Höegh LNG Partners LP
Q3 2017 Earnings Call Transcript

Published: 16 Nov 2017

[Operator:]

Good day and welcome to the Hoegh LNG Partners Third Quarter 2017 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Richard Tyrrell. Please go ahead.

[Richard Tyrrell:]

Good morning ladies and gentlemen. Thank you, Brandon, for that introduction, and welcome to the Hoegh LNG Partners third quarter 2017 results call. As I hope you’ve seen, we’ve announced the drop-down of the remaining 49% of the Hoegh Grace this morning, and as a result the FSRU makes the front page of the presentation. I’m looking forward to getting into the acquisition and the results more broadly, but before I do, please take note of the forward-looking statements and glossary on Pages 2 and 3 respectively, and turn to Page 4. The highlights for Hoegh LNG Partners third quarter 2017 results are as follows. It is the highest ever quarterly results for revenue and distributable cash flow. Operating income, segment EBITDA, and net income have been impacted by an accrual for exceeding historical minimum performance standards for boil-off under our joint venture contracts, but in relation to this it’s important to point out the following. There’s no current cash effect, the performance issue only applies to operations in LNG carrier mode rather than the FSRU mode in which the assets are currently operating, and the performance element is indemnified by HLNG. At the end of the third quarter, the partnership priced $115 million preferential preferred offering that closed at the start of the fourth quarter. It used some of these proceeds to repay the $34 million sellers credit that dates back to the Hoegh Gallant acquisition, but used some to pay down the outstanding balance on the revolving credit facility. Since then we’ve declared and paid a $0.43 per unit distribution to our common unitholders with respect to the third quarter. There was no payment to our new Preferential preferred unitholders at this time but there will be with respect to the fourth quarter of 2017. Lastly as mentioned, the partnership announced this morning the acquisition of the remaining 49% interest that it does not already own in the entities that own Hoegh Grace. Slide No. 5 puts numbers on the quarter. The time charter revenue for the third quarter of 2017 of $35.9 million compares to $23.3 million in the third quarter of 2016 and reflects the acquisition of our first 51% of the Hoegh Grace at the start of this year. The numbers are on a consolidated basis that excludes the JVs and are not therefore affected by the accrual for the performance matter referred to previously. Next I’d highlight the $11.9 million accrual that has been made in the joint ventures for the boil-off claim - that is the [performance] [ph] matter, made by the charterer which affects all the numbers below. Again, I stress this indemnified, and because of the accrual, operating income for the quarter fell to $15.3 million for the third quarter of 2017 from $20.3 million for the third quarter of 2016. We generated $5.4 million of net income for the third quarter of 2017 compared to $13.4 million for the third quarter of 2016. Partners’ interest and net income that excludes the minorities related to the 49% of the Hoegh Grace that is not yet owned is $2.5 million for the third quarter of 2017 compared to $13.4 million for the third quarter of 2016, where such minorities did not exist. Moving onto the numbers excluding losses and gains on derivative instruments, operating income for the third quarter 2017 was $13.5 million compared to $16.1 million for the third quarter of 2016. Partner interest in adjusted net income was $0.2 million in the third quarter of 2017 compared to $8.8 million in the third quarter of 2016. Again, the non-cash and indemnified $11.9 million accrual weighed on these numbers in the quarter. The accrual had the same bearing on the segment EBITDA, reducing it to $19.4 million for the quarter compared to $24.9 million for the third quarter of 2016. Listed below the segment EBITDA line are recurring items that are excluded from segment EBITDA. I’m pleased to say that the non-controlling interest elements of this will fall away once the acquisition of the remaining 49% of the Hoegh Grace closes, which will simplify matters. So how does this look compared to previous quarters? Turning to Page 7, the answer is pretty good without the accrual. The assets all performed according to contract in the quarter with minimal downtime, and distributable cash flow reached $16.5 million. This compares to a distribution of $14.4 million and equates to coverage of 1.14 times. Distribution to common unitholders for the quarter remained at $0.43 a unit or approximately 28% above IPO level. Next, turning to Page 7, I would like to talk about the acquisition of the remaining 49% of the Hoegh Grace that was announced this morning. The purchase price of $85.9 million will be funded by a combination of cash