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Edited Transcript of HMLP earnings conference call or presentation 27-Feb-19 1:30pm GMT

Q4 2018 Hoegh LNG Partners LP Earnings Call

Hamilton Mar 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Hoegh LNG Partners LP earnings conference call or presentation Wednesday, February 27, 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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* Christian F. Wetherbee

Citigroup Inc, Research Division - VP

* Donald Delray McLee

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Gregory Robert Lewis

BTIG, LLC, Research Division - MD

* Max Perri Yaras

Morgan Stanley, Research Division - Research Associate

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Presentation

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Operator [1]

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Good morning, and welcome to the Höegh LNG Partners 4Q '18 Earnings Conference Call. (Operator Instructions)

Please note, this event is being recorded.

And now I would like to turn the conference to Steffen Føreid. Please go ahead, sir.

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

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

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. I'm pleased to report another strong quarter for the partnership with total revenues of $37.8 million, limited partners' interest in net income of $12.8 million and segments' EBITDA of $37.5 million.

Based on the strong operating performance and financial position, the partnership distributed $0.44 per common unit during the quarter, which is equivalent to distribution coverage ratio of 1.25x and a distribution of $1.76 per unit on an annual basis.

I am further pleased to report that the refinancing of Höegh Gallant and Höegh Grace announced last quarter has been closed in a subsequent event in January 2019.

Turning to Page 5, we are putting numbers to the quarter. The partnership reported total revenues of $37.7 million in the quarter, which is up from $37.5 million in the fourth quarter last year. And the increase is due to other revenue relating to insurance proceeds in the quarter and higher time-charter income on Höegh Gallant, offset by lower time-charter income on PGN FSRU Lampung in the quarter compared to the fourth quarter last year.

Due to technical issues, there was a performance claim for Höegh Gallant in the quarter. However, this compares to 7 days of fire for planned maintenance in the fourth quarter last year, resulting in higher income for the unit in the quarter.

Operating income was $22.2 million in the quarter, however, adjusting for unrealized gains and losses of derivative instruments in joint ventures, operating income would have been $26.4 million in the quarter, which is up from $26 million in the fourth quarter last year. The improvement is due to higher revenues and lower administrative expenses, partly offset by higher vessel operating expenses in the quarter compared to the fourth quarter last year.

Limited partners' interest in net profit adjusted for all unrealized gains and losses of derivative instruments was $13.8 million in the quarter. This is down from the fourth quarter last year, mainly due to an income-tax expense in the quarter compared with an income-tax benefit in the fourth quarter last year.

The segment EBITDA was $37.4 million in the quarter. This is up $3.7 million from the fourth quarter last year, mainly due to the acquisition of the remaining 49% of Höegh Grace with effect from December 2017.

Turning to Page 6. We are showing the development in key metrics over time, where the positive trend and consistencies stands out. Segment EBITDA has been improving overtime, driven by acquisitions and improved operating performance.

Limited partners' interest in adjusted net profit, which excludes unrealized gains and losses on derivative instruments, has also been positive trending with the fourth quarter 2017 result standing out due to the tax benefit in that quarter.

With a distribution coverage ratio reaching 1.25x for the quarter, the ratio has been exceeding 1.15x for 5 consecutive quarters and improving overtime, driven by stable cash flows from operation and reduced debt levels.

Turning to Page 6 -- sorry, turning to Page 7. We are showing the income statement in more detail. For the quarter-on-quarter comparison, I would like to highlight the development in vessel operating expenses, which are up partly due to repair cost of Höegh Gallant in the quarter.

I would also like to highlight the reduction in administrative expenses, which is explained by activities relating to the acquisition of the remaining 49% interest in Höegh Grace and offering of preferred units in the fourth quarter last year.

The development in earnings of joint ventures is explained by the development in unrealized gains and losses of financial instruments, while the development in income taxes is due to the tax benefit recorded in the fourth quarter last year, as already mentioned.

Finally, I would like to highlight the reduction in financial expenses, which is driven by a positive development in unrealized gains and financial instruments and lower outstanding debt demands.

For the full year, I would like to highlight that limited partners' interest in net income was $65.3 million, equivalent to an earnings per unit held by the public of $1.93, which compares to distribution per common unit of $1.76.

Turning to Page 8. The balance sheet has not changed much since year-end 2017. One of the larger developments is the reduction in long-term debt of $44 million during the year, which is explained by regular amortization. Another development is the reduction in revolving credit facility due to owners and affiliates of $12 million, repaid mainly with proceeds from the issue of units under the ATM program.

During the quarter, approximately $4 million of proceeds for rates under the program. However, no units have been issued since the beginning of November 2018.

