SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | |
FLEX LNG Ltd. (registrant) |
| By: | /s/ Oystein Kalleklev |
| Name: | Oystein Kalleklev |
| Title: | Chief Executive Officer of Flex LNG Management AS
(Principal Executive Officer of FLEX LNG Ltd.) |
Date: May 16, 2023
EXHIBIT 1
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following presentation of management's discussion and analysis of financial condition and results of operations for the three month period ended March 31, 2023 should be read in conjunction with our unaudited condensed consolidated interim financial statements and related notes thereto included elsewhere herein, which have been prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"). For additional information relating to our management's discussion and analysis of results of operations and financial condition, please see our annual report on Form 20-F for the year ended December 31, 2022 (our "Annual Report"), filed with the U.S. Securities and Exchange Commission, or the SEC, on March 10, 2023.
Unless otherwise indicated, the terms "FLEX LNG," "we," "us," "our," the "Company" and the "Group" refer to FLEX LNG Ltd. and its consolidated subsidiaries. We use the term "LNG" to refer to liquefied natural gas, and we use the term "cbm" to refer to cubic meters in describing the carrying capacity of the vessels in Our Fleet (as defined below).
Unless otherwise indicated, all references to "U.S. Dollars," "USD," "Dollars," "US$" and "$" in this report are to the lawful currency of the United States of America, references to "Norwegian Kroner," and "NOK" are to the lawful currency of Norway, references to "Great British Pounds," and "GBP" are to the lawful currency of the United Kingdom.
Unless otherwise indicated, all references to "LIBOR" are to the London Inter-Bank Offered Rate of interest and references to "SOFR" are to the Secured Overnight Financing Rate of interest.
The below discussion contains forward-looking statements that reflect our current views with respect to future events and financial performance. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, such as those set forth in the section "Risk Factors" in our Annual Report .
General
FLEX LNG Ltd. is an exempted company incorporated under the laws of Bermuda. Our ordinary shares currently trade on the New York Stock Exchange ("NYSE") and the Oslo Stock Exchange ("OSE") under the ticker symbol "FLNG".
We are an owner and commercial operator of fuel efficient, fifth generation LNG carriers. As of May 16, 2023, we own and operate thirteen LNG carriers, which we collectively refer to as our "Operating Vessels" or "Our Fleet."
Our business is currently focused on the operation of our long-term charters for Our Fleet, which is described in the table below, or Our Fleet and exploring accretive opportunities to further grow the Company.
Our Fleet
The following table sets forth additional information about Our Fleet as of May 16, 2023: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Vessel Name | | Cargo Capacity (cbm) | | Propulsion(1) | | Year Built | | Shipyard(2) | | Charter expiration(3) | | Expiration with Charterer options (4) |
| Flex Endeavour | | 173,400 | | | MEGI | | 2018 | | DSME | | Q3 2030 | | Q1 2033 |
| Flex Enterprise | | 173,400 | | | MEGI | | 2018 | | DSME | | Q3 2029 | | NA |
| Flex Ranger | | 174,000 | | | MEGI | | 2018 | | SHI | | Q1 2027 | | NA |
| Flex Rainbow | | 174,000 | | | MEGI | | 2018 | | SHI | | Q1 2033 | | NA |
| Flex Constellation | | 173,400 | | | MEGI | | 2019 | | DSME | | Q2 2024 | | Q2 2027 |
| Flex Courageous | | 173,400 | | | MEGI | | 2019 | | DSME | | Q1 2025 | | Q1 2029 |
| Flex Aurora | | 174,000 | | | X-DF | | 2020 | | HSHI | | Q2 2026 | | Q2 2028 |
| Flex Amber | | 174,000 | | | X-DF | | 2020 | | HSHI | | Q3 2029 | | NA |
| Flex Artemis | | 173,400 | | | MEGI | | 2020 | | DSME | | Q3 2025 | | Q3 2030 |
| Flex Resolute | | 173,400 | | | MEGI | | 2020 | | DSME | | Q1 2025 | | Q1 2029 |
| Flex Freedom | | 173,400 | | | MEGI | | 2021 | | DSME | | Q1 2027 | | Q1 2029 |
| Flex Volunteer | | 174,000 | | | X-DF | | 2021 | | HSHI | | Q1 2026 | | Q1 2028 |
| Flex Vigilant | | 174,000 | | | X-DF | | 2021 | | HSHI | | Q4 2030 | | Q2 2033 |
| | | | | |
| (1) | As used in this report, "MEGI" refers to M-type Electronically Controlled Gas Injection propulsion systems and "X-DF" refers to Generation X Dual Fuel propulsion systems. |
| (2) | As used in this report, "DSME" means Daewoo Ship building and Marine Engineering Co. Ltd., "SHI" means Samsung Heavy Industries, and "HSHI" means Hyundai Samho Heavy Industries Co. Ltd. Each is located in South Korea. |
| (3) | The expiration of our charters is subject to re-delivery windows ranging from 15 to 45 days before or after the expiration date. |
| (4) | Where charterers have option(s) to be declared on a charter; the expiration provided assumes all options have been declared for illustrative purposes. |
Employment of Our Fleet and Our Customers
In March and April 2023, Flex Enterprise and her sister vessel, Flex Endeavour, respectively, completed their first scheduled drydock in Singapore. We are required to drydock each vessel once every five years and we now have two remaining vessels scheduled for drydock in 2023 and two vessels scheduled for drydock in 2024.
Other business updates
The uncertainty in global capital and bank credit markets in recent months has affected both access to and cost of new financing. This has led to a sharp increase in both short and long-term interest rates and has subsequently increased the overall cost of our floating rate debt, however, it has also resulted in significant gains in the past 12 to 18 months, most of which is unrealized, on our interest rate swaps, whereby floating interest rates have been swapped to fixed interest rates.
Uncertainties caused by the Russo-Ukrainian War
The ongoing war between Russia and the Ukraine continues to disrupt supply chains and cause instability in the global economy, while the United States and the European Union, among other countries uphold tight sanctions against Russia. The conflict could result in the imposition of further economic sanctions against Russia that may have a wider reaching impact on the Company's business. Currently, the Company's charter contracts have not been affected by the events in Russia and Ukraine. However, it is possible that in the future third parties with whom the Company has or will have charter contracts may be impacted by such events. While in general much uncertainty remains regarding the global impact of the conflict in Ukraine, it is possible that such tensions could adversely affect the Company's business, financial condition, results of operation and cash flows.
RESULTS OF OPERATIONS
Three months ended March 31, 2023 compared to the three months ended March 31, 2022
Amounts included in the following discussion are derived from our unaudited condensed consolidated financial statements for the three months ended March 31, 2023 and 2022.
Vessel operating revenues
| | | | | | | | | | | | | |
| (unaudited figures in thousands of $) | | Three months ended | | |
| | March 31, | | |
| | 2023 | 2022 | | |
| Vessel operating revenues | | 92,477 | | 74,570 | | | |
Vessel operating revenues increased by $17.9 million to $92.5 million in the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. The increase in revenues is impacted by an improved spot market in 2023 compared to 2022, resulting in an increased charter hire on our index linked time charter and one vessel idling for periods of the first quarter 2022. Furthermore, we had more vessels on improved long-term charters, with respect to their fixed rate of hire, in 2023 compared to 2022 in addition to some vessels impacted by the declaration of charterers' options during 2022. Lastly, these factors were offset by 19 days of offhire in the first quarter 2023 for Flex Enterprise, which was undergoing a dry dock.
Voyage expenses
| | | | | | | | | | | |
| (unaudited figures in thousands of $) | | Three months ended |
| | March 31, |
| | 2023 | 2022 |
| Voyage expenses | | (273) | | (1,354) | |
Voyage expenses, which include voyage specific expenses, broker commissions and bunkers consumption, decreased by $1.1 million to $0.3 million in the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. In 2022, we had one vessel exposed to the spot market which resulted in bunker consumption on the owner's account during the idling periods, whereas in 2023 there were no vessels operating in the spot market, which reduced bunker consumption.
