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Edited Transcript of GMLP earnings conference call or presentation 21-May-19 3:30pm GMT

Q1 2019 Golar LNG Partners LP Earnings Call

HAMILTON BERMUDA-NA Jun 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Golar LNG Partners LP earnings conference call or presentation Tuesday, May 21, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian Tienzo

Golar LNG Partners LP - CEO & CFO

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Conference Call Participants

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* Ariel Luis Rosa

BofA Merrill Lynch, Research Division - Associate

* Jonathan B. Chappell

Evercore ISI Institutional Equities, Research Division - Senior MD

* Michael Webber

Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst

* Randall Giveans

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, thank you for standing by, and welcome to the Golar LNG Partners First Quarter 2019 Results. (Operator Instructions) I must advise you that this conference is being recorded today, Tuesday, the 21st of May, 2019.

And now I'd like to hand the conference over to your speaker today, Brian Tienzo. Please go ahead.

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [2]

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Thank you very much, and good afternoon, and good morning to all of you. Welcome to Golar Partners' 1Q 2019 Results Presentation. My name is Brian Tienzo, I'm joined here by Head of Investor Relations, Stuart Buchanan. Without further ado, I'd like to start the presentation. And I would urge participants to read through Page 2, forward-looking statements, in their own time and so with that done, let's jump job over to Slide 3 for the main highlights.

We report operating income of $25.9 million for the first quarter of 2019. This result does not, however, include our interest in the operating results of Hilli Episeyo. Over the past few years, the first quarter of our financial year had traditionally been the weakest as this quarter experiences 2 months of contractual off-hire for the Golar Igloo and is therefore non-contributive to earnings.

Nevertheless, the first quarter also saw Golar Freeze contribute to cash flow from its former contract with DUSUP as well as earnings from its new contract with NFE. The combination of these 2 major events in the quarter resulted to distributable cash flow of $28.8 million, representing a distribution coverage ratio of 1.01x. There were some further positive news for the quarter for the partnership. As charterers of both Golar Igloo and Golar Grand formalized their options to extend the vessels employment for another year. As a result of the foregoing, the partnership announced unit distribution of $0.4042 for the quarter.

Let's now turn over the page to go through our income statement highlights. Net results for the first quarter was a loss of approximately $15 million as compared to a loss of $19 million in the last quarter. And this is mainly due to the following factors: The Golar Igloo, whose contract was extended by 1 year, was in its contractual off-regas season up to the 25th of February. The Golar Mazo charter that commenced during the fourth quarter ended and this was subsequently followed by a short voyage at a lower rate. The loss of earnings from the Golar Mazo and Golar Igloo was supplemented by earnings from the Freeze, which commenced commissioning during early January and consequently started to accrue its commissioning income. Earnings were also positively impacted by decrease in costs compared to levels seen in the fourth quarter. Whilst operating cost increased during the quarter to $16.8 million from $15.8 million, as we took advantage of the Golar Igloo's off-regas season to store up, decrease in costs from both voyage and administration expenses more than offset this, resulting to an overall cost decrease of approximately $2 million. Finally, net noncash interest rates swap losses following a further decrease in 2- to 5-year interest rates contributed to $14 million and therefore, the majority of the first quarter loss.

Turning over to Page 5 for the balance sheet assets. Cash and cash equivalents as of the end of the quarter was at $74.4 million. During the quarter, there were CapEx payments in respect of the final installment of the Methane Princess drydocking, Golar Igloo drydocking and modifications to increase its regas capacity, finalization of the Golar Freeze modifications and a one-off working capital segment in respect of the Hilli drop-down. Such expenditures are not expected to materialize in the second quarter. And against these expenditures, we took the opportunity to draw down the remaining $25 million from our existing credit facilities.

Going over to Slide 6, balance sheet liabilities. At the end of the quarter, our net debt was $1.59 billion. Now this includes $447 million associated with Hilli Episeyo. As at the quarter end, the percentage of debt swap to fixed rate was approximately 100%. The average fixed interest rates of swaps related to our bank debt is approximately 2.2%, and with that an average remaining period to maturity of approximately 4.4 years. So this means the partnership is pretty well protected from interest rate variability.

Based on the above, our net debt-to-annualized-EBITDA ratio was 5.9x. However, were we to include the cash earnings of Golar Freeze for the quarter, this ratio would be approximately 5.1x, and this is despite months of Igloo being essentially off-hire.

