FLEX LNG .(FLNG) - 2022 Q4 - Annual Report

Q4 2022 Financial & Operational Highlights Key Financial Results Flex LNG reported strong Q4 2022 financial results, with vessel operating revenues of $97.9 million, net income of $41.4 million, and an average TCE rate of $81,699 per day, declaring a $1.00 total dividend per share Q4 2022 Key Financial Metrics | Metric | Q4 2022 | Q3 2022 | | :--- | :--- | :--- | | Vessel Operating Revenues | $97.9 million | $91.3 million | | Net Income | $41.4 million | $46.6 million | | Basic Earnings Per Share | $0.78 | $0.88 | | Average TCE Rate per day | $81,699 | $75,941 | | Adjusted EBITDA | $79.1 million | $70.9 million | | Adjusted Net Income | $54.5 million | $42.2 million | | Adjusted EPS (Basic & Diluted) | $1.02 | $0.79 | - The company declared a total dividend of $1.00 per share for Q4 2022, which includes a regular quarterly dividend of $0.75 and a special dividend of $0.25[112] - In December 2022, the company issued 409,741 ordinary shares under its at-the-market (ATM) program, raising net proceeds of $14.5 million[109] - Subsequent to the quarter end, the company secured significant new financing, including 12-year sale and leaseback agreements for Flex Amber and Flex Artemis in January 2023, and term sheets for a $290 million facility in February 2023[109][110] CEO Commentary The CEO highlighted strong Q4 performance, balance sheet optimization securing over $2 billion in new financing, and a significant charter backlog, supporting a special dividend - The company finalized its balance sheet optimization program, securing over $2 billion in new financing, which is expected to release a total of $387 million in net cash proceeds[121] - With a de-risked chartering profile and strong liquidity, the Board approved a special dividend of $0.25 per share on top of the $0.75 quarterly dividend, totaling $1.00 for Q4[121] - The company added a minimum of 38 years of charter backlog during 2022, with the first two fully open vessel positions now not until 2027, aligning with the next wave of LNG supply[114] - Financial performance is expected to improve in 2023, with projected revenues of around $370 million and an average TCE of approximately $80,000 per day, despite scheduled off-hire for special surveys on four ships[115] Business Update and Fleet Overview The company significantly extended its contract backlog to 60 firm years, with 100% fleet coverage for 2023 and 95% for 2024, despite four vessels scheduled for drydocking - Signed extension options with Cheniere Marketing International LLP ("CMI") for Flex Endeavour, Flex Ranger, and Flex Vigilant, securing long-term employment for these vessels[123] - The firm contract backlog is 60 years, with a potential to increase to 87 years if all charterer's options are exercised, and the fleet is fully contracted for 2023 and has 95% coverage for 2024[125] - Four vessels are scheduled for their mandatory five-year drydocking in 2023, with an additional two scheduled for 2024[118] Finance Update As of December 31, 2022, Flex LNG held $332.4 million in cash and $1.71 billion in long-term debt, actively managing interest rate risk and completing significant refinancing activities Financial Position as of Dec 31, 2022 | Item | Amount (USD) | | :--- | :--- | | Cash, cash equivalents and restricted cash | $332.4 million | | Total long-term debt | $1,714.7 million | | Current portion of long-term debt | $95.5 million | | Non-current portion of long-term debt | $1,619.2 million | - The company utilizes interest rate swaps to hedge against interest rate fluctuations, with an aggregate notional principal of $691.0 million as of year-end 2022[129] - In Q4 2022, the company terminated three interest rate swaps, generating cash proceeds of $14.4 million[131] - The company established an at-the-market (ATM) offering of up to $100 million and a Dividend Reinvestment Plan (DRIP) to enhance financial flexibility and shareholder returns[132][133] - Multiple refinancing deals were signed or initiated post-quarter end, including sale and leasebacks for Flex Rainbow, Flex Amber, and Flex Artemis, and a new $290 million credit facility for Flex Freedom and Flex Vigilant, all aimed at improving terms and liquidity[134][136][137] Financial Performance Analysis Quarterly Performance Comparison (Q4'22 vs Q3'22) Q4 2022 saw increased vessel operating revenues to $97.9 million and lower expenses, but net income decreased to $41.4 million due to derivative gains, while adjusted net income rose to $54.5 million Q4 2022 vs Q3 2022 Performance | Metric | Q4 2022 | Q3 2022 | | :--- | :--- | :--- | | Vessel Operating