Vessel operating expenses | | | | | | | | | | | | | |
| (unaudited figures in thousands of $) | | Three months ended | | |
| | March 31, | | |
| | 2023 | 2022 | | |
| Vessel operating expenses | | (15,706) | | (14,351) | | | |
Vessel operating expenses increased by $1.4 million to $15.7 million in the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. In the three months ended March 31, 2022, there was an out-of-period adjustment of $2.9 million recorded which reduced the vessel operating expenses. With the exception of the aforementioned adjustment, there was a decrease in operating expenses, which is attributable to a decrease in technical expenses such as spares, services and stores offset by an increase in training costs, during the three months ended March 31, 2023.
Administrative expenses | | | | | | | | | | | | | |
| (unaudited figures in thousands of $) | | Three months ended | | |
| | March 31, | | |
| | 2023 | 2022 | | |
| Administrative expenses | | (3,869) | | (2,697) | | | |
Administrative expenses increased by $1.2 million to $3.9 million in the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. The increase in administrative expenses is primarily due to increased stock option compensation expense relating to stock options issued in 2022 and 2021.
Depreciation | | | | | | | | | | | | | |
| (unaudited figures in thousands of $) | | Three months ended | | |
| | March 31, | | |
| | 2023 | 2022 | | |
| Depreciation | | (17,619) | | (17,809) | | | |
Depreciation decreased by $0.2 million to $17.6 million in the three months ended March 31, 2023, as compared to the three months ended March 31, 2022.
Interest income | | | | | | | | | | | | | |
| (unaudited figures in thousands of $) | | Three months ended | | |
| | March 31, | | |
| | 2023 | 2022 | | |
| Interest income | | 1,689 | | 29 | | | |
Interest income increased by $1.7 million to $1.7 million in the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. The increase is primarily due to the increase in the floating rate of interest and increase in the Company's cash and cash equivalents.
Interest expense
| | | | | | | | | | | | | |
| (unaudited figures in thousands of $) | | Three months ended | | |
| | March 31, | | |
| | 2023 | 2022 | | |
| Interest expense | | (26,323) | | (14,639) | | | |
Interest expense increased by $11.7 million to $26.3 million in the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. The increase in interest is due to the increase in the floating rate of interest, based on SOFR and LIBOR, and an increase in long-term debt.
Extinguishment of long-term debt
| | | | | | | | | | | |
| (unaudited figures in thousands of $) | | Three months ended |
| | March 31, |
| | 2023 | 2022 |
| Extinguishment of long-term debt | | (10,238) | | — | |
Extinguishment of long-term debt increased by $10.2 million to $10.2 million in the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. In the three months ended March 31, 2023, the Company recorded an write-off of unamortized debt issuance costs of $8.8 million and direct exit costs of $1.4 million in relation to the extinguishment of the $629 Million Facility and the Flex Amber Sale and Leaseback, which were re-financed.
(Loss)/ gain on derivatives
| | | | | | | | | | | | | |
| (unaudited figures in thousands of $) | | Three months ended | | |
| | March 31, | | |
| | 2023 | 2022 | | |
(Loss)/gain on derivatives | | (2,846) | | 31,864 | | | |
The Company had a loss on derivatives of $2.8 million in the three months ended March 31, 2023 compared to a gain of $31.9 million in the three months ended March 31, 2022; a decrease of $34.7 million. In the three months ended March 31, 2023 the company recorded an unrealized loss on derivatives of $7.9 million (2022: $33.4 million gain), which is as a result in the movement in the fair value of interest rate swaps and will fluctuate based on changes in the total notional amount and the movement in the long-term floating rate of interest between periods. In the three months ended March 31, 2023, the Company recorded a realized gain on settlement of interest rate swaps of $5.0 million (2022: $1.5 million loss), which offsets the aforementioned movement in the fair value.
Other financial items
| | | | | | | | | | | | | |
| (unaudited figures in thousands of $) | | Three months ended | | |
| | March 31, | | |
| | 2023 | 2022 | | |
| Other financial items | | (725) | | 164 | | | |
The Company recorded an expense of $0.7 million in relation to other financial items in the three months ended March 31, 2023, compared to a gain of $0.2 million in the three months ended March 31, 2022. The decrease in other financial items is primarily as a result of the strengthening of the US Dollar negatively impacting cash held in our other currencies.
LIQUIDITY AND CAPITAL RESOURCES
We operate in a capital-intensive industry and have financed the purchase of the vessels in Our Fleet through a combination of cash generated from operations, equity capital and borrowings under our financing agreements. Payment of amounts outstanding under our debt agreements, and all other commitments that we have entered into are made from the cash available to us.
Cash
As of March 31, 2023, we had cash, cash equivalents and restricted cash as of $475.5 million, an increase of $143.1 million, compared to $332.4 million as of December 31, 2022. In the three months ended March 31, 2023, the movements in cash consisted of $38.3 million provided by operating activities and $109.9 million provided by financing activities, offset by $4.5 million used in investing activities and $0.6 million as a result of the effect of exchange rate changes on cash.
Financing information
$375 Million Facility
In March 2022, the Company, through its vessel owning subsidiaries, signed a $375 million secured term and revolving credit facility (the “$375 Million Facility”) with a syndicate of banks to re-finance existing facilities for Flex Endeavour, Flex Ranger and Flex Rainbow.
In February 2023, we completed an asset swap under the $375 Million Facility, which replaced Flex Rainbow with Flex Aurora. In connection with the asset swap, we prepaid the full amount outstanding of $110.0 million under the Flex Aurora tranches of the $629 Million Facility. As of March 31, 2023, the net outstanding balance under the facility was $362.6 million (December 31, 2022: $368.1 million).
$330 Million Sale and Leaseback
In February 2023, we completed sale and leaseback agreements with an Asian-based lease provider for Flex Amber and Flex Artemis to refinance their existing facilities. Under the terms of the agreements, the vessels were sold for a gross consideration, equivalent to the market value of each vessel at the time, and net consideration of $170 million for the Flex Amber and $160 million for the Flex Artemis, adjusted for an advance hire per vessel. The agreements have a lease period of ten years and we have the option to extend for an additional two years. The bareboat rate payable under the leases have a fixed element, treated as principal repayment, and a variable element based on term SOFR plus a margin of 215 basis points per annum calculated on the outstanding under the lease. The agreements include fixed price purchase options, whereby we have options to re-purchase the vessels at or after the third anniversary of the agreement, and on each anniversary thereafter, until the end of the lease period. In February 2023, we prepaid the full amount outstanding under the Flex Artemis tranches of $629 Million Facility and the Flex Amber Sale and Leaseback. As of March 31, 2023, the outstanding balance under the facility was $322.7 million, net of financing costs.
$290 Million Facility
In March 2023, we signed and completed a $290 million term and revolving credit facility for the vessels Flex Freedom and Flex Vigilant to re-finance their remaining tranches of the $629 Million Facility. The facility has an interest of SOFR plus a margin of 185 basis points per annum. The facility is split into a term tranche of $140 million and a revolving tranche of $150 million. The facility has a duration of six years, with the revolving tranche being non-amortizing and the term tranche amortizing reflecting an overall age adjusted profile of 22 years. In connection with this agreement, the Company prepaid the full amount outstanding under the $629 Million Facility. As of March 31, 2023, the outstanding balance under the facility was $288.5 million, net of financing costs.
Flex Rainbow $180 Million Sale and Leaseback
In March 2023, the Company and an Asian-based lease provider signed and completed a sale and leaseback agreement for the vessel, Flex Rainbow. Under the terms of the agreement, the vessel was sold for a consideration of $180 million, with a bareboat charter of 9.9 years. The bareboat rate payable under the lease has a fixed element considered a principal repayment and a variable element considered interest, which is calculated on term SOFR plus a margin. The Company has the options to terminate the lease and repurchase the vessel at fixed price in the first quarter 2028, in the first quarter 2030 and at the end of the charter in first quarter 2033. In connection with the re-financing of Flex Rainbow, the Company prepaid Flex Aurora's outstanding amount under the $629 Million Facility, which subsequently replaced Flex Rainbow via an asset swap under the $375 Million Facility, as previously described. As of March 31, 2023, the outstanding balance under the facility was $177.2 million, net of financing costs.
Interest Rate Swaps
In order to reduce the risks associated with fluctuations in interest rates, the Company has entered into interest rate swap transactions, whereby the floating rate has been swapped to a fixed rate of interest. As of May 15, 2023, the Company has fixed the interest rate on a total amortized notional amounts of $820.0 million. The interest rate swaps with a fixed rate of interest based on LIBOR have a total notional principal of $160.0 million and a weighted average fixed interest rate of 0.96% for a weighted average duration of 1.9 years The interest rate swaps with a fixed rate of interest based on SOFR have a total notional principal of $660.0 million and a weighted average fixed interest rate of 1.81% for a weighted average duration of 5.2 years.
