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Edited Transcript of HMLP earnings conference call or presentation 29-Nov-18 1:30pm GMT

Q3 2018 Hoegh LNG Partners LP Earnings Call

Hamilton Jan 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Hoegh LNG Partners LP earnings conference call or presentation Thursday, November 29, 2018 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Steffen Føreid

Höegh LNG Partners LP - CEO & CFO

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Conference Call Participants

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* James Monigan

Citigroup Inc, Research Division - Senior Associate

* Liam Dalton Burke

B. Riley FBR, Inc., Research Division - Analyst

* Max Perri Yaras

Morgan Stanley, Research Division - Research Associate

* Melvin Shieh

BofA Merrill Lynch, Research Division - Associate

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Presentation

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Operator [1]

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Good day, and welcome to the Höegh LNG Partners Third Quarter 2018 Results Conference Call. (Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Steffen Føreid, CEO and CFO of Höegh LNG Partners. Please go ahead.

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [2]

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Thank you, Nicole. Good morning, ladies and gentlemen, and welcome to Höegh LNG Partners Third Quarter 2018 Earnings Call.

For your convenience, this webcast and presentation are available on our website.

Before we start, please take a note of the forward-looking statements on Page 2 of the presentation and the glossary on Page 3.

Now turning to Page 4. I'm pleased to report another strong quarter for the partnership with total revenues of $37.3 million and net income of $19.9 million. The operating performance in the quarter was positively impacted by a recovery of reimbursable expenses from prior periods relating to PGN FSRU Lampung, partly offset by certain vessel upgrade costs relating to Cape Ann.

At the end of the quarter, the partnership announced that Höegh LNG and EGAS had agreed to amend the time charter for Höegh Gallant in Egypt, where the unit will be employed as an LNG carrier through April 2020.

The amended contract structure is a result of Egypt successfully bringing new gas discoveries into production, and thereby, reducing its need for importing LNG.

As the owner of Höegh Gallant, the contribution to the partnership under lease and maintenance agreement with Höegh LNG is not expected to be materially affected by the amended contract structure.

I'm also pleased to announce that the partnership has secured commitments to refinance Höegh Gallant and Höegh Grace. The new 7-year facility is for an amount up to $385 million and includes a tranche of $65 million that can be used for general partnership purposes.

Turning to Page 5, we put numbers to the quarter. The partnership reported operating income of $28.7 million and net income of $19.9 million for the quarter, which is up from $15.3 million and $5.4 million in the same quarter last year, respectively.

The improvement is driven by the impact from the indemnified boil-off claims recorded in the third quarter of 2017 and the already mentioned improvement in operating performance in the quarter.

Adjusting for payments to preferred unitholders and minority interest, limited partners' interest in net income was $16.6 million in the quarter, which is up from $2.5 million in the third quarter last year.

The development is mainly explained by the impact from the acquisition of the remaining 49% ownership in Höegh Grace and the issue of preferred units in the fourth quarter 2017.

Segment EBITDA of $36.4 million in the quarter includes the partnership's proportionate share of EBITDA from assets in which is owned less than 100%. This is up from $19.4 million year-on-year, mainly due to the increased ownership in Höegh Grace and the impact from the accrual recorded last year.

The partnership distributed $0.44 per common unit during the quarter and had distributable cash flow of $17.4 million, equivalent to a distribution coverage ratio of 1.16.

Now turning to Page 6. This is our dashboard. And here you can see the partnership's consistency on key measures which stands out and is driven by our long-term charter agreements.

With a distribution coverage ratio of 1.16 for the quarter, the ratio has been exceeding 1.15 for 4 consecutive quarters and improving over time, driven by stable cash flows from operation and lower debt levels.

The prudent ratio level highlights the quality of our distributions and provides capacity for increased leverage as growth opportunities arise.

Please note, the partnership has, through the refinancing of Höegh Gallant and Höegh Grace and the modest tapping of the preferred and common equity markets through the ATM program, demonstrated access to incremental capital, which provides confidence around the partnership's ability to fund future growth.

Now page -- turning to Page 7. As already mentioned, the partnership has secured commitments for the refinancing of Höegh Gallant and Höegh Grace, where part of existing credit facilities are maturing in November 2019. The facility of $385 million comprised of a senior secured term loan of $320 million, which will be used to refinance existing debt and a revolving credit tranche of $65 million that can be used for general corporate -- general partnership purposes. The revolving credit facility will be used to repay amounts owed Höegh LNG and will reduce the partnership reliance on funding from its sponsor.

