Dynagas LNG Partners LP (DLNG) Q4 2014 Earnings Report, Transcript and Summary

Thank you for standing by, ladies and gentlemen, and welcome to Dynagas LNG Partners Conference Call on the Fourth Quarter 2014 Financial Results. We have with us Mr. Tony Lauritzen, Chief Executive Officer; and Mr. Michael Gregos, Chief Financial Officer of the company. At this time, all participants are in a listen-only mode. There’ll be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today. At this time, I would like to read the Safe Harbor statement. This conference call and slide presentation of the webcast contains certain forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties, which may affect Dynagas LNG Partners’ business prospects and results of operations. Such risks are more fully disclosed in Dynagas LNG Partners filings with the Securities and Exchange Commission. And I’ll now pass the floor to Mr. Lauritzen. Please go ahead, sir.

Morning everyone and thank you for joining us in our fourth quarter and year end 2014 earnings conference call. I’m joined today by our CFO, Michael Gregos. Earlier today we issued a press release announcing our fourth quarter and yearend 2014 results. Certain non-GAAP measures will be discussed on this call. We have provided a description of those measures as well as the discussion of why we believe this information to be useful in our press release. We are pleased to report the partnership earnings for the quarter and yearend 2014 which are in line with our expectations. In particular we are focused on the performance of our fleet from a safety, operational and technical point of view. During the full year of 2014, we’ve had 100% fleet utilization, which is reflected in our financial results. We had previously stated that we would be focused in 2014 on operational efficiency and growth. Our operating costs were competitive due to our management of operational efficiency, and in 2014 we have grown our fleet by close to 69% on a cubic meter capacity basis, which has enabled us to increase cash distributions to unitholders. With our fleet fully contracted until second quarter 2017, we continue to focus our attention on further fleet growth. The five LNG carriers currently owned by our Sponsor, Dynagas Holding Ltd, provides us with visible growth opportunities. In addition and beyond these five LNG carriers, we believe the full, constant growth in LNG production will enable further commitment to LNG Carriers and other LNG infrastructure assets. Turning to Slide 3 to discuss our recent achievements. On 30 December 2014, our units commenced trading on the New York Stock Exchange. We had voluntarily elected to transfer the listing of our units from NASDAQ as we believe that the New York Stock Exchange will provide more flexible trading platforms for the partnership’s securities and enhance investors’ access. On January 15, 2015 the partnership announced a quarterly cash distribution for the fourth quarter of 2014 of $0.4225 per unit which was paid on February 12 2015 to all unit holders of record as of February 5, 2015. The cash distribution is equal to an increase of 15.8% over the partnership’s minimum quarterly distribution per unit. The increase is driven by the contribution to operating results for a full quarter for 2 LNG Carriers, Arctic Aurora and Yenisei River, which were acquired and delivered to the partnership on June 23, 2014 and September 25, 2014 respectively. We are pleased with the results for the fourth quarter and year ended 2014, for which adjusted EBITDA was $28.7 million and $84.8 million respectively. The corresponding adjusted net income was $15.7 million and $52.6 million. And the distributable cash flow was reported at $80.6 million and $59.8 million for the said period. Moving on to Slide 4, since our IPO in November 2013, we have developed the company’s business profile and foundation to a great extent. The fleet has grown from three to five units through two dropdowns in 2014, which grew our capacity by 69% as well as our revenue stream. The distribution has been increased from an annualized $1.46 per unit to $1.69 per unit, which represents a total increase of 15.8%. Our 12-month forward run rate EBITDA has increased by close to 72% from $65 million to $110 million primarily as a result of expanding the fleet. We have been focused on ensuring stability and visibility and have increased the remaining average charter duration from 3.5 years to five years. We have more than doubled our contract backlog which we increased from $296.7 million to $670.9 million. The average age of our fleet has been reduced from 6.3 years to 5.2 years through focusing on expanding the fleet with young tonnage. We have been active on the capital markets and been successful in raising capital when it was sensible. At time of our IPO, we raised $259 million in IPO proceeds, as well as $214 million in bank debt. Post the IPO; we have raised a total of $502 million from follow-on offering, the issue of unsecured, notes, as well as securing bank debts. I will now turn over the presentation to Michael who will provide you with comments to the financial results.

