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Edited Transcript of HLNG.OL earnings conference call or presentation 22-Aug-19 7:00am GMT

Q2 2019 Hoegh LNG Holdings Ltd Earnings Call

HAMILTON Sep 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Hoegh LNG Holdings Ltd earnings conference call or presentation Thursday, August 22, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Håvard Furu

Höegh LNG Holdings Ltd. - CFO

* Sveinung J. S. Støhle

Höegh LNG Holdings Ltd. - CEO & President

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Conference Call Participants

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* Frode Morkedal

Clarksons Platou Securities AS, Research Division - MD

* Lukas Daul

ABG Sundal Collier Holding ASA, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Höegh LNG Q2 Results Conference Call. At this time, I would like to turn the conference over to the CEO and President of the company. Please go ahead.

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Sveinung J. S. Støhle, Höegh LNG Holdings Ltd. - CEO & President [2]

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Thank you very much. Ladies and gentlemen, a very good morning to you all, and welcome to Höegh LNG's Second Quarter 2019 Financial Results. My name is Sveinung Støhle. I'm the CEO of Höegh LNG, and I will be doing the presentation together with our CFO, Mr. Håvard Furu.

Before moving into the results, the first page or the first slide on our presentation shows the Höegh Galleon, which will be delivered in a few days from the shipyard. And this FSRU marks the completion of our newbuilding program where we, over the last 5 years, have built and taken delivery of 8 newbuild FSRUs, which then completes our fleet with a total of 10 FSRUs. We'll talk a little bit more about the Galleon and the delivery in a few minutes.

So moving on. On Slide #2, we have the forward-looking statement, so please have a look at that.

On Slide 3, we have the agenda. So I will cover the highlights, the operational update, the market update, and then Håvard will do the financials, and I will say a few words on the summary.

So moving into the highlights. We report an EBITDA of $45.7 million and a net loss of $3.6 million, a result which we clearly are not satisfied with. Our numbers are affected by seasonal variations in charter rates and scheduled dry dockings, and we will explain these variations in detail in a few minutes.

We also would like to highlight that as part of our strategy to expand in China, we have opened a representative office in the quarter. We have also -- coming to the Galleon again, we have signed an interim charter for the vessel with Cheniere Energy in the U.S. And to conclude, we continue to pay a quarterly dividend of $0.025, so that's been also declared for the third quarter.

Moving on to Slide 5 to the -- and then to Slide 6 for the operational update. It's been quite a busy quarter across the company where I would like to highlight, on the commercial side, the important progress on the FSRU projects in our portfolio. I will get back to that in a few minutes.

We, on the operational side, have completed class renewals for both the Gallant and the Lampung in the quarter and, again, taken delivery of the Galleon, and that completes our newbuilding program, which again is tied into the next point on the financing. We've signed in the quarter a very attractive sale and leaseback deal with China Construction Bank for the Galleon. And I'd say that we're very pleased with that since not only it's a good deal, but it also further expands our list of financing sources and options with China Construction Bank.

Turning to Page 7, getting into the overview of our, call it, near-term FSRU project portfolio. As mentioned already, we are very pleased with the progress we've made in the quarter. First and the most advanced, as you will see now in this list, is the project with Australian Industrial Energy in Australia, which has achieved governmental approval. It has signed the contract for construction, and it has also achieved its first gas sales agreement with the foundation customer. So this is all going in the right direction and remains on schedule for an FID before the end of this year.

Likewise with AGL in Australia, this project has a somewhat different structure in that AGL already has its customer in place because it's into an existing market. There, we have signed the TCP and the environmental approval process is well underway. And that is actually the main point to be achieved or the main milestone to be achieved before one can reach the FID. So all of this is also being well progressed.

For project #3, the main point here is that the -- our client is in the midst of seeking permits and governmental approvals. It's a long-term contract, and we have exclusivity and are negotiating the TCP with them.

Finally, on the same list, project #4, we are in the final tender round. There's one other company together with us, so we expect the selection of this relatively shortly. The TCP has been negotiated over the last few months and it's also a long-term contract.

So I think on the FSRU projects side, we've, in the quarter, seen a steady progress. We see also in general that the market activity is picking up. Only -- as an example, only in the quarter, we've seen actually 3 new FSRU projects coming to market. And that for me at least is a sign that there is a strong response on the import side from the fact that LNG is available and at very competitive prices. So all in all, on the projects side, we are pleased with the progress and obviously look forward to reaching FID on these projects as soon as possible.