on hand from the recent perpetual preferred offering and drawings under the RCF. The price, which is lower than for the first 51% of the asset, reflects the fact that there’s one less year remaining on the Hoegh Grace charter and reduced new build prices. The proportional share of total debt on the asset is estimated to be $86.6 million at the end of 2018. These amounts added together and grossed up imply a valuation on the asset of $352 million. Hoegh LNG Partners has owned 51% of the Hoegh Grace since the first quarter of 2017 and consolidated 100% as a result. Accordingly, it sits within our majority held segment where you can see how EBITDA has improved as a result of its introduction to the fleet. The initial 51% increased the average EBITDA by $5.5 million. Here, we show segment EBITDA, which is including just 51% of the asset, and you can annualize this to get a sense of the transaction multiple and debt to EBITDA ratio on the asset, so take the difference between the averages, the $5.5 million, gross it up to 100% and multiply by four, and apply that to either the debt or the valuation indicated on the page to figure out the ratios. It’s expected to be an accretive transaction for Hoegh LNG Partners and I anticipate recommending to the board a distribution increase with respect to the first quarter of 2018 due to the acquisition. Of course, the accretion is a function of the cost of financing the transaction and it is being financed predominantly with the 8.75 perpetual preferred, and while we can’t fund every drop down with capital at that level, it does mean for this one at least it is nicely accretive. The acquisition will be funded, as I mentioned, with that perpetual preferred and the revolver. I mention here the draw/redraw on the revolver. That’s because we initially used the proceeds of the offering to pay down the revolver and avoid undue interest over the time while the acquisition is pending. The incremental draw on the revolver as a result of this transaction is going to be about $10 million, so most of it was actually financed with that offering that we completed at the start of October. The acquisition itself is expected to be complete by the beginning of January 2018 and possibly before that within the fourth quarter. I hope you like the acquisition, but turning to Page 8, let me get back to a progress report on the existing fleet, starting with the Neptune and the GdF Suez Cape Ann. They are in Turkey and China respectively, operating FSRUs. This means the performance issue related to the boil-off is not accumulating, but needless to say we’re in active discussions with the charterer over its claim and remedying the root cause. As the footnote observers, the assets are the subject of a potential acquisition of NG’s upstream and midstream LNG activities by Total. Total is the charterer of one of Hoegh LNG’s carriers and as a group, we look forward to extending our relationship with Total to include Neptune and the Cape Ann, assuming of course the transaction closes. The PGN FSRU Lampung continues to perform to contract in Indonesia. The Hoegh Gallant continues to operate again according to contract at high levels of utilization in its case. It will have seven days of scheduled maintenance in the fourth quarter that will take it off-hire and reduce revenue by approximately $1 million. The demand for gas in Egypt continues to increase along, I should say, with the supply, and we note that there’s now potential for an FSRU remaining in place as a result of the deregulation of the gas market that’s recently been announced, so for now it’s busy working for EGas on its existing contract, which is scheduled to run until 2020, but even beyond that we do believe the scope for an FSRU to remain longer term. The Hoegh Grace rounds out our five FSRUs, three of which will be wholly owned after the acquisition of the remaining 49%. The Neptune and the Cape Ann are part of our JV with MOL and 50% owned. The transaction to acquire an additional 23.5% of these assets remains suspended pending the outcome of the performance negotiation related to boil-off with the charterer. Page 9 provides additional information on the long-term contracts that underpin our cash flows and distribution. The Hoegh Grace contract is nominally for 20 years, but given that it has a break at the end of 2016, only 10 years are shown in navy blue in the table. The average length of the contracts on Hoegh LNG Partners current fleet is 11.7 years and the first asset to go without contracted cash flow is the Gallant in April of 2025. This is a sector-leading level of contracted coverage and underpins the cash flows and in turn HMLP’s yield, which at today’s price is approaching 10%. The consolidated P&L is set out on Page 10. The main difference between this quarter and the same quarter last year is the addition of the Hoegh Grace to the fleet. This is an asset that we’ve consolidated since acquiring 51% at the start of 2017. The