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Edited Transcript of HMLP earnings conference call or presentation 31-May-18 12:30pm GMT

Q1 2018 Hoegh LNG Partners LP Earnings Call

Hamilton Jun 25, 2018 (Thomson StreetEvents) -- Edited Transcript of Hoegh LNG Partners LP earnings conference call or presentation Thursday, May 31, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Richard Tyrrell

Höegh LNG Partners LP - CEO & CFO

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Conference Call Participants

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* Christian F. Wetherbee

Citigroup Inc, Research Division - VP

* Melvin Shieh

BofA Merrill Lynch, Research Division - Associate

* Sunil K. Sibal

Seaport Global Securities LLC, Research Division - MD

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Presentation

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Operator [1]

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Good morning, and welcome to the Höegh LNG Partners First Quarter 2018 Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Richard Tyrrell. Mr. Tyrrell, please go ahead.

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Richard Tyrrell, Höegh LNG Partners LP - CEO & CFO [2]

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Thank you, Anita. Good morning, ladies and gentlemen, and welcome to the Höegh LNG Partners first quarter 2018 results call. The presentation is available online or via the webcast. On Page 2 and Page 3, please take note of the forward-looking statements and the glossary, respectively, before turning to the first quarter highlights page on Page 4.

In the first quarter, Höegh LNG Partners FSRUs continued to perform according to contract and delivered strong, consistent cash flow. The quarter included a 100% contribution from the Höegh Grace after the drop-down of the 49% not already owned last December. This expansion enabled us to achieve a record distributable cash flow, while growing our quarterly distributions by 2.3% and maintaining a solid level of coverage. Coverage was 1.15x after the distribution increase to $0.44 per common unit for the quarter.

We also commenced an at-the-market market program for both common and preferred equity units, under which $10.7 million was raised during the quarter. Of this, $2.8 million was common equity and $7.9 million was pref. The proceeds are for general corporate purposes and will increase our flexibility to balance the various sources of financings for future drop-downs.

Page 5 puts numbers on the quarter. Because the Höegh Grace was fully consolidated from when HMLP acquired the first 51% stake at the start of 2017, there's good comparability between the periods, although the swaps, which have finally turned in our favor, do have an impact on the lines where they are included.

The time charter revenue for the first quarter of '18 was $34.9 million compared to $35.1 million in the first quarter of '17. 10 days of maintenance off-hire on the Gallant dragged the revenue down, but this was partially offset elsewhere.

Reported operating income increased for the quarter to $30.4 million from $25.7 million this time last year.

Net income and limited partners' interest in net income also increased for the quarter to $21.7 million from $16.2 million in the case of net income and to $19 million from $13.4 million in the case of limited partners' interest in net income.

As mentioned, the income measures were positively impacted by the interest rate swaps, most notably in our joint ventures that are accounted for according to the equity method above the operating line.

Excluding the effect of these, operating income increased more marginally to $23.9 million from $23.2 million for the same quarter last year, while limited partners' interest in adjusted net income rose to $11.8 million from $10.5 million.

Segment EBITDA includes HMLP's proportional share of EBITDA from the assets, which it does not own 100% interest, so the Cape Ann and the Neptune. This of course rose because of the addition of the remaining 49% of the Höegh Grace in this quarter's results and increased to $34.9 million from $29.5 million for the same quarter last year. As in the past, please take note of the reoccurring cash flow items that are excluded from the P&L in the lines on this Slide below segment EBITDA.

Page 6 tracks how our numbers are progressing over time. The trends are positive. The segment EBITDA has more than doubled since IPO. This quarter includes a full contribution from the remaining 49% of the Höegh Grace compared to the last quarter, where it only contributed for 1 month.

The fourth quarter '17 has the effect of tax on the prior quarter's unwinding following the finalization of an audit I've previously reported. This positive effect was most clearly evident in adjusted net income and it goes away this quarter, but we still see good stability and development.

Distributable cash flow has reached record levels as would be expected given the recent acquisition of the remaining 49% of the Höegh Grace and the absence of the minority interest that was being deducted previously.

As mentioned, we had 10 days of scheduled maintenance off-hire on the Höegh Gallant in the quarter. And without this, the numbers would have been higher. Still, the 1.15x coverage level shows the increasing ability of HMLP and its growing fleet of contracted assets to withstand such assets' specific downside, while still allowing for the modest increase in distribution that was delivered in the quarter followed the accretive -- following the accretive acquisition of the remaining 49% of the Höegh Grace.