Thank you, Tony. Turning to slide 5 of the presentation, I will review some recent financial highlights. This was another productive quarter, with 100% utilization and results in line with our expectations. This quarter also reflects the ownership of five LNG carriers for a full quarter following the acquisition of our second dropdown in September 2014. For the fourth quarter of 2014, the partnership generated distributable cash flow of $18.6 million, adjusted EBITDA of $28.7 million and net income of $15.3 million. Adjusted net income, which is net income adjusted for non-cash time charter high amortization for the fourth quarter amounted to $15.7 million. Adjusted EPU for the fourth quarter of 2014 amounted to $0.44 per common unit. For the 12 month period ended December 31, we reported distributable cash flow of $59.8 million, adjusted net income of $52.6 million, and adjusted EBITDA of $84.8 million. Interest and finance cost for the 12 month period amounted to $14.5 million, which is broken down in $13.3 million interest cost, $785,000 in amortization of deferred financing fees, and $360,000 in commitment fees. For the three month period ended December 31, our fleet average daily hire gross of commission amounted to $79,700 per day. Moving onto slide 6, Tony has already outlined to you our activities since our IPO in November 2013. When we went public, we outlined our vision and in a short space of time, we’ve delivered on exactly what we were saying ahead of schedule. We own a great business with a great future. So putting it in numbers, as Tony talked about earlier, when we went public 14 months ago, we had three vessels in the fleet with a dropdown pipeline of seven LNG carriers. And fast forward to today, we’ve got five LNG carriers on the water, all with long-term contacts and a pipeline of five dropdown candidates at the sponsor level. And what has our growth meant financially? Well, you can see here on the slide that our contract backlog went up 126%. EBITDA is 52% higher between 2012 and 2014 and 111% higher basis our forecasted the next 12 months run rate EBITDA for our current fleet of five vessels. Our distributions to unit holders have increased quite significantly by 15.8% since our first cash distribution in February 2014. Moving on to slide 7, we outline our key financial metrics which are primarily driven by the growth in our fleet from three to five vessels. Comparing the fourth quarter of 2013 to the fourth quarter of 2014, we have experienced an increase of 64% in adjusted EBITDA, 43% in distributable cash flow and 40% in adjusted net income. Moving on to slide 8 to discuss distributable cash flow, we start from adjusted EBITDA, deduct interest and finance costs, add amortization of deferred financing fees and interest income. For the quarter ended, maintenance capital expenditure reserve for dry-docking amounted to $861,000 and replacement CapEx reserve amounted to $2.7 million. Our coverage ratio for the fourth quarter 2014 was 1.24 times and for the year ended December 31st, amounted to 1.13 times. Moving on to slide 9 which outlines our capital structure, we have a simple and flexible capital structure which has allowed us to fund our second dropdown primarily with debt finance without the need for a follow-on equity offering. Our debt comprises of a mix of secured bank debt and unsecured notes. On the one hand, we have our $325 million revolving credit facility secured over four of our LNG carriers, which amortized by $20 million per annum and which matures in 2021. On the other hand we have our non-amortizing $250 million 6.25% unsecured notes due in 2019, which funded the majority of the purchase price of our second dropdown in September 2014. As of December 31, the partnership had total available liquidity of $65.9 million, comprised of $35.9 million in cash, including minimum cash liquidity requirements imposed by our lenders, and $30 million of borrowing capacity under our $30 million sponsor facility. Our pro forma net debt at the end of the quarter end of quarter four stood at about $540 million. So basis the forecasted 2015 run rate EBITDA of $110 million, our net debt to EBITDA is about 4.8 times. At the moment, 43% of our debt is insulated from interest rate exposure. In terms of overall leverage, going forward and under a normalized equity market environment, our base case course for slight balance sheet leveraging as vessels are dropped down. We expect that going forward, future dropdowns will be funded with around 50% to 60% equity and our debt to EBITDA to range between around four to four and half times. We believe that DLNG shall have a fairly conservative financial profile, which will enable us to reach our cash distribution target going forward. Turning now to slide 10 to our cash distributions, something that a lot of you I know are very interested in, DLNG provides gross and yield together, giving total returns to investors. This slide outlines our cash distribution payments since our IPO in November 2013. When an investor buys DLNG, it is buying for high and stable annual cash returns driven by visible growth and cash flows from LNG carries operating under long-term contacts. The first -- the important element of our cash distribution policy is our secure cash flow which comprises of a firm revenue backlog, excluding optional years of $671 million. And as Tony will discuss, when our firm period starts to expire, we think we are in a great part of the cycle to either take advantage of firm rates or get the charges renewed by our customers. The staggered maturity of our charters is very key to a strong financial platform. As we have previously stated, we have a target of two dropdowns per year and an estimated distribution coverage of between 1.1 and 1.2 times going forward. We are motivated on hitting our stated target of 10% to 15% annual growth of LP distributions per unit for the foreseeable future. We’ve already hit and slightly exceeded our 15% growth target for this year so we are pretty happy about that and we’ve got a very good pipeline of five high quality dropdowns today and we hope to have an even better one in the future. I would like to now pass the floor to Tony to continue the presentation.

