverse development in the LNG transportation, storage and regasification industry could have a significantly greater impact on our financial condition and results of operations than if we maintained more diverse assets or lines of businesses.

 

Risks Inherent in an Investment in Us

 

Höegh LNG and its affiliates may compete with us.

 

Pursuant to the omnibus agreement that we and Höegh LNG will enter into in connection with the closing of this offering, Höegh LNG and its controlled affiliates (other than us, our general partner and our subsidiaries) generally will agree not to acquire, own, operate or charter certain FSRUs and LNG carriers operating under charters of five or more years. The omnibus agreement, however, contains significant exceptions that may allow Höegh LNG or any of its controlled affiliates to compete with us, which could harm our business. Additionally, the omnibus agreement contains no restrictions on Höegh LNG’s ability to own, operate or charter FSRUs and

 

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LNG carriers operating under charters of less than five years. Also, pursuant to the omnibus agreement, we will agree not to acquire, own, operate or charter FSRUs and LNG carriers operating under charters of less than five years. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement—Noncompetition.”

 

Unitholders have limited voting rights, and our partnership agreement restricts the voting rights of the unitholders owning more than 4.9% of our common units.

 

Unlike the holders of common stock in a corporation, holders of common units have only limited voting rights on matters affecting our business. We will hold a meeting of the limited partners every year to elect one or more members of our board of directors and to vote on any other matters that are properly brought before the meeting. Common unitholders will be entitled to elect only four of the seven members of our board of directors. The elected directors will be elected on a staggered basis and will serve for four-year terms. Our general partner in its sole discretion will appoint the remaining three directors and set the terms for which those directors will serve. Our partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management. Unitholders will have no right to elect our general partner, and our general partner may not be removed except by a vote of the holders of at least 75% of the outstanding common and subordinated units, including any units owned by our general partner and its affiliates, voting together as a single class.

 

Our partnership agreement further restricts unitholders’ voting rights by providing that if any person or group owns beneficially more than 4.9% of any class of units then outstanding, any such units owned by that person or group in excess of 4.9% may not be voted on any matter and will not be considered to be outstanding when sending notices of a meeting of unitholders, calculating required votes (except for purposes of nominating a person for election to our board of directors), determining the presence of a quorum or for other similar purposes, unless required by law. The voting rights of any such unitholders in excess of 4.9% will effectively be redistributed pro rata among the other common unitholders holding less than 4.9% of the voting power of all classes of units entitled to vote. Our general partner, its affiliates and persons who acquired common units with the prior approval of our board of directors will not be subject to this 4.9% limitation except with respect to voting their common units in the election of the elected directors.

 

Our general partner and its other affiliates own a significant interest in us and have conflicts of interest and limited fiduciary and contractual duties, which may permit them to favor their own interests to your detriment.

 

Following this offering, Höegh LNG will own approximately     % of our common units and all of our subordinated units, which represents an aggregate     % limited partner interest in us, assuming no exercise of the underwriters’ option to purchase additional common units, and will own and control our general partner. Certain of our directors will also serve as directors of Höegh LNG or its affiliates and, as such, they will have fiduciary duties to Höegh LNG that may cause them to pursue business strategies that disproportionately benefit Höegh LNG or its affiliates or which otherwise are not in the best interests of us or our unitholders.

 

Conflicts of interest may arise between Höegh LNG and its affiliates (including our general partner) on the one hand, and us and our unitholders, on the other hand. As a result of these conflicts, our general partner and its affiliates may favor their own interests over the interests of our unitholders. Please read “—Our partnership agreement limits our general partner’s and our directors’ fiduciary duties to our unitholders and restricts the remedies available to unitholders for actions taken by our general partner or our directors.” These conflicts include, among others, the following situations:

 

   

neither our partnership agreement nor any other agreement requires our general partner or Höegh LNG or its affiliates to pursue a business strategy that favors us or utilizes our assets, and Höegh LNG’s officers and directors have a fiduciary duty to make decisions in the best interests of the shareholders of Höegh LNG, which may be contrary to our interests;

 

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our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner. Specifically, our general partner will be considered to be acting in its individual capacity if it exercises its call right, pre-emptive rights or registration rights, consents or withholds consent to any merger or consolidation of the Partnership, appoints any directors or votes for the election of any director, votes or refrains from voting on amendments to our partnership agreement that require a vote of the outstanding units, voluntarily withdraws from the Partnership, transfers (to the extent permitted under our partnership agreement) or refrains from transferring its units or general partner interest or votes upon the dissolution of the Partnership;

 

   

our general partner and our directors have limited their liabilities and reduced their fiduciary duties under the laws of the Marshall Islands, while also restricting the remedies available to our unitholders, and, as a result of purchasing common units, unitholders are treated as having agreed to the modified standard of fiduciary duties and to certain actions that may be taken by our general partner and our directors, all as set forth in our partnership agreement;

 

   

our general partner is entitled to reimbursement of all reasonable costs incurred by it and its affiliates for our benefit;

 

   

our partnership agreement does not restrict us from paying our general partner or its affiliates for any services rendered to us on terms that are fair and reasonable or entering into additional contractual arrangements with any of these entities on our behalf;

 

   

our general partner may exercise its right to call and purchase our common units if it and its affiliates own more than 80% of our common units; and

 

   

our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon the exercise of its limited call right.

 

Although a majority of our directors will over time be elected by common unitholders, our general partner will likely have substantial influence on decisions made by our board of directors. Please read “Certain Relationships and Related Party Transactions,” “Conflicts of Interest and Fiduciary Duties” and “Our Partnership Agreement.”

 

Our officers may face conflicts in the allocation of their time to our business.

 

Our sole officer at the closing of this offering and any future officers may face conflicts in the allocation of their time to our business. The affiliates of our general partner, including Höegh LNG, conduct substantial businesses and activities of their own in which we have no economic interest. As a result, there could be material competition for the time and effort of our officers who also provide services to our general partner’s affiliates, which could have a material adverse effect on our business, financial condition and results of operations. Additionally, while our Chief Executive Officer and Chief Financial Officer will be employed by one of our subsidiaries and is expected to devote the substantial majority of his time to our business, he may, from time to time, participate in business development activities for Höegh LNG that are linked to developing opportunities for us. Please read “Management.”

 

Our partnership agreement limits our general partner’s and our directors’ fiduciary duties to our unitholders and restricts the remedies available to unitholders for actions taken by our general partner or our directors.

 

Our partnership agreement provides that our general partner will irrevocably delegate to our board of directors the authority to oversee and direct our operations, management and policies on an exclusive basis, and such delegation will be binding on any successor general partner of the Partnership. Our partnership agreement also contains provisions that reduce the standards to which our general partner and directors would otherwise be held by Marshall Islands law. For example, our partnership agreement:

 

   

provides that our general partner may make determinations or take or decline to take actions without regard to our or our unitholders’ interests. Our general partner may consider only the interests and factors

 

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that it desires, and it has no duty or obligation to give any consideration to any interest of, or factors affecting us, our affiliates or our unitholders. Decisions made by our general partner will be made by its sole owner. Specifically, our general partner may decide to exercise its right to make a determination to receive common units in exchange for resetting the target distribution levels related to the incentive distribution rights, call right, pre-emptive rights or registration rights, consent or withhold consent to any merger or consolidation of the Partnership, appoint any directors or vote for the election of any director, vote or refrain from voting on amendments to our partnership agreement that require a vote of the outstanding units, voluntarily withdraw from the Partnership, transfer (to the extent permitted under our partnership agreement) or refrain from transferring its units, the general partner interest or incentive distribution rights or vote upon the dissolution of the Partnership;

 

   

provides that our general partner and our directors are entitled to make other decisions in “good faith” if they reasonably believe that the decision is in our best interests;

 

   

generally provides that affiliated transactions and resolutions of conflicts of interest not approved by the conflicts committee of our board of directors and not involving a vote of unitholders must be on terms no less favorable to us than those generally being provided to or available from unrelated third parties or be “fair and reasonable” to us and that, in determining whether a transaction or resolution is “fair and reasonable,” our board of directors may consider the totality of the relationships between the parties involved, including other transactions that may be particularly advantageous or beneficial to us; and

 

   

provides that neither our general partner nor our officers or our directors will be liable for monetary damages to us, our limited partners or assignees for any acts or omissions unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or directors or its officers or directors or those other persons engaged in actual fraud or willful misconduct.

 

By purchasing a common unit, a common unitholder will be deemed to have agreed to become bound by the provisions of our partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Fiduciary Duties—Fiduciary Duties.”

 

Fees and expenses, which Höegh LNG will determine for services provided to us and our joint ventures, will be substantial, will be payable regardless of our profitability and will reduce our cash available for distribution to you.

 

Pursuant to the ship management agreements, our joint ventures will pay fees for services provided to them by Höegh LNG Management, and our joint ventures will reimburse Höegh LNG Management for all expenses they incur on our behalf. These fees and expenses will include all costs and expenses incurred in providing certain crewing and technical management services to our joint ventures. In addition, pursuant to a technical information and services agreement, we will reimburse Höegh Norway for expenses Höegh Norway incurs pursuant to the technical support agreement that it is party to with Höegh LNG Management.

 

We expect the amount of the fees and expenses pursuant to the ship management agreements to be approximately $         million for the 12-month period ending September 30, 2015, and the fees and expenses pursuant to the sub-technical support agreement to be approximately $         million for the 12-month period ending September 30, 2015.

 

In addition, pursuant to an administrative services agreement among us, our operating company and Höegh UK, Höegh UK will provide us and our operating company with certain administrative, financial and other support services. We will reimburse Höegh UK for its reasonable costs and expenses incurred in connection with the provision of these services. In addition, we will pay Höegh UK a service fee equal to 5.0% of its costs and expenses incurred in connection with providing services to us. We expect that we will pay Höegh UK approximately $         million in total under such administrative services agreement for the 12-month period ending September 30, 2015.

 

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Pursuant to the above-mentioned administrative services agreement, Höegh UK is permitted to subcontract to Höegh Norway certain administrative services provided to us pursuant to an administrative services agreement with Höegh Norway. Höegh UK will reimburse Höegh Norway for its reasonable costs and expenses incurred in connection with the provision of these services.

 

For a description of the ship management agreements, the sub-technical support agreement and the administrative services agreements, please read “Certain Relationships and Related Party Transactions.” The fees and expenses payable pursuant to the ship management agreements, the technical support agreement and the Administrative Services Agreements will be payable without regard to our financial condition or results of operations. The payment of fees to and the reimbursement of expenses of Höegh LNG Management, Höegh UK and Höegh Norway could adversely affect our ability to pay cash distributions to you.

 

Our partnership agreement contains provisions that may have the effect of discouraging a person or group from attempting to remove our current management or our general partner, and even if public unitholders are dissatisfied, they will be unable to remove our general partner without Höegh LNG’s consent, unless Höegh LNG’s ownership interest in us is decreased, all of which could diminish the trading price of our common units.

 

Our partnership agreement contains provisions that may have the effect of discouraging a person or group from attempting to remove our current management or our general partner.

 

   

The unitholders will be unable initially to remove our general partner without its consent because our general partner and its affiliates will own sufficient units upon completion of this offering to be able to prevent its removal. The vote of the holders of at least 75% of all outstanding common and subordinated units voting together as a single class is required to remove the general partner. Following the closing of this offering, Höegh LNG will own approximately     % of the outstanding common and subordinated units, assuming no exercise of the underwriters’ option to purchase additional common units. Additionally, during the term of the SRV Joint Gas shareholders’ agreement, Höegh LNG has agreed to continue to own common units and subordinated units representing a greater than 25% limited partner interest in us in the aggregate.