Turning to Page 7. Here we show HMLP's portfolio of increasingly diversified and modern assets. The Neptune continues to serve in Turkey under a subcontract from our customer, a subsidiary of Engie, which will in due course move over to Total once the Total acquisition of Engie's LNG business is completed.

The second FSRU under contract to Engie, the GDF Suez Cape Ann has departed China before dry-docking in readiness for the start of an H-Energy FSRU subcontract in India from the fourth quarter of this year. From a financial perspective, the Cape Ann remains on-hire to Engie over this period with the cost of the dry-docking being principally for Engie's account. The Cape Ann has actually already been in India for its inauguration ceremony and there's real excitement over its full-time arrival towards the end of this year.

The PGN FSRU Lampung remains in its long-term contract in Indonesia as does the Höegh Grace in Colombia.

The Gallant, there, there is a degree of potential downside related to the increases in Egypt's domestic gas production and the reduction in its need for FSRUs from 2 to 1.

EGAS has requested to start a discussion with Höegh LNG over terms for the termination of the Gallant contract in advance of its April 2020 maturity and that's something that would require HLNG consent and compensation.

From a HMLP point of view, should HLNG discontinue the charter of the Gallant through its Egyptian subsidiary for the purposes of serving the EGAS contract, HMLP has the option to charter the Gallant to HLNG until 2025 at a rate which is equal to 90% of its current rate. Whether it be in April 2020 or sooner, HMLP could have to exercise this option. If it does, the impact would negatively impact results. But with the current level of distributable cash flow of over $17 million per quarter, the impact would be small enough to maintain a comfortable coverage ratio.

Page 8 is a slide that details our contracts. The existing assets have more than 11 years of contract life remaining on average, which is amongst the best in the sector, if not the best. HMLP has full contract coverage through to the first quarter of 2025 as a result.

From a growth standpoint, FSRU opportunities at the HLNG level do need to crystallize for them to become drop-down candidates for HMLP. There I would say that there have been some unfortunate pieces of missed business and the HLNG -- at the HLNG level and some of the tendering processes have been lengthier and more complex than initially projected. Nonetheless, I firmly believe that the underlying economic, environmental and practical case for delivering LNG through FSRUs remains solidly in place.

The assets at the HLNG level need suitable contracts before becoming drop-down candidates, but that's not to say that HLNG has been ineffective at putting its assets to work. The Höegh Giant is on a hybrid HLNG carrier FSRU contract to Gas Natural Fenosa and could become a drop-down candidate if the customer secures the FSRU contract it is targeting.

Furthermore, HLNG confirmed earlier that the Esperanza, its newly-delivered asset, is trading as an LNGC in advance of similar hybrid employment, for which terms are agreed.

So what's going to turn the beige blocks on Slide 8 into navy blue and tee them up for further drop-downs to HMLP?

Well first, let's consider demand and Slide 9 shows the primary reason why LNG demand is increasing and I'd separate very much -- this slide is looking at demand as opposed to supply, which will inevitably increase simply because of the new facilities that are coming online. The demand is going up and it's going up because the fuel is clean and cost-effective.

Recent long-term LNG contracts have been entered into at approximately 13% of Brent, which is meaningfully below historic levels, so that goes to the cost-effective point. And furthermore, there's a spot market developing that sees a cycle in the price, where it fluctuates between oil price equivalent in the winter and pipelined gas prices in the lower-demand shoulder periods and summer.

This spot market is an important development, since it further opens up the LNG market for security of supply and seasonal use. And seasonal use is something which we see more and more now with the ever-increasing role that renewables play in the market.

LNG, however, when it comes to renewables, is something that's very much a complement to renewables, given that it can be turned on at the flick of a switch and turned off by the turn of a valve, whenever the renewable is available or vice versa.

Such increase in demand for LNG is what underpins FSRU demand and Slide 10 paints a picture of how this demand has developed recently and how it can be expected to develop in future.

The Höegh LNG Group is the largest provider of FSRUs in the market, if you include its new building program.

Contract awards have clearly been disappointingly slow in 2018, with a couple of those listed here, the Caribbean one and Bangladesh one not even being for full-sized FSRUs. So I think that reflects the current slowness of the market. But as also shown on this page on the right-hand side, there is widespread tender activity, which reflects the more solid fundamentals.

