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Edited Transcript of HMLP earnings conference call or presentation 21-Nov-19 1:30pm GMT

Q3 2019 Hoegh LNG Partners LP Earnings Call

Hamilton Dec 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Hoegh LNG Partners LP earnings conference call or presentation Thursday, November 21, 2019 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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* Benjamin Joel Nolan

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Christian F. Wetherbee

Citigroup Inc, Research Division - VP

* Gregory Robert Lewis

BTIG, LLC, Research Division - MD and Energy & Shipping Analyst

* Liam Dalton Burke

B. Riley FBR, Inc., 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 Partners Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I'd now like to turn the conference over to Steffen Føreid, CEO and CFO. Please go ahead.

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

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Thank you, Carrie. Good morning, ladies and gentlemen, and welcome to Höegh LNG Partners' earning call for the third quarter 2019. For your convenience, this webcast and presentation are available on our website.

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

Now turning to Page 4 and the highlights. I'm pleased to report that all units in the fleet performed according to contract and at 100% availability in the quarter. This resulted in total revenues of $36.9 million, a segment EBITDA of $36.3 million and a coverage ratio of 1.2x in the quarter. The partnership distributed $0.44 per common unit for the quarter, equivalent to an annualized distribution of $1.67 (sic) [$1.76] per common unit.

Turning to Page 5. We are putting more numbers to the quarter. Excluding unrealized losses on derivative instruments and foreign exchange, segment EBITDA was $36.3 million in the quarter, which is in line with the same quarter last year, while operating income was $25.6 million in the quarter, which also is in line with the same quarter last year.

After the said adjustments, limited partners' interest in adjusted net income was $12.5 million in the quarter, which is down from the same quarter last year, mainly due to higher net financial expense and distributions to preferred unitholders. Based on the distributable cash flow of $18 million and a distribution of $0.44 per common unit, the coverage ratio for the quarter was 1.2x, which is up from 1.16x in the same quarter last year.

Turning to Page 6. We are showing the development in key measures over time. And as you can see from the graphs, both the segment EBITDA, adjusted net income and the coverage ratio are back at more normalized levels. As you will recall, the previous quarter was adversely impacted by drydocking and maintenance expenses relating to Höegh Gallant. Periodic surveys of FSRUs will have to be done every 5 to 7 years. And this year, both Höegh Gallant and PGN FSRU Lampung were subject to this at the expense of the partnership.

Turning to Page 7. We are showing the income statement in more detail. Total revenues of $36.9 million in the quarter is down slightly from the same period last year, mainly due to the recognition of revenues in the third quarter last year relating to the reimbursement of prior period expenses.

Vessel operating expenses of $6.6 million in the quarter is up from the same period last year, mainly due to maintenance expense relating to PGN FSRU Lampung in connection with the periodic survey.

Equity in earnings of joint ventures of $621,000 in the quarter is impacted by unrealized losses on derivative instruments in the joint ventures compared to unrealized gains in the same period last year. Excluding unrealized gains and losses on derivative instruments, equity in earnings of joint ventures would have been $2.8 million in the quarter, an increase from $1.4 million in the same quarter last year. The improvement is mainly due to lower operating expenses in the quarter.

Total financial expense of $7.6 million in the quarter is up from the same quarter last year, mainly due to higher amortization of debt issuance costs and commitment fees in this quarter.

Finally, preferred unitholders' interest in net income of $3.4 million in the quarter is up from the same quarter last year due to the higher number of preferred units in issue. During the quarter, the partnership raised approximately $8.6 million in net proceeds under the ATM program, issuing preferred units only.

Turning to Page 8. The balance sheet has not changed much since year-end 2018, with total liabilities and equity standing at just over $1 billion at the end of the quarter. The only thing I would like to mention is that in addition to $32 million in cash and cash equivalents, the partnership had approximately $91 million in undrawn amounts under the 2 revolving credit facilities at the end of the quarter, taking total liquidity to approximately $123 million.

Turning to Page 9. We are showing the partnership's platform of modern assets which have an average remaining contract length of approximately 10 years. As already mentioned, all units operating according to contract during the quarter, serving clients at 3 continents in FSRU and LNG carrier mode.

In regard to Höegh Gallant, the partnership will exercise the option to lease the unit back to Höegh LNG for a period of 5 years from April 2020 unless alternative long-term employment is available. As you will recall, the leaseback option was granted to the partnership in connection with the acquisition of Höegh Gallant back in 2015, effectively ensuring a 10-year employment horizon for the unit at that point in time.

Turning to Page 10 and the business development activity at Höegh LNG level. As already reported, Höegh LNG has been selected as the FSRU provider and/or is in exclusive negotiation for 3 potential FSRU projects, 2 of which are located in Australia and 1 in South Asia.