So moving on to Page 8. Compared to the previous quarter, what you will see here is that we have now allocated the Esperanza to the AGL project because that was part of the deal with them, that they could select 1 or 2 of 2 FSRUs. So that's been done. The Galleon has been allocated to AIE, as already mentioned.

And if you look at this page then, you will see that, that leaves 3 of our FSRUs currently without long-term FSRU contracts in place. They all have short-term contracts as LNGCs. But if you then include the projects that I mentioned on the previous slide and allocate those 2, that would mean that we would be down to 1 open FSRU at the moment. So clearly, our objective remains to secure further long-term contracts on all assets within the next 12 to 18 months.

Moving on to Page #9. I'd like to finish the operational update with a quick look at Avenir LNG, which, as most of you will know, we established together with Stolt-Nielsen and Golar less than a year ago. I actually sit on the Board of Avenir LNG, and I'm very pleased with the progress the company is making.

On the left side, there's a picture of the first 7,500-vessel under construction. It's close to completion. And below, there's a picture of the Sardinia LNG import facility currently being built. And all of that is in good hands. It's on schedule, and the terminal should be ready by the -- by around the middle of next year.

It's important to note that Avenir's business model is not to be a tonnage provider, but to deliver and sell LNG into small markets and obviously also to supply the fast-growing bunkering market. This is all being progressed in a very good fashion, and we see a very strong synergy between what we do on the FSRU side and the small-scale market. We are working together with the management of Avenir to progress combined projects that has, as its base, our assets, our FSRUs. So obviously this is not something that happens overnight, but I am very firm that our decision to invest jointly with Golar and Stolt-Nielsen in Avenir is and will be a very strong contributor to the development of the small-scale market.

So with that, that completes the operational update. Moving into the markets, so going on to Page 11. Starting with the supply side, we see a continued strong growth. Capacity is up around 18% compared to 2018. And as you see from this graph is with what's only under has been decided and is under construction should reach around 500 million tonnes a year by 2025. That's actually a doubling of this market in less than 10 years.

So clearly, the LNG production side is growing very strongly. There's been also made significant FIDs in the quarter with Mozambique, for example, that's the first project in East Africa to come to a decision, and continued expansion in the U.S. with the Sabine Pass and Cheniere on the train #6.

So with this growth in demand, how is -- sorry, with this growth in capacity -- production capacity, how is the demand side responding? So if we go to Page 12, let's first have a look at 2 of the main drivers for new demand, namely coal-to-gas switching and natural gas as the backup for renewable energy, wind and solar.

So on the left, we saw expected growth of gas in the energy mix of some of the main markets. We focus on India and China because there is where we will see the strongest change replacing coal with natural gas. And again, using China as an example with what's projected here, this would mean not only a doubling of the natural gas demand but also a doubling of the LNG imports from around 60 million tonnes a year currently to somewhere between 130 million, 140 million, depending on which projection you are looking at. India, slightly less. India obviously is a very price-sensitive market, but also there, a significant growth.

On the right, an example that shows, and this is from Spain, how LNG actually is the battery, is the backup for wind and solar. So you will see that, if you follow the green line, how LNG will cover for the demand as wind and solar comes off. This is a very good example of how natural gas is part of the long-term solution for energy as it basically supports and is the battery for renewable energy. This example, as I said, is from Spain. You will see similar examples in most markets where the grids are well developed.

Moving on to Page 13. So on the demand side, we see a continued solid response with total volumes up 19% year-on-year in Q2 2019 and around 16% in the first half of 2019. So clearly, the demand side is responding strongly to the supply. So quite interesting for the LNG market in the first half of this year. Actually, the European markets took a very large share of the growth, and that was mainly driven by, of course, very affordable prices which meant that, in particular, U.S. LNG and Russian LNG actually replaced or displaced Norwegian exports and the exports from Algeria in the pipelines.

Then if we look at the fastest-growing market, moving on to the next page, which is and continues to be China, on Page #14. Spectacular growth again. Demand up in the first half, 22%. And this is, of course, why we, as Höegh LNG, continue to focus on this market. Since we are the only FSRU operator in China, we have a strong relationship established with CCB. And we now opened an office there, which will obviously be used to pursue additional FSRU projects that are currently being evaluated in this market.

Moving to Slide 15 to talk about the market potential. We have listed here in the pie chart the total number of projects in operation, 24. There are 6 projects currently under construction, that makes a total of 30. And on the left, it's our estimate of the number of projects that are in the pipeline that could reach an FID within the next -- around 5 years, a total of 30 plus. Obviously, that's a high number, but I mean we have -- there are estimates out there which have a significantly higher number.