Given the small size of the market as well as sensitivity to the number of contract awards each year, it will take more than 3 contracts a year to absorb the currently-available FSRUs. However, fortunately, from HMLP's point of view, its long contracts put it in a good position to bridge this period.

On Page 11, I get back to the numbers in more detail and the income statement. It presents a quarter-on-quarter comparison to the first quarter 2017. As mentioned previously, there is good comparability here, given that we fully consolidated the Höegh Grace after acquiring 51% at the start of 2017.

The comparison shows the consistency in our various measures down to the equity and earnings of joint ventures, where you see the impact of the positive mark-to-market on the interest rate swaps that results from the rising rates over this quarter.

The lower interest rates that you see reflect the amortization of debt over the period. And then moving down to the tax line, this line includes current tax and noncurrent tax. It's an element, which, once it becomes current, is typically reimbursed by the charterer, which makes it cash flow neutral if not P&L neutral.

The noncontrolling interest related -- relating to the 49% in Grace that was acquired in December 2017 falls away this quarter and the preferred unitholders that financed the acquisition of this interest show up, of course, and there the preferred unitholders' interest in net income of $2.66 million can be seen.

Limited partners' interest in net income is up for the quarter, including the benefit of the swaps and it's still up by over 12% even when the swaps are stripped out.

Page 12 has some additional detail on the financial income and expenses. Again, good comparability and strong consistency between the periods can be seen.

The segment report on page 15 provides additional color, especially in relation to how the JVs are performing and the levels of corporate overhead. We are running some additional costs preparing the Cape Ann for service in India, although this time last year we had similar costs in regards to the start-up of Neptune in Turkey. And overall, the joint venture costs are down slightly overall.

The other costs that are running slightly above usual are the corporate overhead costs and that's the function of 2 things: one, it's the year-end related to legal, accounting and [stocks] costs that we typically see in the first quarter; and secondly, the costs of filing the ATM program, which have been expensed in this quarter. They will obviously go away as you only file the program once.

Turning to Page 15. You see a comparison with 2017 -- I'm sorry, 14 and 15 includes the balance sheet.

Cash and cash equivalents here can be seen as being up from $22.6 million to $31.4 million and -- but it's principally because of the proceeds of the ATM program. The carrying cost of these proceeds was offset after the end of the quarter through a $6.5 million repayment on the revolving credit facility. Excluding any contribution from the JVs that are not consolidated and including the equity contribution, the net debt to EBITDA of this balance sheet is approximately 4.3x and we've set the distributions in a way that has allowed this to trend downward nicely. The -- first of all, bank facility matures in...

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Operator [3]

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Pardon me, there has been a disconnect with the speaker. If you could stay on hold, and he'll be right back.

(technical difficulty)

Thank you for your patience. I'd like to introduce Mr. Tyrrell again.

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Richard Tyrrell, Höegh LNG Partners LP - CEO & CFO [4]

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Thanks, Anita. Sorry about that, folks. I'm not quite sure what happened. But I think I was just getting to the balance sheet when I dropped off.

So let me just go through that Page 15 once again. The points that I wanted to make are that the cash and cash equivalents are up this quarter, which is principally because of the proceeds of the ATM program and that those are proceeds that have subsequently been used to pay down the revolving credit facility by $6.5 million and that, of course, offsets the carrying costs.

This balance sheet also shows that excluding the contribution from the JVs and they're equity-method accounted, so they're off balance sheet. So excluding those, including the contribution by way of equity, the net debt to EBITDA can be calculated to be 4.3x and we've set the distributions in a way that has allowed this measure to trend down nicely, which is intentional because we want to be in a position to attract financing at good levels when the bank facilities start maturing. And for us the first bank facility to mature is in the fourth quarter of '19. So whether it be at that time or in advance, it provides us flexibility and the potential to use the balance sheet to fund at least in part future drop-downs.

Page 16 is our distributable cash flow page, and I'm pleased to say that it's starting to get simpler as the effects of the minority interests in the Höegh Grace fall away now that we own 100% of the asset.

Starting with segment EBITDA, we include some of the contracted cash flows that are absent from the P&L and exclude the noncash revenue. The financing lines are adjusted for noncash interest and other items that play back to the previous financial income and expense page.