Thank you, Michael. Let’s move to slide 11 to summarize the partnership’s profile. The partnership’s fleet count five LNG carriers with an average age of about 5.2 years in an industry where expected useful economic lifetime is 35 years. We have a strong and diversified customer base with counterparties namely BG Group, Gazprom and Statoil. These charters are leaders in their fields and only work with the top performing service providers. Our contract backlog is about $671 million and our average remaining charters are about five years. Let’s move to slide 12. We intend to continue to focus on accretive growth going forward. As you may know, we have the right to purchase from our sponsor a further five optional vessels. So we have a large sponsor asset base and substantial dropdown growth potential. Three of those vessels are already on the water and trading and the remaining two are under construction with deliver in 2015. All optional vessels are high specification ice class, winterized and extremely versatile. These optional vessels include two vessels already long term chartered to first class customers with an average five years employment. Of the two long term chartered vessels, one is chartered out to our existing charter at Gazprom and one is chartered to Cheniere. We are confidently evaluating new project opportunities that have the potential to provide us with additional growth beyond these five optional vessels. Moving on to slide 13. Our fleet currently consist of five LNG carriers of which four have ice class 1A notations. Our fleet is fully contracted in 2015 and 2016 and 80% for 2017, a time we expect the LNG shipping market to be very strong. We have a unique fleet that can handle conventional LNG shipping as well as trade in ice bound and sub-zero areas. The drivers behind several of our charters were the ice class features of our fleet as well the operational track record. We are the only company in the world with a capability and experience in transiting the northern sea routes. Our multi-year fleet employment profile and diversified first class customer base and a staggered maturity of our charters, provide solid cash flow visibility going forward. Moving on to slide 15. World energy consumption has been steadily increasing over time. The largest source of our energy comes from coal, oil and gas. Since the early 1980s and up until today, gas has been the fastest growing of those commodities. Going forward, we believe that coal and oil related consumption will be second rated to gas due to the environmental reasons and gas consumption will continue to growth faster than coal and oil. While the last three years have been characterized by almost static LNG production, we expect the next years until the end of the decade to be dominated by strong growth. It is estimated that 241 million tons of LNG was produced in 2014 and it's conservatively forecasted that156 million tons of new incremental LNG will come to the market between now and 2020. This represents a total increase of 65% compared to 2014. The source of the new LNG is primarily from Australia, Southeast Asia, North America and Russia. We continue to believe that the Far East will remain the largest buyers going forward, meaning that the LNG carrier ton-mile requirements are expected to remain high. These production figures are conservative. Most of the LNG included has already been pre-sold or retained by the project developer and the majority of these production terminals are under contraction. Potential increased production in existing projects has not been included. Several LNG production facilities in the world remain significantly underutilized due to technical or political treasons. Australian volumes included in this projection has been estimated to 57 million tons coming from Queensland Curtis, Gladstone , Asia Pacific LNG, Wheatstone, Gorgon, Ichthys and Prelude. U.S. export volumes included in this projection has been estimated to 79 million tons coming from Sabine Pass, Cameron, Freeport, Lake Charles, Cove Point and Corpus Christi. In aggregate there are significant volumes coming from new projects that we believe will have a very positive effect on LNG shipping. When we compare LNG supply to LNG carrier shipping capacity available from now until 2020, we remain confident that the market outlook for shipping looks very favorable. By adding current LNG production and incremental LNG production, we forecast that by the end of 2020, a total of 397 million tons of LNG will be transported per annum. At current, the world LNG carrier fleet count is about 405 vessels. This implies that one need on average about 1.68 LNG carriers to transport 1 million ton of LNG. As a result, we forecast a total need of about 667 LNG carries by the end of 2020. The existing fleet and the order book represents a total of 555 LNG carriers. As such the market may be short of 112 vessels to partially account for the incremental LNG going forward. It is this imbalance that will drive rate increases and that makes our vessels so desirable going forward. Furthermore, it should be mentioned that embedded in the existing worldwide fleet, more than 30% may be considered sub-standard specification in todays’ environment. Actual production in existing projects may also be much higher than forecasted due to the potential materialization of additional LNG production projects. Also current underutilization of existing projects should be rectified over time. This will all lead to additional need for LNG carriers. The potential re-charting possibilities of our fleet will be 2017 at the earliest and beyond, which we expect to a period of high total fleet utilization. This will be further supported by artic LNG coming on stream and requiring ice class vessels. We have now reached the end of our presentation and I now open the floor for questions. Thank you.