 

   

If our general partner is removed without “cause” during the subordination period and units held by our general partner and its affiliates are not voted in favor of that removal, all remaining subordinated units will automatically convert into common units, any existing arrearages on the common units will be extinguished, and Höegh LNG will have the right to convert its incentive distribution rights into common units or to receive cash in exchange for those interests based on the fair market value of those interests at the time. A removal of our general partner under these circumstances would adversely affect the common units by prematurely eliminating their distribution and liquidation preference over the subordinated units, which would otherwise have continued until we had met certain distribution and performance tests. Any conversion of the incentive distribution rights would be dilutive to existing unitholders. Furthermore, any cash payment in lieu of such conversion could be prohibitively expensive. “Cause” is narrowly defined to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding our general partner liable for actual fraud or willful misconduct in its capacity as our general partner. Cause does not include most cases of charges of poor business decisions, such as charges of poor management of our business by the directors appointed by our general partner, so the removal of our general partner because of the unitholders’ dissatisfaction with the general partner’s decisions in this regard would most likely result in the termination of the subordination period.

 

   

Common unitholders will be entitled to elect only four of the seven members of our board of directors. Our general partner in its sole discretion will appoint the remaining three directors.

 

   

Election of the four directors elected by unitholders is staggered, meaning that the members of only one of four classes of our elected directors will be selected each year. In addition, the directors appointed by our general partner will serve for terms determined by our general partner.

 

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Our partnership agreement contains provisions limiting the ability of unitholders to call meetings of unitholders, to nominate directors and to acquire information about our operations as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.

 

   

Unitholders’ voting rights are further restricted by our partnership agreement provision providing that if any person or group owns beneficially more than 4.9% of any class of units then outstanding, any such units owned by that person or group in excess of 4.9% may not be voted on any matter and will not be considered to be outstanding when sending notices of a meeting of unitholders, calculating required votes (except for purposes of nominating a person for election to our board of directors), determining the presence of a quorum or for other similar purposes, unless required by law. The voting rights of any such unitholders in excess of 4.9% will effectively be redistributed pro rata among the other common unitholders holding less than 4.9% of the voting power of all classes of units entitled to vote. Our general partner, its affiliates (including Höegh LNG) and persons who acquired common units with the prior approval of our board of directors will not be subject to this 4.9% limitation except with respect to voting their common units in the election of the elected directors.

 

   

There are no restrictions in our partnership agreement on our ability to issue equity securities, including securities senior to the common units.

 

The effect of these provisions may be to diminish the price at which the common units will trade.

 

The control of our general partner may be transferred to a third party without unitholder consent.

 

Our general partner may transfer its non-economic general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders. In addition, our partnership agreement does not restrict the ability of the members of our general partner from transferring their respective membership interests in our general partner to a third party.

 

Substantial future sales of our common units in the public market could cause the price of our common units to fall.

 

We have granted registration rights to Höegh LNG and certain of its affiliates. These unitholders have the right, subject to some conditions, to require us to file registration statements covering any of our common, subordinated or other equity securities owned by them or to include those securities in registration statements that we may file for ourselves or other unitholders. Upon the closing of this offering and assuming no exercise of the underwriters’ option to purchase additional common units, Höegh LNG will own              common units and              subordinated units and all of the incentive distribution rights. Following their registration and sale under the applicable registration statement, those securities will become freely tradable. By exercising their registration rights and selling a large number of common units or other securities, these unitholders could cause the price of our common units to decline.

 

We are subject to Marshall Islands law, which lacks a bankruptcy statute or general statutory mechanism for insolvency proceedings.

 

We are a Marshall Islands limited partnership, and we have limited operations in the United States and maintain limited assets in the United States. Consequently, in the event of any bankruptcy, insolvency, liquidation, dissolution, reorganization or similar proceeding involving us, bankruptcy laws other than those of the United States could apply. The Republic of the Marshall Islands does not have a bankruptcy statute or general statutory mechanism for insolvency proceedings. If we become a debtor under U.S. bankruptcy law, bankruptcy courts in the United States may seek to assert jurisdiction over all of our assets, wherever located, including property situated in other countries. There can be no assurance, however, that we would become a debtor in the United States, or that a U.S. bankruptcy court would be entitled to, or accept, jurisdiction over such a bankruptcy case, or that courts in other countries that have jurisdiction over us and our operations would recognize a U.S. bankruptcy court’s jurisdiction, if any other bankruptcy court would determine it had jurisdiction. These factors may delay or prevent us from entering bankruptcy in the United States and may affect the ability of our unitholders to receive any recovery following our bankruptcy.

 

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You will experience immediate and substantial dilution of $         per common unit.

 

The assumed initial public offering price of $         per common unit exceeds pro forma net tangible book value of $         per common unit. Based on the assumed initial public offering price, you will incur immediate and substantial dilution of $         per common unit. This dilution results primarily because the assets contributed by our general partner and its affiliates are recorded at their historical cost, and not their fair value, in accordance with U.S. GAAP. Please read “Dilution.”

 

Höegh LNG, as the initial holder of a majority of the incentive distribution rights, may elect to cause us to issue additional common units to it in connection with a resetting of the target distribution levels related to the incentive distribution rights without the approval of the conflicts committee of our board of directors or holders of our common units and subordinated units. This may result in lower distributions to holders of our common units in certain situations.

 

Höegh LNG, as the initial holder of a majority of the incentive distribution rights, has the right, at a time when there are no subordinated units outstanding and Höegh LNG has received incentive distributions at the highest level to which it is entitled (50.0%) for each of the prior four consecutive fiscal quarters (and the amount of each such total distribution did not exceed adjusted operating surplus for each such quarter), to reset the initial cash target distribution levels at higher levels based on the distribution at the time of the exercise of the reset election. Following a reset election, the minimum quarterly distribution amount will be reset to the reset minimum quarterly distribution amount, and the target distribution levels will be reset to correspondingly higher levels based on the same percentage increases above the reset minimum quarterly distribution amount.

 

In connection with resetting these target distribution levels, Höegh LNG will be entitled to receive a number of common units equal to that number of common units whose aggregate quarterly cash distributions equaled the average of the distributions to Höegh LNG on the incentive distribution rights in the prior fiscal quarter. We anticipate that Höegh LNG would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distribution per common unit without such conversion; however, it is possible that Höegh LNG could exercise this reset election at a time when it is experiencing, or may be expected to experience, declines in the cash distributions it receives related to its incentive distribution rights and may therefore desire to be issued our common units, rather than retain the right to receive incentive distributions based on the initial target distribution levels. As a result, a reset election may cause our common unitholders to experience dilution in the amount of cash distributions that they would have otherwise received had we not issued additional common units to Höegh LNG in connection with resetting the target distribution levels related to its incentive distribution rights. Please read “How We Make Cash Distributions—Incentive Distribution Rights” and “How We Make Cash Distributions—Höegh LNG’s Right to Reset Incentive Distribution Levels.”

 

We may issue additional equity securities, including securities senior to the common units, without your approval, which would dilute your ownership interests.

 

We may, without the approval of our unitholders, issue an unlimited number of additional units or other equity securities. In addition, we may issue an unlimited number of units that are senior to the common units in right of distribution, liquidation and voting. The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:

 

   

our unitholders’ proportionate ownership interest in us will decrease;

 

   

the amount of cash available for distribution on each unit may decrease;

 

   

because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment of the minimum quarterly distribution will be borne by our common unitholders will increase;

 

   

because the amount payable to holders of incentive distribution rights is based on a percentage of total available cash, the distributions to holders of incentive distribution rights will increase even if the per unit distribution on the common units remains the same;

 

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the relative voting strength of each previously outstanding unit may be diminished; and

 

   

the market price of the common units may decline.

 

Upon the expiration of the subordination period, the subordinated units will convert into common units and will then participate pro rata with other common units in distributions of available cash.

 

During the subordination period, which we define elsewhere in this prospectus, the common units will have the right to receive distributions of available cash from operating surplus in an amount equal to the minimum quarterly distribution of $         per unit, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. Distribution arrearages do not accrue on the subordinated units. The purpose of the subordinated units is to increase the likelihood that during the subordination period there will be available cash from operating surplus to be distributed on the common units. Upon the expiration of the subordination period, the subordinated units will convert into common units and will then participate pro rata with other common units in distributions of available cash. See “How We Make Cash Distributions—Subordination Period,” “—Distributions of Available Cash From Operating Surplus During the Subordination Period” and “—Distributions of Available Cash From Operating Surplus After the Subordination Period.”

 

In establishing cash reserves, our board of directors may reduce the amount of cash available for distribution to you.

 

Our partnership agreement requires our general partner to deduct from operating surplus cash reserves that it determines are necessary to fund our future operating expenditures. These reserves also will affect the amount of cash available for distribution to our unitholders. Our board of directors may establish reserves for distributions on the subordinated units, but only if those reserves will not prevent us from distributing the full minimum quarterly distribution, plus any arrearages, on the common units for the following four quarters. As described above in “—Risks Inherent in Our Business—We must make substantial capital expenditures to maintain and replace the operating capacity of our fleet, which will reduce our cash available for distribution. In addition, each quarter we will be required, pursuant to our partnership agreement, to deduct estimated maintenance and replacement capital expenditures from operating surplus, which may result in less cash available to unitholders than if actual maintenance and replacement capital expenditures were deducted,” our partnership agreement requires our board of directors each quarter to deduct from operating surplus estimated maintenance and replacement capital expenditures, as opposed to actual maintenance and replacement capital expenditures, which could reduce the amount of available cash for distribution. The amount of estimated maintenance and replacement capital expenditures deducted from operating surplus is subject to review and change by our board of directors at least once a year, provided that any change must be approved by the conflicts committee of our board of directors.

 

Our general partner has a limited call right that may require you to sell your common units at an undesirable time or price.

 

If at any time our general partner and its affiliates own more than 80% of the common units, our general partner will have the right, which it may assign to any of its affiliates or to us, but not the obligation, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than the then-current market price of our common units. Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon the exercise of this limited call right. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. For additional information about the limited call right, please read “Our Partnership Agreement—Limited Call Right.”

 

At the completion of this offering and assuming no exercise of the underwriters’ option to purchase additional common units, Höegh LNG, which owns and controls of our general partner, will own approximately

 

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    % of our common units. At the end of the subordination period, assuming no additional issuances of common units, no exercise of the underwriters’ option to purchase additional common units and the conversion of our subordinated units into common units, Höegh LNG will own     % of our common units.

 

You may not have limited liability if a court finds that unitholder action constitutes control of our business.

 

As a limited partner in a limited partnership organized under the laws of the Marshall Islands, you could be held liable for our obligations to the same extent as a general partner if you participate in the “control” of our business. Our general partner generally has unlimited liability for the obligations of the Partnership, such as its debts and environmental liabilities, except for those contractual obligations of the Partnership that are expressly made without recourse to our general partner. In addition, the limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some jurisdictions in which we do business. Please read “Our Partnership Agreement—Limited Liability” for a discussion of the implications of the limitations on liability of a unitholder.

 

We can borrow money to make cash distributions, which would reduce the amount of credit available to operate our business.

 

Our partnership agreement allows us to make working capital borrowings to make cash distributions. Accordingly, if we have available borrowing capacity, we can make cash distributions on all our units even though cash generated by our operations may not be sufficient to pay such distributions. Any working capital borrowings by us to make cash distributions will reduce the amount of working capital borrowings we can make for operating our business. For more information, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources.”

 

Increases in interest rates may cause the market price of our common units to decline.

 

An increase in interest rates may cause a corresponding decline in demand for equity investments in general and in particular for yield based equity investments such as our common units. Any such increase in interest rates or reduction in demand for our common units resulting from other relatively more attractive investment opportunities may cause the trading price of our common units to decline.

 

There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop. The price of our common units may fluctuate significantly, and you could lose all or part of your investment.

 

Prior to this offering, there has been no public market for the common units. After this offering, there will be only              publicly traded common units, assuming no exercise of the underwriters’ option to purchase additional common units. We do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. You may not be able to resell your common units at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.

 

Unitholders may have liability to repay distributions.