Tax is a consideration since despite being an MLP and it generally being reimbursed by our customers, we do have local taxes that flow through the accounts. But taking all those into consideration, the -- and, of course, the distributions to our preferred unitholders, which are present this quarter, we see that the overall distributable cash flow for the quarter was $17.255 million, which is the highest level we've achieved since IPO and equates to the 1.15x coverage ratio based upon our declared distribution to common unitholders of $14.954 million. Considering the 10 days maintenance off-hire for Gallant, I believe a solid result.

As summarized on Page 10, Höegh LNG Partners is the only publicly-listed pure player of FSRUs. The rapidly-growing supply of clean and inexpensive LNG is driving demand and FSRU adoption. Our modern assets provide critical energy infrastructure. Our portfolio of long-term contracts supports cash flow stability and strong distribution coverage.

And then last but not least, we do look towards accretive drop-down from our very supportive GP as having the potential to drive our distribution growth over time.

On that note, I'm more than happy to take any questions.

Anita, would you be kind enough to open the mics.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today comes from Chris Wetherbee with Citi.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [2]

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Just wanted to actually ask about your distribution target and coverage ratio. It's picked up [quite] comfortably. I wanted to know sort of what the long-term thoughts around that would be and what it would take to sort of see a larger increase in distribution?

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Richard Tyrrell, Höegh LNG Partners LP - CEO & CFO [3]

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You're right. It has picked up. I'd tell you that it's picked up from relatively skinny levels. So that's by design. I think -- in general, I think, investors are wanting to see good levels of coverage and I think we're trying to deliver on those preferences.

Yes, of course, we are a drop-down model. So how we -- how much we increase it will be a function of exactly how quickly we can execute drop-downs. And I'd say that's where there is a lack of clarity right now. We do need a few of these assets that show up at the HLNG level to see their contracts crystallize and therefore, drive the whole drop-down engine and allow for increases in distribution.

So while we've probably got 3 sort of possible scenarios at the HLNG level that could see a drop-down, trying to figure out exactly when is tough, but I'd still say that I'd be disappointed if we couldn't drop-down at least one thing a year. Although as you've seen previously when we dropped-down the second half of Grace, we did sort of -- we were quite conservative with our distribution interest.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [4]

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Yes. And then a follow-up to that. You brought up the point about a strengthening market and taking more than like potentially 3 contracts a year to absorb capacity. What -- like, looking forward, essentially, what do you think it would take to actually absorb all that capacity, sort of, on a -- and get through the backlog to a point where you might see longer contracts and the distribution pipeline strengthen?

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Richard Tyrrell, Höegh LNG Partners LP - CEO & CFO [5]

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Yes. First thing I'd say is, I wouldn't say contract length is necessarily a function of excess supply in the market. I think contract length is -- or [at least directly]. I think from a customer point of view, you've got some customers, for example, in China where their preference is to go for short contracts. And then you've got other customers who are looking to use an FSRU to -- well, as part of a vertically-integrated value chain, which is supported by a 20-year PPA, and they will want to sort of match the contracts on the -- contract length on the FSRU to the contract length of their PPA.

So if anything, the contract length is not customer-driven. To a certain extent, it is supplier-driven. Because with the market being a little bit oversupplied at the moment, I think HLNG would probably be reluctant to enter into long-term contracts at a very low level.

But to answer the other side of that question, which relates to what would it take. I mean, a small market. So I've always said it was kind of maybe a 3- to 4-year type market and it's been towards the bottom end of that range and hence the oversupply that we currently see.

However, if it was to all of a sudden -- or if we were to see 5 awards, that would very much change the picture because it would knock off the competition effectively. And that's what it would take. So it's not out of reach in my view.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [6]

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Right. And then just 1 small -- very smaller question about the ATM. So what are your longer-term plans around that -- you have the $120 million authorized -- so far. What point are you comfortable with? And sort of what sort of cadence to it could we possibly see in the future?

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Richard Tyrrell, Höegh LNG Partners LP - CEO & CFO [7]

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Yes. On the ATM programs, when you file them, they are -- they stay open for 3 years after that one filing. So you always try and size it with that in mind. Yes, we won't be raising that sort of amount without having a drop-down ready to go, but we are raising preemptively if you like at the moment on an opportunistic basis.

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Operator [8]

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(Operator Instructions) The next question comes from Melvin Shieh with Bank of America Merrill Lynch.

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Melvin Shieh, BofA Merrill Lynch, Research Division - Associate [9]

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This is Melvin subbing in for Ken Hoexter. Could you just talk a little bit about the Gallant at EgyptCo? What are the options beside resorting to the obligation with the parent co?