Turning Page 9, and as already mentioned, the partnership secured commitments for a refinancing of Höegh Gallant and Höegh Grace during the third quarter, a transaction that was closed in January 2019.

A new facility is for an amount up to $383 million and comprised $320 million in secured -- senior secured term loans, which are fully drawn, and a revolving credit tranche of up to $63 million, which is undrawn and may be used for general partnership purposes. The facility has a tenor of 7 years, and a swapped interest rate of approximately 5%.

This facility, the partnership has refinanced at improved terms, enabled a further diversification of banking -- of banks in the group and reduced its reliance on funding from the sponsor.

Turning to Page 10. We present the partnership's current platform of 5 modern, high-quality assets, all on long-term charters with an average remaining contract length of more than 10 years.

Neptune continues to operate in FSRU mode in Turkey and is expected to remain at site until mid this year.

Cape Ann is operating in LNG Carrier mode in worldwide trade and will continue to do so until the likely commencements of operation in FSRU mode in India this summer.

PGN FSRU Lampung is in location of Lampung in Indonesia and has seen increased regasification activities in the past few months.

Höegh Grace continues to operate as an FSRU in Cartagena, Columbia, providing to energy to gas-fired backup power plant.

Finally, Höegh Gallant is operating in LNG Carrier mode since the departure from Egypt last year, with a partnership containing to have a contractural relationship with the sponsor relating to the unit.

Turning to Page 11. This slide updates the picture at the sponsor level. And as you can see from the overview, the sponsor has been successful at putting its newbuild FSRUs to work on medium-term contract. Höegh Giant is operating under a 3-year LNG carrier contract with Naturgy.

Höegh Esperanza is operating under a 3-year combined FSRU at LNG Carrier mode with [Ceno]. And Höegh Gallant is operating under a 15-months LNG Carrier contract with Naturgy.

In addition, the sponsor has been selected as the FSRU provider where [GL's] proposed LNG import project in Crib Point in Australia for a project that is estimated to generate an annual EBITDA of around $30 million. The sponsor has further achieved exquisite -- exclusivity and is in the final round of additional projects, all with a scheduled startup in 2020, '21.

Turning to Page 12. We are showing the development in global LNG supply and demand, historically, and projected, as prepared by our IHS Markit. From this, you will see that global LNG production is expected to increase from approximately 320 million tons in 2018 to approximately 550 million tons in 2030. Of this increase, approximately 100 million tons are estimated to come from capacity under construction, and this includes projects, such as Prelude, Corpus Christi, Cameron and Freeport. The rest is expected to come from the post new capacity. And in this respect, the impacts on final investment decisions for new LNG production facilities seems to have ended. In 2018, LNG Canada's project was sanctioned. Qatar Petroleum and ExxonMobil have further advanced their Golden Pass LNG Project in the U.S. Gulf Coast.

And in addition, Qatar Petroleum seems to be moving ahead with its announced expansion of existing facility. Worth noticing is that recent final investment decision are backed by shareholders with volumes to be sold to offtakers at a later stage.

Turning to Page 13. And we are highlighting some statistics showing that 2018 seems to be a turning year for the LNG and the FSRU markets. Global trade in LNG increased almost 10% to 320 million tons in 2018. 90 million tons of new production capacity was sanctioned, including LNG Canada's 40 million tons already mentioned. Within the LNG Carrier segment, the average day rate almost doubled to $85,000 per day. And in the FSRU segment, 6 new contract awards were made, of which 2 went to the sponsor.

Now turning to Page 14. Drivers of FSRU demand is typically replacement of coal and oil in power industry production, diversification of energy supply sources and seasonal demand. While the Middle East, Pakistan and Latin America are the regions importing most LNG through FSRUs today, new FSRU project opportunities are spread across the World. South Asia, Asia and Oceana represents the most prospects, followed by South America, Europe and the Middle East, North Africa. While the FSRU market remains competitive, it's worth mentioning that the recovery of the LNG market has led to traditional ship owners to focus more on this segment and less on the FSRU segment, which is to the benefit of our sponsor when bidding for new business.

So turning to Page 15. I would, then, like to turn to this page just for summary of MLP investment compositions, which concludes the presentation for day -- today.

And with that, I would like to 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) And the first question comes from Chris Wetherbee with Citigroup.

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

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I wanted to start with a question about the Gallant, and just want to get a sense operationally what happened in the fourth quarter? And from a cost perspective, do you expect any of that cost that impact the fourth quarter, linger into the first half of 2019?