non-controlling interest line at the bottom of the table represents the 49% that remained at the Hoegh LNG level throughout this quarter. Two elements to highlight here are the negative results at the joint ventures that is primarily the result of the $11.9 million accrual described earlier, and as was the case last quarter, we continue to have an elevated income tax expense which is primarily related to income taxes in Indonesia that will be reimbursed through revenue once they become payable under the terms of our contract. Page 11 breaks out the results by segment. The majority held FSRU segment includes the Lampung, Gallant and Grace. It is adjusted for the 49% interest in Grace still at the parent level, at least in this quarter, in the line titled Less Non-Controlling Interest in Segment EBITDA. This deduction will of course fall away once the recently announced drop down transaction closes. The accrual of the historical boiler claim can be seen in the JV segment along with the impacts of the long-term interest rate swaps that we have in place on the debt that finances these assets. The impact of these swaps was positive $1.8 million for the quarter. The other category is corporate level SG&A, and this was pleasingly low for the quarter. Page 12 provides a comparison with the third quarter of 2016. Moving onto Page 13, here we provide additional detail at the financial income and expense level. There’s nothing notable to report this quarter. The main differences that you see compared to the same quarter last year relate to the financing that we inherited as part of the first part of the Grace acquisition, that being the original 51%. Elsewhere, you see general stability. A similar story in the case of the balance sheet, where on Page 14 we compare the balance sheet as of September 30 with that of the year-end 2016. Assets are higher again because of the Grace, with debt also being higher because of the debt that was stapled to that asset when we acquired it. The non-controlling interest of course will fall away once the drop down of the last 49% of Hoegh Grace closes. Page 15 has our analysis of distributable cash flow. It starts as always with our proportional measure of EBITDA, or segment EBITDA as we call it. It [indiscernible] takes away cash and non-cash numbers to normalize it. It takes away the financial elements and provisions for estimated maintenance and replacement capital expenditures. After all that, you can see that the total distributable cash flow for the quarter is $16.5 million compared to a declared distribution of $14.4 million, which equates to the coverage level for the quarter of 1.14 times. There’s a reconciliation back to the U.S. GAAP measures on Page 16 of the same. So what of the future? If I could ask you to turn to Page 17, the aim remains very much to double in size between 2016 and 2020, and the acquisition of the 49% remaining of the Grace is another step along this path. Looking further out, Hoegh LNG has announce some setbacks in the business development pipeline which are unfortunate, but the assets do exist and from an HMLP perspective, at least, we’re not warehousing them and there is still time. Hoegh LNG has announced a charter with Gas Natural Fenosa that has an FSRU option. The Giant will serve this contract, at least initially, and as a major LNG company Gas Natural are keen to utilize their FSRU option to open new markets. They would be an excellent customer from an HMLP standpoint. Both Pakistan and Ghana have encountered well publicized hurdles. More business development and project work needs to be done on both, but the demand has not gone away. Chile remains a 2020 project and there the environmental study continues as was expected. Elsewhere, Hoegh LNG has set [indiscernible] final rounds of several tender processes representing start dates in 2018 and 2021. It maintains flexibility as to which asset gets allocated to which project, and clearly we look forward to seeing some positive news in relation to those processes. It also continues to develop its relationship with Nakilat. Page 18 shows one of the reasons why we remain enthusiastic about the FSRU market. It shows how LNG really is starting to penetrate global markets. Volumes are up by 12% this year and we very much believe that this developing market in LNG will drive demand for FSRUs going forward. Page 19 provides a summary of the HMLP opportunity. I won’t dwell on each point but I do want to highlight how beneficial it is to have a supportive general partner in HLNG. We see this in the recently announced drop down, and furthermore I do just want to point out that it has announced a review into the IDR structure. HMLP fulfills an important function within the group and HLNG’s appreciation of how the IDRs impact the cost of capital and ability to raise equity and grow is the reason for this review. With that, thank you for listening, and Brandon, could you please open it up for questions.

