Hornbeck Offshore Services Inc. announced today that it has closed the previously announced sale of three 250EDF class OSVs, the HOS Arrowhead, the HOS Eagleview and the HOS Westwind, to the Navy for $114 million. The vessels were previously chartered to the Navy. Since the OSVs construction in 2008 and 2009, these vessels have supported the Navy’s submarine fleet on the east and west coast of the U.S. In order for the Navy to continue to use the unique capabilities of these vessels, Congress required their purchase from Hornbeck.
The $114 million purchase is expected to result in a gain on sale of assets of approximately $33 million ($20.8 million after-tax or $0.57 per diluted share). The proceeds from this transaction will be used for general corporate purposes that may include retirement of debt, funding for the acquisition, construction or retrofit of vessels or discretionary share repurchases. The vessel purchase agreement includes an option for the purchase of a fourth vessel currently under charter to the Navy, the HOS Black Powder, that, if exercised as anticipated, would bring the aggregate sale amount to $152 million. This is expected to result in an aggregate gain on sale of assets for the four vessels of approximately $44 million ($27.7 million after-tax or $0.77 per diluted share).
In addition to these vessel sales, the Hornbeck has entered into an operations and maintenance (O&M) contract for the three vessels sold. The contract contains an initial term and annual renewal options spanning a 10-year operating period including annual day rate escalations. Associated with the O&M contract, Hornbeck was also awarded a time charter for the HOS Black Powder that will remain in effect until the closing of the anticipated sale of the vessel pursuant to the Navy purchase option is completed. Until then, the HOS Black Powder will operate under the same terms and conditions of the current O&M contract for the other three vessels.
Hornbeck expects to complete the sale of HOS Black Powder by the end of the third quarter, subject to government funding, and all guidance estimates included below reflect an assumed sale date of Sept. 30, 2015.
Hornbeck’s previous guidance estimates last reported on Feb. 11, 2015, expressly excluded any contribution from the four vessels involved in these agreements, including O&M contract revenue and operating costs, after Feb. 27, 2015. In recognition of the final terms and conditions of the contracts mentioned above, Hornbeck now expects to operate the HOS Black Powder under a 215-day time charter beginning Feb. 28, 2015, at an average day rate of just over $30,000.
This time charter will result in an increase in the “term” and active fleet vessel counts for the first quarter of 2015 and fiscal 2015 of 0.3 and 0.6 vessels, respectively. These additional contracted days will cause Hornbeck’s forward contract coverage for its current and projected fleet of new generation OSVs (including stacked vessels) for fiscal 2015 to increase by 1%.
Hornbeck expects to generate revenues related to the O&M contract between $1.5 million and $1.7 million for the first quarter of 2015 and $17.5 million and $18.5 million for fiscal 2015, including O&M contract revenue from the HOS Black Powder for the fourth quarter of 2015, after its anticipated sale to the Navy on the assumed closing date of Sept. 30, 2015.
Operating expenses from the O&M contract and time charter are projected to increase the Hornbeck’s previous guidance range by $1.5 million and $15 million for the first quarter of 2015 and the full-year 2015, respectively.
Assuming the fourth vessel is purchased in 2015 and all four O&M renewal options are exercised, Hornbeck expects O&M revenues and operating expenses for fiscal 2016 to be in the range of $27 million to $28 million and $17.5 million to $18.5 million, respectively, and should increase annually thereafter due to a 5.7% contractual escalation provision associated with the annual renewal options.
In future releases, the revenues earned from the O&M contact will be reported as “Non-vessel revenues,” on a separate line-item that has historically included revenue earned from the Hornbeck’s shore-based port facility, management of third-party non-owned vessels, including OSVs, MPSVs, tugs and tank barges, and other non-vessel equipment rentals. In recognition of the purchase option for the HOS Black Powder, Hornbeck will account for that vessel as an “asset held for sale.” This accounting treatment will require Hornbeck to suspend depreciation and amortization for the vessel until the purchase option is exercised, which is expected to occur on or before Sept. 30, 2015. Therefore, the final terms of the agreements mentioned above will not impact the Hornbeck’s forward guidance previously provided for depreciation and amortization or for general and administrative expenses.
The cash proceeds from the vessel sales are projected to result in an increase in interest income of $0.4 million and $0.4 million in fiscal years 2015 and 2016, respectively. Hornbeck’s annual effective tax rate for fiscal 2015 is now expected to be 37% and should remain within the prior guidance range of 36% to 38%, while cash income taxes for fiscal 2015 are expected to increase $0.4 million.