Navigator .(NVGS) - 2022 Q2 - Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Navigator Holdings is the owner and operator of 53 liquefied gas carriers, including the world's largest fleet of handysize vessels, also holding a 50% share in the Ethylene Export Terminal at Morgan's Point, Texas, with its fleet specializing in transporting LPG, petrochemical gases, and ammonia for diverse clients - As of June 30, 2022, the company owns and operates a fleet of 53 liquefied gas carriers, making it the world's largest owner of handysize liquefied gas carriers[8][10] - The company owns a 50% share in an ethylene export marine terminal on the Houston Ship Channel, which has an export capacity of at least one million tons of ethylene per year[10][16] - The fleet primarily transports LPG (propane and butane), petrochemical gases (like ethylene and propylene), and ammonia, serving a diverse client base of energy companies, industrial consumers, and commodity traders[14][15] Our Fleet As of August 17, 2022, the company's fleet consists of 53 vessels, including ethylene/ethane capable midsize and handysize carriers, semi-refrigerated handysize and smaller vessels, and fully-refrigerated vessels, with a significant portion employed on time charters or operating in the spot market or within vessel pools Fleet Composition and Employment Status (as of August 17, 2022) | Vessel Type | Total Count | Employment Mix | | :--- | :--- | :--- | | Ethylene/ethane capable semi-refrigerated midsize | 4 | All on Time Charter | | Ethylene/ethane capable semi-refrigerated handysize | 9 | Mix of Time Charter and Spot Market | | Ethylene/ethane capable semi-refrigerated smaller size | 5 | All in Unigas Pool | | Semi-refrigerated handysize | 19 | Mix of Time Charter and Spot Market | | Semi-refrigerated smaller size | 4 | All in Unigas Pool | | Fully-refrigerated | 7 | All on Time Charter | - Several vessels operate within pools: nine owned vessels are in the Luna Pool for ethylene/ethane transport, and nine smaller vessels are in the independently managed Unigas Pool[18][19] Recent Developments The company has managed impacts from the Russia-Ukraine conflict, with two charters to a Russian counterparty concluding and two others set to expire in December 2023, while the Ethylene Export Terminal saw a significant year-over-year increase in throughput to 268,444 metric tons in Q2 2022, driven by strong European demand for U.S. energy and petrochemicals, and the company is also expanding its presence in the ammonia transport market - Two vessels on charter to a Russian counterparty were redelivered in July 2022; two other charters with the same party expire in December 2023. The counterparty remains unsanctioned[20] - Ethylene Export Terminal throughput increased to 268,444 metric tons in Q2 2022, a significant rise from 155,428 metric tons in Q2 2021, primarily driven by strong European demand[22] - Handysize semi-refrigerated 12-month time charter rates increased by $35,000 pcm during Q2 2022 to $720,000 pcm[23] - The company increased its vessels on ammonia charters to seven in Q2 2022, which now constitutes 15% of its earnings days[26] Results of Operations The company reported significant growth in both the three and six months ended June 30, 2022, compared to the same periods in 2021, driven by the addition of vessels from the Ultragas Transaction, higher time charter equivalent (TCE) rates, and increased fleet utilization, leading to a substantial increase in net income bolstered by improved operating performance and higher earnings from the Ethylene Export Terminal joint venture Comparison for the Three Months Ended June 30, 2022 and 2021 For the second quarter of 2022, total operating revenues grew 44.6% to $123.9 million, and net income attributable to stockholders surged to $14.0 million from $0.3 million in Q2 2021, driven by a 19.7% increase in vessel available days from the Ultragas fleet acquisition, a rise in average TCE rates to $24,633/day, and higher fleet utilization of 87.4%, with a significant contribution from the Ethylene Export Terminal joint venture, which rose to $6.8 million from $2.0 million year-over-year Q2 2022 vs Q2 2021 Financial Highlights (in thousands) | Metric | Q2 2022 | Q2 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Total Operating Revenues | $123,917 | $85,699 | 44.6% | | Operating Income | $16,771 | $7,366 | 127.7% | | Net Income Attributable to Stockholders | $14,022 | $260 | 5,293.1% | Q2 2022 vs Q2 2021 Operating Metrics | Metric | Q2 2022 | Q2 2021 | | :--- | :--- | :--- | | Fleet Utilization | 87.4% | 85.4% | | Average Daily TCE Rate | $24,633 | $22,169 | - Revenue growth was primarily due to: $12.3 million from increased vessel available days (Ultragas Transaction), $8.3 million from higher TCE rates, and $2.0 million from increased fleet utilization[28] - Depreciation and amortization increased by 61.6% to $31.5 million, with $6.2 million of the increase resulting from changing the useful economic life of vessels from 30 to 25 years[40] - Share of income from the Ethylene Export Terminal Joint Venture increased to $6.8 million from $2.0 million, driven by a throughput increase to 268,444 tons from 155,428 tons[47] Comparison for the Six Months Ended June 30, 2022 and 2021 For the first half of 2022, total operating revenues increased 42.1% to $243.7 million, and net income attributable to stockholders was $41.1 million, compared to $3.1 million in H1 2021, driven by a 17.7% increase in vessel available days, an increase in average TCE rates to $23,781/day, and a rise in fleet utilization to 88.4%, with earnings from the Ethylene Export Terminal joint venture increasing to $13.3 million from $1.4 million due to a more than doubling of throughput volumes H1 2022 vs H1 2021 Financial Highlights (in thousands) | Metric | H1 2022 | H1 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Total Operating Revenues | $243,694 | $171,447 | 42.1% | | Operating Income | $34,466 | $19,700 | 75.0% | | Net Income Attributable to Stockholders | $41,060 | $3,080 | 1,233.1% | H1 2022 vs H1 2021 Operating Metrics | Metric | H1 2022 | H1 2021 | | :--- | :--- | :--- | | Fleet Utilization | 88.4% | 86.8% | | Average Daily TCE Rate | $23,781 | $22,060 | - Revenue growth was primarily due to: $22.6 million from increased vessel available days, $11.7 million from higher TCE rates, and $3.0 million from increased fleet utilization[51] - Share of income from the Ethylene Export Terminal Joint Venture increased to $13.3 million from $1.4 million, as throughput volumes rose to 535,554 tons from 245,805 tons[70] Liquidity and Capital Resources As of June 30, 2022, the company had $151.2 million in cash and $20.0 million available on a revolving credit facility, with a net current liability position of $27.7 million due to upcoming debt maturities, which management is actively working to refinance, while cash from operations increased to $58.7 million for the first half of 2022, investing activities provided $40.4 million, and financing activities used $72.1 million for debt repayments, with no newbuildings on order but potential future investments Liquidity and Cash Needs The company's primary funding sources are cash from operations and financing activities, with liquidity at $151.2 million in cash and $20.0 million in undrawn credit as of June 30, 2022, and despite a net current liability of $27.7 million due to maturing debt, management is negotiating refinancing and believes existing resources are sufficient for the next twelve months - As of June 30, 2022, the company had cash, cash equivalents, and restricted cash of $151.2 million, plus $20.0 million available under a revolving credit facility[73] - A net current liability position of $27.7 million was reported, primarily due to the upcoming maturity of two secured term loan facilities. Management expects to refinance these facilities[76] - Total outstanding obligations were $920.2 million, with $82.9 million maturing in the remainder of 2022[77] Capital Expenditures The company currently has no newbuildings on order, but future capital may be allocated to acquiring additional vessels or investing in terminal infrastructure, such as expanding the existing Ethylene Export Terminal - The company has no newbuildings on order but may acquire additional vessels or invest in terminal infrastructure as part of its growth strategy[79] Cash Flows For the six months ended June 30, 2022, net cash from operating activities was $58.7 million, an increase from $53.8 million in the prior year period, net cash from investing activities was $40.4 million, largely from vessel sales, and net cash used in financing activities was $72.1 million for debt repayments, resulting in a cash balance of $151.2 million at the end of the period Cash Flow Summary for the Six Months Ended June 30 (in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $58,705 | $53,812 | | Net cash provided by investing activities | $40,352 | $2,745 | | Net cash used in financing activities | ($72,064) | ($19,472) | | Net increase in cash | $26,993 | $37,085 | - Investing cash flows in H1 2022 were driven by $26.4 million in proceeds from vessel sales and $14.2 million in distributions from the Export Terminal Joint Venture[85] - Financing cash flows in H1 2022 were primarily used for $68.8 million in repayments of secured term loan facilities[87] Debt Facilities The company's debt structure includes a Terminal Facility for the Ethylene Export Terminal, multiple secured term loan and revolving credit facilities, and both senior secured and unsecured bonds, with total outstanding principal on these facilities approximately $864 million as of June 30, 2022, and the company was in compliance with all financial covenants Summary of Secured Term Loan and Revolving Credit Facilities (as of June 