 

Under some circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under the Marshall Islands Limited Partnership Act (the “Marshall Islands Act”), we may not make a distribution to you if the distribution would cause our liabilities, other than liabilities to partners on account of their partnership interest and liabilities for which the recourse of creditors is limited to specified property of ours, to exceed the fair value of our assets, except that the fair value of property that is subject to a liability for which the recourse of creditors is limited will be included in our assets only to the extent that the fair value of that

 

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property exceeds that liability. Marshall Islands law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Marshall Islands law will be liable to the limited partnership for the distribution amount. Assignees who become substituted limited partners are liable for the obligations of the assignor to make contributions to the limited partnership that are known to the assignee at the time it became a limited partner and for unknown obligations if the liabilities could be determined from our partnership agreement.

 

We have no history operating as a separate publicly traded entity and will incur increased costs as a result of being a publicly traded limited partnership.

 

We have no history operating as a separate publicly traded entity. As a publicly traded limited partnership, we will incur significant legal, accounting and other expenses that we did not incur prior to this offering. In addition, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), as well as rules implemented by the SEC, require publicly traded entities to adopt various corporate governance practices that will further increase our costs. Before we are able to make cash distributions to our unitholders, we must first pay or reserve cash for our expenses, including the costs of being a publicly traded partnership. As a result, the amount of cash we have available for distribution to our unitholders will be affected by the costs associated with being a public company.

 

Prior to this offering, we have not filed reports with the SEC. Following this offering, we will become subject to the public reporting requirements of the Exchange Act. We expect these rules and regulations to increase certain of our legal and financial compliance costs and to make activities more time-consuming and costly. For example, as a result of becoming a publicly traded partnership, our board of directors will be required to have at least three independent directors, create an audit committee and adopt policies regarding internal controls and disclosure controls and procedures, including the preparation of reports on internal controls over financial reporting. In addition, we will incur additional costs associated with our publicly traded partnership reporting requirements.

 

We also expect to incur significant expense in order to obtain director and officer liability insurance. Because of the limitations in coverage for directors, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.

 

We anticipate that our incremental general and administrative expenses as a publicly traded limited partnership will be approximately $3.0 million annually and will include costs associated with annual reports to unitholders, tax return preparation, investor relations, registrar and transfer agent’s fees, incremental director and officer liability insurance costs and officer and director compensation. In addition, these expenses include approximately $         million of annual fees and expenses that we will incur pursuant to the Administrative Services Agreements, including the 5.0% service charge that will be incurred in connection with the Administrative Services Agreements. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Administrative Services Agreements.”

 

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common units less attractive to investors.

 

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” as described under “Summary—Implications of Being an Emerging Growth Company.” We cannot predict if investors will find our common units less attractive because we may rely on these exemptions. If some investors find our common units less attractive as a result, there may be a less active trading market for our common units and our unit price may be more volatile.

 

In addition, under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-

 

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Oxley Act for so long as we are an emerging growth company. For as long as we take advantage of the reduced reporting obligations, the information that we provide unitholders may be different than information provided by other public companies.

 

We have been organized as a limited partnership under the laws of the Republic of the Marshall Islands, which does not have a well-developed body of partnership law.

 

The Partnership’s affairs are governed by our partnership agreement and by the Marshall Islands Act. The provisions of the Marshall Islands Act resemble provisions of the limited partnership laws of a number of states in the United States, most notably Delaware. The Marshall Islands Act also provides that it is to be applied and construed to make it uniform with the Delaware Revised Uniform Partnership Act and, so long as it does not conflict with the Marshall Islands Act or decisions of the Marshall Islands courts, the non-statutory law (“case law”) of the State of Delaware is adopted as the law of the Marshall Islands. There have been, however, few, if any, court cases in the Marshall Islands interpreting the Marshall Islands Act, in contrast to Delaware, which has a fairly well-developed body of case law interpreting its limited partnership statute. Accordingly, we cannot predict whether Marshall Islands courts would reach the same conclusions as the courts in Delaware. For example, the rights of our unitholders and the fiduciary responsibilities of our general partner under Marshall Islands law are not as clearly established as under judicial precedent in existence in Delaware. As a result, unitholders may have more difficulty in protecting their interests in the face of actions by our general partner and its officers and directors than would unitholders of a similarly organized limited partnership in the United States.

 

Because we are organized under the laws of the Marshall Islands, it may be difficult to serve us with legal process or enforce judgments against us, our directors or our management.

 

We are organized under the laws of the Marshall Islands, and substantially all of our assets are located outside of the United States. In addition, our general partner is a Marshall Islands limited liability company, and a majority of our directors and officers generally are or will be non-residents of the United States, and all or a substantial portion of the assets of these non-residents are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States if you believe that your rights have been infringed under securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Marshall Islands and of other jurisdictions may prevent or restrict you from enforcing a judgment against our assets or the assets of our general partner or our directors or officers. For more information regarding the relevant laws of the Marshall Islands, please read “Service of Process and Enforcement of Civil Liabilities.”

 

The initial public offering price for the common units and the total consideration to be paid to Höegh LNG for the interests in the entities that own the vessels in our initial fleet will be determined by negotiations among us and the representatives of the underwriters.

 

There has been no public trading market for our common units prior to this offering. As a result, the initial public offering price for our common units will be determined through negotiations among us and the representatives of the underwriters. In addition, the total consideration to Höegh LNG in the form of common units, subordinated units and cash for the interests in the entities that own the vessels in our initial fleet will be dependent on the initial public offering price. We will not be obtaining an independent third-party valuation regarding the total value of the interests in the entities that own the vessels in our initial fleet. In negotiating the initial public offering price for our common units, the underwriters and Höegh LNG may have interests which differ from the interests of our unitholders. Accordingly, the initial public offering price may be different than the price that would have been determined based on an independent third-party valuation regarding the value of our initial fleet, or the market price of the common units that will prevail in the trading market. Please read “Use of Proceeds,” “Conflicts of Interest and Fiduciary Duties” and “Underwriting.”

 

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Tax Risks

 

In addition to the following risk factors, you should read “Business—Taxation of the Partnership,” “Material U.S. Federal Income Tax Considerations” and “Non-United States Tax Consequences” for a more complete discussion of the expected material U.S. federal and non-U.S. income tax considerations relating to us and the ownership and disposition of our common units.

 

We will be subject to taxes, which will reduce our cash available for distribution to you.

 

Some of our subsidiaries will be subject to tax in the jurisdictions in which they are organized or operate, reducing the amount of cash available for distribution. In computing our tax obligation in these jurisdictions, we are required to take various tax accounting and reporting positions on matters that are not entirely free from doubt and for which we have not received rulings from the governing authorities. We cannot assure you that upon review of these positions the applicable authorities will agree with our positions. A successful challenge by a tax authority could result in additional tax imposed on our subsidiaries, further reducing the cash available for distribution. In addition, changes in our operations could result in additional tax being imposed on us, OPCO or our or its subsidiaries in jurisdictions in which operations are conducted. Please read “Business—Taxation of the Partnership.”

 

U.S. tax authorities could treat us as a “passive foreign investment company,” which would have adverse U.S. federal income tax consequences to U.S. unitholders.

 

A non-U.S. entity treated as a corporation for U.S. federal income tax purposes will be treated as a “passive foreign investment company” (“PFIC”) for U.S. federal income tax purposes for any taxable year in which at least 75.0% of its gross income consists of “passive income” or at least 50.0% of the average value of its assets (based on the average of the values at the end of each quarter) produce, or are held for the production of, “passive income.” For purposes of these tests, “passive income” includes dividends, interest, gains from the sale or exchange of investment property, and rents and royalties other than rents and royalties that are received from unrelated parties in connection with the active conduct of a trade or business, and income derived from the performance of services does not constitute “passive income.” U.S. shareholders of a PFIC are subject to a disadvantageous U.S. federal income tax regime with respect to the income derived by the PFIC, certain distributions they receive from the PFIC, and the gain, if any, they derive from the sale or other disposition of their interests in the PFIC.

 

Based on our current and projected method of operation, and on an opinion of our U.S. counsel, Vinson & Elkins L.L.P., we believe that we will not be a PFIC for our initial taxable year, and we expect that we will not be treated as a PFIC for any future taxable year. We have received an opinion of our U.S. counsel in support of this position that concludes that the income our subsidiaries earn from our present time-chartering activities should not constitute passive income for purposes of determining whether we are a PFIC. In addition, we have represented to our U.S. counsel that we expect that more than 25.0% of our gross income for our current taxable year and each future year will arise from such time-chartering activities or other income our U.S. counsel has opined does not constitute passive income, and more than 50.0% of the average value of our assets for each such year will be held for the production of such nonpassive income. Assuming the composition of our income and assets is consistent with these expectations, and assuming the accuracy of other representations we have made to our U.S. counsel for purposes of their opinion, our U.S. counsel is of the opinion that we should not be a PFIC for the current or any future year. This opinion is based, and its accuracy is conditioned, on representations, valuations and projections provided by us regarding our assets, income and charters. While we believe these representations, valuations and projections to be accurate, the shipping market is volatile and no assurance can be given that they will continue to be accurate at any time in the future.

 

Moreover, there are legal uncertainties involved in determining whether the income derived from time-chartering activities constitutes rental income or income derived from the performance of services. In Tidewater

 

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Inc. v. United States, 565 F.3d 299 (5th Cir. 2009), the United States Court of Appeals for the Fifth Circuit (the “Fifth Circuit”) held that income derived from certain time-chartering activities should be treated as rental income rather than services income for purposes of a provision of the Code relating to foreign sales corporations. In that case, the Fifth Circuit did not address the definition of passive income or the PFIC rules; however, the reasoning of the case could have implications as to how the income from a time charter would be classified under such rules. If the reasoning of this case were extended to the PFIC context, the gross income we derive or are deemed to derive from our time-chartering activities may be treated as rental income, and we would likely be treated as a PFIC. In published guidance, the Internal Revenue Service, or IRS, stated that it disagreed with the holding in Tidewater, and specified that time charters similar to those at issue in the case should be treated as service contracts. We have not sought, and we do not expect to seek, an IRS ruling on the treatment of income generated from our time-chartering activities, and the opinion of our counsel is not binding on the IRS or any court. As a result, the IRS or a court could disagree with our position. No assurance can be given that this result will not occur.

 

In addition, although we intend to conduct our affairs in a manner to avoid being classified as a PFIC with respect to any taxable year, we cannot assure you that the nature of our operations will not change in the future and that we will not become a PFIC in the future. If the IRS were to find that we are or have been a PFIC for any taxable year (and regardless of whether we remain a PFIC for subsequent taxable years), our U.S. unitholders would face adverse U.S. federal income tax consequences. Please read “Material U.S. Federal Income Tax Considerations—U.S. Federal Income Taxation of U.S. Holders—PFIC Status and Significant Tax Consequences” for a more detailed discussion of the U.S. federal income tax consequences to U.S. unitholders if we are treated as a PFIC.

 

We may have to pay tax on U.S. source income, which would reduce our cash flow.

 

Under the Code, U.S. source gross transportation income generally is subject to a 4.0% U.S. federal income tax without allowance for deduction of expenses unless an exemption from tax applies under Section 883 of the Code and the existing final and temporary regulations promulgated thereunder (“Treasury Regulations”). U.S. source gross transportation consists of 50.0% of the gross shipping income that a vessel-owning or chartering corporation, such as ourselves, derives (either directly or through one or more subsidiaries that are classified as partnerships or disregarded as entities separate from such corporation for U.S. federal income tax purposes) and that is attributable to transportation that either begins or ends, but that does not both begin and end, in the United States.

 

We believe that we will qualify for an exemption from U.S. tax on any U.S. source gross transportation income under Section 883 of the Code for the foreseeable future, and we expect to take this position for U.S. federal income tax purposes. Please read “Business—Taxation of the Partnership.” However, there are factual circumstances, including some that may be beyond our control, which could cause us to lose the benefit of this tax exemption after this offering. In addition, our position that we qualify for this exemption is based upon legal authorities that do not expressly contemplate an organizational structure such as ours; specifically, although we have elected to be treated as a corporation for U.S. federal income tax purposes, we are organized as a limited partnership under Marshall Islands law. Therefore, we can give no assurance that the IRS will not take a different position regarding our qualification for this tax exemption.