[Operator instructions.] Our first question today is from the line Ben Nolan from Stifel. Please go ahead

Thank you. Nice results guys. My first question has to do with the three vessels that you guys have, one in the water and two to be delivered shortly that don’t have contracts. I'm trying to get my head around maybe the state of contracts for vessels that are immediately available. How would you maybe or is it possible to quantify the rate level at which you might be able to firm up long term contracts on those? Or are there -- is there a bid for long term contracts on assets that are immediately available in the market right now? And if so is it at levels that you’re comfortable with?

So, out of the five optional vessels, two of them are fixed on term contracts. The partnership is always looking for term coverage. That is the market that we operate in. We operate in two different markets. One, the conventional shipping market and also the unique market for ice class and winterized vessels. So when we look at the chartering market right now, on the short term market, there has been quite a lot of volatility and a reduction in rate on the short term market. Again that is not a market that the partnership is looking at, but I think the short term market is very useful sometimes. For example for the sponsors fleet, in securing short term contracts until you find the right profitable long term contract, that would be benefited for their partnership. That is what has been looked at. I don’t think at this very moment that it's the right and opportune moment to lock in long term charters, but as we go into the year, as we have significant volumes being introduced to the market in particular from Australia, from the United States by the end of the year, then I think it would make a lot of sense to commit for term coverage. When we compare for example the short term market and the long term market, we’ve seen a lot more volatility in the short term market versus the long term market. We haven’t actually seen that tremendously much volatility in the long term market. I think that what we will end up concluding on the sponsor’s uncommitted vessels would be in line with what we already have as in average charter rate in our fleet.

Okay, that’s helpful. And then my next question relates to the potential dropdown strategy for the two vessels that do have contract, the Lena River and the Clean Ocean, Are you guys still thinking about a schedule that drops approximately two vessels down per year? And furthermore, given the state of the balance sheet as it is now and the fact that you last -- the last dropdown you funded with the bond, how are you thinking about the debt to equity mix on subsequent dropdowns specifically for the next two?

Hi Ben. The plan still is intact, two dropdowns per year. And as I previously said, there’s going to be a slight balance sheet de-leveraging going forward. So you should model around, the next dropdown should be around 55% to 60% equity.

Perfect. That's very helpful. And then my last question relates to sort of what happens beyond that. There’s five option vessels here that are held at the sponsor, and if you stick to two dropdowns a year, that gets you into the first part of 2017, which at this point if I'm correct, if you were to place an order for a new LNG vessel, you probably wouldn't get it until late 2017. Is there any thinking maybe on the sponsor level, if you could speak to that, about placing additional follow-on orders or would something like that likely only be done on the back of contracts?

Well, looking at the forward production curve and also the demand for new tonnage that you’re seeing in the market and the level of project activity and tender activity right now, we think it’s likely that further commitment to LNG carriers and other LNG infrastructure assets should take place going forward.

Okay. And I’d hate to use up too much of your time, but when you said commitment to other LNG infrastructure assets, is that -- should I take that to mean possibly FSRUs or any clarification there?

As an organization we do absolutely have the capability to operate FSRUs. So that is an obvious segment that we will be looking at.

