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Edited Transcript of GMLP earnings conference call or presentation 27-Feb-19 4:30pm GMT

Q4 2018 Golar LNG Partners LP Earnings Call

HAMILTON BERMUDA-NA Mar 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Golar LNG Partners LP earnings conference call or presentation Wednesday, February 27, 2019 at 4:30:00pm 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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* Fotis Giannakoulis

Morgan Stanley, Research Division - VP, Research

* 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 LP 4Q 2018 Conference Call. (Operator Instructions) I must advise you that this call is recorded today, on Wednesday, the 27th of February, 2019. And I would now like to hand over to your speaker today, Mr. Brian Tienzo. Please go ahead, sir.

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

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Thank you, moderator, and good afternoon and good morning to all of you. Welcome to Golar Partners' 4Q 2018 Results Presentation. My name is Brian Tienzo. I'm joined here by our Head of Investor Relations, Stuart Buchanan.

So let's start the presentation by jumping over to Slide 3 for the main highlights. We report income of $31.8 million for the fourth quarter of 2018. This result does not, however, include our interest in the operating result of Hilli Episeyo. During the fourth quarter, we continue to experience the tail end of off-hire days in respect to Methane Princess drydocking and Golar Freeze's modification. Despite this and as a guide in last quarter's earnings announcement with the help of full quarter's contribution from Golar Mazo and Hilli Episeyo, the fourth quarter saw improvement in distributable cash flows and resulted to an increased distribution coverage ratio of 1.2x. There were further positive news for the partnership as charterers of both Golar Igloo and Golar Grand exercised 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.

So let's now turn over the page to go through our income statement highlights. Net results for the fourth quarter was a loss of $19 million as compared to an income of $49 million in the third quarter, and this is mainly due to the following noncash factors. In the third quarter, the remaining income at Golar Freeze and the DUSUP charter was recognized in that quarter. This amounted to $33.5 million. However, this income will actually be received by the partnership pro rata up to April 2019. Of course, this is taken into consideration when we estimate our distribution coverage. Also, due to decrease in medium- to long-term swap rates relative to levels at the end of the third quarter, we booked in this quarter a noncash negative mark-to-market loss of approximately $27.5 million. And finally, and to a much less degree, we saw an increase in G&A to $4.7 million this quarter from $2.9 million in the previous quarter due mainly to finalization of management fees. The above were offset by full quarter's earnings contribution from the Golar Mazo and Hilli Episeyo. We also witnessed a slight increase in net interest expense in the quarter due to a small rise in LIBOR and higher debt balance following the drawdown of $50 million from our revolving credit facility.

Turning over to Page 5 for the balance sheet assets. Our cash and cash equivalents increased to $96.6 million at the end of Q4 compared to third quarter cash level of $75.8 million. During the quarter, $50 million was drawn from available credit facilities in anticipation of paying for capital expenditures following the completion of the drydocking for Methane Princess, the modifications for the Golar Freeze and the January 2019 drydocking of Golar Igloo. As event of 4Q, the partnership still had $25 million of undrawn credit facility remaining.

Going over to Slide 6, balance sheet liabilities. At the end of the quarter, our net debt position was $1.58 billion. This includes $455.3 million associated with Hilli Episeyo. As of the quarter end, the percentage of debt swap to fixed rate was approximately 100%. The average fixed interest rate of swaps related to bank debt is approximately 2.2%, with an average remaining period to maturity of approximately 4.6 years. So the partnership is pretty well protected from interest rate variability.

Based on the above, our net debt-to-EBITDA ratio was 5.1x. However, when we do include the actual cash earnings of Golar Freeze for the quarter, this ratio would be improved and would go up to approximately 4.5x.

Turning over to Slide 7. So the solid results achieved in the quarter have manifested itself in a materially improved 4Q distribution coverage of 1.2x. Our life-to-date distribution coverage at 1.12x remains pretty strong and is a slight improvement from last quarter's ratio of 1.11x. Whilst we expect 1Q 2019 ratio to decrease from the 4Q level mainly due to Golar Igloo's 2 months off-rig season, the following factors give us confidence that we should see improved ratio again from 2Q '19 and onwards. Firstly, Golar Igloo's extended charter have just recommenced. Secondly, charterers of Golar Grand have exercised their extension option and the economics of this option are superior to its previous earnings. And finally, Golar Freeze is expected to have complete its commissioning in Jamaica and earning full hire. Furthermore, whilst an improved shipping market is not built into our earnings anticipation, we nevertheless expect 2Q '19 to show some improvement, which could further improve earnings through our spot shipping exposure into Golar Mazo.