 

If we are not entitled to this exemption under Section 883 of the Code for any taxable year, we generally would be subject to a 4.0% U.S. federal gross income tax on our U.S. source gross transportation income for such year. Our failure to qualify for the exemption under Section 883 of the Code could have a negative effect on our business and would result in decreased earnings available for distribution to our unitholders.

 

The vessels in our fleet do not currently engage, and we do not expect that they will in the future engage, in transportation that begins and ends in the United States or in the provision of regasification or storage services in the United States. If, notwithstanding this expectation, our subsidiaries earn income in the future from transportation that begins and ends in the United States, or from regasification or storage activities in the United States, that income would not be exempt from U.S. federal income tax under Section 883 of the Code and

 

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would be subject to a 35% net income tax in the United States (and the after-tax earnings attributable to such income may be subject to an additional 30% branch profits tax). Please read “Business—Taxation of the Partnership—The Section 883 Exemption” for a more detailed discussion of the rules relating to qualification for the exemption under Section 883 of the Code and the consequences for failing to qualify for such an exemption.

 

You may be subject to income tax in one or more non-U.S. jurisdictions, including the United Kingdom and Norway, as a result of owning our common units if, under the laws of any such jurisdiction, we are considered to be carrying on business there. Such laws may require you to file a tax return with, and pay taxes to, those jurisdictions.

 

We intend to conduct our affairs and cause or influence each of our subsidiaries to operate its business in a manner that minimizes income taxes imposed upon us and our subsidiaries and that may be imposed upon you as a result of owning our common units. However, because we are organized as a limited partnership, there is a risk in some jurisdictions, including the United Kingdom and Norway, that our activities or the activities of our subsidiaries may be attributed to our unitholders for tax purposes if, under the laws of such jurisdiction, we are considered to be carrying on business there. If you are subject to tax in any such jurisdiction, you may be required to file a tax return with, and to pay tax in, that jurisdiction based on your allocable share of our income. We may be required to reduce distributions to you on account of any tax withholding obligations imposed upon us by that jurisdiction in respect of such allocation to you. The United States may not allow a tax credit for any foreign income taxes that you directly or indirectly incur by virtue of an investment in us.

 

We believe we can conduct our affairs in a manner that does not result in our unitholders being considered to be carrying on business in the United Kingdom or Norway solely as a consequence of the acquisition, ownership, disposition or redemption of our common units. However, the question of whether either we or any of our subsidiaries will be treated as carrying on business in any jurisdiction, including the United Kingdom and Norway, will be largely a question of fact to be determined through an analysis of contractual arrangements, including the sub-technical support agreement that Höegh Norway has entered into with Höegh LNG Management, the ship management agreements that our joint ventures have entered into with Höegh LNG Management, the administrative service agreement we will enter into with our operating company and Höegh UK and the administrative service agreement Höegh UK will enter into with Höegh Norway in connection with the closing of this offering, as well as through an analysis of the manner in which we conduct business or operations, all of which may change over time. Furthermore, the laws of the United Kingdom, Norway or any other jurisdiction may also change, which could cause that jurisdiction’s taxing authorities to determine that we are carrying on business in such jurisdiction and that we or our unitholders are subject to its taxation laws. In addition to the potential for taxation of our unitholders, any additional taxes imposed on us or any of our subsidiaries will reduce our cash available for distribution.

 

The ratio of dividend income to distributions on our common units is subject to business, economic and other uncertainties as well as tax reporting positions with which the IRS may disagree, which could result in a higher ratio of dividend income to distributions and adversely affect the value of our common units.

 

We estimate that approximately     % of the total cash distributions made to a purchaser of common units in this offering who owns those units from the date of this offering through December 31, 2016 will constitute dividend income. The remaining portion of the distributions will be treated first as a nontaxable return of capital to the extent of the purchaser’s tax basis in its common units and thereafter as capital gain. These estimates are based on certain assumptions that are subject to business, economic, regulatory, competitive and political uncertainties beyond our control. In addition, these estimates are based on current U.S. federal income tax law and tax reporting positions that we will adopt and with which the IRS could disagree. As a result of these uncertainties, these estimates may be incorrect and the actual percentage of total cash distributions that will constitute dividend income could be higher, and any difference could adversely affect the value of the common units. Please read “Material U.S. Federal Income Tax Considerations—U.S. Federal Income Taxation of U.S. Holders—Ratio of Dividend Income to Distributions.”

 

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FORWARD-LOOKING STATEMENTS

 

Statements included in this prospectus concerning plans and objectives of management for future operations or economic performance, or assumptions related thereto, including our financial forecast, contain forward-looking statements. In addition, we and our representatives may from time to time make other oral or written statements that are also forward-looking statements. Such statements include, in particular, statements about our plans, strategies, business prospects, changes and trends in our business, and the markets in which we operate as described in this prospectus. In some cases, you can identify the forward-looking statements by the use of words such as “may,” “could,” “should,” “would,” “expect,” “plan,” “anticipate,” “intend,” “forecast,” “believe,” “estimate,” “predict,” “propose,” “potential,” “continue” or the negative of these terms or other comparable terminology.

 

Forward-looking statements appear in a number of places and include statements with respect to, among other things:

 

   

statements about FSRU and LNG carrier market trends, including hire rates and factors affecting supply and demand;

 

   

our anticipated growth strategies;

 

   

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

 

   

the effect of the worldwide economic environment;

 

   

turmoil in the global financial markets;

 

   

fluctuations in currencies and interest rates;

 

   

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

 

   

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

 

   

forecasts of our ability to make cash distributions on the units and the amount of any borrowings that may be necessary to make such distributions;

 

   

our future financial condition or results of operations and our future revenues and expenses;

 

   

expected compliance with financing agreements and the expected effect of restrictions and covenants in such agreements;

 

   

the future financial condition of our existing or future customers;

 

   

the repayment of debt;

 

   

our ability to make additional borrowings and to access public equity and debt capital markets;

 

   

planned capital expenditures and availability of capital resources to fund capital expenditures;

 

   

the exercise of purchase options by our customers;

 

   

our ability to maintain long-term relationships with our customers;

 

   

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

 

   

our ability to purchase vessels from Höegh LNG in the future, including the Independence;

 

   

our continued ability to enter into long-term, fixed-rate charters;

 

   

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

 

   

expected pursuit of strategic opportunities, including the acquisition of vessels;

 

   

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

 

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acceptance of a vessel by her charterer;

 

   

termination dates and extensions of charters;

 

   

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

 

   

expected demand in the offshore and crude oil shipping sectors in general and the demand for vessels in particular;

 

   

availability of skilled labor, vessel crews and management;

 

   

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

 

   

the anticipated taxation of the Partnership and distributions to our unitholders;

 

   

estimated future maintenance and replacement capital expenditures;

 

   

our ability to retain key employees;

 

   

customers’ increasing emphasis on environmental and safety concerns;

 

   

potential liability from any pending or future litigation;

 

   

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

 

   

future sales of our common units in the public market; and

 

   

our business strategy and other plans and objectives for future operations.

 

These and other forward-looking statements are made based upon management’s current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us and therefore involve a number of risks and uncertainties, including those risks discussed in “Risk Factors.” The risks, uncertainties and assumptions involve known and unknown risks and are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements.

 

We undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict all of these factors. Further, we cannot assess the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to be materially different from those contained in any forward-looking statement.

 

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USE OF PROCEEDS

 

We expect to receive net proceeds of approximately $         million from the sale of              common units offered by this prospectus, after deducting the underwriting discounts, structuring fees and estimated offering expenses payable by us. We expect to use these net proceeds as follows: (i) up to $140 million to make a loan to Höegh LNG in exchange for a note bearing interest at a rate of 5.88% per annum, which is repayable on demand or which we can elect to utilize as part of the purchase consideration in the event we purchase all or a portion of Höegh LNG’s interests in the Independence, (ii) $20 million for general partnership purposes and (iii) the remainder to make a cash distribution to Höegh LNG as partial consideration for the interests in the entities that own the vessels in our initial fleet.

 

The purchase price of our initial fleet will be dependent on the initial public offering price of our common units and will be equal to the value of the $         distribution to Höegh LNG from the net proceeds of this offering, plus              common units and              subordinated units to be issued to Höegh LNG, plus all of our incentive distribution rights.

 

Assuming an initial public offering price of $         per common unit and assuming that the fair market value of each subordinated unit is $         and the incentive distribution rights is zero, the total dollar value of the consideration to be paid to Höegh LNG for its 50% interest in the joint ventures and the 100% interest in Höegh Lampung, the entities that own interests in the three vessels in our initial fleet, will be approximately $         million. If the initial public offering price of our common units increases or decreases by $1.00, the consideration will change by $         million. Please read “How We Make Cash Distributions—Subordination Period” and “How We Make Cash Distributions—Incentive Distribution Rights.”

 

The initial public offering price of our common units, as well as the total consideration to be paid to Höegh LNG for the interests in the entities that own the vessels in our initial fleet, will be determined through negotiations among us and the representatives of the underwriters. Please read “Underwriting.”

 

We have granted the underwriters a 30-day option to purchase up to              additional common units. If the underwriters exercise their option to purchase additional common units, we will use the net proceeds (approximately $         million, if exercised in full, after deducting the underwriting discounts, structuring fees and estimated offering expenses payable by us) to make an additional cash distribution to Höegh LNG. If the underwriters do not exercise their option to purchase any additional common units, we will issue              common units to Höegh LNG at the expiration of the option period. If and to the extent the underwriters exercise their option to purchase additional common units, the number of units purchased by the underwriters pursuant to such exercise will be issued to the public and the remainder, if any, will be issued to Höegh LNG. Accordingly, the exercise of the underwriters’ option will not affect the total number of units outstanding or the amount of cash needed to pay the minimum quarterly distribution on all units.

 

A $1.00 increase or decrease in the assumed initial public offering price of $         per common unit would cause the net proceeds from this offering, after deducting the underwriting discounts, structuring fees and estimated offering expenses payable by us, to increase or decrease, respectively, by approximately $         million. In addition, we may also increase or decrease the number of common units we are offering. Each increase of 1.0 million common units offered by us, together with a concomitant $1.00 increase in the assumed initial public offering price to $         per common unit, would increase net proceeds to us from this offering by approximately $         million. Similarly, each decrease of 1.0 million common units offered by us, together with a concomitant $1.00 decrease in the assumed initial public offering price to $         per common unit, would decrease the net proceeds to us from this offering by approximately $         million.

 

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CAPITALIZATION

 

The following table shows:

 

   

our historical cash and capitalization as of March 31, 2014; and

 

   

our pro forma cash and capitalization as of March 31, 2014, which reflects the offering and the other transactions described in the unaudited pro forma combined balance sheet included elsewhere in this prospectus, including the application of the net proceeds from this offering as described in “Use of Proceeds” as follows: (i) up to $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 to make a cash distribution to Höegh LNG.