30, 2022) | Facility Date | Principal Outstanding (millions) | Maturity Date | | :--- | :--- | :--- | | January 2015 | $65.6 | Aug 2022 - Apr 2023 | | October 2016 | $70.3 | November 2023 | | June 2017 | $78.3 | June 2023 | | Total (all facilities) | $692.3 | Various | - The company has NOK 600 million in 2018 Senior Secured Bonds maturing in November 2023, secured by three vessels[100][101][103] - The company has $100.0 million in 2020 Senior Unsecured Bonds maturing in September 2025[108][110] Critical Accounting Estimates The company's financial statements are prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions that are regularly reviewed, but actual results could differ, with key accounting policies detailed in the 2021 Annual Report - The preparation of financial statements under U.S. GAAP requires management to make estimates and judgments that could materially affect reported results[119] Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk The company is exposed to interest rate risk on its variable-rate debt, with $419.2 million of debt subject to variable interest rates as of June 30, 2022, where a 100 basis point change in U.S. LIBOR would impact annual interest payments by $4.2 million, and the company utilizes interest rate swaps to mitigate this risk - As of June 30, 2022, the company had $419.2 million in outstanding debt subject to variable interest rates[123] - A 100 basis point (1%) variation in U.S. LIBOR would result in a $4.2 million change in annual interest payments[123] - Interest rate swaps are used to reduce exposure to market risk from changes in interest rates[124] Foreign Currency Exchange Rate Risk The company's primary currency is the U.S. Dollar, but it incurs expenses in other currencies like the Euro and Pound Sterling, with the main foreign currency exposure coming from its NOK 600 million senior secured bonds, which is economically hedged using a cross-currency interest rate swap to mitigate risks on both interest and principal payments - The company's primary currency is the U.S. Dollar, but it has transactional risk from expenses in foreign currencies, primarily the Euro, Pound Sterling, Danish Kroner, and Polish Zloty[125] - A significant exposure exists from the NOK 600 million senior secured bonds issued in 2018. This risk is mitigated through a cross-currency interest rate swap covering both interest and principal[126][127] Inflation Inflation affects operating expenses such as crewing, insurance, and drydocking costs, and rising bunker (fuel) costs can have a material effect on voyage charters where the company bears the fuel expense, potentially causing a temporary negative impact on results despite freight rates tending to adjust - Operating expenses like crewing, insurance, and drydocking are subject to inflation[128] - Increases in bunker costs primarily affect vessels on voyage charters, as charterers pay for fuel on time charters. As of June 30, 2022, 28 of 44 owned and managed vessels were on time charter[128] Credit Risk The company faces credit risk from its vessel charterers and continuously evaluates their creditworthiness, with credit risk concentration limited as of June 30, 2022, as no single charterer employed more than four of the company's vessels - The company continuously monitors credit risk associated with its charterers. As of June 30, 2022, no single charterer employed more than four of its vessels[129] Important Information Regarding Forward-Looking Statements Forward-Looking Statements Disclosure This section contains a standard safe harbor statement, warning that the report includes forward-looking statements regarding plans, strategies, and future performance, listing numerous risks and uncertainties such as market conditions, charter rates, the impact of the Russian invasion of Ukraine, and the financial success of its joint ventures, that could cause actual results to differ materially from those projected, and the company disclaims any obligation to update these statements - The report includes forward-looking statements concerning future operations and economic performance[132] - Key risks identified include global health crises, market trends, charter rates, ability to comply with debt covenants, the impact of the Russian invasion of Ukraine, and the success of the Ethylene Export Terminal and Ultragas integration[133] Unaudited Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets As of June 30, 2022, the company reported total assets of $2.125 billion, a slight decrease from $2.157 billion at year-end 2021, with total liabilities decreasing to $965.4 million from $1.040 billion primarily due to debt repayments, and total stockholders' equity increasing to $1.159 billion from $1.117 billion Balance Sheet Highlights (in thousands) | Account | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash, cash equivalents and restricted cash | $151,216 | $124,223 | | Vessels, net | $1,709,356 | $1,763,252 | | Total Assets | $2,124,865 | $2,157,425 | | Current portion of secured term loan facilities | $222,684 | $148,570 | | Total Liabilities | $965,405 | $1,039,971 | | Total Stockholders' Equity | $1,159,460 | $1,117,454 | Condensed Consolidated Statements of Operations The company's statements of operations show significant year-over-year improvement, with net income attributable to stockholders at $14.0 million ($0.18 per diluted share) for Q2 2022, compared to $0.3 million ($0.01 per diluted share) in Q2 2021, and $41.1 million ($0.53 per diluted share) for the six-month period, up from $3.1 million ($0.05 per diluted share) in H1 2021 Statement of Operations Summary (in thousands, except per share data) | Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Total Operating Revenues | $123,917 | $85,699 | $243,694 | $171,447 | | Operating Income | $16,771 | $7,366 | $34,466 | $19,700 | | Net Income Attributable to Stockholders | $14,022 | $260 | $41,060 | $3,080 | | Diluted EPS | $0.18 | $0.01 | $0.53 | $0.05 | Condensed Consolidated Statements of Comprehensive Income For the six months ended June 30, 2022, total comprehensive income was $41.5 million, consisting of $41.8 million in net income and a foreign currency translation loss of $0.2 million, compared to a total comprehensive income of $3.9 million for the same period in 2021 Comprehensive Income Summary (in thousands) | Metric | H1 2022 | H1 2021 | | :--- | :--- | :--- | | Net Income | $41,764 | $3,863 | | Foreign currency translation (loss) / gain | ($235) | $33 | | Total Comprehensive Income | $41,529 | $3,896 | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity increased from $1.117 billion at the start of 2022 to $1.159 billion as of June 30, 2022, primarily driven by net income of $41.8 million for the six-month period, partially offset by a foreign currency translation loss, with the number of outstanding shares remaining relatively stable at approximately 77.3 million - Total equity increased from $1,117.5 million on January 1, 2022, to $1,159.5 million on June 30, 2022[143] - The primary driver of the equity increase was net income of $41.8 million for the six-month period[143] Condensed Consolidated Statements of Cash Flows For the first six months of 2022, cash and cash equivalents increased by $27.0 million, with net cash provided by operating activities at $58.7 million, investing activities providing $40.4 million largely from vessel sales, and financing activities using $72.1 million for debt repayments, resulting in a cash balance of $151.2 million at the end of the period Cash Flow Summary for the Six Months Ended June 30 (in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $58,705 | $53,812 | | Net cash provided by investing activities | $40,352 | $2,745 | | Net cash used in financing activities | ($72,064) | ($19,472) | | Net increase in cash | $26,993 | $37,085 | | Cash at end of period | $151,216 | $96,356 | Notes to Unaudited Condensed Consolidated Financial Statements The notes provide detailed explanations of the company's accounting policies and financial figures, covering the basis of presentation, revenue recognition, vessels, equity investments, debt structure, derivative instruments, share-based compensation, commitments, and related party transactions, notably including a significant accounting change reducing vessels' estimated useful lives from 30 to 25 years Note 1: General Information and Basis of Presentation The company operates a fleet of 53 gas carriers and has a 50% share in an ethylene export terminal, with financial statements prepared under U.S. GAAP, and despite a net current liability position of $27.7 million due to maturing debt, management has determined the going concern basis is appropriate as it expects to successfully refinance these facilities - Management has adopted the going concern basis for preparing financial statements, despite a net current liability of $27.7 million, based on the expectation of refinancing maturing debt facilities[156][157] Note 3: Operating Revenues Operating revenues are generated from time charters and voyage charters, with time charter revenues at $112.5 million and voyage charter revenues at $93.7 million for the six months ended June 30, 2022, and as of June 30, 2022, the company had committed future undiscounted time charter revenues of $388.6 million Operating Revenue by Source - H1 2022 (in thousands) | Revenue Source | H1 2022 | | :--- | :--- | | Time charters | $112,522 | | Voyage charters | $93,749 | | Voyage charters from Luna Pool | $12,530 | | Operating revenues from Unigas Pool | $24,893 | | Total Operating Revenues | $243,694 | - As of June 30, 2022, estimated undiscounted cash flows for committed time charter revenues totaled $388.6 million, with $167.5 million expected within one year[162] Note 4: Vessels, Net The net book value of the company's