So let's turn over now to Slide 8 to look at shipping updates. With newbuild deliveries in 2019 expected to be front-loaded and along with this and seasonably warm winter so far, these factors have negatively affected shipping dynamics during the first quarter of '19. However, looking ahead, and as the shipping balance graph suggests, the overall shipping forecast for the rest of the year, and indeed for 2020, remains positive.

With the Golar Maria on charter until summer and now Golar Grand's employment extended to at least spring 2020, the partnership's short-term shipping exposure is limited to the Golar Mazo. Since October 2018, the Golar Mazo has been in full-time employment up until recently. However, the vessel could experience some commercial waiting time until shipping sufficiently improves, which is expected to occur in early summer. Of the partnerships revenue backlog, $2.3 billion, shipping revenue accounts for 7% and less than 1% of backlog revenue is associated with short-term contracts. So shipping volatility will have limited impact on the partnerships earnings.

Finally, just some words on the Golar Spirit. So the Episeyo is currently in cold layer, offshore Freeze. We have assumed no earnings contribution in our forecast, but of course, in the background, we are working on various employment possibilities in Brazil, West Africa and the Caribbean to name a few areas. Investors should be rest assured then that we are actively in pursuit of employment for the vessel.

Turning over to Slide now 9, which depicts the partnership's revenue backlog, and at $2.3 billion, this remains significant. The most notable movement from previous version of this slide on our existing fleet is on Golar Igloo and Golar Grand, whose charters -- charterers have been extended by 1 year and in the case of Golar Grand, the charter maintains a multi-year options and increasing daily rates. We continue to be excited with the potential drop-down candidates, which include cash flows from the Hilli Episeyo, Episeyo and the new kind of associated cash flows into Sergipe power project. Golar LNG share of the EBITDA of the latitude is approximately $100 million over a 25-year period. Furthermore, Golar's latest FLNG project with BP-Kosmos with a 20-year contract term and an annual EBITDA of $215 million are characteristics that are very attractive to the partnership and will add to a growth story that is becoming even more compelling. Also pleasing to see the longevity of these growth contracts, with an average tenure of more than 20 years, each is akin to pipeline contract and therefore mitigate residual risk. However, funding growth remains a challenge for the partnership, and so we will now look at that in the following slide.

So looking at Slide 10. The progression of time is allowing the partnership to build out its debt capacity simply as a byproduct of debt that is reducing more quickly than the asset life or the contract life to which those debts are secured by. Further work will be done in 2019 to try and enhance the partnership's debt capacity by refinancing some of the facilities that better matches the asset life or contract life.

In addition to debt capacity, the partnership's unit price has also improved materially since the beginning of the year. Even more pleasing is our observation that some retail volume seem to have made a comeback. How long this keeps remains to be seen, even so the current common unit price still has a way to go for this currency to be viable as funding source for accretive acquisitions. So whilst its growth prospects for the partnership already exist within the short term, it's currency to facilitate such growth is still under development.

Let's now turn to Page 11 to summarize. So financial results continue to improve, and whilst we may see a small drop in earnings contribution during 1Q due to off-rig season of Golar Igloo, contract extensions for Golar Igloo, Golar Grand and M&A commencement of Freeze 15-year charter, our 2019 prognosis remains positive. The Golar Group continues to build on its operating excellence with another quarter of unblemished operational record. It is one of the foundations from which long-term contracts are being secured by Golar LNG and these contracts are compelling growth opportunities for the partnership when this acquisition currency becomes available again.

That ends the presentation. I turn now the presentation back to the moderator for a 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 Jon Chappell from Evercore.

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Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [2]

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First one is really simple on the Grand. Is there any way you can kind of provide a magnitude on the increase of the contract extension? And then also I mean, I know we'll have to wait and see how other options are treated, but maybe just a broad range of magnitude on the inflationary increases on those if they were to be exercised?

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

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I'm afraid I can't, only to say that the increase in rate as a result of the charterer exercising their option materially improves the economics of the initial 2-year charter. It almost doubles.