 

This table is derived from and should be read together with the historical combined carve-out financial statements of our predecessor and the unaudited pro forma combined balance sheet and the accompanying notes contained elsewhere in this prospectus. We account for our equity interests in our joint ventures that own two of the vessels in our initial fleet as equity method investments in our combined financial statements. You should also read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

 

     As of March 31, 2014  
       Historical          Pro Forma    
     (in thousands of U.S. Dollars)  

Cash and cash equivalents

   $ 4,957       $                
  

 

 

    

 

 

 

Debt:

     

Current portion of long-term debt(1)

   $ 41,631       $     

Current loans and promissory note due to owners and affiliates(2)

     45,132      

Borrowings under sponsor credit facility(3)

     —        
  

 

 

    

 

 

 

Non-current portion of long-term debt(1)

     54,369      
  

 

 

    

 

 

 

Total debt(4)

     141,132      
  

 

 

    

 

 

 

Equity:

     

Total equity

   $ 39,333       $     

Held by public:

     

Common units(5)

     —        

Held by general partner and its affiliates:

     

Common units(5)

     —        

Subordinated units(5)

     —        
  

 

 

    

 

 

 

Equity attributable to Höegh LNG Partners

     —        
  

 

 

    

 

 

 

Note receivable from Höegh LNG(6)

     —        
  

 

 

    

 

 

 

Total capitalization

   $ 180,465       $            
  

 

 

    

 

 

 

 

(1)   Secured by our vessels. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources” and note 9 to our predecessor’s unaudited condensed interim combined carve-out financial statements.
(2)   Represents promissory notes issued by Höegh Lampung and PT Hoegh to Höegh LNG Ltd. in connection with the transfer of ownership from Höegh LNG Ltd. to PT Hoegh of the construction in progress for the PGN FSRU Lampung and the unbilled construction contract receivable for the Mooring. Please read note 2 to our predecessor’s historical audited combined carve-out financial statements and note 10 to our predecessor’s unaudited condensed interim combined carve-out financial statements.
(3)   At or prior to the closing of this offering, we will enter into the sponsor credit facility with Höegh LNG. We do not anticipate drawing under this facility at the closing of this offering.

 

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(4)   As of                     , 2014, we had approximately $          million of total debt outstanding, including $             million under the $299 million Lampung facility that was drawn on                 , 2014. Please read notes 9, 10 and 17 to our predecessor’s unaudited combined carve-out financial statements. Because we account for our joint ventures that own the GDF Suez Neptune and the GDF Suez Cape Ann under the equity method, the table does not reflect our 50% portion of the indebtedness of the two joint ventures. As of March 31, 2014, the two joint ventures had $536.9 million in long-term bank debt and $45.8 million in subordinated debt due to the joint venture owners.
(5)   Equity attributable to common units held by public represents the net proceeds of the offering. Equity attributable to the general partner and its affiliates represent pro forma net assets contributed by Höegh LNG before the allocation of net proceeds, allocated pro rata to the common and subordinated units. No allocation has been attributed to incentive distribution rights owned by Höegh LNG, based on an assumption that these rights have nominal value at the time of this offering.
(6)   See “Certain Relationships and Related Party Transactions—Intercompany Note.”

 

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DILUTION

 

Dilution is the amount by which the offering price will exceed the net tangible book value per common unit after this offering. Based on the initial public offering price of $         per common unit, on a pro forma basis as of March 31, 2014, after giving effect to this offering of common units, the application of the net proceeds in the manner described under “Use of Proceeds” and the formation transactions related to this offering, our pro forma net tangible book value was $         million, or $         per common unit. Purchasers of common units in this offering will experience substantial and immediate dilution in net tangible book value per common unit for financial accounting purposes, as illustrated in the following table.

 

Assumed initial public offering price per common unit

   $                   

Pro forma net tangible book value(1) per common unit before this offering(2)

   $        

Increase in net tangible book value(1) per common unit attributable to purchasers in this offering

     
  

 

 

    

Less: Pro forma net tangible book value per common unit after this offering(3)

     
     

 

 

 

Immediate dilution in net tangible book value per common unit to purchasers in this offering(4)

      $                
     

 

 

 

 

(1)   Pro forma net tangible book value is defined as pro forma total assets minus goodwill and pro forma total liabilities.
(2)   Determined by dividing the total number of units (             common units and             subordinated units to be issued to our general partner and its affiliates for their contribution of assets and liabilities to us) into the net tangible book value of the contributed assets and liabilities.
(3)   Determined by dividing the total number of units (             common units and             subordinated units to be outstanding after this offering) into our pro forma net tangible book value, after giving effect to the application of the net proceeds of this offering.
(4)   Because the total number of units outstanding following this offering will not be impacted by any exercise of the underwriters’ option to purchase additional common units and any net proceeds from such exercise will not be retained by us, there will be no change to the dilution in net tangible book value per common unit to purchasers in the offering due to any exercise of the option.

 

The following table sets forth the number of units that we will issue and the total consideration contributed to us by our general partner and its affiliates and by the purchasers of common units in this offering upon consummation of the transactions contemplated by this prospectus.

 

     Units Acquired     Total Consideration  
     Number    Percent     Amount      Percent  

General partner and its affiliates(1)(2)

                   $                              

New investors

          
  

 

  

 

 

   

 

 

    

 

 

 

Total

                   $                   
  

 

  

 

 

   

 

 

    

 

 

 

 

(1)   Upon consummation of the transactions contemplated by this prospectus, our general partner and its affiliates will own an aggregate of              common units and              subordinated units.
(2)   The assets contributed by our general partner and its affiliates were recorded at historical book value, rather than fair value, in accordance with U.S. GAAP. Book value of the consideration provided by our general partner and its affiliates, as of March 31, 2014, is as follows:

 

     (in thousands of
U.S. Dollars)
 

Book value of net assets contributed

   $                

Less: Distribution to Höegh LNG from net proceeds of this offering

  
  

 

 

 

Total consideration

   $     
  

 

 

 

 

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OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

 

You should read the following discussion of our cash distribution policy and restrictions on distributions in conjunction with specific assumptions included in this section. In addition, you should read “Forward-Looking Statements” and “Risk Factors” for information regarding statements that do not relate strictly to historical or current facts and certain risks inherent in our business.

 

General

 

Rationale for Our Cash Distribution Policy

 

Our cash distribution policy reflects a judgment that our unitholders will be better served by our distributing our available cash (after deducting expenses, including estimated maintenance and replacement capital expenditures and reserves) rather than retaining it. Because we believe we will generally finance any expansion capital expenditures from external financing sources, we believe that our unitholders are best served by our distributing all of our available cash. Our cash distribution policy is consistent with the terms of our partnership agreement, which requires that we distribute all of our available cash quarterly (after deducting expenses, including estimated maintenance and replacement capital expenditures and reserves).

 

Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy

 

There is no guarantee that unitholders will receive quarterly distributions from us. Our distribution policy is subject to certain restrictions and may be changed at any time, including:

 

   

Our unitholders have no contractual or other legal right to receive distributions other than the obligation under our partnership agreement to distribute available cash on a quarterly basis, which is subject to the broad discretion of our board of directors to establish reserves and other limitations.

 

   

We will be subject to restrictions on distributions under our financing agreements. Our financing agreements contain material financial tests and covenants that must be satisfied in order to pay distributions. If we are unable to satisfy the restrictions included in any of our financing agreements or are otherwise in default under any of those agreements, as a result of our debt levels or otherwise, we will not be able to make cash distributions to you, notwithstanding our stated cash distribution policy. These financial tests and covenants are described in this prospectus in “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources.”

 

   

A substantial majority of our business is currently conducted through our joint ventures. Under the joint venture agreement that governs our joint ventures that own the GDF Suez Neptune and the GDF Suez Cape Ann, our joint ventures are prohibited from making distributions under certain circumstances, including when they have outstanding shareholder loans. In addition, we are unable to cause our joint ventures to make distributions without the agreement of our joint venture partners. If our joint ventures are unable to make distributions to us, it could have a material adverse effect on our ability to pay cash distributions to you in accordance with our stated cash distribution policy. The restrictions on distributions by our joint ventures are described in this prospectus in “Our Joint Ventures and Joint Venture Agreements.”

 

   

We are required to make substantial capital expenditures to maintain and replace our fleet. These expenditures may fluctuate significantly over time, particularly as our vessels near the end of their useful lives. In order to minimize these fluctuations, our partnership agreement requires us to deduct estimated, as opposed to actual, maintenance and replacement capital expenditures from the amount of cash that we would otherwise have available for distribution to our unitholders. In years when estimated maintenance and replacement capital expenditures are higher than actual maintenance and replacement capital expenditures, the amount of cash available for distribution to unitholders will be lower than if actual maintenance and replacement capital expenditures were deducted.

 

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Although our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including provisions contained therein requiring us to make cash distributions, may be amended. During the subordination period, with certain exceptions, our partnership agreement may not be amended without the approval of non-affiliated common unitholders. After the subordination period has ended, our partnership agreement can be amended with the approval of a majority of the outstanding common units. Höegh LNG will own approximately     % of our common units and all of our subordinated units outstanding immediately after the closing of this offering. Please read “Our Partnership Agreement—Amendment of Our Partnership Agreement.”

 

   

Even if our cash distribution policy is not modified or revoked, the amount of distributions we pay under our cash distribution policy and the decision to make any distribution is determined by our board of directors, taking into consideration the terms of our partnership agreement.

 

   

Under Section 51 of the Marshall Islands Act, we may not make a distribution to you if the distribution would cause our liabilities, other than liabilities to partners on account of their partnership interest and liabilities for which the recourse of creditors is limited to specified property of ours, to exceed the fair value of our assets, except that the fair value of property that is subject to a liability for which the recourse of creditors is limited shall be included in our assets only to the extent that the fair value of that property exceeds that liability.

 

   

PT Hoegh will be subject to restrictions on distributions under Indonesian laws due to its formation under the laws of Indonesia. Under Article 71.3 of the Indonesian Company Law (Law No. 40 of 2007), distributions may be made only if the company has positive retained earnings. Our subsidiary holding the ownership interest in PT Hoegh is subject to restrictions under Singapore law due to its formation under Singapore law. Under Section 403(1) of the Companies Act (Cap. 50) of Singapore, no dividends may be paid to the shareholders of any company except out of profits.

 

   

Our joint ventures for the GDF Suez Neptune and the GDF Suez Cape Ann will be subject to restrictions on distributions under the laws of the Cayman Islands due to their formation under the laws of the Cayman Islands. Under such laws, a distribution may be paid out of profits or, if profits are insufficient to make a distribution and subject to the joint venture being solvent immediately following the date on which the distribution is made, out of share premium or distributable capital reserve resulting from contributed surplus paid into the joint venture.

 

   

We may lack sufficient cash to pay distributions to our unitholders due to decreases in total operating revenues, decreases in hire rates, the loss of a vessel, increases in operating or general and administrative expenses, principal and interest payments on outstanding debt, taxes, working capital requirements, maintenance and replacement capital expenditures or anticipated cash needs. Please read “Risk Factors” for a discussion of these factors.

 

Our Ability to Grow Depends on Our Ability to Access External Expansion Capital

 

Because we distribute all of our available cash, we may not grow as quickly as businesses that reinvest their available cash to expand ongoing operations. We expect that we will rely upon external financing sources, including bank borrowings and the issuance of debt and equity securities, to fund acquisitions and expansion and investment capital expenditures. As a result, to the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow. To the extent we issue additional units in connection with any acquisitions or other capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level, which in turn may affect the available cash that we have to distribute on each unit. There are no limitations in our partnership agreement on our ability to issue additional units, including units ranking senior to the common units. The incurrence of additional borrowings or other debt by us to finance our growth would result in increased interest expense, which in turn may affect the available cash that we have to distribute to our unitholders.

 

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Initial Distribution Rate

 

Upon completion of this offering, our board of directors will adopt a policy pursuant to which we will declare an initial quarterly distribution of $         per unit for each complete quarter, or $         per unit on an annualized basis, to be paid no later than 45 days after the end of each fiscal quarter (beginning with the quarter ending                     , 2014). This equates to an aggregate cash distribution of $         million per quarter, or $         million per year, in each case based on the number of common units and subordinated units outstanding immediately after completion of this offering. Our ability to make cash distributions at the initial distribution rate pursuant to this policy will be subject to the factors described above under “—General—Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy.”

 

The table below sets forth the number of outstanding common units and subordinated units upon the closing of this offering and the aggregate distribution amounts payable on such units during the year following the closing of this offering at our initial distribution rate of $         per unit per quarter ($         per unit on an annualized basis).