Okay. All right, that does it for me. Again nice results and I'll turn it over to someone else.

Thank you. Our next question today is from Fotis Giannakoulis from Morgan Stanley. Please go ahead.

Hello guys and congratulations on the good quarter. Tony, I would like to ask you how has the market environment for the LNG industry has changed the last quarter? We have seen gas prices in Asia dropping significantly together with oil prices. What does this mean for shipping demand and are there any discussions about project delays that might affect negatively the shipping results and any renegotiations that perhaps you might see? And what about the long-term growth of the sector given the fact that also that we have seen a number of new building orders that they were placed very recently?

Thank you. So I think that a reduction or a decrease in gas prices and general energy prices has a positive and a negative. On the positive side, lower prices means more appetite for buyers. So we expect in the long term for the demand for LNG to increase as a result of that. And then on the negative side, I think that maybe some projects that maybe we hadn’t deemed them as very likely in the first place, but let’s say that the project developer’s income has been reduced to a certain level at current, that would make it more difficult for them to pursue this project. I do think that we will see some potential LNG projects that will be postponed or kicked further down the road as a result of that. At the same time, I think it’s very important that when we look at the LNG production forward curve, we should understand that at least based on the projections that we have made that the majority of that are terminals that are already under construction. If we add up all terminals that are under construction right now, we get to a very significant amount. And as we know, LNG is a commodity that it’s not so easy to adjust production. When you produce, you have to produce it and when you produce it, you have to lift it on to an LNG carrier irrespective of what the prices onboard the ship. So I think that in the long-term, I think actually the price reduction has been a bit healthy. It has cleaned out projects that were maybe not so likely in the first place.

Can you give us your estimate of how many vessels the market is currently over supplied? We saw that in 2014 there were plenty of ships that they were delivered, but the ramp up in new liquefaction facilities starts towards the end of this year. Between 2014 and 2015, how many more vessels that have been delivered compared to what is needed in the market. And at what point do you expect that these vessels will be absorbed in order to see the market balancing?

Okay, thank you. It’s difficult to give an exact answer to that. What we do know is that the majority of the order book has already been employed. We estimate that about 80% or so of the order book is already fixed out. So that doesn’t leave too many vessels to be employed for various opportunities. When we look at vessels that are coming off charter going forward because that’s also very important, we realize that about 30% or so of the existing fleet is what we can consider substandard in today’s environment. Vessels below 140,000 cubic meters, it doesn’t really have a lot of carrying capacity to support the long hauls that we see the need for today and going forward. So we do think that a lot of these vessels will fall -- well, let’s say they will not be renewed for charters. A lot of the more modern and better suited vessels, they will be reprogramed for term. I do think that it’s an ongoing rebalancing in the market where we will see good tonnage being programmed for term, older tonnage that doesn’t have any special features etc., they will be dominating a short term market. I do think that toward the mid of this year and certainly into the second half of this year, I expect the short-term market to improve quite a lot due to the incremental volumes and also reprogramming of the fleet.

Thank you, Tony. Following up on your answer about the vessels that are substandard vessels and the fact that it seems that most of the new buildings have been deployed, can you talk to us about the difference between the vessels and their rate capabilities? And I'm talking not only about the older vessels, the first generation vessels, but also about the steam turbine vessels. What kind of rates shall we expect, especially since in the next two years, 2.5 years, you have also a couple of ships, steam turbine ships that they have to be renewed, actually one of them if I'm not mistaken?

What we deem more important is size versus propulsion. In particular with low bunker prices, low fuel cost, the propulsion technology is less important. We have proven that for example the 150,000 cubic type carriers that we have that they are very, very suitable for a particular project. Last year we concluded a long term contract on the Clean Force for 13 years because also we have very particular features. Again we don’t operate only in the conventional shipping market. We operate also, we have the full optionality to operate in ice bound areas. We do think that the need for this kind of tonnage will just be increased going forward in particular with the Arctic LNG production project. That is something that I think really differentiates ourselves from the rest of the peers and we have proven that we can profit on that. I do think that in general for vessels that don’t have particular features, I think that there may be a gap between various propulsion types. Although it's very difficult to qualify what that gap is, but again I think that size is more important than the propulsion on the vessel.