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Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [4]

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Okay. That helps. The second one and I know this is difficult. And listen, we'll do our own analysis on it as well. But given the seasonality of the Igloo, given what's happened in the market with the Mazo, I thought your point that your financial leverage to the volatility of the spot market is pretty minimal at this point. But is there a chance that the coverage ratio falls below 1 in the first quarter? And then is there a scenario with the Igloo back in line in the second quarter, even if the Mazo is not utilized at all that it would be below 1 in the second quarter?

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

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It's difficult to say simply because we're not through Q1 yet, but one of the things that we did looking at the new level of distribution is use very conservative assumptions. We are within those assumptions today and if the performances of the various vessels within those assumptions remain within the parameters, I don't think that we will go below 1. Saying that, of course, as I said, avoiding any mishaps or fires and so on and so forth, then we would expect to be close to, above or just around the 1 mark.

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Operator [6]

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The next question comes from the line of Michael Webber from Wells Fargo.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [7]

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So just to start off with a kind of high-level question around kind of the Golar universe and I kind of got at this on the Golar call, but it's a question for you as well. There -- it looks like some big pieces are set to move around in terms of the carrier spend in Golar Power. I'm just curious -- it kind of begs the question of GML's position within that structure as it's kind of currently constituted. And I know that sounds a bit like a loaded question, but just in terms of what we're seeing there including the write-down at the parent, how should we interpret that as it pertains to the next year or 2 for Golar Partners as it's currently positioned within the Golar structure?

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [8]

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Yes, look, I think, clearly, the Golar parent is looking at the various business franchises that it has and trying to find ways to make sure that the valuation of those business franchises are properly reflected in share price. I mean that's pretty obvious. As far as GMLP's involvement in that, I think, and to the extent that it is decided that there is a spinoff on the vessels of the ship, I'm not entirely so worried too much about it simply because I think, if the currency is there, we've shown that there is already a growing and compelling growth opportunity for the partnership. And those contracts in respect of Nanook and so on and so forth are actually better in my view, particularly, as they are very long term in tenure. Of course, it's not lost in us. There are challenges there of the MLP -- the MLP universe in general. But I think to the extent that we can get through the hurdles that we see today, not just on Golar Partners, but also the MLP universe, the currency comes back. I think there's a fantastic growth opportunity to be had.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [9]

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Okay. Now that's helpful. I know that's kind of a tough question to answer today. And I appreciate you taking a swing at it. The -- just to kind of piggyback on the earlier question on the Igloo. That's a particularly large chunk of cash flow. I know you got the 1-year extension, I believe it was flat. Is there -- what's the right timetable for us to think about in terms of a more permanent solution there, be it an open tender or a long-term extension? I think last year, we kind of went up until the deadline, which kind of triggered an extension. Is it -- is a similar scenario on the table or is that even contractually available? Or do you think you can find a long-term solution before that?

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [10]

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Well, I mean to the extent that we're not looking beyond the 1-year extension with the same charter. We're already -- in the background, we're already looking at other opportunities for the Igloo. I think the challenge is going to be that while as you rightly say, there was the intention by the charter to go to attend the last time. I think the timing of that tender didn't go according to plan. And so as a result, it became a bilateral discussion between us and them. Clearly, they have that time and they had at the moment, so there is an expectation clearly from ourselves that they will go to tender. And we'll participate in that tender. But at the same time, we can't just limit our participation to that. We are looking at various opportunities as well. And there are a few and those opportunities are actually more of a long dated than a potential extension on the current charter's intention to tender.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [11]

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Got you. Is there any visibility into the timetable for that yet?

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [12]

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No. I mean, it's very much driven by KNPC. I'm sure that this is right and when their minds are ready -- they'll -- they'll make it public.

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Operator [13]

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Next question comes from the line of Fotis Giannakoulis from Morgan Stanley.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [14]

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Brian, I want to ask you about the potential growth projects that you mentioned. You mentioned the difficulty in financing these projects. I'm wondering if there had been any discussions of Golar providing any sort of financing that will allow you to do the -- this acquisition? And also what is the status of the refinancing of the loan of the Hilli that will increase the free cash flow from this project?