[Operator:]

[Operator instructions] Our first question comes from Chris Wetherbee with Citi. Please go ahead.

[Chris Wetherbee:]

Yes, thanks. Good morning Richard.

[Richard Tyrrell:]

Good morning, Chris.

[Chris Wetherbee:]

I wanted to pick up just where you left off there. Can you walk us through some of the thoughts around timing of the IDR review and maybe just some color around that? Would just love to get a little bit more incremental sort of thoughts around that process.

[Richard Tyrrell:]

Sure. At the moment, we are at about 28% above our minimum distribution level, so we’re just about into the 25% split. Obviously once you get into the higher splits, the impact of the--of I guess what I’d call leakage APRs becomes more material. So we always do factor it into the drop downs anyway, but it makes it more and more difficult to pay what the sellers, what HLNG in this case are looking to achieve for their assets if we have such leakage, and that’s why we’re looking at it. There’s various options. You’ve seen people go about the resets in various ways I believe the simplest way to approach it would be to cap the level at 25% because I think the math works at that level and it takes away any sort of long term fear that you might eventually reach the 50% level where nothing seems to be particularly sustainable. So that’s something which I think could be achieved--it would be very, very straightforward to achieve, to bring it down, which would require maybe a little bit more of a value exchange. I don’t think there’d be much of a value exchange just capping it at 25%, if any, and those are the things that are coming under review.

[Chris Wetherbee:]

Okay, that’s actually very helpful color, appreciate that. Next question, I wanted to kind of talk about the drop down pipeline a little bit. As you noted, there’s been some changes there. Can you talk a little bit about sequencing and how we should be thinking about the pace for 2018 in particular? Obviously we have Grace coming, I guess beginning of the first quarter, but how should we think about your expected pace for 2018 as it stands given the changes in the pipeline that’s there?

[Richard Tyrrell:]

In terms of things which I’m able to announce today, it’s a bit difficult to put my finger on one particular drop down, but that’s not to say there aren’t other things going on that could change that picture, so I’d be disappointed if we couldn’t find something to drop down in 2018.

[Chris Wetherbee:]

Okay, all right. Now, that’s in addition to the Grace, I’m guessing is what you’re saying. That makes sense.

[Richard Tyrrell:]

Yes, absolutely. Yes.

[Chris Wetherbee:]

Okay, then last question on the Grace. I apologize, I jumped on late if you mentioned it. I know you’re recommending a distribution increase to the Board. Any thoughts on the size or maybe what coverage ratio we should be thinking about for 2018 post-Grace drop?

[Richard Tyrrell:]

Sure. I think I’m going to review that as and when I have to make the decision and the Board has to make the decision on the actual size of the distribution increase, and clearly the size of the increase and how much you want to improve coverage by are fungible. Certainly if we continue trading at such a high yield, I’d be inclined to look a little bit more to focus on improving coverage than distributing to what would be sort of theoretical maximum as a result of the transaction, but it’s something we’re going to review and make a decision at the time.

[Chris Wetherbee:]

Okay, all right. That’s very helpful. Thanks for the time this morning. Appreciate it.

[Richard Tyrrell:]

Thanks for the questions, Chris.

[Operator:]

Our next question comes from Spiro Dounis with UBS Securities. Please go ahead.

[Spiro Dounis:]

Hey Richard, good morning. How are you?

[Richard Tyrrell:]

I’m well, thanks Spiro.

[Spiro Dounis:]

Good. Just wanted to maybe go through the Ghana impact on projects. I realize it’s a fluid situation there, but just curious if you can update us maybe on contingency plans and what’s available to you to the extent those projects don’t move forward as planned. Is there any near term project you can put those on, or is it more likely that those could go out and bid on contracts for maybe the 2020 time frame?