vessels was $1.709 billion as of June 30, 2022, following a significant accounting change effective January 1, 2022, reducing the estimated useful lives of vessels from 30 years to 25 years to reflect the impact of climate change, and during the first half of 2022, the company sold two vessels, Navigator Neptune and Happy Bird - Effective January 1, 2022, the company changed the estimated useful lives of its vessels from 30 years to 25 years[172] - The net book value of vessels decreased from $1.763 billion at year-end 2021 to $1.709 billion at June 30, 2022, reflecting depreciation and the sale of two vessels[168] Note 5: Equity Method Investments The company holds several equity method investments, with the largest being its 50% stake in the Export Terminal Joint Venture, which had a carrying value of $147.0 million as of June 30, 2022 with no impairment recorded, and the company also holds interests in Luna Pool Agency, Unigas International, and Dan Unity CO2 - The carrying value of the investment in the Export Terminal Joint Venture was $147.0 million as of June 30, 2022. No impairment has been recorded[185] - For H1 2022, the company recognized $13.3 million in income from its equity method investments and received $14.2 million in distributions[177][183] Note 9: Derivative Instruments The company uses derivative instruments, primarily interest rate swaps and a cross-currency interest rate swap, to manage market risks, with interest rate swaps having a net fair value asset of $14.4 million as of June 30, 2022, and the cross-currency swap, used to hedge the NOK-denominated bonds, having a fair value liability of $12.7 million, resulting in an unrealized loss of $7.7 million for the first half of 2022 Fair Value of Derivative Instruments (as of June 30, 2022, in thousands) | Instrument | Fair Value (Asset / Liability) | | :--- | :--- | | Cross-currency interest rate swap | $(12,725) | | Interest rate swap agreements | $14,405 | - The cross-currency interest rate swap is used to economically hedge the foreign currency exposure on the NOK-denominated 2018 Bonds[204] Note 12: Share-Based Compensation The company maintains a long-term incentive plan, granting restricted shares and share options to directors, officers, and employees, with 85,716 restricted shares and 10,000 share options granted in H1 2022, total share-based compensation cost recognized in H1 2022 approximately $0.5 million, and $0.9 million in unrecognized compensation costs as of June 30, 2022 - During H1 2022, the company recognized $475,692 in share-based compensation costs for share grants[225] - As of June 30, 2022, there was a total of $857,827 in unrecognized compensation costs related to non-vested restricted shares, expected to be recognized over a weighted average period of 1.55 years[225] Note 13: Commitments and Contingencies As of June 30, 2022, the company had total contractual obligations of $920.2 million, including $692.3 million for secured term loan facilities, $100.0 million for the 2020 Bonds, $71.7 million for the 2018 Bonds, and $51.5 million for the Navigator Aurora facility Total Contractual Obligations (as of June 30, 2022, in thousands) | Obligation | Total Amount | | :--- | :--- | | Secured term loan facilities | $692,286 | | 2020 Bonds | $100,000 | | 2018 Bonds | $71,697 | | Office operating leases | $4,705 | | Navigator Aurora Facility | $51,488 | | Total | $920,176 | Note 16: Variable Interest Entities (VIEs) The company consolidates several Variable Interest Entities (VIEs) where it is deemed the primary beneficiary, including PT Navigator Khatulistiwa, the lessor entity for the Navigator Aurora (OCY Aurora Ltd.), and two entities acquired in the Ultragas Transaction (UCPI and USPI), with these VIEs having total assets of $186.2 million and liabilities of $69.9 million included in the consolidated balance sheet as of June 30, 2022 - The company consolidates OCY Aurora Ltd., the special purpose vehicle that owns the vessel Navigator Aurora under a sale and leaseback arrangement, because it is deemed the primary beneficiary[243][244] - As of June 30, 2022, the consolidated VIEs had total assets of $186.2 million and total liabilities of $69.9 million[248] Note 17: Related Party Transactions Following the Ultragas Transaction, Naviera Ultranav Limitada became a principal shareholder with a 27.5% ownership interest, and the company entered into a Transitional Services Agreement with an Ultranav affiliate (UBS) for back-office services at a monthly fee of $173,659, with other related parties including Ocean Yield Malta Limited (related to the Navigator Aurora financing) and various pools - Naviera Ultranav Limitada holds a 27.5% ownership interest in the company and is considered a principal shareholder[250] - A Transitional Services Agreement is in place with Ultranav Business Support ApS for various back-office services, with a monthly fee of $173,659[251]