Turning over to Slide 7 on distributable cash flow. Whilst distribution coverage ratio was lower this quarter as compared to last quarter, this was entirely expected and mainly due to the 2 months in which the Golar Igloo was off-hire. With this distribution coverage remaining above 1x during this period when financial results is at its weakest is a testament that the dividend distribution set a couple of quarters ago is one which is sustainable. In contrast, the distribution coverage in Q1 2018 was 0.32x. Our life-to-date distribution coverage at 1.12x remains pretty strong. We fully expect 2Q distributable coverage ratio to improve on the basis that: one, the Golar Igloo will be on full higher for the entire quarter; and also the Golar Grand's charter extension commences and it does so at increased hire; and, of course, the Golar Freeze contributes earnings from its new 15-year charter with NFE and for a short period in the second quarter, there is also cash contribution from its old charter with DUSUP.

Turning over to Slide 8 now which highlights the partnership's revenue backlog as of the end of 1Q. This level was at $2.25 billion. All of the partnership's fleet, the Golar Spirit is the only asset not to contribute earnings over the past few quarters. Of course, when arriving at a new distribution level, no income had been assumed from this assets. Nevertheless, a potential use of this Episeyo in Brazil is developing positively and could be a source of organic growth. This opportunity is being developed jointly with Golar Power, who, as you know, has been successful in developing the Sergipe power project in Brazil. Based on a normalized quarter and only taking into account contracted revenue, the average remaining term of the contract backlog is approximately 7 years with a variety of strong counterparties. And whilst today, the partnership remains exposed to LNG shipping, this is actually a very small portion of its revenue backlog as we will now see in Slide 9.

So Slide 9 shows the revenue breakdown of the partnership's earnings. Following the conclusion of the acquisition of 50% of equity interest in the contracted capacity of FLNG Episeyo in July 2018, the partnership's revenue backlog have improved materially. 61% of its income is contributed by its Episeyos, excluding charter options. These have an average contract term of approximately 7 years. 32.5% of its income is from Hilli Episeyo, whose contract runs for another 7 years. And then 16.5% of its income is from shipping, so this is represented mostly by the long-term contract, which the Methane Princess is currently servicing.

Shipping revenue, and therefore shipping exposure and associated volatility is, therefore, a small component of a stable and transparent revenue backlog from well-established charters. These numbers have been arrived at without taking account of any potential option extension or earnings contributions from ships not currently in employment. So our ambition is, of course, to improve on this already strong revenue backlog. We have already said that organic growth is possible through deployment of Golar Spirit. And the next slide underlines the various acquisition possibilities available to the MLP.

Turning over now to Slide 10 to look at the partnership's acquisition possibilities. We previously mentioned Hilli, whose contractual performance today has been flawless. The partnership already owns 50% of the committed capacity. The other 50%, therefore, remains available as an acquisition target. It is also encouraging to learn that Golar LNG's discussions with Perenco with regards to utilization of the third and possibly the fourth train continues at pace and more so that these discussions could result in potentially materially increasing the overall duration of the contract term. Investors will remember in the event that both trains are fully utilized without accelerating production of the existing resource, Golar Partners will receive 5% of any additional earnings, reducing to 2.5% of additional earnings in the event that only train 3 is contracted.

Additionally, we have 25-year cash flows from FSRU Golar Nanook and Sergipe power plant to come. Both of these are expected to be cash-generating from early 2020. Our GP's annual EBITDA share from these is approximately $99 million. The longevity of these contracts make these attractive potential acquisitions to the MLP.

Of course, whilst the acquisition targets remain, funding such acquisitions remains a question. We have already seen that organic growth can be achieved through the Golar Spirit and Hilli Episeyo. Furthermore, as time lapses, the MLP's debt capacity improves. This will provide a partnership with a limited ammunition for acquisition for growth with that materially negatively affecting its leverage ratios in covenant. Nevertheless, the ambition must be to be able to maintain a growth trajectory, and for this, an improved equity currency is required.

So turning over to Slide 11. To summarize then, despite a traditionally challenging quarter, the partnership has been able to maintain a respectable distribution coverage ratio. This has been achieved through another quarter of flawless operations and testament to distribution level being sustainable. With improved financial results expected from Golar Igloo, Golar Grand and Golar Freeze, we anticipate coverage ratio to be materially better in the second quarter of 2019. With Sergipe power project due to become operational in a few months, we look forward to having another acquisition target option. And whilst sustainable funding for such acquisitions remain evasive, growth through the MLP's existing assets remains a good alternative and possibility. That, ladies and gentlemen, concludes the presentation.