 

     Number of Units    Distributions  
        One Quarter     Four Quarters  

Common units

      $                   $                

Subordinated units

       
  

 

  

 

 

   

 

 

 

Total

      $              (1)    $                
  

 

  

 

 

   

 

 

 

 

(1)   Actual payments of distributions on the common units and the subordinated units are expected to be approximately $         million for the period between the estimated closing date of this offering (                    , 2014) and the end of the fiscal quarter in which the closing date of this offering occurs.

 

If the underwriters do not exercise their option to purchase additional common units, we will issue common units to Höegh LNG at the expiration of the option period. If and to the extent the underwriters exercise their option to purchase additional common units, the number of common units purchased by the underwriters pursuant to such exercise will be issued to the underwriters and the remainder, if any, will be issued to Höegh LNG. Any such units issued to Höegh LNG will be issued for no additional consideration. Accordingly, the exercise of the underwriters’ option will not affect the total number of units outstanding or the amount of cash needed to pay the minimum quarterly distribution on all units.

 

During the subordination period, before we make any quarterly distributions to subordinated unitholders, our common unitholders are entitled to receive payment of the full minimum quarterly distribution plus any arrearages in distributions from prior quarters. Please read “How We Make Cash Distributions—Subordination Period.” We cannot guarantee, however, that we will pay the minimum quarterly distribution or any amount on the common units in any quarter.

 

Forecasted Results of Operations for the 12-Month Period Ending September 30, 2015

 

In this section, we present in detail the basis for our belief that we will be able to pay our minimum quarterly distribution on all of our outstanding units for the 12-month period ending September 30, 2015. We present:

 

   

Forecasted Results of Operations for the 12-month period ending September 30, 2015; and

 

   

Forecasted Cash Available for Distribution for the 12-month period ending September 30, 2015,

 

as well as the significant assumptions upon which the forecast is based.

 

We present below a forecast of our expected results of operations for the 12-month period ending September 30, 2015 for each of us and our joint ventures. Our forecasts present, to the best of our knowledge and

 

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belief, the expected results of operations for each of us and our joint ventures for the forecast period. The forecast of our expected results of operations for the forecast period includes the expected results of operations and the related financing of the PGN FSRU Lampung.

 

Although we anticipate exercising our right to purchase from Höegh LNG the Independence, the timing of such purchase is uncertain and such purchase is subject to reaching an agreement with Höegh LNG regarding the purchase price, the availability of financing and any rights ABKN has under her time charter. As a result, the forecast of our expected results of operations for the forecast period does not reflect the expected results of operations or related financing of the Independence.

 

Our financial forecast reflects our judgment, as of the date of this prospectus, of conditions we expect to exist and the course of action we expect we and our joint ventures will take during the 12-month period ending September 30, 2015. Our financial forecast is based on assumptions that we believe to be reasonable with respect to the forecast period as a whole. The assumptions and estimates used in the financial forecast are inherently uncertain and represent those that we believe are significant to our financial forecast. We believe that we have a reasonable objective basis for those assumptions. To the extent that there is a shortfall during any quarter in the forecast period, we believe we would be able to make borrowings to pay distributions in such quarter and would be able to repay such borrowings in a subsequent quarter, because we believe the total cash available for distribution for the forecast period will be more than sufficient to pay the aggregate minimum quarterly distribution to all unitholders. We believe actual results of operations of us and our joint ventures will approximate those reflected in our financial forecasts, but we can give no assurance that such forecasted results will be achieved. There will likely be differences between our financial forecast and the actual results and those differences could be material. Our operations are subject to numerous risks that are beyond our control. If either or both of the financial forecasts are not achieved, we may not be able to pay cash distributions on our units at the initial distribution rate stated in our cash distribution policy or at all.

 

Our forecasts of results of operations are forward-looking statements and should be read together with the historical combined carve-out financial statements of our predecessor, our unaudited pro forma combined balance sheet and the historical combined financial statements of our joint ventures and the accompanying notes included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operation.” We do not, as a matter of course, make public projections as to future revenues, earnings or other results. The financial forecasts have been prepared by and are the responsibility of our management. However, our management has prepared the financial forecast set forth below in support of our belief that we will have sufficient cash available to allow us to pay the minimum quarterly distribution on all of our outstanding units during the forecast period. In addition, in the view of our management, the accompanying financial forecasts were prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of our knowledge and belief, our and our joint ventures’ expected course of action and our and our joint ventures’ expected future financial performance. However, this information is not fact and should not be relied upon as being necessarily indicative of future results, and readers of this prospectus are cautioned not to place undue reliance on the financial forecast.

 

When considering our financial forecast, you should keep in mind the risk factors and other cautionary statements included under the heading “Risk Factors” elsewhere in this prospectus. Any of the risks discussed in this prospectus or unanticipated events could cause our actual results of operations, cash flows and financial condition to vary significantly from the financial forecast and such variations may be material. Prospective investors are cautioned to not place undue reliance on the financial forecast and should make their own independent assessment of our future results of operations, cash flows and financial condition.

 

We are providing the financial forecasts to supplement the historical combined carve-out financial statements of our predecessor and our joint ventures in support of our belief that we will have sufficient cash available to allow us to pay cash distributions on all of our units for each quarter in the 12-month period ending September 30, 2015 at our stated initial distribution rate. Please read “—Forecast Assumptions and Considerations—Summary of Significant Forecast Assumptions” for further information as to the assumptions we have made for the financial forecast.

 

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We do not undertake any obligation to release publicly the results of any future revisions we may make to the financial forecasts or to update the financial forecast to reflect events or circumstances after the date of this prospectus, even in the event that any or all of the underlying assumptions are shown to be in error. Therefore, we caution you not to place undue reliance on this information.

 

Neither our independent registered public accounting firm, nor any other independent registered public accounting firm, has compiled, examined or performed any procedures with respect to the forecasted financial information contained herein, nor has it expressed any opinion or given any other form of assurance on such information or its achievability, and it assumes no responsibility for such forecasted financial information. Our independent registered public accounting firm’s report included in this prospectus relates to the historical financial information of our predecessor and our joint ventures. That report does not extend to the tables and the related forecasted financial information contained in this section and should not be read to do so.

 

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HÖEGH LNG PARTNERS LP

FORECASTED RESULTS OF OPERATIONS

 

The following table presents our forecasted results of operations for the 12-month period ending September 30, 2015. We account for our equity interests in our two joint ventures as equity method investments.

 

     Twelve Months  Ending
September 30, 2015
 
(in millions of U.S. Dollars, except per unit amounts)    Höegh LNG Partners LP  
     (unaudited)  

Time charter revenues

   $ 44.5   
  

 

 

 

Total revenues

   $ 44.5   

Vessel operating expenses

     (6.3

Administrative expenses

     (4.5

Depreciation and amortization

     0.0   
  

 

 

 

Total operating expenses

   $ (10.8

Equity in earnings of joint ventures

     7.3   
  

 

 

 

Operating income

   $ 41.1   

Interest income

     8.7   

Interest expense

     (15.4

Other items, net

     (0.2
  

 

 

 

Income before taxes

   $ 34.2   
  

 

 

 

Income tax expense

     (0.6
  

 

 

 

Net income

   $ 33.7   
  

 

 

 

Net income per:

  

Common unit (basic and diluted)

   $            

Subordinated unit (basic and diluted)

   $     

 

The following table presents our joint ventures’ forecasted results of operations for the 12-month period ending September 30, 2015, on a 100% basis.

 

     Twelve Months Ending
September 30, 2015
 
(in millions of U.S. Dollars)    Joint Ventures  
     (unaudited)  

Time charter revenues

   $ 83.3   
  

 

 

 

Total revenues

   $ 83.3   

Vessel operating expenses

     (15.8

Administrative expenses

     (2.0

Depreciation and amortization

     (18.2
  

 

 

 

Total operating expenses

   $ (36.0
  

 

 

 

Operating income

   $ 47.2   

Interest income

     —     

Interest expense

     (32.7

Gain/(loss) on derivative instruments

     —     

Other financial items, net

     —     
  

 

 

 

Income before taxes

   $ 14.6   

Income tax expense

     —     
  

 

 

 

Net income

   $ 14.6   
  

 

 

 

 

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The following table presents the forecasted results of operations for each of our two segments for the 12-month period ending September 30, 2015.

 

     Höegh LNG Partners LP
Twelve Months Ending September 30, 2015
 
(in millions of U.S. Dollars)    Majority
Held
FSRUs
    Joint Venture
FSRUs
(Proportional
Consolidation)
    Other     Total
Segment
Reporting
    Eliminations     Combined
Carve-out
Reporting
 

Time charter revenues

   $ 44.5      $ 41.6      $ 0.0      $ 86.2      $ (41.6   $ 44.5   

Vessel operating expenses

     (6.3     (7.9     0.0        (14.2     7.9        (6.3

Administrative expenses

     (1.5     (1.0     (3.0     (5.5     1.0        (4.5

Equity in earnings of joint ventures

     —          —          —          —          7.3        7.3   
  

 

 

   

 

 

   

 

 

   

 

 

     

Segment EBITDA

   $ 36.8      $ 32.7      $ (3.0   $ 66.5       

Depreciation and amortization

     —          (9.1     —          (9.1     9.1        —     
  

 

 

   

 

 

   

 

 

   

 

 

     

Operating income

   $ 36.8      $ 23.6      $ (3.0   $ 57.4        —        $ 41.1   

Gain on derivative instruments

     —          —          —          —          —          —     

Interest income from intercompany note

     —          —          8.2        8.2        —          8.2   

Interest income from joint venture shareholder loans

     —          —          0.5        0.5        —          0.5   

Interest expense

     (14.2     (16.3     (1.2     (31.7     16.3        (15.4

Other items, net

     (0.2     —          —          (0.2     —          (0.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

   $ 22.4      $ 7.3      $ 4.5      $ 34.2        —        $ 34.2   

Income tax expense

     (0.6     —          —          (0.6     —          (0.6
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Net income

   $ 21.9      $ 7.3      $ 4.5      $ 33.7        $ 33.7   
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

 

Please read the accompanying summary of significant accounting policies and forecast assumptions.

 

Forecast Assumptions and Considerations

 

Basis of Presentation

 

The accompanying financial forecasts and related notes present our forecasted results of operations of each of us and our joint ventures for the 12-month period ending September 30, 2015, based on the assumption that:

 

   

we will issue to Höegh LNG             common units and             subordinated units, representing an aggregate     % limited partner interest in us, and all of our incentive distribution rights;

 

   

we will issue to our general partner, a wholly owned subsidiary of Höegh LNG, a non-economic general partner interest in us;

 

   

we will sell             common units to the public in this offering, representing a     % limited partner interest in us;

 

   

we will apply the net proceeds of the offering as follows: (i) up to $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 to make a cash distribution to Höegh LNG;

 

   

the shareholder loans made by Höegh LNG to each of our joint ventures, in part to finance the operations of such joint ventures, will be transferred to our operating company; and

 

   

the receivable for the $40 million promissory note due to Höegh LNG relating to the Höegh Lampung will be transferred from Höegh LNG to our operating company.

 

Summary of Significant Accounting Policies

 

Organization.    We are a Marshall Islands limited partnership formed to own, operate and acquire FSRUs, LNG carriers and other LNG infrastructure assets under long-term charters. Our general partner is Höegh LNG GP LLC.

 

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Principles of Combination.    The financial forecast for Höegh LNG Partners LP includes the subsidiaries we will control and our interest in our joint ventures using the equity method of accounting, as well as the interest income from the advances to our joint ventures. All intercompany transactions have been eliminated in the forecast for Höegh LNG Partners LP. The financial forecast for our joint ventures includes the forecast for our two joint ventures on a combined basis. Our predecessor for accounting purposes accounts for its equity interests in the joint ventures owning two of the vessels in our initial fleet (the GDF Suez Neptune and the GDF Suez Cape Ann) as equity method investments in its combined financial statements. Rule 3-09 of Regulation S-X requires separate financial statements of 50% or less owned persons accounted for under the equity method by a registrant such as us if either the income or the investment test in Rule 1-02(w) of Regulation S-X exceeds 20%. Furthermore, Rule 3-09(c) of Regulation S-X provides for the combination of Rule 3-09 financial statements if the underlying investments are under common management. In such scenarios, the significance of investments under Rule 1-02(w) of Regulation S-X is to be measured on a combined basis.