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

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Chris, there was an issue with the electrical equipment onboard, which meant that we had to deviate from the planned route and had some additional costs. And those costs are covered in the fourth quarter, and we don't expect any additional cost to come in 2019 relating to that matter.

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

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Okay, that's helpful. Appreciate it. Wanted to also ask about the potential for the AGL contract, and how do you think about the asset? The asset to deploy onto that business? Is it the call number 10? Or do we have one of the other FSRU that's currently in trading mode that might be able to be shifted there? How do you think about the asset deployed for that potential business?

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

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Yes, so the decision for which asset to use there is still to be decided upon. But it will be one of the existing assets. And we hope that a final investment decision -- this contract is still subject to CPs, and we hope them to be lifted during the year with a startup then of the project in 2021. So the parent will responsible use of one of the existing units for that project, but it remains to be decided which one.

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

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Okay, okay, that's helpful. And then, I guess, just maybe more broadly taking a step back and thinking about the fleet in general. As you look at supply, demand of FSRUs build over the course of the next couple of years, do you have, sort of, a target date when you'd like to have the asset that're currently trading as carriers, transition back into, sort of, full FSRU deployment? I just want to get a sense of maybe how do you think about this a couple of years out? If you still think that you'll need to have vessels trading, as opposed to actually operating in, sort of, true FSRU employment?

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

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Yes. So that -- again, that question goes in relation to the sponsor. And if you look at the fleet of the sponsor, you have Giant, Esperanza, Gallant, and FSRU #10, which then are potential drop-down candidates. And Giant, Esperanza and Gallant, they are on medium-term contract, expiring in 2020, '21. And that means that they go off their current interim contract in a timely manner to be able to start off on the FSRU projects that we currently are bidding on. Because the FSRU projects that we currently are bidding on, they have a startup in the 2020-'21 period, which is when the units of the sponsor go off their interim contract. And the plan is, then, for them to go from the interim medium-term contract and on to long-term FSRU contracts. And then we drop down to -- offered for drop down to the MLP.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [8]

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Okay, okay, that's helpful in terms of the timing there. Last question just on distribution and coverage ratio for 2019. Can you give us a sense of -- the coverage ratio has been rising here, what do you think the appropriate one is? And then, how do you think about it in a context of distribution increases?

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

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I think what we normally have done is to consider distribution increases in connection with drop downs, and I don't think we should deviate from that. And that's the next point in time when we will consider changing distributions. We hit -- we reached 1.25x this quarter. That's a high number. It might not be the same level next quarter, but if you see the history, we have been above 1.15x now for 5 consecutive quarters, and that's what where you normally would expect to see us going forward.

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Operator [10]

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And the next question comes from Donald McLee with Berenberg.

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Donald Delray McLee, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [11]

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Just to start things off. Could you talk a bit about the boil-off claim for the JV, is it better? And then, that's isolated to 2018 results? Or could there potentially be a cash limit that comes through in 2019, to sell the plant?

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

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So the boil-off claim, it's the joint-venture companies that is subject to that. But the joint-venture companies and the partnership, they have been indemnified by the sponsors. So it -- the risk carries at the sponsor level, not the MLP level. And we already have made a -- we have made a provision there, and if they should come to a payout under the boil-off claim, the partnership is indemnified from its sponsor relating to that.

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Donald Delray McLee, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [13]

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Okay, thanks for clearing that up. And then, just following up on Chris' question on the distribution. We do have some debt maturities coming due in 2020, even though you've, kind of, ticked up your distribution coverage to that 1.2x levels. You also have some dry docking that's probably going to impact that coverage in 2019. So if we look at 2020 as kind of the earliest point where a distribution hike could happen, how should we -- how are you guys think about prioritizing distribution growth in 2020 versus the -- getting that -- the upcoming maturity refinanced?

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

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I think if you look at -- the debt we have that's amortizing, it always is. So -- and it's amortizing with a pace of between 12 and 18 years normally. When we refinanced Gallant and Grace, we were able to re-leverage because we had to reach down to a relatively low loan-to-value on the existing debt. So I think we will -- when we come to refinancing, we hope to be able to maintain the regular distribution, I believe, we will. And we will always pursue a prudent distribution policy.

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Donald Delray McLee, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [15]

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Okay. And then, just one more in terms of maybe growth priorities. How do you think about facilitating an additional drop-down from the parent level versus acquiring some of the unowned interest in the assets that are actually in your fleet?

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

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So I think when it comes to acquire -- the -- making acquirers from the parent is -- we expect to be done in connection with the sponsors securing long-term contract and going on a contract on long-term FSRU contract.