[Richard Tyrrell:]

Well, there are other contracts that we’re bidding on, the tenders, which--and HLNG, I should say, is bidding on them, and some of those are at the front end of this timeline, some of them are a little bit further out. Then, we’ve got the Gas Natural contract as well - they have FSRU aspirations, so there are alternatives but as I said, they’re going to have to crystallize a little more before I can be too specific.

[Spiro Dounis:]

Okay, that’s fair. Then just wondering if you could update us on the MOL transaction and just remind us again exactly what needs to be done in order for you guys to get comfortable with closing that.

[Richard Tyrrell:]

Well, the fundamental question is the size of this performance-related settlement, because that has a direct impact on the equity value of the assets, so that’s the first step and then the next step will be sitting down with MOL again.

[Spiro Dounis:]

Okay, and would you say from a timing perspective, I don’t know if you can narrow the band a little bit, but is this maybe a first quarter event or you think it will be beyond that?

[Richard Tyrrell:]

I should hope so.

[Spiro Dounis:]

Okay, got it. Last one from me, just sort of curious, bigger picture. Obviously you’re a pure play FSRU story right now, and I think that’s generally worked out pretty well for you - it’s a nice little niche. But as you think about the growth pipeline going forward and diversifying the business a little bit, maybe moving away from having your counterparties or projects be so longer term and sort of FID-dependent, do you think maybe moving into the LNG carrier market is something we could see sooner than later, or any other type of vertical to LNG?

[Richard Tyrrell:]

I’m not aware of any plans, Spiro, on that. Obviously as sort of industry participants, we always discuss other sectors, but I’m going to say that I don’t think it’s evolved to the level of where I would call it a plan.

[Spiro Dounis:]

Okay, fair enough. Figured I’d ask. Thank you, Richard, that’s it for me.

[Richard Tyrrell:]

Thanks a lot for the questions, Spiro.

[Operator:]

Our next question comes from Ben Nolan with Stifel. Please go ahead.

[Ben Nolan:]

Yes, thanks. Hey Richard. So just a couple of things. With respect to the accrual and effective indemnification as it relates to the Cape Ann and the Neptune, the accrual, if I understand right, will be reversed, is that correct? Is it settled when the indemnification kicks into force?

[Richard Tyrrell:]

Actually no. The way it normally works with these indemnities, and we’ve seen it before a little bit in Indonesia, for example, they tend to be settled as a contribution to equity, so ultimately the accounting treatment is that the number stays in and we obviously put in a claim to the parent and they would pay cash, which would then show up on our balance sheet in return for zero equity. That’s mechanically how it works.

[Ben Nolan:]

Okay, I see. Then along those lines, the amount that you’ve accrued thus far, the little over $11 million, is that your best guess at what the total cost is going to be, or do you think that number could change materially at all?

[Richard Tyrrell:]

I mean, it’s part of a negotiation, so the one thing that’s certain is that it’s probably going to be slightly different. But at the moment, that’s the best estimate.

[Ben Nolan:]

Okay, that’s helpful. Then just lastly, switching to the market a bit, I believe actually it was in the presentation for the parent company, but there was the updated list of all the different players in the FSRU market, including a couple new ones and a handful of speculative orders. Obviously those have been talked about in the market for a while and there hasn’t been too much ordering as of late away from that, but are you seeing or as a group are you seeing any other further developments in the competitive landscape? Is some of this more aggressive, speculative action that we’d seen earlier in the year, is that beginning to tail off and some of the issues that people have had getting projects across the finish line, is that starting to weigh a little bit more heavily on people’s minds with respect to deciding that they want to be in this business, do you think?

[Richard Tyrrell:]

Well yes, I think the serious players in the business have always been under no illusions about what needs to come together to make one of these projects happen, and that has always deterred the more speculative types from actually getting that pen out, even if they’ve talked about it. We haven’t seen many new orders actually signed. What we have seen is a few cases of companies order an asset sort of directly, so basically go around the service companies like ourselves, and my feeling on those is that they’ve done it because it has been cheap to order one of these vessels in the last 12 months because of the over-capacity at the yards, and that gave them the confidence to move ahead with that. I’ve always thought that they may look to partner up with people sort of nearer to a time when these assets became available or are delivered, because they’ll need someone who can operate them, but you’ve seen that in the case of Swan in India and you’ve seen it in the case of [indiscernible] in Turkey. So if there is a sort of development which I’ll point to, it’s that one rather than that being sort of the big speculative wave of ordering out there.