The facility has a tenor of 7 years, which means that the debt will mature first in 2026. The financing is subject to final documentation and is expected to be closed in January 2019.

Turning to Page 8. This -- we present the partnership's current platform of 5 modern, high-quality assets. Neptune and Cape Ann are serving Total S.A's acquisition of Engie's LNG assets.

Neptune is in Turkey and Cape Ann is ready for India, having recently completed a drydocking. Under the Cape Ann contract, most drydocking costs are for the customer's account. Although, there were some smaller upgrades during the recent drydocking that were not reimbursable, hence, the weaker contribution from our joint venture segment in the quarter.

PGN FSRU Lampung continues to serve PGN in Indonesia. And moving westwards to Egypt, Höegh Gallant recently departed and is now operating in LNG carrier mode. The partnership's direct counterparty for Höegh Gallant continues to be Höegh LNG. And unless more attractive employment alternatives emerge, the partnership intend to exercise the option to charter the FSRU back to Höegh LNG at 90% of the current rate upon expire of existing contracts.

Last but not least, Höegh Grace continues to serve SPEC in Colombia in its role of providing energy security in a market where gas-fired power plants serve as a complement to hydro-generated power.

Turning to Page 9. This slide provide additional color on the existing contracts and updates the picture at the sponsor level. And as you can see from the overview, Höegh LNG has been successful at putting its newbuild FSRUs to work on medium-term contracts, employing them both in FSRU and LNG carrier mode with Naturgy and CNOOC as counterparties.

Höegh Esperanza arrived in Tianjin in China this month and has been sending out commissioning volumes of gas in advance of the winter season, while also providing LNG for reloading to trucks. Operating FSRUs in this manner increases throughput and can make the economics particularly compelling in large markets such as China.

Now turning to Page 10. Here, you see the high number of market opportunities backed by diverse drivers of demand. Driven by replacement of coal and oil in power and industry production, China is believed to pick up a large share of the increasing LNG supply, although volumes are expected to go elsewhere as well.

Höegh LNG consider itself to be well positioned for potential FSRU projects in China as well as in Australia and is pursuing opportunity also in Southeast Asia, Middle East, Africa and Latin America.

While the FSRU market remains competitive, it's worth mentioning that the value of our FSRUs have enhanced by the strong recovery in the LNG carrier market, where our customers could put the units into alternative use in periods of lower seasonal re-gasification demand.

Opportunities are also expected in small-scale LNG applications, which could impact the throughput of our existing assets, serving as hubs for local distribution, bunkering and other small-scale LNG activity.

Our sponsor, Höegh LNG, has recently made an investment into Avenir LNG, which is a newly established provider of small-scale LNG services. And over time, this activity is expected to stimulate further demand for FSRU capacity.

Now turning to Page 11. This sets out the income statement of the quarter from our 6-K in more detail. I have commented on many of the lines items in my opening remarks. And here, you can see that revenues have increased year-on-year due to the recovery of reimbursable expenses. And that equity in earnings of joint ventures also is up year-on-year, mainly due to the impact from the accrual recorded last year.

I'd further like to highlight the reduction in interest expenses, which is primarily related to amortization of debt. And elsewhere, there's good stability as you would expect of our contracted business.

Preferred unitholders' interest in net income is as a result of the preferred unit offering that was made in the fourth quarter last year and the subsequent issue of preferred units under the ATM program. And the absence of noncontrolling interests in net income in the quarter is due to the acquisition of the remaining 49% ownership share in Höegh Gallant in the fourth quarter of 2017.

Now turning to Page 12. The balance sheet is little changed. One of the larger development is a $19 million change in accumulated losses of joint ventures included under other long-term liabilities, which is driven by the development in the mark-to-market of derivatives. The reduction in revolving credit facility due to owners and affiliates from $52 million to $39 million is also notable, and this will be reduced to 0 on the closing of the refinancing of Höegh Grace and Höegh Gallant.

Page 13 summarizes the numbers making up the distributable cash flow for the quarter. And from this, I would like to highlight the $1 million that will be refunded back to Höegh LNG in the fourth quarter relating to a previously paid indemnity in relation to the expenses from prior periods that ultimately was reimbursed by the charter and recorded as income in this quarter.