Revenues | $97.9 million | $91.3 million | | Vessel Operating Expenses | $16.2 million | $17.5 million | | Interest Expense | $24.5 million | $21.6 million | | Gain on Derivatives | $4.9 million | $28.4 million | | Net Income | $41.4 million | $46.6 million | | Adjusted Net Income | $54.5 million | $42.2 million | - The increase in revenues was principally due to improved market rates, which increased revenues on the company's existing variable rate hire contract[138] - The decrease in vessel operating expenses was primarily due to lower crew costs (fewer COVID-related expenses and crew changes) and reduced technical expenses for spares and services[140] - The significant drop in the gain on derivatives was due to a decrease in the long-term forward interest rate curve in Q4, compared to a steep increase in Q3 which had boosted the value of interest rate swaps[170] Annual Performance Comparison (FY2022 vs FY2021) FY2022 vessel operating revenues slightly increased to $347.9 million, with net income significantly growing to $188.0 million, primarily driven by a substantial $79.7 million gain on derivatives FY2022 vs FY2021 Performance | Metric | FY 2022 | FY 2021 | | :--- | :--- | :--- | | Vessel Operating Revenues | $347.9 million | $343.4 million | | Vessel Operating Expenses | $63.4 million | $61.2 million | | Interest Expense | $76.6 million | $56.2 million | | Extinguishment costs of long-term debt | $16.1 million | $1.2 million | | Gain on Derivatives | $79.7 million | $18.4 million | | Net Income | $188.0 million | $162.2 million | | Basic Earnings Per Share | $3.53 | $3.04 | - The increase in net income was primarily due to a significant unrealized gain of $78.2 million on interest rate swap derivatives, reflecting the positive development of interest rates during the year[182] - Administrative expenses rose to $9.1 million from $7.9 million due to increased audit fees, registrar fees, legal costs for the ATM program, and higher share-based compensation amortization[178] Cash Flow Analysis Q4 2022 saw $53.4 million in operating cash flow and a positive $6.8 million from financing activities, increasing total cash to $332.4 million Cash Flow Summary (Q4 2022 vs Q3 2022) | Cash Flow Activity | Q4 2022 | Q3 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $53.4 million | $71.9 million | | Net cash used in investing activities | $0 | $0 | | Net cash provided by/(used in) financing activities | $6.8 million | ($83.5 million) | | Ending Cash and Cash Equivalents | $332.4 million | $271.2 million | - Key financing activities in Q4 included a $150 million drawdown under the Resolute facility, $14.5 million net proceeds from the ATM program, and $14.4 million from terminating derivatives, partially offset by $113.8 million in debt prepayment and $40.0 million in dividend payments[189][70] Balance Sheet Analysis As of December 31, 2022, total equity increased to $907.1 million, while total long-term debt rose to $1.71 billion due to significant refinancing activities Balance Sheet Comparison (Year-End) | Item | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Long-Term Debt | $1,714.7 million | $1,633.4 million | | Net Book Value of Vessels | $2,269.9 million | $2,342.2 million | | Total Equity | $907.1 million | $889.4 million | - The increase in long-term debt during 2022 was driven by several new financing facilities, including the $375 million Facility, the $320 million Sale and Leaseback, and two separate $150 million facilities[193][72] - Major debt decreases resulted from prepayments related to the Hyundai Glovis Sale and Charterback ($263.1 million), the $250 million Facility ($217.2 million), and other facilities as part of the refinancing program[144][145] Market Outlook & Corporate Information LNG Market Update The LNG shipping market was tight in Q4 2022 due to high demand, but softened in early 2023 amid a large newbuild order book and unwinding floating storage - Europe's LNG imports increased by 54% in 2022, reaching nearly 130 million tonnes, as it replaced Russian pipeline gas[149] - China's LNG imports fell by over 20% in 2022, which freed up cargoes for Europe, though a reversal of China's zero-COVID policies is expected to increase competition for LNG in 2023[150][152] - A record 169 newbuild LNG vessels were ordered in 2022, with a large number of deliveries scheduled for 2024 (64 vessels) and 2025 (85 vessels), potentially loosening the market balance before new liquefaction projects start up in 2025[156] - The unwinding of floating storage, which peaked at around 50 vessels in late October 2022, has released significant fleet capacity back