[Ben Nolan:]

Okay. Perhaps participating in something like that, is that something that the partnership would look to do in terms of potential growth that might come outside of the traditional drop down vertical?

[Richard Tyrrell:]

Yes, absolutely, because it doesn’t really matter to the partnership who’s done the development at the end of the day. If the partnership can, as a sort of selling point when it comes to partnership discussions, can bring in the experience of Hoegh LNG, then it could be compelling to these types, and it’s something we’ll look to follow up.

[Ben Nolan:]

Okay, all right. I’ll turn it over. Thanks Richard.

[Richard Tyrrell:]

Great, thanks Ben.

[Operator:]

Our next question comes from Fotis Giannakoulis with Morgan Stanley. Please go ahead.

[Fotis Giannakoulis:]

Hello, can you hear me?

[Richard Tyrrell:]

Hi Fotis. Yes, we can hear you.

[Fotis Giannakoulis:]

I want to ask a little bit more color about the Pakistan project. There seems to be a lot of uncertainty and the stock reacted quite negatively with the announcement of Exxon walking away from the consortium. I understand that in this consortium, the leading player is Qatar and I wonder how important the departure of Exxon Mobile is for the future of this project.

[Richard Tyrrell:]

It’s one of those things where there’s a number of things that have to come together on that project, and so I wouldn’t say it’s necessarily Exxon Mobile. They themselves aren’t absolutely critical, but until those things come together, I think at least from my point of view, I’ve sort of de-emphasized it somewhat as a project. I think as an opportunity, I think it’s still very much there because the market in Pakistan is fantastic, but there’s things with the project that still need to be figured out and that’s where we are.

[Fotis Giannakoulis:]

Can you remind us what are the pending issues, what are the things that they have to come together, and is there a way that we can put a probability on the fruition of this project?

[Richard Tyrrell:]

It’s commercial stuff, it’s permitting related stuff, so it’s stuff which is quite difficult to handicap.

[Fotis Giannakoulis:]

Okay, thank you. That’s very helpful. We heard about the discussion of the IDRs, which is definitely very positive news for the MLPs [indiscernible] obviously favorably for the MLP. I’m wondering if in this discussion you will be able to give us some guidance on how do you view the drop down multiple and how should we think of future drop downs after the new IDR is in.

[Richard Tyrrell:]

Well, this particular drop down multiple, you can see how it’s lower than the previous or the first transaction, and that’s predominantly because of, as I said, being one year further into the contract. Yes, it’s paid down debt in that time and also we are, or at least the conflict committee has taken a more conservative view on terminal value that reflects lower new build prices, so the multiple, you can do the math, but basically on the historic numbers, it is below 8.5 times and I wouldn’t necessarily say that’s a good read across for future drop downs because of course you’ve got to look at some current EBITDA versus what your assessment is of potential future EBITDA, and that makes a difference. The length of the contract makes a difference and all these things get factored in. But you know, I think it does reflect the current conditions, the current cost of equity of the MLP and so on, and that’s why the negotiation ended up at that point.

[Fotis Giannakoulis:]

Thank you very much, Richard. One more question for me. I’m wondering if there are any new discussions with the Lithuanian authorities about the potential drop down of the Independence. I know that your customer was not very easy on something like that. I don’t know if you touched upon it earlier, is there any chance we can see the contracts of the Arctic Princess and the Arctic Lady being dropped down, given the length of their contracts?

[Richard Tyrrell:]

On the carriers, they aren’t particularly material because we don’t own--Hoegh LNG doesn’t own 100% of them. It owns 50% of one and owns 33% of the other, so I don’t think it’s likely to see either of those assets coming down to the HMLP level anytime soon. On Independence, we’ve got a very strong relationship with the customer there. As a matter of fact, I wouldn’t say that they’ve been in any way difficult, but they have had constraints, so never say never.