 

Use of Estimates.    The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include revenue recognition, the useful lives of the vessels in our initial fleet, drydocking and the valuation of derivatives.

 

Reporting Currency.    Our financial forecast is stated in U.S. Dollars. The functional currency of our vessel-owning subsidiaries and our joint ventures is the U.S. Dollar. Since such joint ventures and subsidiaries operate in the international shipping market, all revenues are U.S. Dollar-denominated and the majority of the expenditures and all of the long-term debt is denominated in U.S. Dollars. Transactions involving other currencies during the year are converted into U.S. Dollars using the exchange rates in effect at the time of the transactions. Monetary assets and liabilities that are denominated in currencies other than the U.S. Dollar are translated at the exchange rates in effect at the balance sheet date. Resulting gains or losses are reflected separately in the statement of operations.

 

Revenue Recognition.    Revenue arrangements include the right to use FSRUs for a stated period of time that meet the criteria for lease accounting, in addition to providing a time charter service element. Time charter revenues consist of charter hire payments under time charters, fees for providing time charter services, fees for reimbursement for actual vessel operating expenses and drydocking costs borne by the charterer on a pass-through basis, as well as fees for the reimbursement of certain vessel modifications or other costs borne by the charterer. The lease element of time charters that are accounted for as operating leases and any upfront payments for amounts reimbursed by the charterer are recognized on a straight-line basis over the term of the charter. The joint ventures’ time charters are accounted for as operating leases. The lease element of time charters that are accounted for as direct financing leases is recognized over the charter term using the effective interest rate method and is included in time charter revenues. Direct financing leases are reflected on the balance sheets as net investments in direct financing leases. The PGN FSRU Lampung time charter will be accounted for as a financial lease. Revenues for the lease element of time charters are not recognized for days that the FSRUs are off-hire. Fees for providing time charter services and reimbursements for actual vessel operating expenses are recognized as revenues as services are performed. Revenues for the time charter services element are not recognized for days that the FSRUs are off-hire. Upfront payments of fees for reimbursement of drydocking costs are recognized on a straight-line basis over the period to the next drydocking, which is generally five years for the GDF Suez Neptune and the GDF Suez Cape Ann.

 

Voyage Expenses.    Under both of our joint ventures’ time charters, the charterer typically pays the voyage expenses. Our joint ventures, as vessel owners, are responsible for any voyage expenses incurred during periods of off-hire under the time charters. However, we do not expect any voyage expenses incurred during periods of off-hire to be substantial and therefore, our forecast assumes that we will not incur any voyage expenses during the forecast period.

 

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Vessel Operating Expenses.    Vessel operating expenses include crewing, repairs and maintenance, insurance, stores, lube oil, communication expenses and management fees. Vessel operating expenses are paid by the vessel owner under time charters, spot contracts and during off-hire and are recognized when incurred.

 

Cash and Cash Equivalents.    We consider all highly liquid investments with an original maturity date of three months or less when purchased to be cash equivalents.

 

Vessels.    Vessels are stated at the historical acquisition or construction cost, including capitalized interest, supervision, technical cost, net of accumulated depreciation and impairment loss, if any. Depreciation is calculated on a straight-line basis over a vessel’s estimated useful life, less an estimated residual value. Depreciation is calculated using an estimated useful life of 35 years for the FSRUs. Modifications to the vessels, including the addition of new equipment, which improves or increases the operational efficiency, functionality or safety of the vessels, are capitalized. These expenditures are amortized over the estimated useful life of the modification. Expenditures covering recurring routine repairs and maintenance are expensed as incurred.

 

For each of the GDF Suez Neptune and the GDF Suez Cape Ann, a renewal survey is conducted every five to seven years and an intermediate survey is conducted every two to three years after a renewal survey. Until these vessels are 15 years old, they only are drydocked at each renewal survey, with the intermediate surveys occurring while she is afloat, using an approved diving company in the presence of a surveyor from the classification society. After these vessels are 15 years old, they are drydocked both at each renewal survey and each intermediate survey, resulting in drydocking approximately every 30 months. We do not anticipate drydocking the PGN FSRU Lampung for at least 20 years as certain inspections can be done without drydocking. We capitalize the costs directly associated with the classification and regulatory requirements for inspection of the vessels, major repairs and improvements to the vessel’s operating efficiency, functionality or safety incurred during drydocking. Drydocking cost is amortized on a straight-line basis over the period until the next planned drydocking takes place. We expense costs related to routine repairs and maintenance performed during drydocking. For vessels that are newly built or acquired, an element of the cost of the vessel is allocated to a drydock component initially and amortized on a straight-line basis over the period until the next planned drydocking.

 

Impairment of Long-Lived Assets.    Vessels and newbuildings subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, we first compare undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment charge is recognized to the extent that the carrying value exceeds its fair value.

 

Debt Issuance Costs.    Debt issuance costs, including arrangement fees and legal expenses, are deferred and presented as deferred debt issuance cost and amortized on an effective interest rate method over the term of the relevant loan. Amortization of debt issuance costs is included as a component of interest expense. If a loan is repaid early, any unamortized portion of the deferred debt issuance costs is recognized as interest expense in the period in which the loan is repaid.

 

Derivative Instruments.    We may, from time to time, enter into interest rate swap contracts to hedge a portion of our exposure to floating interest rates. These transactions involve the conversion of floating rates into fixed rates over the life of the transactions without an exchange of underlying principal. In addition, from time to time we enter into foreign currency swap contracts to reduce risk from foreign currency fluctuations. Our predecessor and joint ventures have interest rate swap contracts for the management of interest rate risk exposure. The interest rate swap contracts have the effect of converting a portion of the outstanding debt from a floating to a fixed rate over the life of the transactions. The interest rate swap contracts were designated as cash flow hedges for our predecessor, however, they were not designated as hedges for accounting purposes for our joint ventures. All derivative instruments are initially recorded at fair value as either current or long-term assets or liabilities as derivative financial instruments in the combined balance sheet and are subsequently remeasured

 

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to fair value. The changes in the fair value of the derivative financial instruments are recognized in other comprehensive income, net of related tax effects, for our predecessor and in earnings under financial income (expenses), net as gain (loss) on derivative instruments for our joint ventures. Because it is not possible to forecast gains and losses on derivative instruments, we have assumed that gains and losses on derivative instruments during the forecast period will be zero.

 

Income Taxes.    Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the tax and the book bases of assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. 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. If the more-likely-than-not recognition criterion is met, a tax position is measured based on the cumulative amount that is more-likely-than-not of being sustained upon examination by tax authorities to determine the amount of benefit to be recognized.

 

Net Income per Unit.    The calculation of the forecasted basic and diluted earnings for the 12-month period ending September 30, 2015 is set forth below:

 

(in thousands of U.S. Dollars)    Common
Unitholders
     Subordinated
Unitholders
 

Partners’ interests in forecasted net income

   $                    $                

Forecasted weighted average number of units outstanding

     

Forecasted net income per unit

   $         $     

 

Summary of Significant Forecast Assumptions—Höegh LNG Partners LP

 

Vessels.    The forecasts assume that we will retain our 50.0% interest in each of the two joint ventures that own the GDF Suez Neptune and the GDF Suez Cape Ann. In addition, the forecasts reflect or assume that the PGN FSRU Lampung will receive time charter revenue for 365 days of operation under a time charter during the forecast period. There are no scheduled drydockings for the PGN FSRU Lampung for the 12-month period ending September 30, 2015, as the vessel will not be drydocked during the term of her time charter.

 

We have assumed that we will not make any acquisitions during the forecast period.

 

Time Charter Revenues.    Our forecasted time charter revenues are based on the total number of days the PGN FSRU Lampung is expected to be on-hire during the 12-month period ending September 30, 2015. The lease element of time charters that are accounted for as direct financing leases is recognized over the charter term using the effective interest rate method and is included in time charter revenues. The PGN FSRU Lampung time charter will be accounted for as a financial lease. The interest payments relating to the financial lease are recognized in time charter revenues on the income statement and principal payment relating to the financial lease are reflected in the cash flow statement as investing activities. Fees for providing time charter services and reimbursements for actual vessel operating expenses are recognized as revenues as services are performed. We have built into our forecast no off-hire for the PGN FSRU Lampung. The amount of actual off-hire time depends upon, among other things, the time the PGN FSRU Lampung spends in delays due to accidents, crewing strikes, certain vessel detentions or similar problems and drydocking for repairs, as well as failure to maintain the vessel in compliance with her specifications and contractual standards or to provide the required crew.

 

The hire rate payable under our time charter related to the PGN FSRU Lampung is fixed and payable monthly in advance, in U.S. Dollars, and increases annually based on a fixed percentage increase or fixed schedule to enable us to offset expected increases in operating costs. For more information on the components of the hire rate payable under the PGN FSRU Lampung time charter, please read “Business—Vessel Time Charters—PGN FSRU Lampung Time Charter—Hire Rate.”

 

Voyage Expenses.    Under the PGN FSRU Lampung time charter, the charterer typically pays the voyage expenses. We, as vessel owner, are responsible for any voyage expenses incurred during periods of off-hire under

 

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the time charter. However, we do not expect any voyage expenses incurred during periods of potential off-hire to be substantial and therefore, our forecast assumes that we will not incur any voyage expenses during the forecast period.

 

Vessel Operating Expenses.    Our forecasted vessel operating expenses assume that the PGN FSRU Lampung is operational during the 12-month period ending September 30, 2015. Vessel operating expenses primarily relate to the PGN FSRU Lampung operating under her time charter. The forecast takes into account increases in crewing and other labor-related costs driven predominantly by an increase in demand for qualified and experienced officers and crew. In addition, in our calculation of forecasted vessel operating expenses, we have assumed that we will incur approximately $0.6 million of fees pursuant to the sub-technical support agreement to which it is party with Höegh LNG Management. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Ship Management Agreements.”

 

Depreciation and Amortization.    The PGN FSRU Lampung time charter will be accounted for as a financial lease. Accordingly, we do not expect to have any depreciation or amortization during the forecast period.

 

Administrative Expenses.    Forecasted administrative expenses for the 12-month period ending September 30, 2015 are based on the assumption that we will incur approximately $3.0 million in incremental expenses as a result of being a publicly traded limited partnership. These expenses will include costs associated with annual reports to unitholders, tax return preparation, investor relations, registrar and transfer agent’s fees, incremental director and officer liability insurance costs and officer and director compensation. In addition, these expenses include approximately $1.85 million of fees and expenses that we will incur pursuant to the Administrative Services Agreements. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Administrative Services Agreements.”

 

Interest Income.    In addition to interest income derived from payments made by our joint ventures on our shareholder loans, we expect to receive $8.2 million of interest income with respect to the $140 million note bearing interest at a rate of 5.88% per annum that Höegh LNG will issue to us concurrently with the closing of this offering.

 

Interest Expense.    Our financial forecast for the 12-month period ending September 30, 2015 assumes we will have an average outstanding loan balance of approximately $199.0 million with an estimated weighted average interest rate of 5.88% per annum.

 

Other items, net.    Other items, net includes foreign exchange gain (loss) and withholding tax on interest expense described below.

 

Foreign Exchange Gain (Loss).    We receive all of our revenues in U.S. Dollars. However, a portion of our expenses are denominated in other currencies. For purposes of the financial forecast, we have assumed a constant exchange rate of U.S. Dollar to other currencies for the 12-month period ending September 30, 2015.

 

Withholding tax.     Hoegh LNG Lampung Pte Ltd. is required to pay withholding tax on its interest expense paid out of Singapore which is not reimbursable under any time charter. The estimated withholding is $0.2 million for the twelve months ending September 30, 2015.