into the market in early 2023[153] Forward-Looking Statements This section contains forward-looking statements subject to risks and uncertainties, including market conditions, operating expenses, and geopolitical events - The report includes forward-looking statements concerning plans, objectives, and future events, which are protected under the Private Securities Litigation Reform Act of 1995[55] - Key risk factors that could affect future results include fluctuations in charter rates, changes in LNG demand, operating expenses, geopolitical events, and other factors disclosed in SEC filings[56][57] Unaudited Interim Financial Statements Condensed Consolidated Statements of Operations The condensed consolidated statement of operations shows a net income of $41.4 million for Q4 2022 and $188.0 million for the full year, driven by revenues and derivative gains Condensed Consolidated Statements of Operations (Year Ended) | (in thousands of $) | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Vessel operating revenues | 347,917 | 343,448 | | Total operating expenses | (144,788) | (138,957) | | Operating income | 200,615 | 201,157 | | Interest expense | (76,596) | (56,221) | | Gain on derivatives | 79,682 | 18,399 | | Extinguishment costs of long-term debt | (16,102) | (1,209) | | Net income | 188,042 | 162,205 | Condensed Consolidated Balance Sheets As of December 31, 2022, total assets were $2.68 billion, with total liabilities at $1.77 billion and total equity increasing to $907.1 million Condensed Consolidated Balance Sheet Highlights | (in thousands of $) | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | 332,329 | 200,652 | | Vessels and equipment, net | 2,269,946 | 2,342,165 | | Total Assets | 2,679,512 | 2,572,921 | | Current portion of long-term debt | 95,507 | 81,472 | | Long-term debt (non-current) | 1,619,224 | 1,551,947 | | Total Liabilities | 1,772,422 | 1,683,534 | | Total Equity | 907,090 | 889,387 | Condensed Consolidated Interim Statements of Cash Flows For FY2022, operating activities generated $219.9 million in cash, while financing activities resulted in an $88.8 million outflow, increasing cash to $332.4 million Condensed Consolidated Statements of Cash Flows (Year Ended) | (in thousands of $) | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | 219,882 | 214,844 | | Net cash used in investing activities | (5) | (265,934) | | Net cash (used in)/provided by financing activities | (88,761) | 123,103 | | Net increase in cash | 131,231 | 72,208 | | Cash at end of period | 332,401 | 201,170 | Condensed Consolidated Interim Statement of Changes in Equity Total equity increased from $889.4 million to $907.1 million in 2022, driven by net income and share issuance, partially offset by dividends paid Changes in Equity for the Year Ended Dec 31, 2022 | (in thousands of $) | Amount | | :--- | :--- | | Total Equity at Jan 1, 2022 | 889,387 | | Net income | 188,042 | | Dividends paid | (186,094) | | Shares issued | 14,490 | | Share-based payments & other | 1,265 | | Total Equity at Dec 31, 2022 | 907,090 | Notes to the Interim Consolidated Accounts Note 1 & 2: General Information and Accounting Principles Flex LNG, an LNG transportation company, prepares its U.S. GAAP financial statements, including a $2.9 million out-of-period adjustment in 2022 - The company's primary business is the seaborne transportation of liquefied natural gas (LNG)[5] - The financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (U.S. GAAP)[6] - An out-of-period adjustment was made in 2022 to correct a $2.9 million overstatement of technical ship management fees from 2020 and 2021, which decreased vessel operating expenses and increased net income for 2022 by $2.9 million[7] Note 3: Earnings per Share This note details EPS calculations, with FY2022 net income of $188.0 million yielding basic EPS of $3.53 and diluted EPS of $3.51, alongside $3.50 in dividends paid per share Earnings Per Share Calculation (Full Year) | (figures in thousands, except per share data) | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Net income | $188,042 | $162,205 | | Weighted average shares (Basic) | 53,198,015 | 53,319,408 | | Weighted average shares (Diluted) | 53,523,866 | 53,340,292 | | Basic EPS | $3.53 | $3.04 | | Diluted EPS | $3.51 | $3.04 | | Dividends paid per share | ($3.50) | ($1.85) | Note 8 & 9: Capital Commitments and Long-term Debt As of December 31, 2022, capital commitments totaled $1.73 billion in long-term debt, with significant 2022 financing activities including new facilities and sale-leasebacks - Total long-term debt obligations as of December 31, 2022, amounted to $1.73 billion[22] - In March 2022, the company signed a $375 million term and revolving credit facility[24][31] - In May 2022, the company completed a $320 million sale and leaseback for Flex Constellation and Flex Courageous, using proceeds to prepay a $217.2 million facility[33][27] - In September and December 2022, the company signed two separate $150 million term loan facilities to refinance the vessels Flex Enterprise and Flex Resolute, respectively[29][37] Note 10: Financial Instruments (Derivatives) Flex LNG uses interest rate swaps to manage risk, with $691.0 million notional principal as of year-end 2022, generating a $79.7 million gain on derivatives for the year - The company holds interest rate swap agreements on an aggregate notional principal of $691.0 million as of December 31, 2022[38] - In October 2022, the company terminated five interest rate swap agreements, some of which generated cash proceeds and others were utilized to enter into a new, more favorable swap agreement[39][40] Gain on Derivatives (Full Year) | (in thousands of $) | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Change in fair value of derivative instruments | 78,207 | 24,423 | | Realized gain/(loss) on derivative instruments | 1,475 | (6,024) | | Total Gain on derivatives | 79,682 | 18,399 | Note 13, 14, 15: Share Capital, Treasury Shares, and Share-based Compensation In 2022, the company issued 409,741 shares via an ATM program for $14.5 million, held 838,185 treasury shares, and managed share options - In December 2022, 409,741 ordinary shares were issued under the at-the-market (ATM) program for net proceeds of $14.5 million[67][73] - As of December 31, 2022, the company held 838,185 treasury shares at a cost of $8.1 million[75] - During 2022, a total of 161,250 share options were exercised by holders and settled by the company through the transfer of treasury shares[76][79] - As of year-end 2022, there were 488,750 outstanding non-vested share options with a weighted average remaining contractual term of 3.7 years[80] Note 16: Subsequent Events Subsequent events include new financing deals for Flex Amber and Artemis, a $290 million credit facility, and a declared Q4 2022 dividend of $1.00 per share - In January 2023, signed sale and leaseback agreements to refinance Flex Amber and Flex Artemis, securing net consideration of $170 million and $160 million, respectively[82] - In February 2023, received credit approved term sheets for a $290 million term and revolving credit facility to refinance Flex Freedom and Flex Vigilant[83] - On February 13, 2023, the Board declared a total cash dividend of $1.00 per share for Q4 2022 ($0.75 regular + $0.25 special), payable in March 2023[84][85] Reconciliation of Non-GAAP Financial Measures Reconciliation of Net Income to EBITDA and Adjusted EBITDA This section reconciles FY2022 Net Income of $188.0 million to EBITDA of $339.9 million and Adjusted EBITDA of $272.3 million, adjusting for non-operating items EBITDA and Adjusted EBITDA Reconciliation (Full Year) | (in thousands of $) | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Net income/(loss) | 188,042 | 162,205 | | Interest, Tax, Depreciation, etc. | 151,890 | 127,321 | | EBITDA | 339,932 | 289,526 | | Adjustments (Derivatives, FX, etc.) | (67,590) | (18,706) | | Adjusted EBITDA | 272,342 | 270,820 | Reconciliation of Net Income to Adjusted Net Income and Adjusted EPS Net Income is reconciled to Adjusted Net Income of $150.7 million for FY2022, yielding an adjusted basic EPS of $2.83, by excluding non-core items Adjusted Net Income and EPS Reconciliation (Full Year) | (in thousands of $, except per share data) | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Net income | 188,042 | 162,205 | | Extinguishment costs of long-term debt | 16,102 | 1,209 | | Change in assets/liabilities of derivatives | (54,417) | (24,423) | | Foreign exchange (gain)/loss | 967 | (307) | | Adjusted net income | 150,694 | 138,684 | | Adjusted basic earnings per share | $2.83 | $2.60 | Reconciliation of Total Operating Revenues to Time Charter Equivalent (TCE) Income and Rate This section reconciles FY2022 vessel operating revenues of $347.9 million to TCE income of $345.4 million, resulting in an average TCE rate of $72,806 per day TCE Income and Rate (Full Year) | (Unaudited figures) | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Vessel operating revenues ($'000) | 347,917 | 343,448 | | Voyage expenses ($'000) | (2,517) | (3,334) | | Time charter equivalent income ($'000) | 345,400 | 340,114 | | Fleet onhire days | 4,744 | 4,563 | | Time charter equivalent rate ($/day) | 72,806 | 74,536 |