Finally, turning to Page 14. This summarizes the investment proposition in Höegh LNG Partners. And I would just like to highlight the partnership is a leading provider of floating LNG import terminal services, operating a fleet of modern FSRUs, generating stable and predictable cash flows in an industry with strong fundamentals.

And with that, I would like to conclude the presentation and up -- open up to questions from participants.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Melvin Shieh of Bank of America Merrill Lynch.

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Melvin Shieh, BofA Merrill Lynch, Research Division - Associate [2]

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Just wanted to see if I could get some details to help frame the timing of potential dropdowns, the appetite for longer deals from current charters for the Esperanza and the Giant. And any interest in the currently uncontracted newbuild?

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [3]

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So the newbuilds are currently contracted. They are on medium-term contracts, and are being offered for long-term FSRU employment. The interim employment then goes through 2021, which fits well with then the scheduled or anticipated startup of the long-term FSRU opportunities that we are pursuing.

So I think the dropdown prospects to the MLP would be linked with the estimated startup of the long-term FSRU contracts that we are pursuing which start up in the '20 -- from '20 and onwards.

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Melvin Shieh, BofA Merrill Lynch, Research Division - Associate [4]

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Great. And how about just on the Avenir comment. Just talk a little bit about how the current fleet might fit in to the business and strategy of that investment?

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [5]

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Yes. So Avenir is a provider then of small-scale LNG services. And that could be both small-scale local distribution, it could be small-scale import terminals and it could also be bunkering. And what we foresee is that the network we have of FSRUs could be used as, let's call it, gas station, as hubs for local distribution, where you then have small-scale LNG carriers offloading from FSRUs and then distributing to other demand points.

And we believe that over time this small-scale activity will increase or could increase the throughput through existing fleets of Höegh LNG Partners and also contribute to increased demand for FSRUs over time. So we see this as a market -- interest market in itself, where there could likely will be knock-on effects for the future FSRU demand.

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Melvin Shieh, BofA Merrill Lynch, Research Division - Associate [6]

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Got it. And are the current 5 vessels all operating at full capacity? Or there's still unused re-gas capacity?

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [7]

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In Avenir?

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Melvin Shieh, BofA Merrill Lynch, Research Division - Associate [8]

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No, for the current fleet. The 5 vessels in the current fleet. For HMLP.

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [9]

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Yes. All -- for HMLP, all units on the water are on contract at the moment. And when the next delivery comes now later in December, Höegh Gannet it's called, that will also go straight into employment as an LNG carrier. So all units at the current level are on employment.

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Operator [10]

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Our next question comes from Chris Wetherbee of Citi.

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James Monigan, Citigroup Inc, Research Division - Senior Associate [11]

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James on for Chris. Had a couple of questions about the refinancing. Wanted to get a sense of what magnitude of interest savings you might get initially. And then I had a couple of follow-ups.

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [12]

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Sorry, I didn't pick up the question, could you repeat that, please?

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James Monigan, Citigroup Inc, Research Division - Senior Associate [13]

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Sorry about that. The -- what level of interest savings might you see through this refinancing if -- or if any, from the bank deal?

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [14]

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Sorry, there's a bad line. Are you asking interest levels?

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James Monigan, Citigroup Inc, Research Division - Senior Associate [15]

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Correct.

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [16]

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So the -- if you compare this to the existing financing, the margin is down. We do intend to swap it, the swap rate is up. So all in all, you might see a marginal increase in the fixed interest rate compared to what we're paying today.

On the revolving credit facility, there will be a lower interest charge compared to what the partnership is paying to the parent today. So if you then assume full drawing under the revolver and taking into account the increased leverage compared to today, the total interest expense will only be marginally higher.

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James Monigan, Citigroup Inc, Research Division - Senior Associate [17]

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Got it. So you are expecting to utilize the full revolver, based on your comment there?

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [18]

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Not at the outset. What we intend to do is to draw an amount and repay what's outstanding under the revolver to the parent. That's some $35 million something. So we expect it to be drawn to that amount initially. And over time, we expect to use that revolver instead of drawing under the revolver provided by the parent. And so over time, it will then be an increasing draw under the revolver.

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James Monigan, Citigroup Inc, Research Division - Senior Associate [19]

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Right. Okay. And then you've used your share issuances to pay down debt historically to the parent. Will this change that strategy over time? Or will we still see the same cadence and pattern?

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [20]

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Yes. We have tapped the common and preferred unit markets marginally or through the ATM program, and we will continue that if market condition allow to a certain extent. And then we will use that proceeds to reduce the drawing under the revolver.