So I think again if you look at this and what we have seen in the last few months, these projects are coming to fruition. In the quarter, Total has signed a firm agreement for an FSRU project in Benin. The Croatia project has received EU funding, so that's going ahead. Only recently, there's been announced FSRU projects to add to the 30-plus list in South Africa, New Caledonia, Mexico. So again, I do believe that we see the markets being more firm, the projects being backed by solid companies like Total. And I think that bodes well for the projects that we have in our portfolio but also for the future.

So moving to Slide 16. So what does the supply side for FSRU look like if we look at a potential project list of 30 plus? First of all, the order book is exactly the same as the previous quarter. There has not been made any new FSRU orders. That means that the list of competitors or players in the market -- in this market is exactly the same as before.

The order book consists of 10 units. According to our analysis, the -- of the 10, 6 are already in contract. That leaves 4 open. And if you look at the FSRUs which are either trading as LNGCs or awaiting a new contract that amounts to 8, that makes a total of 12, which would be available to cover the 30-plus projects that we have on the total list.

Clearly, this is also a snapshot of what the market looks like right now. It does not include FSRUs that would come off in the next few years. But anyway, I think it gives a good view of the fact that the order book remains the same, that the market keeps growing, which should mean that, at least the way we look at it, we see a turnaround in the market driven by the supply side and obviously very competitive prices.

And in our view, this will certainly bring more FSRU clients into the market to take advantage of this situation. And that, in our view, should also take out the current order book over the next couple of years. So we are very confident that our objective of having all of our FSRUs on long-term FSRU contracts within the next 12 to 18 months is within reach.

With that, I will hand over to Håvard which will do the financials.

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Håvard Furu, Höegh LNG Holdings Ltd. - CFO [3]

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Thank you, Sveinung, and good morning to everyone.

Turning to the results on Page 18. We see that in the second quarter, we had a total income of $75.5 million, which was $8.8 million less than in the first quarter. Operating expenses were $18.9 million, an increase of $3.1 million from the first quarter. And administrative and business development expenses were $10.7 million, down by $2.1 million from the first quarter. That gives us an EBITDA of $45.7 million for the second quarter, which is $10.2 million lower than in the first quarter. The quarter-on-quarter change in the result is largely explained by the dry dock of the Höegh Gallant and also seasonality and the market effects.

Turning to the Gallant first. We see that it has a negative impact on the results with $4.9 million, which is partly due to off-hire with $2.2 million and additional maintenance of $2.7 million. This additional maintenance is related to taking the main overhaul of all 4 main engines while in dry dock to minimize the downtime of the vessel while trading as an LNGC. This is usually part of the OpEx and was spread out in time when the vessel is operating as an FSRU. In addition to this one-off on the OpEx, we had $2.9 million class renewal expenses that was capitalized in the quarter.

Turning to the seasonal effects. The Höegh Esperanza operated as an LNGC throughout the entire second quarter, earning $5.2 million less under its contract with CNOOC than in the first quarter where it was operating as an FSRU. And finally, the Höegh Giant earned $1.7 million less than in the first quarter due to the indexed charter earning about $19,000 a day less than in the first quarter.

As for the other effects on the results, the admin expenses were $2.1 million less, also partly caused by seasonal effects with some savings on the admin expenses. Depreciations were about the same as in the first quarter, and net finance slightly lower with $1.8 million less than first quarter. Corporate tax was also lower in second quarter than the first quarter.

Turning to Page 19 and the financial position of the company. We have, first of all, no significant changes to the financial position quarter-on-quarter, and total assets stands at $2.4 billion at the end of the quarter. Book equity ratio was 33%, which is similar to first quarter book equity ratio. The net interest-bearing debt was $1.46 billion, which is also similar to the first quarter.

Then turning to Page 20. We have shown the debt repayment schedule and, as you can see, this is a very much manageable and laddered-out repayment profile. We completed the financing of the Höegh Galleon in the second quarter, as already mentioned by Sveinung, by signing the agreement with China Construction Bank. This diversifies our sources of funding at an attractive price with long repayment profile and tenor. Our next refinancing is up in the second -- in the first half of 2020 with the Independence commercial tranche of $61 million up for refinancing and also the bond loan of $130 million coming up for refinancing in second quarter next year.

As for the remaining CapEx commitments, we have $171 million remaining on the Galleon, which will then be financed with a drawdown on the sale and leaseback transaction with CCB Financial Leasing. And we also have $18 million remaining on the capital commitment for Avenir LNG. This we expect to fund with existing cash in the group.