Loan Covenants
Certain of our financing agreements contain, among other things, the following financial and vessel covenants, which are tested quarterly, the most stringent of which require us (on a consolidated basis) to maintain:
•a book equity ratio of minimum 0.25 to 1.0 (note that from April 1, 2023, the most stringent book equity ratio will change to a minimum of 0.20 to 1.0);
•a positive working capital; and
•minimum liquidity, including undrawn credit lines with a remaining term of at least six months, being the higher of:
i.$25 million; and
ii.an amount equal to five per cent (5%) of our total interest bearing financial indebtedness net of any cash and cash equivalents.
•collateral maintenance test, ensuring that the aggregate value of the vessels making up the facility in question exceeds the aggregate value of the debt commitment outstanding.
Our financing agreements discussed above contain, among other things, restrictive covenants which, to the extent triggered, would restrict our ability to:
i.declare, make or pay any dividend, charge, fee or other distribution (whether in cash or in kind) on or in respect of its share capital (or any class of its share capital);
ii.pay any interest or repay any principal amount (or capitalized interest) on any debt to any of its shareholders;
iii.redeem, repurchase or repay any of its share capital or resolve to do so; or
iv.enter into any transaction or arrangement having a similar effect as described in (i) through (iii) above.
Our secured credit facilities may be secured by, among other things:
•a first priority mortgage over the relevant collateralized vessels;
•a first priority assignment of earnings, insurances and charters from the mortgaged vessels for the specific facility;
•a pledge of earnings accounts generated by the mortgaged vessels for the specific facility; and
•a pledge of the equity interests of each vessel owning subsidiary under the specific facility.
A violation of any of the covenants contained in our financing agreements may constitute an event of default under the relevant financing agreement, which, unless cured within the grace period set forth under the financing agreement, if applicable, or waived or modified by our lenders, provides our lenders, by notice to the borrowers, with the right to, among other things, cancel the commitments immediately, declare that all or part of the loan, together with accrued interest, and all other amounts accrued or outstanding under the agreement, be immediately due and payable, enforce any or all security under the security documents, and/or exercise any or all of the rights, remedies, powers or discretion's granted to the facility agent or finance parties under the finance documents or by any applicable law or regulation or otherwise as a consequence of such event of default.
Furthermore, certain of our financing agreements contain a cross-default provision that may be triggered by a default under one of our other financing agreements. A cross-default provision means that a default on one loan would result in a default on certain of our other loans. Because of the presence of cross-default provisions in certain of our financing agreements, the refusal of any one lender under our financing agreements to grant or extend a waiver could result in certain of our indebtedness being accelerated, even if our other lenders under our financing agreements have waived covenant defaults under the respective agreements. If our secured indebtedness is accelerated in full or in part, it would be difficult for us to refinance our debt or obtain additional financing and we could lose our vessels and other assets securing our financing agreements if our lenders foreclose their liens, which would adversely affect our ability to conduct our business.
Moreover, in connection with any waivers of or amendments to our financing agreements that we have obtained, or may obtain in the future, our lenders may impose additional operating and financial restrictions on us or modify the terms of our existing financing agreements. These restrictions may further restrict our ability to, among other things, pay dividends, make capital expenditures or incur additional indebtedness, including through the issuance of guarantees. In addition, our lenders may require the payment of additional fees, require prepayment of a portion of our indebtedness to them, accelerate the amortization schedule for our indebtedness and increase the interest rates they charge us on our outstanding indebtedness.
As of March 31, 2023, we were in compliance with all of the financial covenants contained in our financing agreements.
Cash Flows
The following summarizes our cash flows from operating, investing and financing activities for the three months ended March 31, 2023 and 2022.
| | | | | | | | | | | | | |
| (in thousands of $) | | Three months ended | | |
| | March 31, | | |
| | 2023 | 2022 | | |
| Net cash provided by operating activities | | 38,276 | | 42,450 | | | |
| Net cash used in investing activities | | (4,531) | | (1) | | | |
| Net cash provided/(used in) by financing activities | | 109,909 | | (69,141) | | | |
| Effect of exchange rate changes on cash | | (585) | | 30 | | | |
| Net change in cash, cash equivalents and restricted cash | | 143,069 | | (26,662) | | | |
| Cash, cash equivalents and restricted cash at beginning of period | | 332,401 | | 201,170 | | | |
| Cash, cash equivalents and restricted cash at end of period | | 475,470 | | 174,508 | | | |
Operating Activities
Net cash provided by operating activities decreased by $4.2 million to $38.3 million for the three months ended March 31, 2023, compared to cash provided of $42.5 million for the three months ended March 31, 2022.
Net cash provided by operating activities was primarily impacted by: (i) overall market conditions as reflected by the increase in vessel operating revenues of Our Fleet, (ii) increases in interest expense as a result of the increase in floating interest rates, LIBOR and SOFR, and an increase in our long term debt, (iii) an increase in our other current assets and liabilities affecting working capital;
i.The majority of our ships are on improved long term fixed rate charter hires compared to the three months ended March 31, 2022;
ii.The increase in the Company's debt facilities, along with the increased interest rates has resulted in an increase in interest paid of $17.8 million in the three months ended March 31, 2023 compared to the three months ended March 31, 2022;
iii.Changes in operating assets and liabilities resulted in an increase in cash provided by operating activities of $15.8 million. The movement in working capital balances are impacted by the timing of voyages, and also by the timing of fueling and consumption of fuel on board our vessels. Revenues for all of our vessels operate under time charters and are typically billed in advance.
Investing Activities
Net cash used in investing activities increased by $4.5 million to $4.5 million in the three months ended March 31, 2023, compared to cash used in investing activities of $0.0 million in the three months ended March 31, 2022. This is solely due to capitalized costs for the vessel Flex Enterprise, who underwent her drydocking in Singapore in the quarter, as scheduled.
Financing Activities
Net cash provided by financing activities was $109.9 million in the three months ended March 31, 2023, compared to net cash used in financing activities of $69.1 million in the three months ended March 31, 2022.
Net cash provided by financing activities in the three months ended to March 31, 2023 comprised of:
•proceeds from long-term debt of $140.0 million under the term tranche of the $290 Million Facility;
•net drawdown of revolving credit facilities of $150.0 million in relation to the $290 Million Facility and the $375 Million Facility;
•proceeds from long-term debt of $180.0 million under the Flex Rainbow $180 Million Sale and Leaseback;
•proceeds from long-term debt of $160.0 million under the $330 Million Sale and Leaseback;
•proceeds from long-term debt of $170.0 million under the $330 Million Sale and Leaseback;
These items were partially offset by:
•prepayment of the remaining tranches under the $629 Million Facility relating to the vessels Flex Aurora, Flex Reliance, Flex Freedom and Flex Vigilant, amounting to $458.5 million;
•prepayment of the Flex Amber Sale and Leaseback amounting to $136.8 million;
•direct costs in relation to the extinguishment of long-term debt of $1.4 million from the repayment of the Flex Amber Sale and Leaseback;
•scheduled repayments of long-term debt amounting to $32.1 million;
•dividend payments of $53.7 million and;
•financing costs of $7.5 million.
In the three months ended March 31, 2022, the Company paid $28.6 million in regular installments of long-term debt, $64.1 million for the repayment of revolving credit facilities and had dividend payments of $39.8 million. This was offset by the drawdown of revolving credit facilities amounted to $63.4 million.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our activities expose us to a variety of financial risks including market risk (including currency risk and interest rate risk), credit risk and liquidity risk. Our overall risk management program considers the unpredictability of financial markets and seeks to minimize potential adverse effects on our financial performance, in a cost-effective manner.
Currency Risk
The majority of our transactions, assets and liabilities are denominated in U.S. dollars, our functional currency. However, we incur expenditures in currencies other than the functional currency, mainly overhead costs in GBP and NOK. Historically, we have not hedged these exposures. There is a risk that currency fluctuations in transactions incurred in currencies other than our functional currency will have a negative effect of the value of our cash flows.