I will now turn the call over to our moderator for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Randy Giveans of Jefferies.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [2]

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So the biggest question out there is distribution sustainability. I look at the coverage, 1.2x in 4Q '18 obviously falling for a few factors to still slightly above 1x in 1Q '19 and, as you just stated 4 minutes ago, will be materially higher in the coming quarters. So trying to think about distribution sustainability, can you give a vote of confidence around that? And even possible distribution increases in the future, what would it take, maybe additional drop-downs, to get that distribution higher going forward?

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [3]

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Absolutely. So I think we mentioned previously that in taking -- in presenting the new level of distribution, we took a very conservative approach, particularly on the vessels that were in -- contracts that were in short term. As we have said previously as well, the Q1 of any financial year for the GMLP traditionally had been the weakest. And in contrast to Q1 2018, we had 0.32 as a coverage ratio, we have 1 this time around. So I think to me that shows that we chose the right level of distribution. And to that extent, Q1 is always the challenge. Going forward, we see the earnings, particularly in the Golar Igloo and now the Golar Freeze, as a factor that will allow the distribution ratio to materially increase, and therefore, allows us to be able to sustain the dividend that we have set.

Secondly, I think it's encouraging from the Golar call that the discussions with the FLNG Hilli Episeyo is ongoing. Clearly, if we are looking at organic growth that as well as the Golar Spirit opportunity that's been mentioned also is accentuated to that growth. Now there is obviously a path to growth by way of acquisition. But as you can imagine, a 13% yield -- dividend yield is not sustainable, and therefore, the currency -- the equity currency vehicle is not available for that purpose. We can grow a little bit by way of debt acquisition, but that will only take you so far. We need that equity currency to become available to be able to sustain growth. And obviously having that and with the combination of very long-dated contract backlog at the sponsor level allows us to then contemplate increasing the dividend going forward.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [4]

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Sure. Okay. So just to clarify though, at this point, distribution seems very stable, rising coverage, no real issues around that.

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [5]

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No. As I said, Q1 is always the weakest spot. Q2 will be the -- coverage in Q2 will definitely be better, and so will be the Q3 we expect.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [6]

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Got it. Just wanted to clear that up. Now common unit buybacks, obviously, you want to have the liquidity but at the same time, like you said, the market is not giving you the credit, yielding 13%, 14%. You repurchased, I think, about $4.5 million in 4Q, looks like no unit repurchases in 1Q. So how do you balance that kind of taking advantage of the disconnection, I guess, dislocation between the yields of the unit price at the same time of kind of maintaining cash for future project finance? Any additional units -- go ahead.

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [7]

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Sure. I mean we just got to be opportunistic about this. So to some extent, we want to maintain a certain level of cash in order to be able to be ready for those kind of opportunity. At the same time, we want to balance it a little bit because clearly there is an opportunity, maybe buy back a little bit of Nanook once that becomes operational towards the end of this year or next year. So we just -- we want to make sure that we use it for the right purpose. I mean Nanook to me is an attractive acquisition if it can be done, particularly it's a very long-dated contract. But it is something that we continue to consider. But as I said, we just have to make sure it's probably balanced when we do something.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [8]

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Yes. Then in the second part of that question, and this will be my last question, just how do you kind of rank those project on Slide 10 in terms of future drop-downs? Is it more ownership of the remaining interest in Hilli? Is it the Nanook? Is it the power project itself? Can you kind of rank those?

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [9]

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Well, in terms of ranking, my first would be Nanook simply because it's a very long dated. I mean as it stands today, without changes to any of those contracts, that would be my preference simply because it's very long-dated contract. It mitigates the residual risk materially, and to some extent, it's -- to say, it's a less chunky acquisition than the Hilli, for example.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [10]

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Yes. Absolutely. And it certainly would extend your average contract duration.

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [11]

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Absolutely.

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Operator [12]

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Your next question comes from the line of Jon Chappell of Evercore.

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Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [13]

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If we can maybe expand a little bit on the last line of question a little bit and just talk about plan B. If there is -- I think you laid out pretty well a coverage ratio that should stay above 1x, all else equal, but the market sometimes, I guess, perception becomes reality. But if you stay at this, kind of, 13-plus percent yield and equity -- common equity for drop-downs becomes prohibitive, how do you think about the next, kind of, 1 to 3 years at GMLP? Is there another, kind of, plan if growth just becomes prohibitive because the market doesn't allow it?