For the AIE project in Australia, the time charter negotiations between Höegh LNG and the client is making progress. And in parallel, the client is seeking consent for higher input capacity due to increased demand from customers.

For the AGL project in Australia, the agreement between Höegh LNG and the client has already been signed, and the client is now in the process of seeking the environmental permit for the project.

The FSRU project #3 mentioned on this slide is located in South Asia and is with an energy major who is in the process of seeking permits and offtake agreements.

All 3 projects mentioned are subject to final investment decision as mentioned previously. Furthermore, Höegh LNG is involved in official tender processes for 2 additional long-term FSRU projects of 10 years or more, where the award is expected to take place sometime in 2020. And it's also involved in several other early-stage processes around the world.

Turning to Page 11. We are showing the projected development in the energy supply mix through 2050 taken from DNV's report from September this year. The trend in this illustration is clear. Namely, a decarbonization of the energy mix, which is shown by the substantial growth in renewable sources of energy in the decades ahead. The illustration further shows that natural gas is expected to play an important role in making the transition happen. And this is important because it represents opportunities for Höegh LNG and the partnership.

FSRU solution is a cost-efficient way of opening up new markets to the supply of LNG and thereby facilitating a quicker transition into a more sustainable energy mix where natural gas is serving as backup for renewable sources of energy and serving markets where renewable sources of energy is less available.

Turning to Page 12 and the LNG supply. We are showing that the strong build-out in new liquefaction capacity continues with record high liquefaction volumes sanctioned so far in 2019, a trend that is expected to continue into next year. This is expected to bring the annual liquefaction capacity up to approximately 470 million tonnes by 2025, an increase of approximately 48% from 2018. And it's important to remember that this supply growth is coming from capacity that has been decided and is under construction. So with this backdrop on the supply side, how is then the LNG demand side reacting?

Turning to Page 13. We are showing the monthly development in global LNG trade. And as you can see, the growth in demand continues. Year-to-date, the global trade in LNG is up 15% compared to the same period last year or 35 million tonnes, which is a high number.

The interesting part of this development is that demand growth from Europe is so strong. Year-to-date, trade into Europe is up 97% compared to the same period last year, equivalent to approximately 31 million tonnes. So why is that? Well, it's mainly due to the availability of import capacity into Europe, but also because demand from the main Asian markets, such as Japan, Taiwan and South Korea, has been soft, impacting LNG prices.

At the same time, we see continued strong growth from the Chinese market, where the growth year-to-date is around 19%, equivalent to approximately 7 million tonnes. This is less than what we saw last year, but still represents a solid growth.

The overall situation in the market is that the market is long LNG and prices are, therefore, expected to remain competitive. This means that demand for LNG from new markets is expected to continue to be strong driven by environmental and cost arguments which is good for FSRU demand. So how is then FSRU demand looking?

Turning to Page 14. On the left-hand side of this slide, we are showing the development in FSRU contract awards year by year over the last decade or so. As you can see, the number of awards peaked in 2018 at 10. This includes projects subject to FID and projects where FSRU negotiations are exclusive. So far, this year, there have been 3 awards.

On the right-hand side, we have listed the potential FSRU project pipeline by region. As you can see, a major portion of this is located in Asia and the Middle East, but mainly in Asia. And that is also the region where Höegh LNG currently is focusing its activities now with a business development office both in China and Singapore.

The potential project pipeline is based on information from 2 external sources where Höegh LNG has now moved to mutually exclusive projects. However, it's worth mentioning that the project has varying likelihood of realization and no time constraints in award. Nevertheless, the list of potential FSRU project is substantial. And with that backdrop, let's turn to Page 15 and the FSRU fleet.

At this page, we are showing an overview of the current FSRU fleet and the employment status of this. And as you can see, the fleet count's 35 units, of which 26 are operating under FSRU contracts. The order book comprise 8 FSRUs for delivery through 2022. And as far as Höegh LNG can see, 5 of these are committed on long-term FSRU projects. That should leave 12 units that are available for FSRU employment. And with a long list of potential FSRU projects identified driven by environmental and cost arguments, it's Höegh LNG's view that FSRU supply-demand situation will balance as new projects make FID and over time potentially move into a short position.

And with that, I would like to turn to Page 16 for a summary and open up for questions from the audience.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question will come from Chris Wetherbee of Citi.

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

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I guess I wanted to start on Slide 10, where you run through some new potential projects there. I guess you have the scheduled start-up dates there, which we appreciate. I guess could you give us a little bit of sense of maybe the time line between now and when those scheduled start-ups are expected to understand maybe what the benchmarks we should be looking for between now and then to, I guess, sort of grow confidence that they're beginning to kind of come through and that you guys will be able to potentially participate in those. So I guess anything that you can kind of help us in terms of realistic timing? Is there some point in 2020 that maybe there's better indication of how these are developing, that would be very helpful.