Interest rate risk
We are exposed to interest rate fluctuations primarily due to our floating rate interest-bearing long-term debt and interest rate swap agreements. The international LNG transportation industry is a capital-intensive industry, which requires significant amounts of financing, typically provided in the form of secured long-term debt or lease financing. Certain of our current bank and lease financing in floating interest rates could adversely affect our operating and financial performance and our ability to service our debt.
As of March 31, 2023, the Company's net outstanding debt was $1,889.1 million.
As of March 31, 2023, we had 23 interest rate swap transactions, aimed at reducing the risks associated with fluctuations in interest rates, whereby the floating rate has been swapped to a fixed rate. The total amortized notional principal of our interest rate swaps was $820.0 million. The interest rate swaps with a fixed rate of interest based on LIBOR have a total notional principal of $160.0 million and a weighted average fixed interest rate of 0.96% for a weighted average duration of 2.0 years. The interest rate swaps with a fixed rate of interest based on SOFR have a total notional principal of $660.0 million and a weighted average fixed interest rate of 1.81% for a weighted average duration of 5.3 years. Please see “Note 10. Financial Instruments” to our unaudited interim condensed consolidated financial statements.
Liquidity Risk
We monitor the risk of a shortage of funds using a cash modeling forecast. This model considers the maturity of payment profiles and projected cash flows required to fund the operations. Historically funds have been raised via equity issuance, lease finance and loan finance. Market conditions can have a significant impact on the ability to raise equity, lease finance and loan finance. While equity issuance may be dilutive to existing shareholders, lease and loan finance will contain covenants and other restrictions.
Our objective is to maintain a balance between continuity of funding and flexibility through the raising of funds from investors.
Credit Risk
We are exposed to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. There is a concentration of credit risk with respect to cash and cash equivalents to the extent that substantially all of the amounts are carried with Skandinaviska Enskilda Banken AB ("SEB") (S&P Global rating: A+), Nordea Bank AB ("Nordea") (S&P Global rating: AA-), Danske Bank AS ("Danske Bank") (S&P Global rating: A+) and DNB BANK ASA ("DNB") (S&P Global rating: AA-).
Price Risk
We are also subject, indirectly, to price risk related to the spot/short term charter market for chartering LNG carriers. Charter rates may be uncertain and volatile and depend upon, among other things, the natural gas prices, the supply and demand for vessels, arbitrage opportunities, vessel obsolesce and the energy market, which we cannot predict with certainty. Currently, no financial instruments have been entered into to reduce this risk.
Operational Risk
The operation of a LNG carrier has certain unique operational risks. Our vessels and their cargoes are at risk of being damaged or lost because of events such as marine disasters, bad weather, business interruptions caused by mechanical failures, grounding and fire, explosions and collisions, human error, war, terrorism, piracy, labor strikes, boycotts and other circumstances or events. These hazards may result in death or injury to persons, loss of revenues or property, higher insurance rates, damage to our customer relationships and market disruptions, delay or rerouting.
If our LNG carriers suffer damage, they may need to be repaired at a dry-docking facility. The costs of dry-dock repairs are unpredictable and may be substantial. We may have to pay dry-docking costs that our insurance does not cover at all or in full. The loss of revenues while these vessels are being repaired and repositioned, as well as the actual cost of these repairs, may adversely affect our business and financial condition.
INDEX TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | |
| Page |
| Condensed Consolidated Statements of Operations for the three months ended March 31, 2023 and 2022 (unaudited) | |
| Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2023 and 2022 (unaudited) | |
| Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022 (unaudited) | |
| Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022 (unaudited) | |
| Condensed Consolidated Statements of Changes in Equity for the three months ended March 31, 2023 and 2022 (unaudited) | |
| Notes to the Unaudited Interim Condensed Consolidated Financial Statements | |
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months ended March 31, 2023 and 2022
(in thousands of $, except per share data) | | | | | | | | | | | | | |
| | Three months ended | | |
| | March 31, | | |
| | 2023 | 2022 | | |
| Revenues | | | | | |
| Vessel operating revenues | | 92,477 | | 74,570 | | | |
| | | | | |
| Operating expenses | | | | | |
| Voyage expenses | | (273) | | (1,354) | | | |
| Vessel operating expenses | | (15,706) | | (14,351) | | | |
| Administrative expenses | | (3,869) | | (2,697) | | | |
| Depreciation | | (17,619) | | (17,809) | | | |
| Operating income | | 55,010 | | 38,359 | | | |
| | | | | |
| Other income/(expenses) | | | | | |
| Interest income | | 1,689 | | 29 | | | |
| Interest expense | | (26,323) | | (14,639) | | | |
| Extinguishment of long-term debt | | (10,238) | | — | | | |
| (Loss)/gain on derivatives | | (2,846) | | 31,864 | | | |
| Other financial items | | (725) | | 164 | | | |
| Income before tax | | 16,567 | | 55,777 | | | |
| Income tax expense | | (36) | | (16) | | | |
| Net income | | 16,531 | | 55,761 | | | |
| | | | | |
| Earnings/(loss) per share: | | | | | |
| Basic | | 0.31 | | 1.05 | | | |
| Diluted | | 0.31 | | 1.05 | | | |
| | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
for the three months ended March 31, 2023 and 2022
(in thousands of $) | | | | | | | | | | | | | |
| | Three months ended | | |
| | March 31, | | |
| | 2023 | 2022 | | |
| Net income/(loss) | | 16,531 | | 55,761 | | | |
| Total other comprehensive income/(loss) | | — | | — | | | |
| Total comprehensive income/(loss) | | 16,531 | | 55,761 | | | |
The accompanying notes are an integral part of these consolidated financial statements.
UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
as of March 31, 2023 and December 31, 2022
(in thousands of $, except share data) | | | | | | | | | | | | | | |
| | March 31, | | December 31, |
| | 2023 | | 2022 |
| ASSETS | | | | |
| | | | |
| Current assets | | | | |
| Cash and cash equivalents | | 474,950 | | | 332,329 | |
| Restricted cash | | 520 | | | 72 | |
| Inventory | | 5,178 | | | 5,260 | |
| Receivables due from related parties | | 910 | | | 60 | |
| Other current assets | | 28,642 | | | 16,327 | |
| Total current assets | | 510,200 | | | 354,048 | |
| | | | |
| Non-current assets | | | | |
| Derivative instruments | | 48,566 | | | 55,515 | |
| | | | |
| Vessels and equipment, net | | 2,256,859 | | | 2,269,946 | |
| Other fixed assets | | 2 | | | 3 | |
| Total non-current assets | | 2,305,427 | | | 2,325,464 | |
| Total assets | | 2,815,627 | | | 2,679,512 | |
| | | | |
| EQUITY AND LIABILITIES | | | | |
| | | | |
| Current liabilities | | | | |
| Current portion of long-term debt | | 101,959 | | | 95,507 | |
| Derivative instruments | | 928 | | | — | |
| Payables due to related parties | | 407 | | | 328 | |
| Accounts payable | | 4,235 | | | 1,794 | |
| Other current liabilities | | 50,293 | | | 55,569 | |
| Total current liabilities | | 157,822 | | | 153,198 | |
| | | | |
| Non-current liabilities | | | | |
| Long-term debt | | 1,787,174 | | | 1,619,224 | |
| | | | |
| Total non-current liabilities | | 1,787,174 | | | 1,619,224 | |
| Total liabilities | | 1,944,996 | | | 1,772,422 | |
| | | | |
| Equity | | | | |
Share capital (March 31, 2023: 54,520,325 (December 31, 2022: 54,520,325) shares issued, par value $0.10 per share) | | 5,452 | | | 5,452 | |
Treasury shares (March 31, 2023: 838,185 (December 31, 2022: 838,185) | | (8,082) | | | (8,082) | |
| Additional paid in capital | | 1,204,099 | | | 1,203,407 | |
| Accumulated deficit | | (330,838) | | | (293,687) | |
| Total equity | | 870,631 | | | 907,090 | |
| Total equity and liabilities | | 2,815,627 | | | 2,679,512 | |
The accompanying notes are an integral part of these consolidated financial statements.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended March 31, 2023 and 2022