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James Monigan, Citigroup Inc, Research Division - Senior Associate [21]

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Okay. Understood. And I also wanted to get a clarification on a previous comment. So when you had talked about dropdowns, you talked about 2020, is that when you sort of see the most -- the next most likely dropdown in your opinion? Or do you think 2019 -- there could be something in 2019?

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [22]

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No. I think the base case is that you will dropdown in connection with commercial startup. We could potentially do it before commercial startup if we do it in combination with an interim employment, assuming there [all sea base] are lifted relating to the long-term employment.

So I think, yes, it could potentially be earlier than 2020. But that's when -- it's around 2020 where there is the scheduled startup of the long-term employment we're looking at is. But that could be -- it could -- you could see also earlier dropdowns depending on how the market is developing.

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James Monigan, Citigroup Inc, Research Division - Senior Associate [23]

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Would a longer-term contract being struck in early 2019 for the Esperanza or one of the other ones potentially lead to a dropdown? Or would -- do you actually see the commercial startup and a longer-term contract from that being the more likely driver for a dropdown?

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [24]

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I think -- the base case is that commercial startup is the trigger point for a dropdown, but we will also consider it -- or if it can be done in combination with an interim employment, but that's something we then have to consider on when the opportunity arise.

So I think the base case is dropdown at commercial startup. But depending on the contract, we could also see it earlier in combination with an interim employment. But it's too early to commit to anything like that.

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Operator [25]

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Our next question comes from Max Yaras of Morgan Stanley.

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Max Perri Yaras, Morgan Stanley, Research Division - Research Associate [26]

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I'd like to ask a couple questions about the Slide 10, the existing and potential FSRU contracts. Any other color you could provide on how many tenders you think could be decided soon? Where are these projects? And how do returns compare now versus maybe the past couple years?

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [27]

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So we are -- we, at least, we are, Höegh LNG, is involved in several tender processes. We have exclusivity on 2 processes and are in the final round of another 2. So there are several ongoing processes, and they are located in Asia and Africa.

And so I think the area where we see most activity at the moment is in Southeast Asia, Australia and China. That's where the most activity is ongoing at the moment.

When it comes to the return, I think the -- we have seen increased competition in the FSRU space over some time, and we have seen the rates coming down. But at the same time, newbuilding prices has decreased, so the returns are still healthy. We expect that we are at, let's call it, the low point in the FSRU cycle in terms of rates. And that we maybe will be able to see improving rates going forward.

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Max Perri Yaras, Morgan Stanley, Research Division - Research Associate [28]

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Okay. That's helpful. And then we talked a bit about Avenir. But are there any potential dropdowns to HMLP directly? And how would that be shared with Golar MLP, for example?

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [29]

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No. I don't think there will be -- there will not be any dropdown possibilities from Avenir as we see it. But we -- there's a kind of a strategic rationale for doing this from a FSRU perspective is that, we believe the small-scale activity will drive demand for FSRU services and could lead to a widening of the FSRU market. And that would be kind of the dropdown, a result of the Avenir investment. But no dropdowns from Avenir itself. I don't foresee that that's a possibility to the partnership.

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Operator [30]

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(Operator Instructions) Our next question comes from Liam Burke of B. Riley FBR.

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Liam Dalton Burke, B. Riley FBR, Inc., Research Division - Analyst [31]

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You mentioned in your prepared statements that you do have flexibility of shifting from FSRU to LNG carrier. If the FSRU project softens and you do have to shift assets away from there to the carrier market, do you see any significant risk to the cash flows?

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [32]

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Are you talking at partnership levels?

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Liam Dalton Burke, B. Riley FBR, Inc., Research Division - Analyst [33]

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Yes.

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [34]

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No. I mean, we have -- if our clients should wish to use the FSRUs in carrier mode instead of FSRU mode, we would still have the same time charter income. So from our perspective, we have a -- the partnership has charter agreement with the client and will earn a day rate, whether it's used in FSRU or carrier mode.

So my comment on that was more that, the strengthening of the carrier market is something that has a positive knock-on effect also on the valuation of our FSRU business as such. But it would not lead to any changes in the cash flow from the partnership, as I see it.

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Operator [35]

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

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [36]

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Okay. Thank you, Nicole. Then I would just like to thank everyone for dialing in and for asking questions, and for attending the -- this earning call. Many thanks.

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Operator [37]

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