And with that, I hand back to Sveinung to summarize the presentation.

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Sveinung J. S. Støhle, Höegh LNG Holdings Ltd. - CEO & President [4]

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Thank you, Håvard. So in summing up, as already mentioned, I'm not pleased with the finance results for this quarter even if these effects are well explained, as already mentioned here by Håvard. However, we see important commercial progress on our projects and particularly in Australia. And very encouraging, the market continues its healthy growth. And finally, with our arrangement with CCB, we complete our newbuilding program and again find yet another source of debt funding.

So that completes our presentation. Thank you very much for listening in, and we look forward to your questions in the Q&A session which will follow shortly.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question from Frode Morkedal from Clarksons Securities.

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Frode Morkedal, Clarksons Platou Securities AS, Research Division - MD [2]

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Just a question on the market and basically low LNG prices you've seen this year. And I guess if you look at the spot prices of all the LNG players, they have been pressured by worries about that, I think, and especially maybe delays on FID activity, which I guess makes sense on -- if you're a liquefaction provider. But for you guys who are in the FSRU market, I'm curious to hear your thoughts on the low LNG prices. I guess you would expect positive demand for LNG, but do you also expect like FID activity to be impacted regardless? What's your thoughts?

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Sveinung J. S. Støhle, Höegh LNG Holdings Ltd. - CEO & President [3]

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Well, thank you for that. Well, first of all, obviously the low prices that we see now mainly is a concern for people that are in the process of developing new export facilities that have not reached an FID because obviously for them, I think it will be a challenge to get to an investment decision, certainly, if you need to raise finance or debt finance in the process. If you look at the FIDs that have been taken so far this year, they've all been taken by the majors or by projects backed by the majors because they have a somewhat different balance sheet than the developers do.

However, I think the most important there is, as you I think alluded to, what's the effect on the FSRU side. And I think it's important to keep in mind that our clients are the companies that buy the LNG. And for them, a lower price is obviously very good. So we've, as I mentioned, I believe, in my presentation on the market, we've seen a definite market response to the availability of supplies at low prices in that the number of projects keep increasing. Only this quarter, we've seen 2, 3 come to market, which are projects that have not been there before and at least 1 or 2 which also have been there before but have sort of been on standstill.

So my conclusion is, yes, we do see a market response, a positive market response to the low prices from the importers, and that obviously is good for us and hopefully will lead to more decisions to conclude on new FSRU imports. There is -- I think that in addition to that, when you look at how the capacity will increase over the next 4 or 5 years, I mean even if some of the projects that are under development will have to delay their decision, I do not believe that, that will have a significant impact on the availability of LNG simply because of the large amount of capacity currently being built.

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Frode Morkedal, Clarksons Platou Securities AS, Research Division - MD [4]

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Yes. That was good to hear. I guess on the regas capacity, I mean there was a lot of talk about that being like a bottleneck in China. What's your view on that? Obviously, that should be good for you guys if it were true.

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Sveinung J. S. Støhle, Höegh LNG Holdings Ltd. - CEO & President [5]

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Well, I mean the -- I think when it comes to China, I think one needs to be a bit careful to look at the headline numbers because China is basically split into 3 zones when you look at demand because of the seasonality. You have the north, which has a very high demand in the winter because it's very cold. You have the middle, which is basically the industrial belt where the demand is more or less flat. And then in the south, it's the opposite of the north where the demand is highest in the summer because of air-conditioning load.

So added to that, yes, there are terminals all along the Chinese coast, but number one, they're not interconnected and the pipeline system is not interconnected. We focus mostly in the north because that's where there is, call it, the highest demand for additional regas capacity. That is where also the Esperanza operates. And they do have bottlenecks in the winter already. And we firmly believe that, that will be solved with additional regas capacity, and part of that will be FSRUs, not all of it, but some of it.

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Frode Morkedal, Clarksons Platou Securities AS, Research Division - MD [6]

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Okay. My final question is on Avenir. Could you just remind us on how much you have or will invest? And what type of return potentially you are looking at in, let's say, percent there?

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Sveinung J. S. Støhle, Höegh LNG Holdings Ltd. - CEO & President [7]

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Well, I mean our current -- you mean our -- what's our current shareholding, was that the question?

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Frode Morkedal, Clarksons Platou Securities AS, Research Division - MD [8]

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No, in terms of how much you have invested in...