[Fotis Giannakoulis:]

Okay, thank you very much, Richard.

[Richard Tyrrell:]

Thanks Fotis.

[Operator:]

Our next question comes from Ken Hoexter with Merrill Lynch. Please go ahead.

[Ken Hoexter:]

Good morning. Richard, just maybe revisiting the NG and the boil-off, maybe you could just kind of walk us through that process. I know you mentioned time to resolve, but I guess you mentioned the MOL hopefully getting a resolution. I thought at the analyst day you might have put that off from perhaps 2018 to even into 2019, but maybe just start off talking about the process with the boil-off disagreement and what’s going on there.

[Richard Tyrrell:]

Well, boil-off is what it says - it’s related to gas which is ultimately being lost during the passage, so these contracts have a boil-off provision in them that at a certain level protects the charterer for that loss. The reason why it becomes quite a negotiation is that of course there’s various circumstances when you get more boil-off than others, and there’s various interpretations in the contract or various interpretations as to what the contract says on these sorts of exceptions. We’re in the process of that negotiation.

[Ken Hoexter:]

This is when it moved from China back to its current contract? Is that just the Cape Ann, or you mentioned the Neptune as well? A - Richard Tyrrell] Actually it’s something which doesn’t apply when the operating vessels are used, so you picked up that, yes--I mean, it does apply when operating LNG carriers. So as of late, this hasn’t been a major issue, but the claim goes back to many years ago when these assets were first in operation. In early years they were being used as LNG carriers more than FSRUs.

[Ken Hoexter:]

Okay, and then your thought on the timing then of the MOL? It sounded like earlier you were hoping for a first quarter solution, a resolution? I thought at the analyst day you had kind of intimated it might be even until 2019?

[Richard Tyrrell:]

Well, I don’t think it’d be as late as that if it happens, because I think if it was 2019 it probably wouldn’t happen, but--or at least less likely to happen. But I think as soon as we know where we are on this boil-off gas, then we get back together with MOL.

[Ken Hoexter:]

Okay. Then vessel opex started creeping up. What is that relating to?

[Richard Tyrrell:]

It depends on the asset. It’s, I think, just a matter of the blend over the fleet, and in some places you have to pay things like payroll tax because the assets are not considered ships, and those things have an impact. There isn’t any sort of industry trend to speak of that’s causing that.

[Ken Hoexter:]

All right, thanks. Appreciate the time.

[Richard Tyrrell:]

Thanks for the questions, Ken.

[Ken Hoexter:]

Also for moving the call, by the way. Thank you for not having double overlap this morning, appreciate that.

[Richard Tyrrell:]

Oh, you’re very welcome. Thanks for bringing that to my attention.

[Operator:]

Our next question comes from Andy Gupta with HITE Hedge. Please go ahead.

[Andy Gupta:]

Hi Richard, how are you?

[Richard Tyrrell:]

I’m well, thanks Andy. How are you?

[Andy Gupta:]

Doing well. I’m sure you can’t give much color on--a lot of topics have been discussed on in terms of timing or what could happen next in terms of a drop down, but conceptually, assuming there is another drop in ’18, what are your thoughts on financing that? You were very successful in doing [indiscernible], you had some cash on hand last time around. I’m curious as to how you’re thinking about financing the next conceptual drop.

[Richard Tyrrell:]

It’s a good question, and as with most drop downs, you’ve got to finance them somehow, whether it be through internal means or external means. We have got a few options, and I’d be reluctant to issue equity at today’s price but hopefully that will improve. I think we’d all hope that in general across the sector. That’s obviously sort of our primary source of capital, but if you look at things like net debt to EBITDA, we are starting to--we have a bit of balance sheet headroom that can be used to finance at least part of an acquisition. There are--well, there is the option of preferential preferred, although I think there’s a limit to how much you can do of that, and I’m not exactly sure what that is but I’m pretty comfortable with today’s split between the capital. I’m not sure whether I’d want to move it too far away from where it is today. Then, you’ve seen people raise small amounts of equity off the back of ATMs as well, and we are monitoring all those options. Then lastly, it doesn’t apply maybe so much to us because of the size of our acquisitions are quite lumpy, but clearly if you’re running at a coverage ratio of 1.15 or 1.2 times or higher, you’ve got a greater amount of internally generated cash flow to fund such things, and you combine that with a bit of debt and it can sometimes at least get you somewhere.