When it comes to acquiring, increasing the ownership in existing assets, I think that's something we have considered. But I think we have to solve the boil-off issue before we can reconsider that again. So that was put on hold in connection with the boil-off and will be on hold until that has been resolved.

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Operator [17]

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And the next question comes from Max Yaras with Morgan Stanley.

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Max Perri Yaras, Morgan Stanley, Research Division - Research Associate [18]

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I'd just like to follow-up on the AGL project. Is there any, kind of, view on what duration maybe pricing would be? And then, what is the potential for that, whatever FSRU is selected for that [B] drop-down?

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

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The AGL?

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Max Perri Yaras, Morgan Stanley, Research Division - Research Associate [20]

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Yes, yes.

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

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Yes, yes. So the AGL is the -- we expect that there will be -- that the CPs will be lifted during the year. And with the startup in 2020, '21. The contract is expected to generate around USD 30 million in EBITDA. And it's a long-term contract that will fit well into the partnership's portfolio. So I think once CPs have been lifted and we are closer to commercial startup, that's when there will be a dialogue between the sponsor and the partnership for the drop-down of that. But I do expect that to be maybe the next drop-down candidate, but it's certainly a relevant one.

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Donald Delray McLee, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [22]

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Okay. And then, I believe you guys are looking at another Australia project. You have any update on that? Or how close is FID?

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

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That's right. So we have also been -- the sponsor has been selected, preferred supplier for another the AIE project in Australia. So that project is also subject to CPs. They are pursuing environmental permits, and they are also pursuing commercial offtake agreements. So that's a project that is material -- is progressing in parallel with the AGL. But it's too early to say anything about the likely outcome of that process and when potentially there can be a final award for that project. But it is one of the 2 more realistic or relevant projects in Australia from our point of view.

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Max Perri Yaras, Morgan Stanley, Research Division - Research Associate [24]

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Okay. And then, I'm just wondering if you could give a little bit of color as to current market rate. Obviously, we've seen LNG carrier rate come down in the past couple of months, but how is that effective maybe in near term? FSRU rate? And then, longer-term charter rate?

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

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I think -- yes, the -- in the carrier market, the rates have come down recently, but still compared to the last year, they are up on average. So '18 compared to '19 -- '17. And I think the positive development in the carrier market is -- has led traditional shipowners to focus more on that segment and less on the FSRU segment. So I think the big -- the biggest benefit from the sponsor's perspective and also from the partnership perspective relating to the improvement in the carrier market is that it will -- it has led to less competition. And I think that's a positive note on the FSRU rate going forward as such.

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Operator [26]

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(Operator Instructions) And the next question comes from Gregory Lewis with BTIG.

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Gregory Robert Lewis, BTIG, LLC, Research Division - MD [27]

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Just as we look at developments in the FSRU market, it clearly looks like there's some potential opportunities out there over the next couple of years. Just as we think about that, like how should we be thinking about these -- this pickup in potential FSRU demand in 2021. Is that really just these customers need to set these units in place? Or has the market, as a whole, had to adjust their pricing to entice some of these potential projects?

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

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Well, I think we have seen a drop in FSRU rates, compared to some years back, yes, we have, compared to the first -- the FSRU contracts we were awarded 4, 5, 6 years ago. And so I think -- and that's -- that probably have led to the projects we are looking at now. It's been a catalyst for them to get moving and developing their project further. So they are benefiting from a rate reduction we have seen over few years now. But I think, we believe, we have reached the bottom of the curve, and that we hope to see a positive development in FSRU rates going forward. I think the fact that there is more activity on the FSRU segment now is more driven by the fact that they need to move forward now in order to be ready for this supply -- to take on board the supply of LNG when it's coming in 2021. So I think that's the -- the main reason for the increased activity is that, they see that LNG is coming and they need to move forward with the project in order to be able to meet that -- time when the LNG is coming.

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Gregory Robert Lewis, BTIG, LLC, Research Division - MD [29]

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Okay. So almost sounds like the fourth or fifth FSRU contract will most likely have a better return than the first one's time? Is that fair?

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Steffen Føreid, Höegh LNG Partners LP - CEO & CFO [30]

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Well, I hope to -- we do hope to -- we think that we have reached the bottom, yes. And that you should expect to see a positive development hopefully in FSRU rates going forward to compare to what it is today, yes.

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Operator [31]

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And as there are no more questions at the present time, I would like to turn the floor to Mr. Føreid for any closing comments.

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

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Well, I would like to -- just like to thank everyone for dialing in today to Höegh LNG Partners Fourth Quarter Earnings Call. And if there are any follow-up questions, I welcome everyone to contact and ask directly. Thank you.

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Operator [33]

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