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Sveinung J. S. Støhle, Höegh LNG Holdings Ltd. - CEO & President [9]

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Yes. So we...

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Frode Morkedal, Clarksons Platou Securities AS, Research Division - MD [10]

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How much have you invested and what's your route?

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Sveinung J. S. Støhle, Höegh LNG Holdings Ltd. - CEO & President [11]

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We have committed around $44 million, I believe, where about $18 million remains to be paid in, and that will happen sometime this year. I would be hesitant to give any numbers on the returns. Obviously, here, as you know, the model of Avenir is to be a buyer and seller of LNG. Of course, that will vary over time. But if you look at the economics of replacing diesel with LNG and particularly at today's prices, that is an extremely interesting proposition. And obviously that is the market that Avenir is looking at.

So I think I would like to wait and see a little bit more with how that business develops before giving any specific number on the returns. But clearly, the returns there are -- and the margins are very, very interesting.

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Operator [12]

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We will now take our next question from Lukas Daul from ABG.

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Lukas Daul, ABG Sundal Collier Holding ASA, Research Division - Analyst [13]

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I was wondering the maturities that you are facing in 2020 on the bond and the commercial tranche in Independence. For Independence, do you intend to just refinance the bullet? Or do you see opportunities to upsize it? And then what are your current thoughts on how to deal with the bond?

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Sveinung J. S. Støhle, Höegh LNG Holdings Ltd. - CEO & President [14]

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Håvard?

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Håvard Furu, Höegh LNG Holdings Ltd. - CFO [15]

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I can comment on that. On the Independence, we are looking at different ways to refinance, either it will be just a commercial tranche or if we'll refinance it. We are discussing with several banks on that, and we don't have a clear picture yet, but we are looking at potentially increasing the leverage but also seeking ways to reduce the margin paid on those loans. So we are penning out the plan to -- how to refinance it.

And also when it comes to the bond, we are considering also other sources of financing to refinance the bond. So either it could be a total bank financing or just refinance with issuing a new bond. We haven't yet made the decision on that either.

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Lukas Daul, ABG Sundal Collier Holding ASA, Research Division - Analyst [16]

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Okay. Good. And the class renewal of Lampung that was partly done in Q2 and Q3, is there going to be any OpEx impact in Q3? Or is it going to be very marginal?

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Sveinung J. S. Støhle, Höegh LNG Holdings Ltd. - CEO & President [17]

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Well, Håvard?

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Håvard Furu, Höegh LNG Holdings Ltd. - CFO [18]

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Yes. That looks like it will be very, very marginal on the OpEx side, and we have not seen any off-hire either on the Lampung as it has some off-hire allowance in the contract without a deduction in the revenue.

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Sveinung J. S. Støhle, Höegh LNG Holdings Ltd. - CEO & President [19]

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Yes, exactly, which the Gallant, of course, as an LNGC, does not have. Yes.

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Lukas Daul, ABG Sundal Collier Holding ASA, Research Division - Analyst [20]

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Okay. Okay. And then finally, on Gallant, which is sort of coming off the LNG contract next year, can you just sort of remind us about the structure with the MLP? How that works for that particular unit?

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Sveinung J. S. Støhle, Höegh LNG Holdings Ltd. - CEO & President [21]

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Yes. So as you know, the MLP has the right to basically put the vessel back to the holding company at a pre-agreed rate for another 5 years, and that needs to be exercised before the end of this year. At the same time, obviously with the portfolio we have, Gallant is one of the FSRUs that we are looking to place and could be one of the FSRUs we place on projects #3 or 4. That has not been decided yet. Clearly, the objective is that Gallant will be on a long-term FSRU contract before the current arrangement with Egas/Gunvor ends in either April or in June next year.

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Lukas Daul, ABG Sundal Collier Holding ASA, Research Division - Analyst [22]

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Okay. Okay. And have you -- can you disclose what the pre-agreed rate is? Or is it sort of confidential?

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Sveinung J. S. Støhle, Höegh LNG Holdings Ltd. - CEO & President [23]

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I would have to -- it's a percentage or a discount to the existing contract.

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Operator [24]

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There's no further questions at this time. I would now like to turn the call back to your host for any additional or closing remarks.

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Sveinung J. S. Støhle, Höegh LNG Holdings Ltd. - CEO & President [25]

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Thank you. So if there are no further questions, thank you all for calling in and thanks for the questions. Much appreciated. So that will end Höegh LNG's second quarter presentation of the financial results. Thank you very much. Goodbye.

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Operator [26]

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That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.