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [15]

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Fotis, so on the first question, absolutely, I mean that discussion exists. But as you can appreciate at the same time, we need to be able to show that regardless of where the sellers credit takes effect, at some point, the sellers credit has to be sold. And so of course, it gives us also more encouragement and confidence to be able to use a sellers credit as a mechanism for acquisition for GMLP as we see both equity and debt capacity improving, so that is available to us. But that's more of a short-term measure. And then on the second point on the refinancing, that's still in our cards. It's a big number to manage. And of course, one of the bigger factors in making sure that, that's done properly is to include a portion of the Hilli in there. The discussion with the lenders is ongoing. But at the same time, we can't really push too much particularly, if the market that we're trying to tap for this refinancing isn't as buoyant as we are hoping too. But that's certainly in the cards for 2019 execution.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [16]

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And -- but regarding the assets -- the older assets that you have, the shipping assets, how do you view these assets in your balance sheet given the fact that GMLP was originally structured as a company that will have assets with long-term cash flows. Are there any opportunities that these assets will be deployed under long-term contracts? I understand that you have a very close relationship with New Fortress Energy and they have been looking -- they have declared that they are looking for assets use for their project. Is this something that you would -- that there are high expectations, or could you potentially dispose this assets completely?

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [17]

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I think it's good point you mention with the relation between Golar and NFE. I think, clearly, the Golar Freeze is second asset that we have deployed with them. I think there is clearly an ambition on NFE to grow within the Caribbean and discussions along those lines happening within Golar. I mean, but we're not just limiting ourselves to that. I mean, we -- there are various opportunities for small-scale Episeyos, we're seeing very suitable for the Golar Spirit, for example, whilst Mazo remains a vessel today for shipping purposes. She is also a first-rate candidate for another FSRU to enter into very long-term contract. I think the unfortunate thing, of course, is that these contract Episeyos typically take a long time to do. And so whilst there are opportunities out there that we can pursue. The timing of those opportunities is very difficult to pin down, so which is why one of the reasons I've just been keeping that away from too much discussion on the slide, but clearly, in the background, we are working very hard to make sure that these vessels -- the shipping vessels are put away in long-term contracts in one shape or form.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [18]

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But you do not have any plans of disposing entities or you are going to keep them until you find the long-term contract? Is that correct?

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

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So if -- I mean, clearly if an opportunity arises, and it's the right opportunity, particularly for the vessels that are of an age, then we will definitely consider it.

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Operator [20]

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The next question comes from the line of Randall Giveans from Jefferies.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [21]

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So 2 quick questions here, I guess, first, it looks like you repurchased about $4.5 million worth of common units in 4Q '18. Is there about $10 million or so remaining in that authorization? And then when does that expire and anymore kind of plans for further unit repurchases or kind of holding off on that for now?

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [22]

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So the approval we have is actually up to $50 million. So we've used up a small fraction of that to date. I mean -- in fact, the strategy to do some of the buyback in December has worked out pretty well and to the extent that we -- those units are now, if you want, in the money so to speak. But we just got to see what opportunity there are. It's not an ingrained opportunity within ourselves to keep doing that, but if it's the right price then we'll continue doing it. But as I said, the share price, the unit price has improved somewhat. Hopefully, it maintains that way. And if it improves furthermore, then we do have a currency to use.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [23]

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Sure. Okay. And then with that looking at the kind of distribution coverage ratio, I guess, it was like 1.2x in 4Q '18, probably a similar level in 2019. Previously, you've kind of guided to maybe a target of 1.1 to 1.2x. So thinking about maybe timing and scale of possible distribution increases or movements in the future, I guess, what's more likely, a distribution increase or a cut over the next 2 years?

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [24]

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So when we look at the change in distribution a quarter back, we're looking a pretty long time line of at least 2.5 years. So -- and then under those scenarios and under the very conservative assumptions, we needn't have to do anything on the distribution. So from that perspective, I think that distribution is -- we're looking at distribution as unnecessary. Clearly, what is more important to us is making sure that we do have a currency to be able to grow. There is no point in increasing distribution where we are today, under the current levels of the coverage until such time as we are able to plug some of the recontracting list that will come in a few years time. I mean, yes, I think the priority's got to be, get a currency in place, have a look at the pretty long-term tenure available that is coming. And replay and get rid of the residual risk and recontracting risk that happens in a few years' time.

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Operator [25]

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Thank you. We have no further questions. Sir, if you wish to continue.

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [26]

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Thank you, moderator. And just to thank, everyone, for their participation today. And we look forward to seeing you again in the next quarter. Thank you, and goodbye.

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Operator [27]

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Thank you. Ladies and gentlemen, that does conclude your call for today. Thank you all for participating. You may now disconnect.