Indonesian state-owned gas firm PT Perusahaan Gas Negara (PGN), a unit of Pertamina, is planning to start an arbitration process against New York-listed Hoegh LNG Partners over issues related to the Lampung FSRU charter.
The vessel serves a 20-year charter deal with PGN LNG, a unit of PGN, off the southeast coast of Sumatra in Indonesia. Parent Hoegh LNG manages the FSRU while its MLP Hoegh LNG Partners owns it.
Hoegh LNG Partners said on Tuesday it received a letter from PGN on July 13 where the charterer “raised certain issues in relation to the operations of the vessel.”
Moreover, the limited partnership received another letter dated July 27 where PGN said it would start arbitration to “declare the charter null and void, and/or to terminate the charter, and/or seek damages.”
“Based on an initial legal review, the partnership believes the charterer’s position is without merit,” Hoegh LNG Partners said.
In the meantime, the FSRU Lampung has continued to operate pursuant to the terms of the charter, it said.
FSRU refinancing
The ongoing refinancing of the PGN FSRU Lampung credit facility, which had been scheduled to close by the end of the second quarter of this year, is not yet completed.
This is due to the “failure by the charterer of the PGN FSRU Lampung to consent to and countersign certain customary documents related to the new credit facility,” Hoegh LNG Partners said.
These circumstances have left the partnership exposed to having to arrange alternative refinancing, or rearrange the existing refinancing, it said.
“We have commenced discussions with key lenders, and expect that the terms of any alternative refinancing, if we are successful in finalizing such refinancing, are likely to be less favorable than the terms of the originally agreed refinancing,” Hoegh LNG Partners said.
Furthermore, the partnership has received notice from parent Hoegh LNG Holdings that it would not extend the revolving credit line of $85 million when it matures on January 1, 2023.
“In addition, following the consummation of an amalgamation by Hoegh LNG which closed on May 4, 2021, some provisions of the omnibus agreement entered into in connection with the IPO, terminated in accordance with their terms,” the firm said.
Slashing cash distributions
With these recent changes, the partnership’s liquidity and financial flexibility will be reduced.
The board of directors has reduced the partnership’s quarterly cash distribution to $0.01 per common unit, down from a distribution of $0.44 per common unit in the first quarter.
John Veech, chairman of the board of directors said the board has “determined that it is in the best interests of the partnership moving forward to focus its capital allocation on deleveraging its balance sheet, strengthening its long-term financial sustainability, and enhancing its ability to operate the business within its internally generated cash flows.”
First, the partnership needs to prioritize resolving the issues related to the ongoing refinancing of the PGN FSRU Lampung credit facility.
“With that near-term priority addressed, and by adjusting our capital allocation to conserve internally generated cash flows from our time charters, we are confident that we can reduce our debt levels, strengthen our balance sheet, and operate on a more sustainable basis in the context of an evolving FSRU market,” he said.