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [14]

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Well, I guess I think -- so the acquisition growth, I mean, obviously, at those -- at these current levels will be very difficult but clearly we have pathway for organic growth. We are not necessarily depending heavily on the Hilli, for example, but that would be a fantastic way to grow the company. The other thing, of course, is the positive development that we are seeing in respect of the Brazilian opportunity where Golar Spirit could be deployed. Now don't forget that when we took the decision to reset the level of dividend, we had assumed that Golar Spirit is just earning nothing, so it's not contributive at all to GLMP's earning. So to the extent that we do find something for the Golar Spirit, I think that, in itself, is quite a big turnaround and certainly lends itself positively to potentially looking at increasing the dividend at that point.

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Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [15]

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Okay. And then the -- you've contracted the Grand for a short period of time and made comments about how it's substantially above the initial first 2 year and now even the Maria. Short term, I guess the biggest kind of near-term question mark then becomes the Igloo. And I understand that it's in service for the next 7 months or so. How soon or how much ahead of the end of this year, do you think KNPC needs to lock down its arrangement? I mean it's obviously a very important part of the infrastructure. So do you think this is kind of something that goes all the way to the end, or something maybe we can have an update on as soon as the next quarter?

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [16]

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Well, I think, I mean it's difficult -- we can't completely rely on the history of the events we've seen on the Igloo. But referring back to what happened last year, there was an intention for a competitive tender to come out during the summer of last year. That didn't happen. We're now nearing the same time line as previously. And of course, the -- in the end KNPC just simply ran out of time. Now we're not necessarily relying on that to happen again. So when we looked at what could potentially happen to the Igloo, we took a very conservative approach on its earnings potential -- shipping earning potential, in fact, much, much less so than what it's earning today, for the dividend to -- its contribution to distributable cash flow. And of course, what we have tried to do to try and mitigate and provide a much better offering for the Igloo is we've modified the vessel to increase its output capacity. It makes it actually 1 of possibly only 2 Episeyos in a world with that type of output. So at the very least, it widens its envelope of opportunity. But in the event, there is a tender, a competitive tender going forward then we would certainly look to compete with that. We have a very good relationship where KNPC, now to the extent that adds to our ability to win it then obviously, we would ride on the back of that but -- we will be very competitive.

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Operator [17]

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Our final question comes from the line of Michael Webber of Wells Fargo.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [18]

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Brian, just to follow up on the questions on the Igloo, they ran out of time last year and you guys are able to work out on extension and I think the rate was roughly flat. Are there -- is there an actual -- is there an evergreen option series on that? Is there something you negotiate on a bespoke basis? You would need to negotiate on a bespoke basis this year, if it were to get extended again for a year.

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [19]

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Yes. So in the previous contract prior to them exercising their option, there was actually a contemplated option for them to exercise then. This time around, there isn't. So it will be properly negotiated. Having said that, the -- it was a very amicable sit-down negotiation and in the end, it wasn't -- the economics were actually probably slightly better than -- the extension economics were actually probably slightly better than the initial 5 years. As I said, there is -- whilst there was a delay in their ability to put together a tender process last time, I think their intention this time is fully to go down that route. We are in constant dialogue with those guys to make sure that we're kept up-to-date. And we want to make sure that we're at the forefront of being able to compete where necessary. And of course, what we have -- what they've communicated to us previously was that the ideal position for them would be to have an Episeyo that's slightly greater in regas capacity than the Igloo was, which is why we took the opportunity during the off-regas season in January and February to modify the vessel properly and allow and give it that competitive edge. Now we know that they are -- at some point, they will be quite reliant on land-based facility, but we also know that in the interim they need an Episeyo. So the combination of good operations and allowing a -- allowing them a better -- higher regas capacity hopefully puts us in good stead.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [20]

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Right. And so obviously the tender is not out yet, but give a vague sense of in a sense that it is providing bridge capacity what kind of term or tender you think they'll be looking for? Are we talking something that's particularly MLP-friendly? Or is it something that's more along -- more kind of a 2- or 3-year deal?

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [21]

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It's very difficult to know, it's very difficult to say, I should say. I mean clearly we would like to see another 5-year contract. Whilst there is an ambition for them to use land-based facility, I think it's clearly also an ambition for them to have a contingency like we have seen in other places where there is an Episeyo available in case if nothing else from negotiation or for sort of emergency use. I can't really comment on whether or not -- as a said, I'd like to see a longer tender as a contract but my gut feel is it's probably in the range of 2 to 4 years rather than 5 years.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [22]

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Okay. That's helpful we can obviously get more color on that as it happens. I guess, one last on...