(in thousands of $) | | | | | | | | | | | | | |
| | Three months ended | | |
| | March 31, | | |
| | 2023 | 2022 | | |
| Operating activities | | | | | |
| Net income | | 16,531 | | 55,761 | | | |
| Adjustments to reconcile net income to net cash provided by operating activities | | | | | |
| Depreciation | | 17,619 | | 17,809 | | | |
| Amortization of debt issuance costs. | | 573 | | 1,137 | | | |
| Extinguishment of long-term debt | | 10,238 | | — | | | |
| Change in fair value of derivative instruments | | 7,877 | | (33,375) | | | |
| Foreign exchange loss/(gain) | | 587 | | (20) | | | |
| Share-based payments | | 692 | | 94 | | | |
| Other | | (2) | | (10) | | | |
| Changes in operating assets and liabilities, net: | | | | | |
| Inventory | | 82 | | 1,247 | | | |
| | | | | |
| | | | | |
| | | | | |
| Other current assets | | (12,315) | | 3,074 | | | |
| Receivables due from related parties | | (850) | | 99 | | | |
| Payables due to related parties | | 79 | | 81 | | | |
| Accounts payable | | 2,441 | | 1,989 | | | |
| | | | | |
| | | | | |
| Other current liabilities | | (5,276) | | (5,436) | | | |
| | | | | |
| Net cash provided by operating activities | | 38,276 | | 42,450 | | | |
| | | | | |
| Investing activities | | | | | |
| Purchase of other fixed assets | | — | | (1) | | | |
| | | | | |
| Purchase to vessels and equipment | | (4,531) | | — | | | |
| Net cash used in investing activities | | (4,531) | | (1) | | | |
| | | | | |
| Financing activities | | | | | |
| | | | | |
| Repayment of long-term debt | | (32,107) | | (28,615) | | | |
| Proceeds of revolving credit facility | | 556,667 | | 63,421 | | | |
| Repayment of revolving credit facility | | (406,667) | | (64,079) | | | |
| Prepayment of long-term debt | | (595,344) | | — | | | |
| Proceeds from long-term debt | | 650,000 | | — | | | |
| Extinguishment costs paid on long-term debt | | (1,433) | | — | | | |
| | | | | |
| Financing costs | | (7,525) | | (20) | | | |
| | | | | |
| Dividends paid | | (53,682) | | (39,848) | | | |
| Net cash provided/(used in) by financing activities | | 109,909 | | (69,141) | | | |
| | | | | |
| Effect of exchange rate changes on cash | | (585) | | 30 | | | |
| Net increase in cash, cash equivalents and restricted cash | | 143,069 | | (26,662) | | | |
| | | | | |
| Cash, cash equivalents and restricted cash at the beginning of the period | | 332,401 | | 201,170 | | | |
| Cash, cash equivalents and restricted cash at the end of the period | | 475,470 | | 174,508 | | | |
| | | | | |
| Supplemental Information | | | | | |
| Interest paid, net of amounts capitalized | | (32,798) | | (14,964) | | | |
| Income tax paid | | (20) | | (17) | | | |
The accompanying notes are an integral part of these consolidated financial statements.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
for the three months ended March 31, 2023 and 2022
(in thousands of $, except number of shares) | | | | | | | | | | | | | |
| | Three months ended | | |
| | March 31, | | |
| | 2023 | 2022 | | |
| Number of shares outstanding | | | | | |
| At beginning of period | | 53,682,140 | | 53,130,584 | | | |
| | | | | |
| | | | | |
| | | | | |
| At end of period | | 53,682,140 | | 53,130,584 | | | |
| | | | | |
| Share capital | | | | | |
| At beginning of period | | 5,452 | | 5,411 | | | |
| | | | | |
| At end of period | | 5,452 | | 5,411 | | | |
| | | | | |
| Treasury shares | | | | | |
| At beginning of period | | (8,082) | | (9,449) | | | |
| | | | | |
| | | | | |
| At end of period | | (8,082) | | (9,449) | | | |
| | | | | |
| Additional paid in capital | | | | | |
| At beginning of period | | 1,203,407 | | 1,189,060 | | | |
| | | | | |
| Stock option expense | | 692 | | 94 | | | |
| | | | | |
| At end of period | | 1,204,099 | | 1,189,154 | | | |
| | | | | |
| Accumulated deficit | | | | | |
| At beginning of period | | (293,687) | | (295,635) | | | |
| Net income | | 16,531 | | 55,761 | | | |
| Dividends paid | | (53,682) | | (39,848) | | | |
| At end of period | | (330,838) | | (279,722) | | | |
| Total equity | | 870,631 | | 905,394 | | | |
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
FLEX LNG Ltd. ("FLEX LNG" or the "Company") is a limited liability company, originally incorporated in the British Virgin Islands in September 2006 and re-domiciled to Bermuda in June 2017. The Company is currently listed on the Oslo and New York Stock Exchanges under the symbol "FLNG". The Company's activities are focused on seaborne transportation of liquefied natural gas ("LNG") through the ownership and operation of fuel efficient, fifth generation LNG carriers. As of March 31, 2023, the Company had thirteen LNG carriers in operation.
2. ACCOUNTING POLICIES
Basis of accounting
The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the Company’s audited consolidated financial statements and, in the opinion of management, include all material adjustments, consisting only of normal recurring adjustments considered necessary for a fair statement of the Company's consolidated financial statements, in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The unaudited interim condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements and notes included in our Annual Report on Form 20-F for the year ended December 31, 2022, filed with the Securities and Exchange Commission (the "SEC") on March 10, 2023.
The unaudited interim condensed consolidated financial statements do not include all the disclosures required in an Annual Report on Form 20-F.
Significant accounting policies
The accounting policies adopted in the preparation of the unaudited condensed consolidated interim financial statements are consistent with those followed in the preparation of the Company’s annual financial statements for the year ended December 31, 2022.
3. RECENT ACCOUNTING PRONOUNCEMENTS
Recently issued accounting pronouncements are not expected to materially impact the Company.
4. EARNINGS PER SHARE
Basic earnings per share amounts are calculated by dividing the net income/(loss) by the weighted average number of ordinary shares outstanding during that period.
Diluted earnings per share amounts are calculated by dividing the net income/(loss) by the weighted average number of shares outstanding during the period, plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares into ordinary shares. If in the period there was a loss then any potential ordinary shares have been excluded from the calculation of diluted loss per share, because the effects were anti-dilutive.
The following reflects the net income/(loss) and share data used in the earnings per share calculation.
| | | | | | | | | | | | | |
| (in thousands of $, except share data) | | Three months ended | | |
| | March 31, | | |
| | 2023 | 2022 | | |
| Net income | | 16,531 | | 55,761 | | | |
| | | | | |
| Weighted average number of ordinary shares | | 53,682,140 | | 53,130,584 | | | |
| Share options | | 242,956 | | 218,364 | | | |
| Weighted average number of ordinary shares, adjusted for dilution | | 53,925,096 | | 53,348,948 | | | |
| | | | | |
| Earnings per share: | | | | | |
| Basic | | 0.31 | | 1.05 | | | |
| Diluted | | 0.31 | | 1.05 | | | |
5. CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The following identifies the balance sheet line items included in cash, cash equivalents and restricted cash as presented in the interim condensed consolidated statements of cash flows:
| | | | | | | | | | | | | | |
| (in thousands of $) | | March 31, | | December 31, |
| | 2023 | | 2022 |
| Cash and cash equivalents | | 474,950 | | | 332,329 | |
| Restricted cash | | 520 | | | 72 | |
| Cash, cash equivalents and restricted cash | | 475,470 | | | 332,401 | |
Restricted cash consists of cash that is restricted by law for the Norwegian tax authorities in relation to social security of employees.
6. OTHER CURRENT ASSETS
Other current assets includes the following:
| | | | | | | | | | | | | | |
| (in thousands of $) | | March 31, | | December 31, |
| | 2023 | | 2022 |
| Trade accounts receivable, net | | 5,235 | | | 4,859 | |
| Accrued income | | 4,791 | | | 2,152 | |
| Prepaid expenses | | 13,424 | | | 5,940 | |
| Other receivables | | 5,192 | | | 3,376 | |
| Total other current assets | | 28,642 | | | 16,327 | |
Trade accounts receivable are presented net of allowances for doubtful accounts. The Company recorded allowances for doubtful debts of $nil as of March 31, 2023 (December 31, 2022: $nil).