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

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Yes. Chris, for the AIE project, the scheduled start-up is 2021. That's the official scheduled start-up line by the project. I think this is the project that it already has a permit but it is in the process of modifying that. So when that modified approval is obtained, I guess, that's a data point. This is also a project where we are in discussions and formulating the TCP. So when that is completed, that would also be a data point. So I think it's fair to say that these projects, it's the progress on the modification of the permit that will be a data point. And also reports from the client on securing the offtake from this project.

For the AGL, the offtake there is secured as such. But there I think the progress in obtaining the environmental impact and statement process, it will be a data point. We have already signed the TCP there. So this is for then the project to obtain the necessary permits. And I think you should expect to see good progress on both projects by mid next year some time. This project has a scheduled start-up then as we state here in 2022. So I think that's the kind of the -- I think the projects also will issue information as they make progress both on the environmental and the offtake side for these projects.

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

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Okay. No. That's very helpful. I appreciate that. And assuming sort of a normal course where the parent would potentially participate in the sort of the business development for those new projects and then there could theoretically be a drop-down candidate identified by the partnership at some point in the future, I guess it's been a while since we thought a little bit about that so could you sort of give us a sense of how you might think about sort of the funding of any potential drop downs, willingness for incremental debt capacity, how you think about sort of the equity valuation as it stands right now? Just want to get a rough sense of how you guys are thinking about potential funding. I know it's early, but just sort of structurally or conceptually would be helpful.

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

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Yes. First of all, I think on the next couple of drop downs, you will probably see slightly higher leverage following the asset from the parent on a debt-to-EBITDA basis than you have seen in the past. That means that at the starting point there is less equity needed for the next few drop downs than what we have seen in the past. I think the plan would be for the partnership to raise equity for the equity portion. And we could access both the common and the preferred equity market, hopefully, at that point in time, but it would have to be equity. But I think further considerations around which markets to approach, we would have to make closer to a transaction and we will then see how the various instruments are priced. Again, the big picture is slightly more leverage from the asset, which means that it's less equity needed than what we have seen in the past.

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Operator [6]

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The next question will come from Greg Lewis with BTIG.

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Gregory Robert Lewis, BTIG, LLC, Research Division - MD and Energy & Shipping Analyst [7]

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I guess I just had -- just following up kind of on that thought. As you look at your preferreds, I mean, right now they're yielding 6%. As you look at the common equity, it's definitely been a tough couple of months here for MLPs. The yield is now at over 12% it looks like on the equity side. How should we be thinking about cash flow? And I mean should we be thinking about buybacks here? I'm just trying to get a better understanding of capital allocation when we try to balance the ability to drop down assets and grow the fleet versus potentially buying back some stock.

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [8]

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I think it's a good question. I think the main source or allocation of the capital we have is likely to be used for growth, I believe. There's obviously a point in time where we would consider using it more for maybe for buying back. But so far, at least, we have preserved capital for growth purposes. But we are continuously evaluating if we should use any funds for other purposes. But at the moment, we have not taken any action in that direction. And I think as a starting point, at least, as I said, the plan is to use the capital available for growth purposes.

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Gregory Robert Lewis, BTIG, LLC, Research Division - MD and Energy & Shipping Analyst [9]

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Okay. Great. And then just got one little bit, I guess easier. As we think about the total FSRU fleet, yes, I mean about 2/3 of the fleet is committed to traditional FSRU work. Of the units that are not operating as FSRUs, are any of those on multiyear contracts that potentially keep them out of the market and bidding on some of this work that looks like it's going to be bid on over the next few quarters? Are those vessels all pretty much are all just trading spot, I guess, is my answer.

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [10]

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No. Well, some are trading spot, but Höegh LNG has some of them and they are on medium-term contracts. So what we have done, what Höegh LNG has done is to enter into between 1- and 2-year contracts in carrier mode. So I think it's a mixture of medium-term and spot contracts.

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Gregory Robert Lewis, BTIG, LLC, Research Division - MD and Energy & Shipping Analyst [11]

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And I'm sorry, I was thinking more beyond what's inside Höegh. I mean like do we have like any kind of view into the competitive landscape in terms of the non-Höegh FSRU capable ship?

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

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Yes. So they are. I think there might be one that's idle, but the rest is on short- to medium-term LNG carrier contracts. So as far as we know, none of them are on long-term carrier contract. It's spot to medium-term LNG contracts for all of those units, except maybe one that's idle.