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [23]

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I think just one thing -- sorry, just going back to that, I think whilst we will compete very competitively for the Igloo, we mustn't lose sight to the fact that when we -- again, looking at the distribution sustainability and assuming what the Igloo could possibly do post the KNPC contract, we took a huge haircut on that and so -- and that makes us a very competitive bidder in that in the event that happens. Or alternatively, as you will have heard from Golar LNG's remarks earlier, I think an alternative would be hopefully in a very good shipping market if that -- if it came to it.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [24]

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Right. Right. Now that's helpful. Just last one for me, just around your IDRs obviously not a big driver of -- value driver. One way or the other here, you've already adjust them once. I believe it was 2016.

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [25]

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2016, yes.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [26]

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In October, but there are still some IDRs that are hanging out there. Is there any thought or conversation with, kind of, cleaning up the rest of those with Golar? It's not going to be top of the stack in terms of priorities, but just curious in terms of thinking of ways or rationale for why the equity might not screen as well other than the -- and the equity cost of capital not be wider than maybe somewhat implied?

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [27]

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Sure. I think if the IDRs ever became a point of discussion that means that we are hopefully getting closer to those thresholds. And if we came to it, I mean, we'd be very happy to discuss -- structure those such that it doesn't impact negatively on our investors.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [28]

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Okay. And I would like have one more. So I think you've answered this in the past, but just to refresh. The Golar Power in terms of the way those transactions that actually work, do you actually have a right of first offer or right of first refusal on those Golar Power assets? And is that something that Golar panel will get to unilaterally decide? I believe it's 50-50 JV, so would they need to get Stonepeak's approval to actually draw something down to you?

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [29]

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Well, I mean first and foremost, GLNG themselves will not need approval from Stonepeak for GLNG shares, for example, but for the MLP -- sorry, for the entirety of it, there would need to be discussions with the Stonepeak. And whilst we talk about the Golar Spirit, so the Golar Spirit is being chartered for this opportunity in real simply because it's the right size and the right asset for the project that's being looked at.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [30]

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Okay. But then in terms of the transactions to and from, I guess, it does -- it would only matter if there was a third party involved, I guess, but the technical difference between the right of first refusal and the right of first offer.

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [31]

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Correct. So as with -- that's right. There needs to be an offer from the Power. It's a similar mechanism we have with GLNG but...

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Operator [32]

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Thank you. We do have a question from Ari Rosa of Bank of America.

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Ariel Luis Rosa, BofA Merrill Lynch, Research Division - Associate [33]

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So you mentioned this point about equity capital being off the table as a funding source. Maybe if you could just touch quickly on your views on your debt capacity and if you view that as having any room there to fund growth?

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [34]

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We do. I think one of the things that we have highlighted previously is the debt funding in some of our vessels are amortizing much more quickly than the tenure of the some of the contracts there. So what you're seeing is that whilst debt is coming down very quickly, the earnings capacity of the vessels and the earnings -- sorry, the contracted earnings on those vessels aren't amortizing as quickly. So there is a bit of a mismatch. Once the debt has been fully repaid, if you want, there remains some really good earnings in some of those vessels. So there is an opportunity to lever up against those. And obviously, this increases as time progresses, which is why I mentioned earlier on about the improving debt capacity as time passes.

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Ariel Luis Rosa, BofA Merrill Lynch, Research Division - Associate [35]

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Great. That's helpful color there. And then just quickly, you mentioned in the press release some of the macro considerations that you're seeing with the China pulling forward some demand. Just maybe if you could touch quickly on what you're seeing in terms of the macro environment and the overall rate picture?

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [36]

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You mean on shipping side?

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Ariel Luis Rosa, BofA Merrill Lynch, Research Division - Associate [37]

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Yes, correct.

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [38]

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So -- absolutely. So I mean we've seen how China could be a big factor and swinging factor of -- particularly, in shipping. But what I wanted to point out is the sustainability of the MLP's distribution on the basis that we have sufficient contractual sort of capacity in earnings to not be too heavily reliant on the shipping income. So we do have some ships available to trade on the shipping side. But their contribution to the earnings is actually very small. Whilst -- obviously, as rates gets better, which we expect in the second half of this year will do so and for the most part of 2020, then clearly the contribution from those vessels will be a positive result for the MLP.

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Operator [39]

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There are no further questions on the line, sir.

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [40]

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Brilliant. Well, I'd just like to me to say thank you very much for your participation. And hopefully, we'll see you in the next quarter. Thank you, and goodbye.

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Operator [41]

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Thank you. That does conclude our conference for today. Thank you all for participating. You may all disconnect.