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Richard Tyrrell, Höegh LNG Partners LP - CEO & CFO [10]

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Sure. I mean, I sort of view it for a while now that based on the current rates that we see in the market, once that asset went off contract in Egypt, there's a pretty high likelihood that we'd end up resorting to that option, just simply because of how rates have moved.

Now of course, that doesn't mean that the parent co are going to be reaching into their pocket for the full amount. They are going to be substantially offsetting that by, hopefully, another FSRU contract. But it's not some LNG carrier revenue and, of course, these assets are perfectly capable of competing in that market.

So what are the options? The options are that it stays in Egypt for this 1 FSRU or it goes elsewhere, as an FSRU or end up sort of like as a worst-case scenario, trade as an LNG carrier. And the shortfall is met by Höegh LNG.

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Melvin Shieh, BofA Merrill Lynch, Research Division - Associate [11]

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Got it. And then if it were to trade as an LNG carrier, so what's the -- what would you anticipate the hit based on market conditions?

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Richard Tyrrell, Höegh LNG Partners LP - CEO & CFO [12]

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Well, I mean, the hit at the MLP level, let's be very clear on this, is that we have a hit of 10% to revenue. And if you think about it, we had 10 days off-hire on that vessel this quarter and there were 90 days in the quarter. So that's actually just above 10%. So the type of hit you'd see is broadly in line with what we saw anyway in this quarter. Hopefully, that answers your question.

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Operator [13]

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The next question comes from Sunil Sibal with Seaport Global.

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Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [14]

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So just wanted to go back to the Slide 10 in terms of where you laid out competitive environment. So seems like -- when I look at the rightmost column at about 12 kind of tenders in work, so as to say, right, in that list. So I was kind of curious, in terms of the time line on that, is there a good way to handicap out of those 12, how much could be -- how much -- how many could be decided this year versus over the next, say, year or 1.5 years?

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Richard Tyrrell, Höegh LNG Partners LP - CEO & CFO [15]

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2 to 3.

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Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [16]

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So 2 to 3 this year, you're saying?

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Richard Tyrrell, Höegh LNG Partners LP - CEO & CFO [17]

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6 -- and 6 to 7, yes. 2 to 3 this year, and 6 to 7 between now and the next 1.5 years.

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Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [18]

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Okay. And then when you say 2 to 3 this year, they necessarily won't start up in '18, right, from a contractual perspective?

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Richard Tyrrell, Höegh LNG Partners LP - CEO & CFO [19]

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No. That's right. I mean, exactly when these contracts start up depend very much on the nature of the contracts. And you have -- I'd say the shortest lead time is 5 months, I think, is a record and the longest if it's part of an integrated project, 18 months, 2 years.

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Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [20]

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Okay. Got it. And I just wanted to -- so it seems like from that perspective, anything coming your way or anything coming the parent's way in '18 is probably going to be a little bit of a long shot, right? So when you think about that and you commented that you would be disappointed if you don't get 1 drop-down every year, how do I kind of reconcile those situations?

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Richard Tyrrell, Höegh LNG Partners LP - CEO & CFO [21]

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Yes. I mean I think in 2018, there's a few possibilities, but I wouldn't say them -- I wouldn't call them probabilities just yet or -- let's call them possibles right now rather than probables, maybe is a better way of putting it. So I could end up being disappointed in 2018, but I certainly hope to be back on track by 2019 and early in 2019 at least.

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Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [22]

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Okay. And then on Independence, any update on consent from the charter on that? How should we kind of think about it, any time line on that?

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Richard Tyrrell, Höegh LNG Partners LP - CEO & CFO [23]

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I'd say that's one of the possibles, but not yet one of the probables.

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Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [24]

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Is there any time marker that we should be thinking about when delivery is going to be made? Or is this like a continuing discussion with the charter and decision can be made anytime?

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Richard Tyrrell, Höegh LNG Partners LP - CEO & CFO [25]

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No. I think it's impossible to put a time line on it.

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Operator [26]

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

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Richard Tyrrell, Höegh LNG Partners LP - CEO & CFO [27]

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Well, thanks everybody for joining. And if there's any follow-up, I'll be at Marine Money for the Morgan Stanley day and generally around in that week in New York. So if anyone would like to follow-up in person then or just call me in the meantime. I'm more than happy to take any further questions as they come to mind. Thanks, Anita.

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Operator [28]

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