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Operator [13]

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The next question will come from Ben Nolan of Stifel.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [14]

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So I wanted to follow up a little bit on the Gallant, which obviously comes off contract with Egypt. And where you've said you've exercised your option with HLNG. Just curious, as you look forward, obviously, HLNG would be trying to go out and find alternative employment on that. But in your view, is there any way that, that 90% number ever deviates from being 90% without a subsequent contract on the back end to sort of make up for it?

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [15]

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Ben, no. I see either it's executed as is or it's employed on alternative employment. I think from the partnership perspective, we have the 5-year option to lease it to the parent for 5 years. Then the alternative would then be alternative long-term employment. But I could theorize that we exercise this. And then at the later stage, we then convert it from a time charter contract with the parent to a time charter contract with a third party. But in terms of our relationship with the parent, I can only foresee 90% of the current rate and nothing else than that.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [16]

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Okay. And if, let's say, the parent were able to get alternative employment but it was perhaps below that 90% threshold, you could maintain your contract with the parent and they just make up the difference?

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [17]

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Yes. I mean the situation then would be that we lease it to the parent and the parent would then employ it in the interim market maybe as carrier. And then it's likely that the parent will earn a lesser amount that they are paying the partnership because the rate that you can earn in the carrier market at the moment is less than 90% of the current rate.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [18]

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Right. Well, then that sort of gets me to my next question which is, based on the tenders and some of the work that's being done primarily at the parent to get long-term contracts as FSRUs on the vessels, can you maybe guide us to sort of -- at least maybe give a range as to sort of where the market is relative to maybe the carrier fleet for long-term business? What kind of a premium is available for an FSRU relative to carriers on long-term business?

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [19]

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Yes. What we have seen, as you know, over the last years, the rate in the FSRU market has been declining due to competition, but it's still above the long-term carrier rate. We expect that we have hit the low point in the cycle and that we, going forward, will see increasing FSRU rate. And it's difficult to say how much premium we will get, but it is a more expensive vessel than a carrier. So we are getting premiums today compared to the carrier rate and we expect that to increase going forward as the FSRU market is getting more in balance.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [20]

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Okay. So if, let's say, an FSRU is 30% more expensive than a carrier, can you capture that 30% premium in cash flows do you think or it's somewhat below that?

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [21]

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Well, I think we're not doing that today. We're not doing that today. But I think longer term, we should be able to do that.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [22]

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Okay. Perfect. And then lastly, just for me. As it relates broadly speaking to the FSRU market, you mentioned in the slides that last year, 2018, was a very big year in terms of FSRU awards. It's been 3 thus far this year, but there's a very big backlog. Do you have any sense just from your conversations with clients and then those being done at the parent if the cadence of contracts, if we're reaching some sort of a tipping point or something such that there might be a lot of activity in the near term or is this, in your view, just going to be a little bit more staggered and spread out maybe than it was last year?

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [23]

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Well, a lot of the projects we have been working on for quite some time, I think Höegh LNG and we, we think there's a lot of things going to happen next year on projects where there has been activity for some time and project that has come to market. So I think we are positive to the high level of activity next year, but I don't want to predict by giving numbers. It is always difficult. These take time. But we are certainly positive that there will be good progress on existing and new projects going into 2020.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [24]

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Okay. I guess another way of saying it, does it feel like the pace of activity is speeding or it's not materially different than it was, I don't know, 3, 6 months?

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [25]

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No. I think good progress is being made. There's not a material change in the activity. It's high. It's good. And we have good hopes for several FIDs being made also to Höegh LNG's advantage in 2020.

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Operator [26]

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The next question will come from Liam Burke with B. Riley FBR.

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Liam Dalton Burke, B. Riley FBR, Inc., Research Division - Analyst [27]

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I think we've talked about this in the past, your existing projects require redundant capacity. If I look at existing projects, is there any need or demand to increase capacity where you could probably could generate some more operating cash out of the projects that are currently up and running?

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [28]

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Yes. I think there is potential for increased activity relating to the existing fleet. But that would, to a large extent, be to the benefit of our client. Our client could make agreements with more scale operators to use our fleet to provide services in that respect. Now we might have to change slightly our commercial agreement with our client then, but that would only represent marginal, I think, increases in revenues on the partnership's hand. So I think the upside relating to providing incremental service is relating to the small-scale activities, for instance, at least with the current fleet is more at the hand of our client and only to a lesser extent to our benefit. But we could see small changes, small improvements in earnings.

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Operator [29]

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And this concludes our question-and-answer session. I would now 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 [30]

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Well, then I would like to thank everyone for dialing in and for asking questions. And if there is any follow-up questions, don't hesitate to contact us. Many thanks.

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Operator [31]

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Thank you. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.