7. OTHER CURRENT LIABILITIES
Other current liabilities includes the following:
| | | | | | | | | | | | | | |
| (in thousands of $) | | March 31, | | December 31, |
| | 2023 | | 2022 |
| Accrued expenses | | 19,233 | | | 20,686 | |
| Deferred charter revenue | | 28,882 | | | 32,963 | |
| Other current liabilities | | 2,053 | | | 1,673 | |
| Provisions | | 125 | | | 247 | |
| Total other current liabilities | | 50,293 | | | 55,569 | |
8. VESSELS AND EQUIPMENT, NET
Movements in the three months ended March 31, 2023 for vessels and equipment, net is summarized as follows:
| | | | | | | | | | | | | | | | | | |
| (in thousands of $) | | Vessels and equipment | Dry docks | | | Total |
| Cost | | | | | | |
| At December 31, 2022 | | 2,467,470 | | 32,500 | | | | 2,499,970 | |
| Additions | | — | | 4,531 | | | | 4,531 | |
| | | | | | |
| Disposals | | — | | (2,500) | | | | (2,500) | |
| At March 31, 2023 | | 2,467,470 | | 34,531 | | | | 2,502,001 | |
| | | | | | |
| Accumulated depreciation | | | | | | |
| At December 31, 2022 | | (209,647) | | (20,377) | | | | (230,024) | |
| Charge | | (16,206) | | (1,412) | | | | (17,618) | |
| Disposals | | — | | 2,500 | | | | 2,500 | |
| At March 31, 2023 | | (225,853) | | (19,289) | | | | (245,142) | |
| | | | | | |
| Net book value | | | | | | |
| At December 31, 2022 | | 2,257,823 | | 12,123 | | | | 2,269,946 | |
| At March 31, 2023 | | 2,241,617 | | 15,242 | | | | 2,256,859 | |
The net book value of vessels that serve as collateral for the Company's long-term debt (Note 9) was $2,256.9 million as at March 31, 2023 (December 31, 2022: $2,269.9 million). The net book value of leased vessels: Flex Volunteer, Flex Constellation, Flex Courageous, Flex Rainbow, Flex Artemis and Flex Amber further referred to in Note 9 was $1032.1 million as at March 31, 2023.
9. SHORT TERM AND LONG-TERM DEBT
| | | | | | | | | | | | | | |
| (in thousands of $) | | March 31, | | December 31, |
| | 2023 | | 2022 |
| U.S. dollar denominated floating rate debt | | | | |
| | | | |
| | | | |
| | | | |
$629 Million Facility | | — | | | 467,865 | |
| Flex Amber Sale and Leaseback | | — | | | 139,022 | |
$320 Million Sale and Leaseback | | 301,300 | | | 305,974 | |
$125 million tranche under the $375 Million Facility | | 113,946 | | | 119,475 | |
Flex Resolute $150 Million Facility | | 148,026 | | | 150,000 | |
Flex Enterprise $150 Million Facility | | 145,087 | | | 147,542 | |
Flex Rainbow $180 Million Sale and Leaseback | | 180,000 | | | — | |
$330 Million Sale and Leaseback | | 325,750 | | | — | |
$140 million term tranche under the $290 Million Facility | | 140,000 | | | — | |
| Total U.S. dollar floating rate debt | | 1,354,109 | | | 1,329,878 | |
| | | | |
| U.S. dollar denominated fixed rate debt | | | | |
| | | | |
| Flex Volunteer Sale and Leaseback | | 151,116 | | | 152,801 | |
| Total U.S. dollar denominated fixed rate debt | | 151,116 | | | 152,801 | |
| | | | |
| U.S. dollar denominated revolving credit facilities | | | | |
| | | | |
$150 million revolving tranche under the $290 Million Facility | | 150,000 | | | — | |
$250 million revolving tranche under the $375 Million Facility | | 250,000 | | | 250,000 | |
| Total U.S. dollar denominated revolving credit facilities | | 400,000 | | | 250,000 | |
| | | | |
| Total debt | | 1,905,225 | | | 1,732,679 | |
| | | | |
| Less | | | | |
| Current portion of debt | | (105,140) | | | (99,706) | |
| Long-term portion of debt issuance costs | | (12,911) | | | (13,749) | |
| Long-term debt | | 1,787,174 | | | 1,619,224 | |
As of March 31, 2023, the Company's only capital commitments relate to long-term debt obligations, summarized below;
| | | | | | | | | | | | | | | | | | | | |
| (figures in thousands of $) | | | | | | |
| | Sale & Leaseback | Period repayment | Balloon repayment | | Total |
| 1 year | | 50,778 | | 54,362 | | — | | | 105,140 | |
| 2 years | | 51,931 | | 54,362 | | — | | | 106,293 | |
| 3 years | | 52,639 | | 54,362 | | — | | | 107,001 | |
| 4 years | | 53,377 | | 54,362 | | — | | | 107,739 | |
| 5 years | | 54,169 | | 57,728 | | 250,000 | | | 361,897 | |
| Thereafter | | 695,272 | | 29,097 | | 392,786 | | | 1,117,155 | |
| Total | | 958,166 | | 304,273 | | 642,786 | | | 1,905,225 | |
Flex Amber Sale and Leaseback
In January 2023, the Company exercised its option to repurchase the vessel Flex Amber and paid the fully amount outstanding under the facility of $136.8 million. The vessel was subsequently refinanced under the $330 Million Sale and Leaseback, as further described below.
$375 Million Facility
In February 2023, we completed an asset swap under the $375 Million Facility, which replaced Flex Rainbow with Flex Aurora. In connection with the asset swap, we prepaid the full amount outstanding under the Flex Aurora tranches of the $629 Million Facility.
Flex Rainbow Sale and Leaseback
In March 2023, the Company completed a sale and leaseback agreement with an Asian-based lease provider for the vessel, Flex Rainbow. Under the terms of the agreement, the vessel was sold for a consideration of $180.0 million, with a bareboat charter of 9.9 years. The bareboat rate payable under the lease has a fixed element considered a principal repayment and a variable element considered interest, which is calculated on term SOFR plus a margin. The Company has the options to terminate the lease and repurchase the vessel at fixed price in the first quarter 2028, in the first quarter 2030 and at the end of the charter in the first quarter 2033. The facility includes various financial covenants, the most stringent of which are further described below.
As of March 31, 2023, the net outstanding balance under the facility was $177.2 million, after deducting for debt issuance costs.
$330 Million Sale and Leaseback
In January 2023, the Company signed sale and leaseback agreements with an Asian-based lease provider for Flex Amber and Flex Artemis to re-finance their existing facilities. Under the terms of the agreements, the vessels were sold for a gross consideration, equivalent to the market value of each vessel at the time, and net consideration of $170.0 million for the Flex Amber and $160.0 million for the Flex Artemis, adjusted for an advance hire per vessel. The agreements have a lease period of 10 years and the Company has the option to extend for an additional 2 years. The bareboat rate payable under the leases have a fixed element, treated as principal repayment, and a variable element based on term SOFR plus a margin of 215 basis points per annum calculated on the outstanding under the lease. The agreements include fixed price purchase options, whereby we have options to re-purchase the vessels at or after the third anniversary of the agreement, and on each anniversary thereafter, until the end of the lease period. In February 2023, the transactions were completed and in connection with this, the Company prepaid the full amount outstanding under the Flex Artemis tranches of $629 Million Facility and the Flex Amber Sale and Leaseback.
As of March 31, 2023, the net outstanding balance under the facility was $322.7 million, after deducting for debt issuance costs.
$290 Million Facility
In March 2023, the Company completed a $290 million term and revolving credit facility for the vessels Flex Freedom and Flex Vigilant to re-finance their remaining tranches of the $629 Million Facility. The facility has an interest of SOFR plus a margin of 185 basis points per annum. The facility is split into a term tranche of $140.0 million and a revolving tranche of $150.0 million. The facility has a duration of six years, with the revolving tranche being non-amortizing and the term tranche amortizing reflecting an overall age adjusted profile of 22 years. In connection with this agreement, the Company prepaid the full amount outstanding under the $629 Million Facility. The facility includes various financial covenants, the most stringent of which are further described below.
As at March 31, 2023, the net outstanding balance under the term tranche of the $290 Million Facility was $138.5 million and the revolving tranche of $150.0 million was fully drawn.