[Andy Gupta:]

How about--is there a possibility of the parent taking any equity?

[Richard Tyrrell:]

Absolutely, that’s a very good point. It’s another option.

[Andy Gupta:]

Okay, understood. A question with [indiscernible] Independence, any progress on resolving the situation there in the country?

[Richard Tyrrell:]

You know, I’d say there is progress, and I cannot say that it’s going to lead to the consent, but there’s definitely a good dialog.

[Andy Gupta:]

Yes, okay. Understood, Richard. Thank you.

[Richard Tyrrell:]

Thanks Andy.

[Operator:]

Our next question comes from Sunil Sibal with Seaport Global Securities. Please go ahead.

[Sunil Sibal:]

Hi, good morning Richard, and thanks for all the clarity on the call. I got on the call a little bit late so not sure if this was addressed, but I was curious on the Gas Natural Fenosa project that you’ve indicated. What’s the timeline on that FSRU option on the season?

[Richard Tyrrell:]

Well, it’s--like I said, in a way it’s a bit more of a question for the HLNG level, but I can tell you what I know. Gas Natural Fenosa is a big integrated player in the LNG space, and they’ve got businesses in various countries around the world. They’ve got various LNG carriers on charter and various sales and off-take agreements in place, so what they want to do is to have the ability to deliver an FSRU into one of their projects, and it’s for them to put everything in place. But by entering into this charter with us, they’ve basically got that option and obviously from my point of view, I’m very hopeful that they find an FSRU project for it.

[Sunil Sibal:]

Okay, got it. Then on the Total acquisition of Engie’s LNG business, I know you mentioned on the call that the way some of these issues and boil-off that [indiscernible] is dependent on Total [indiscernible] this issue. I was thinking more [indiscernible] with Total taking over that portfolio, is there any impact that we should think about from Hoegh’s perspective?

[Richard Tyrrell:]

It’s relatively early days because that deal was only announced, I think it was last Wednesday, so we’re still trying to get our head around exactly what it will mean, but on the face of it it’s positive. We’ve got a good relationship with Total, and I think they’re now going to be the second biggest LNG--second biggest private LNG company in the world after Shell - of course, people like Qatar are bigger. They ought to be good to do business with, and we do have a good relationship.

[Sunil Sibal:]

Okay, got it. Then lastly on the Pakistan project, I think there has been some chatter on alternate locations for Pakistan FSRUs. I was just kind of curious based on how things kind of rolled out for this particular project, has your view in any way changed in terms of how you are tendering on those projects in Pakistan?

[Richard Tyrrell:]

I mean, there are a lot of moving parts at the moment in Pakistan, and I’ve heard that locations are being looked at, amongst other things. The market is a good market, there’s demand which is there yesterday, so there’s some strong pull factors, but the puzzle isn’t quite yet complete.

[Sunil Sibal:]

Okay, so we’ll stay tuned for me.

[Richard Tyrrell:]

Please do.

[Sunil Sibal:]

Yes, okay. That’s all I had. Thanks for all the color.

[Richard Tyrrell:]

Super, thanks for the questions, Sunil.

[Operator:]

This concludes our question and answer session. I would like to turn the conference back over to Richard Tyrrell for any closing remarks.

[Richard Tyrrell:]

Thank you, Brandon, and thank you to everyone else for dialing in. I wish everybody a good Thanksgiving for next week, and I will next be in New York for the Wells Fargo conference, so look forward to seeing people there if you’re going to be in attendance. Thanks once again.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.