 

Derivative Financial Instruments.    We will have certain interest rate swap contracts outstanding, relating to the financing for the PGN FSRU Lampung, that will be effective during the twelve months ending September 30, 2015. For purposes of the financial forecast, we have assumed a constant interest rate during the forecast period. Accordingly, we have assumed that we will not have any gains or losses on derivative instruments recognized in other comprehensive income during the 12 months ending September 30, 2015. We have assumed that we will not enter into any additional interest rate swap or foreign currency swap transactions during the forecast period.

 

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Taxes.    We have not forecasted Indonesian tax expense for the 12-month period ending September 30, 2015, because pursuant to the charter for the PGN FSRU Lampung, the charterer will reimburse us for applicable Indonesian taxes. Our financial forecast assumes that we will incur $0.6 million of Singapore taxes for the forecast period.

 

Summary of Significant Forecast Assumptions—Our Joint Ventures

 

Vessels.    The forecasts reflect or assume that each vessel in our joint ventures will receive time charter revenues for 365 days of operation under her respective time charter during the forecast period. Although the GDF Suez Neptune is scheduled for a drydocking in December 2014, the charterer will bear the cost of such drydocking. Therefore, we have assumed no drydocking expense and no days of off-hire associated with such drydocking during the forecast period. We have assumed that our joint ventures will not make any acquisitions during the forecast period.

 

Time Charter Revenues.    Forecasted time charter revenues are based on the daily hire rates multiplied by the total number of days the GDF Suez Neptune and the GDF Suez Cape Ann are expected to be on-hire during the 12-month period ending September 30, 2015. This is consistent with such vessels’ performance in 2012, in 2013 and in the first quarter of 2014 as they experienced no off-hire. We have built into our forecast no off-hire for the vessels in our joint ventures’ fleet. The amount of actual off-hire time depends upon, among other things, the time a vessel spends in drydocking for repairs, maintenance or inspection, equipment breakdowns or delays due to accidents, crewing strikes, certain vessel detentions or similar problems, as well as failure to maintain the vessel in compliance with her specifications and contractual standards or to provide the required crew.

 

The hire rate payable under our joint ventures’ time charters is payable monthly in advance, in U.S. Dollars, a portion of which is subject to annual adjustment for changes in labor costs and the size of the fleet under management. For more information on the components of the hire rate payable under our joint ventures’ time charters, please read “Business—Vessel Time Charters—GDF Suez Neptune Time Charter—Hire Rate.”

 

Voyage Expenses.    The charterer pays for bunker fuels; marine gas oil; boil-off if used or burned while steaming at a reduced rate; boil-off used to provide power for discharge and regasification; and fuel for inert gas, nitrogen and diesel generators, unless the vessel is off-hire. However, we do not expect any voyage expenses incurred by our joint ventures to be substantial.

 

Vessel Operating Expenses.    Under our joint ventures’ time charters, our joint ventures are responsible for providing certain items and services, which include the crew; drydocking, overhaul, maintenance and repairs; insurance; stores; necessary spare parts; water; inert gas and nitrogen; communication expenses and fees paid to the classification societies, regulatory authorities and consultants. The variable (operating cost) element of the hire rate is designed to cover these expenses. Forecasted vessel operating expenses assume that all of our joint ventures’ vessels are operational during the 12-month period ending September 30, 2015. The forecast takes into account increases in crewing and other labor-related costs driven predominantly by an increase in demand for qualified and experienced officers and crew. In addition, these expenses include approximately $1.3 million of fees pursuant to ship management agreements to which our joint ventures are party to with Höegh LNG Management. Please read “Certain Relationships and Related Party Transactions — Agreements Governing the Transactions — Ship Management Agreements.”

 

Depreciation and Amortization.    Forecasted depreciation and amortization includes only the GDF Suez Neptune and the GDF Suez Cape Ann. Vessels are stated at cost less accumulated depreciation. The cost of vessels less the estimated residual value is depreciated on a straight-line basis over the assets’ estimated remaining useful lives, which is estimated to be 35 years from initial delivery. The estimated economic life for newbuilding FSRUs operated worldwide has generally been estimated to be 40 years.

 

Administrative Expenses.    Forecasted administrative expenses for the 12-month period ending September 30, 2015 primarily consist of our joint ventures’ incurred service expenses such as accounting and

 

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audit fees. Fees and expenses for the provision of management and administrative services are incurred by our joint ventures pursuant to the Höegh UK Administrative Services Agreement, the Höegh Norway Administrative Services Agreement and the commercial and administration management agreements. We anticipate that our joint ventures will incur an aggregate of $0.6 million in fees pursuant to such agreements for the 12-month period ending September 30, 2015. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Administrative Services Agreements” and “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Joint Venture Commercial and Administration Management Agreements.”

 

Interest Income.    We have assumed that any cash surplus balances will not earn any interest during the forecast period.

 

Interest Expense.    Our financial forecasts for the 12-month period ending September 30, 2015 assume that our joint ventures will have an average loan balance of approximately $550.2 million with an estimated weighted average interest rate of 5.94% per annum, which includes both bank loan facilities and shareholder loans.

 

Foreign Exchange Gain (Loss).    Our joint ventures receive revenues in U.S. Dollars. However, a portion of their expenses are denominated in other currencies. For purposes of this financial forecast, we have assumed a constant exchange rate of U.S. Dollar to other currencies for the 12-month period ending September 30, 2015.

 

Derivative Financial Instruments.    Our joint ventures will have certain interest rate swap contracts outstanding relating to the financing of the GDF Suez Neptune and the GDF Suez Cape Ann during the twelve months ending September 30, 2015. For purposes of the forecast, we have assumed a constant interest rate during the forecast period. Accordingly, we have assumed that we will not have any gains or losses on derivative instruments during the twelve months ending September 30, 2015.

 

Taxes.    We have not forecasted income tax expense for the 12-month period ending September 30, 2015. Our joint ventures are not subject to taxes in the Cayman Islands, where they are organized. We generally do not incur any tax liability in jurisdictions where the joint ventures’ vessels operated. For those jurisdictions where we believe there is a risk of incurring a liability, such tax would be reimbursed by the charterer.

 

General

 

Regulatory, Industry and Economic Factors.    Our financial forecast for the 12-month period ending September 30, 2015 is based on the following assumptions related to regulatory, industry and economic factors:

 

   

no material nonperformance or credit-related defaults by suppliers, customers or vendors;

 

   

no new regulation or interpretation of existing regulations or governmental action that, in either case, would be materially adverse to our business;

 

   

no material accidents, environmental incidents, releases, weather-related incidents, unscheduled downtime or similar unanticipated events;

 

   

no major adverse change in the markets in which we operate resulting from LNG production disruptions, reduced demand for LNG or significant changes in the market price for LNG; and

 

   

no material changes to market, regulatory and overall economic conditions or in prevailing interest rates.

 

Forecasted Cash Available for Distribution

 

The tables below sets forth our calculation of forecasted cash available for distribution to our unitholders based on the Forecasted Results of Operations set forth above. Based on the financial forecasts and related assumptions, we forecast that our cash available for distribution generated during the 12-month period ending September 30, 2015 will be approximately $         million. This amount would be sufficient to pay 100% of the

 

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minimum quarterly distribution of $         per unit on all of our common units and subordinated units for the four quarters ending September 30, 2015. Actual payments of distributions on the common units and the subordinated units are expected to be approximately $         million for the period between the estimated closing date of this offering (                    , 2014) and the end of the fiscal quarter in which the closing date of this offering occurs, and we anticipate our cash available for distribution generated during such period will be sufficient to pay 100% of the minimum quarterly distribution on all of our common units and subordinated units with respect to such period.

 

You should read “—Forecast Assumptions and Considerations—Summary of Significant Forecast Assumptions” included as part of the financial forecast for a discussion of the material assumptions underlying our forecasts of segment EBITDA and adjusted EBITDA included in the tables below. Our forecasts are based on those material assumptions and reflect our judgment of conditions we expect to exist and the course of action we expect to take and we expect that our joint ventures will take. The assumptions disclosed in our financial forecasts are those that we believe are significant to generate the forecasts of segment EBITDA and adjusted EBITDA. If our estimates are not achieved, we may not be able to pay distributions on the common units at the initial distribution rate of $         per unit per quarter ($         per unit on an annualized basis). Our financial forecast and the forecast of cash available for distribution set forth below have been prepared by our management. This calculation represents available cash from operating surplus generated during the period and excludes any cash from working capital borrowings, capital expenditures and cash on hand on the closing date.

 

Segment EBITDA and adjusted EBITDA should not be considered alternatives to net income, operating income, cash flow from operating activities or any other measure of financial performance calculated in accordance with U.S. GAAP.

 

When considering our forecast of cash available for distribution for the 12-month period ending September 30, 2015, you should keep in mind the risk factors and other cautionary statements under the headings “Forward-Looking Statements” and “Risk Factors” elsewhere in this prospectus. Any of these factors or the other risks discussed in this prospectus could cause our results of operations of us and of our joint ventures to vary significantly from those set forth in the financial forecast and the forecast of cash available for distribution set forth below.

 

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HÖEGH LNG PARTNERS LP

FORECASTED CASH AVAILABLE FOR DISTRIBUTION

 

The following table presents our forecasted cash available for distribution to our unitholders for the 12-month period ending September 30, 2015. We account for our equity interests in our two joint ventures as equity method investments.

 

     Twelve  Months
Ending

September 30, 2015
 
(in millions of U.S. Dollars, except per unit amounts)    Höegh LNG
Partners LP(1)
 
     (unaudited)  

Net income

   $ 33.7   

Depreciation and amortization

     —     

Interest income

     (8.7

Interest expense

     15.4   

Income tax expense

     0.6   

Equity in earnings of joint ventures: Depreciation and amortization

     9.1   

Equity in earnings of joint ventures: Interest (income), expenses, net

     16.3   

Other items, net

     0.2   
  

 

 

 

Segment EBITDA(2)

   $ 66.5   

Cash collection on direct financial lease investments

     2.7   
  

 

 

 

Adjusted EBITDA(2)

   $ 69.2   

Cash interest expense

     (13.0

Cash interest income from intercompany note

     8.2   

Other non-cash items

     0.3   

Other items, net

     (0.2

Income tax expense

     (0.6

Adjustments for cash flow from joint venture distributions(3):

  

Segment EBITDA of joint ventures

     (32.7

Interest payments on shareholder loans from joint ventures

     0.5   

Principal payments on shareholder loans from joint ventures

     6.5   

Net estimated replacement capital expenditures(4)

     0.0   
  

 

 

 

Cash available for distribution to our unitholders

   $ 38.2   
  

 

 

 

Expected distributions:

  

Distribution per unit

   $     

Distributions to our public common unitholders(5)

   $     

Distributions to Höegh LNG common units(5)

  

Distributions to Höegh LNG subordinated units

  

Total distributions(6)

  
  

 

 

 
   $     
  

 

 

 

Excess (shortfall)

  

Annualized minimum quarterly distribution per unit

   $     

Aggregate distributions based on annualized minimum quarterly distribution

   $     

Percent of minimum quarterly distributions payable to common unitholders

     100

Percent of minimum quarterly distributions payable to subordinated unitholder

     100

 

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The following table presents our joint ventures’ forecasted cash available for distribution to us for the 12-month period ending September 30, 2015, on a 100% basis.

 

     Twelve
Months
Ending
September 30, 2015
 
(in millions of U.S. Dollars)    Joint Ventures(1)  
     (unaudited)  

Net income

   $ 14.6   

Depreciation and amortization

     18.2   

Interest income

     —     

Interest expense:

  

Bank facilities

     29.8   

Shareholder loans to us

     1.4   

Shareholder loans to our joint venture partner

     1.4   

Income taxes

     —     
  

 

 

 

Segment EBITDA(2)

     65.4   

Adjustments for cash items:

  

Cash interest expense:

  

Bank facilities

     (29.5

Shareholder loans to us

     (0.5

Shareholder loans to our joint venture partner

     (0.5

Cash interest income

     —     

Principal payments:

  

Bank facilities

     (20.3