Loan covenants
Certain of our financing agreements discussed above, have, amongst other things, the following financial and vessel covenants, as amended or waived, which are tested quarterly, the most stringent of which require us (on a consolidated basis) to maintain:
• a book equity ratio of minimum 0.25 to 1.0 (note that from April 1, 2023, the most stringent book equity ratio will change to a minimum of 0.20 to 1.0);
• a positive working capital;
• minimum liquidity, including undrawn credit lines with a remaining term of at least six months, being the higher of:
(i) $25 million; and (ii) an amount equal to five percent (5%) of our total interest bearing financial indebtedness net
of any cash and cash equivalents; and
•collateral maintenance test, ensuring that the aggregate value of the vessels making up the facility in question exceeds the aggregate value of the debt commitment outstanding.
As of March 31, 2023, all financial covenants have been met accordingly.
11. FINANCIAL INSTRUMENTS
In order to reduce the risks associated with fluctuations in interest rates, the Company has hedged exposures to interest rates using derivative instruments, which involves swapping floating rates of interest to fixed rates of interest. These instruments are not designated as hedges for accounting purposes.
Credit risk is the failure of the counterparty to perform under the terms of the derivative instrument. When the fair value of a derivative instrument is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative instrument is negative, the Company owes the counterparty, and, therefore, the Company is not exposed to the counterparty's credit risk in those circumstances. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with major banking and financial institutions. The derivative instruments entered into by the Company do not contain credit risk-related contingent features. The Company has not entered into master netting agreements with the counterparties to its derivative financial instrument contracts.
Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates, currency exchange rates or commodity prices. The market risk associated with interest rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
The Company assesses interest rate risk by monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating economical hedging opportunities.
In order to reduce the risk associated with fluctuations in interest rates, the Company has a total of 23 interest rate swap transactions, whereby floating interest based on LIBOR and SOFR on a total amortized notional principal of $820.0 million as at March 31, 2023 (December 31, 2022: $691.0 million), has been swapped to a fixed rate.
Our interest rate swap contracts as of March 31, 2023, of which none are designated as hedging instruments, are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands of $) | | Notional principal | | Effective date | | Maturity date | | Floating rate benchmark | | Fixed Interest Rate |
| Receiving floating, pay fixed | | 25,000 | | | September 2019 | | June 2024 | | LIBOR | | 1.38 | % |
| Receiving floating, pay fixed | | 25,000 | | | July 2020 | | July 2025 | | LIBOR | | 1.38 | % |
| Receiving floating, pay fixed | | 35,000 | | | September 2020 | | September 2025 | | LIBOR | | 1.03 | % |
| Receiving floating, pay fixed | | 25,000 | | | September 2020 | | September 2025 | | LIBOR | | 1.22 | % |
| Receiving floating, pay fixed | | 25,000 | | | September 2020 | | September 2025 | | LIBOR | | 0.37 | % |
| Receiving floating, pay fixed | | 25,000 | | | March 2021 | | June 2024 | | LIBOR | | 0.35 | % |
| Receiving floating, pay fixed | | 50,000 | | | July 2022 | | July 2032 | | SOFR | | 2.15 | % |
| Receiving floating, pay fixed | | 50,000 | | | July 2022 | | July 2032 | | SOFR | | 1.91 | % |
| Receiving floating, pay fixed | | 181,000 | | | October 2022 | | April 2025 | | SOFR | | 0.95 | % |
| Receiving floating, pay fixed | | 50,000 | | | December 2022 | | December 2032 | | SOFR | | 3.28 | % |
| Receiving floating, pay fixed | | 50,000 | | | January 2023 | | January 2033 | | SOFR | | 3.26 | % |
| Receiving fixed, pay floating | | (181,000) | | | March 2023 | | April 2025 | | SOFR | | 4.80 | % |
| Receiving floating, pay fixed | | 100,000 | | | March 2023 | | September 2024 | | SOFR | | 4.64 | % |
| Receiving floating, pay fixed | | 35,000 | | | March 2023 | | March 2025 | | SOFR | | 4.07 | % |
| Receiving floating, pay fixed | | 20,000 | | | March 2023 | | March 2025 | | SOFR | | 3.95 | % |
| Receiving floating, pay fixed | | 20,000 | | | March 2023 | | March 2025 | | SOFR | | 4.11 | % |
| Receiving floating, pay fixed | | 20,000 | | | March 2023 | | March 2025 | | SOFR | | 4.02 | % |
| Receiving floating, pay fixed | | 25,000 | | | March 2023 | | March 2025 | | SOFR | | 3.94 | % |
| Receiving floating, pay fixed | | 25,000 | | | March 2023 | | March 2025 | | SOFR | | 3.96 | % |
| Receiving floating, pay fixed | | 15,000 | | | March 2023 | | March 2025 | | SOFR | | 3.76 | % |
| Receiving floating, pay fixed | | 25,000 | | | March 2023 | | September 2025 | | SOFR | | 1.22 | % |
| Receiving floating, pay fixed | | 75,000 | | | March 2023 | | June 2025 | | SOFR | | 1.39 | % |
| Receiving floating, pay fixed | | 100,000 | | | March 2026 | | March 2032 | | SOFR | | 1.26 | % |
| | 820,000 | | | | | | | | | |
The Company's (loss)/gain on derivatives per the consolidated statement of operations for the three months ended March 31, 2023 and 2022 was comprised of the following:
| | | | | | | | | | | |
| (figures in thousands of $) | | | |
| | Three months ended |
| | March 31, |
| | | 2023 | 2022 |
| Change in fair value of derivative instruments | | (7,877) | | 33,375 | |
| Realized gain/(loss) on derivative instruments | | 5,031 | | (1,511) | |
| (Loss)/gain on derivatives | | (2,846) | | 31,864 | |
Movements in the three months ended March 31, 2023 for the derivative instrument assets and liabilities is summarized as follows:
| | | | | | | | | | | | | | | | | | |
| (in thousands of $) | | Derivative Instrument Asset | Derivative Instrument Liability | | | Total |
| | | | | | |
| At January 1, 2023 | | 55,515 | | — | | | | (55,515) | |
| Change in fair value of derivative instruments | | (6,949) | | (928) | | | | (7,877) | |
| | | | | | |
| At March 31, 2023 | | 48,566 | | (928) | | | | 47,638 | |
Movements in the three months ended March 31, 2022 for the derivative instrument assets and liabilities is summarized as follows:
| | | | | | | | | | | | | | | | | | |
| (in thousands of $) | | Derivative Instrument Asset | Derivative Instrument Liability | | | Total |
| | | | | | |
| At January 1, 2022 | | 5,862 | | (4,764) | | | | 1,098 | |
| Change in fair value of derivative instruments | | 28,611 | | 4,764 | | | | 33,375 | |
| | | | | | |
| At March 31, 2022 | | 34,473 | | — | | | | 34,473 | |
11. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
The principal financial assets of the Company at March 31, 2023 and December 31, 2022 consist of cash and cash equivalents, restricted cash, other current assets, receivables due from related parties and derivative instruments receivable amongst other less significant items. The principal financial liabilities of the Company consist of payables due to related parties, accounts payable, other current liabilities, derivative instruments payable and secured long-term debt.
The fair value measurements requirement applies to all assets and liabilities that are being measured and reported on a fair value basis. The assets and liabilities carried at fair value should be classified and disclosed in one of the following three categories based on the inputs used to determine its fair value:
Level 1: Quoted market prices in active markets for identical assets or liabilities;
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data;
Level 3: Unobservable inputs that are not corroborated by market data.
The fair value of the Company's cash and cash equivalents and restricted cash approximates their carrying amounts reported in the accompanying consolidated balance sheets.
The fair value of other current assets, receivables from related parties, payables due to related parties, accounts payable and other current liabilities approximate their carrying amounts reported in the accompanying consolidated balance sheets.
The fair value of floating rate debt has been determined using Level 2 inputs and is considered to be equal to the carrying value since it bears variable interest rates, which are reset on a quarterly or semi-annual basis. Carrying value of the floating rate debt is shown net deduction of debt issuance cost, while fair value of floating rate debt is shown gross.
The fixed rate debt has been determined using Level 2 inputs being the discounted expected cash flows of the outstanding debt.
The following table includes the estimated fair value and carrying value of those assets and liabilities.
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands of $) | | | March 31, | | December 31, |
| | | 2023 | | 2022 |
| Fair value hierarchy level | | Carrying value of asset (liability) | Fair value
asset (liability) | | Carrying value of asset (liability) | Fair value asset
(liability) |
| Cash, cash equivalents | Level 1 | | 474,950 | | 474,950 | | | 332,329 | | 332,329 | |
| Restricted cash | Level 1 | | 520 | | 520 | | | 72 | | 72 | |
| Derivative instruments receivable | Level 2 | | 48,566 | | 48,566 | | | 55,515 | | 55,515 | |
| Derivative instruments payable | Level 2 | | (928) | | (928) | | | — | | — | |
| Floating rate long-term debt | Level 2 | | (1,739,664) | | (1,754,109) | | | (1,563,657) | | (1,579,878) | |
| Fixed rate long- term debt | Level 2 | | (149,469) | | (166,821) | | | (151,074) | | (159,698) | |
There have been no transfers between different levels in the fair value hierarchy during the three months ended March 31, 2023.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair value (Level 2) of our derivative instruments, which is comprised of interest rate swap derivative agreements, is the present value of the estimated future cash flows that we would receive or pay to terminate the agreements at the balance sheet date, taking into account, as applicable, fixed interest rates on interest rate swaps, current interest rates, forward rate curves and the credit worthiness of both us and the derivative counterparty.
Concentration of Risk
There is a concentration of credit risk with respect to cash and cash equivalents to the extent that substantially all of the amounts are carried with SEB (S&P Global rating: A+), Nordea (S&P Global rating: AA-), Danske Bank (S&P Global rating: A+) and DNB (S&P Global rating: AA-).
12. RELATED PARTY TRANSACTIONS
Related Party Balances
A summary of balances due from related parties at March 31, 2023 and December 31, 2022 is as follows:
| | | | | | | | | | | | | | |
| (in thousands of $) | | March 31, | | December 31, |
| | 2023 | | 2022 |
| | | | |
| Seatankers Management Norway AS | | 15 | | | 16 | |
| | | | |
| Frontline Management (Bermuda) Limited | | 657 | | | — | |
| | | | |
| | | | |
| | | | |
| | | | |
| Northern Ocean Limited | | — | | | 33 | |
| | | | |
| | | | |
| | | | |
| | | | |
| Avance Gas Trading Ltd | | 223 | | | 2 | |
| Sloane Square Capital Holdings Ltd | | 15 | | | 9 | |
| Receivables due from related parties | | 910 | | | 60 | |
A summary of balances due to related parties at March 31, 2023 and December 31, 2022 is as follows:
| | | | | | | | | | | | | | |
| (in thousands of $) | | March 31, | | December 31, |
| | 2023 | | 2022 |
| | | | |
| | | | |
| Frontline Management (Bermuda) Limited | | — | | | (30) | |
| Frontline Corporate Services Ltd | | (47) | | | (4) | |
| | | | |
| | | | |
| Flex LNG Fleet Management AS | | (357) | | | (293) | |
| SFL Corporation Ltd | | (1) | | | (1) | |
| | | | |
| | | | |
| | | | |
| | | | |
| Front Ocean Management Ltd | | (2) | | | — | |
| | | | |
| | | | |
| Payables due to related parties | | (407) | | | (328) | |
Related Party Transactions
A summary of (expenses)/income from related parties is as follows:
| | | | | | | | | | | | | |
| (in thousands of $) | | Three months ended | | |
| | March 31, | | |
| | 2023 | 2022 | | |
| Seatankers Management Co Ltd | | (8) | | 23 | | | |
| Seatankers Management Norway AS | | (17) | | (15) | | | |
| | | | | |
| Frontline Management (Bermuda) Limited | | (38) | | (64) | | | |
| Frontline Management AS | | — | | 11 | | | |
| Flex LNG Fleet Management AS | | (803) | | (1,015) | | | |
| | | | | |
| FS Maritime SARL | | — | | (32) | | | |
| Northern Ocean Limited | | — | | 2 | | | |
| | | | | |
| Front Ocean Management AS | | (105) | | (53) | | | |
| Front Ocean Management Ltd | | (67) | | — | | | |
| Sloane Square Capital Holdings Ltd | | 6 | | 4 | | | |
| Avance Gas | | 178 | | 2 | | | |
| Total related party transactions | | (854) | | (1,137) | | | |
General Management Agreements
We have service level agreements with Front Ocean Management AS, for the Oslo office, and Front Ocean Management Ltd, for the Bermudan office (together "Front Ocean"). Front Ocean provides certain administrative support services including human resources, shared office costs, administrative support, IT systems and services, compliance, insurance and legal assistance. In the three months ended March 31, 2023, we recorded an expense with Front Ocean of $0.2 million (March 31, 2022: $0.1 million) for these services.
We have an administrative services agreement with Frontline Management AS ("Frontline Management") under which they provide us with certain administrative support, technical supervision, purchase of goods and services within the ordinary course of business and other support services, for which we pay our allocation of the actual costs they incur on our behalf, plus a margin. Frontline Management may subcontract these services to other associated companies, including Frontline Management (Bermuda) Limited. In the three months ended March 31, 2023, we recorded an expense with Frontline Management and associated companies of $0.0 million for these services (March 31, 2022: $0.1 million).
We have an agreement with Seatankers Management Co. Ltd. under which it provides us with certain advisory and support services, for which we pay our allocation of the actual costs they incur on our behalf, plus a margin.
Technical Management
Flex LNG Fleet Management AS is responsible for the provision of technical ship management of all of our vessels. During the three months ended March 31, 2023, we recorded an expense with Flex LNG Fleet Management AS of $0.8 million for these services (March 31, 2022: $1.0 million).
Management Support Services
In the three months ended March 31, 2023, the Company re-charged $0.2 million to Avance Gas group in relation to management support services during the quarter.
13. SHARE CAPITAL
The Company had an issued share capital at March 31, 2023 of $5.5 million divided into 54,520,325 ordinary shares (December 31, 2022: $5.5 million divided into 54,520,325 ordinary shares) of $0.10 par value.
In November 2022, the Company entered into an Equity Distribution Agreement with Citigroup Global Markets Inc. and Barclays Capital Inc. for the offer and sale of up to $100.0 million of the Company’s ordinary shares, par value $0.10 per share, through an at-the-market offering ("ATM").
In November 2022, the Company filed a registration statement to register the sale of up to $100 million ordinary shares pursuant to a dividend reinvestment plan ("DRIP"), to facilitate investments by individual and institutional shareholders who wish to invest dividend payments received on shares owned or other cash amounts, in the Company's ordinary shares on a regular basis, one time basis or otherwise. If certain waiver provisions in the DRIP are requested and granted pursuant to the terms of the plan, the Company may grant additional share sales to investors from time to time up to the amount registered under the plan.
No new shares were issued and sold under the ATM and DRIP arrangements during the first quarter 2023. In the year ended December 31, 2022, the Company issued and sold 409,741 ordinary shares pursuant to the ATM arrangement, for aggregate proceeds of $14.5 million, with an average net sales price of $35.36 per share and issued and sold no ordinary shares pursuant to the DRIP arrangement.
14. TREASURY SHARES
As of March 31, 2023, the Company holds an aggregate of 838,185 shares at a cost of $8.1 million, with a weighted average of $9.64 per share (December 31, 2022: 838,185 shares at a cost of $8.1 million).
15. SHARE BASED COMPENSATION
As at March 31, 2023, the Company had 488,750 outstanding non-vested share options (December 31, 2022: 488,750), with a weighted average adjusted exercise price of $11.87 (December 31, 2022: $12.87) and a weighted average remaining contractual term of 3.5 years (December 31, 2022: 3.7 years). The number of outstanding vested share options as at March 31, 2023 was nil (December 31, 2022: nil). Adjusted exercise price refers to the fact that the exercise price of each option is adjusted for dividends paid since the grant date of the option in line with the Company's share option scheme.
16. SUBSEQUENT EVENTS
In April 2023, Flex Endeavour completed her drydock in Singapore.
On May 15, 2023, the Company’s Board of Directors declared a cash dividend for the first quarter of 2023 of $0.75 per share. This dividend will be paid on or around June 13, 2023, to shareholders on record as of May 31, 2023. The ex-dividend date will be May 30, 2023.
All declarations of dividends are subject to the determination and discretion of the Company’s Board of Directors based on its consideration of various factors, including the Company’s results of operations, financial condition, level of indebtedness, anticipated capital requirements, contractual restrictions, restrictions in its debt agreements, restrictions under applicable law, its business prospects and other factors that the Board of Directors may deem relevant.