If you have to give -- and I'm not talking your vessels which are ice class vessels, I'm talking about non-ice class vessels, if you would have to give a range of potential discounts vis-à-vis the new building vessels, what would that be?

It's too difficult to give a general answer to that. I think it's so individualistic. When the vessel is needed sometimes, a vessel is needed to carry cargo irrespective of the propulsion type.

Fair enough. And my last question has to do with a lot of noise that exists in the market right now regarding the risks involved in two LNG shipping. And also, and I'm talking about in relation to Gazprom and exposure to a Russian company. And secondly in regards to the Greek economy and the fact that many of the shipping companies are located in Greece, can you address a little bit these kinds of risk, how much is justified and how much is just noise?

Yeah. So when it comes to for example Gazprom and the Gazprom charters that we have, there has been put in place some sanctions today and these do not affect us at all. We will always adhere whatever sanctions that there are. And today there are nothing that disturbs our relationship with our charterer. I think it's very, very important to look into the construction of the political noise and the sanctions that have been in place and they look like they’re structured to deliberately omit the gas segment. And the reason for that is that in the European Union, the countries in the EU are very, very dependent on gas from Russia via pipelines. It is crucial for the European economy. So to put in place anything that would jeopardize gas deliveries from Russia to Europe would be very, let’s say anti-productive. And we have clearly seen that yes, that there has been a real omission on patching this subject. So we don’t -- when it comes to our Gazprom charters, everything is business as usual. There is no change. The body language that we rather see from companies such as Gazprom is their willingness to do more LNG projects. Time will tell, but at the moment and the way that we see it, there are no issues that are affecting our company. When it comes to the Greek new government and the political situation there, also at the moment there is nothing on a company level that would disturb us.

Thank you very much. Operator. [Operator instructions] the next question is from the line of Gregory Lewis from Credit Suisse. Please go ahead.

Yes, thank you and good afternoon. Tony, I just wanted to touch a little bit more on slide 15, where you reference the implied LNG carrier demand. Just roughly speaking it looks like there’s incremental demand for let’s call it 100 LNG vessels out in the market. In thinking about how the sponsor is positioning itself for, let’s call it the next phase two of the drop down cycle, is there opportunities for the -- is the sponsor activity looking at opportunities to take new building capacity at shipyard right now based on this? And what I’m saying is, could you give us an outline of how many tenders are out in the market and how many vessels are potentially being marketed currently?

It's a little bit difficult to add up exactly those tenders that are needed or on the market, but what we can say is that I think that when it comes to further contracting etc. because the need is there for tonnage going forward, I would not be surprised if we see the next wave of ordering with charters attached.

I mean, and just as we look at the five vessels you have that are targeted for dropdown, is there something where we could potentially see a gap in 2017, 2018 where then maybe the sponsor looks to vessels that are on the water that are potentially for sale to provide another leg of growth to Dynagas Partners?

Absolutely. We are not looking at only what our sponsor can provide. We are also monitoring what is available on the market. I think that there could be opportunities where there is a low oil price and projects that are owners of LNG carrier would seek a way of releasing capital by selling vessels and chartering them back because they would still need the vessel. I think that we’re in an interesting market where there could be various opportunities going forward.

Okay, thank your very much for the time.

Our next question today is from the line of Ari Rosa from Bank of America. Please go ahead

Hey guys, good morning and thank you for taking the call. Congratulations on a solid quarter. Just wanted to ask about the vessels, the five vessels there that are targeted for dropdown. What's your thinking around what’s going to determine which vessels get dropped down, when and what’s going -- just the timing around that? Is it really just based on securing long term contract for those vessels or is there something else?

Right now from the sponsor, the sponsor has two vessels which have long term contracts. One of them is already trading under its long term contract. That would be I guess the prime candidate. And the next one would also be the next one which is fixed. We do have a certain idea which vessel will be dropped down next. But we don’t have a specific idea in terms of timing. What we do say is we will do two vessels this year.

Okay that’s helpful. And then just you’re obviously a little bit above your target on leverage. Is there any risk that that could contain any of that activity?

No, not at all. As I previously said, we’re planning on going forward having slight deleveraging. We are at the upper end of where we want to be, although theoretically we could increase it further, but we don’t want to. Going forward as I said, we would like to have around 55% to 60% equity for our drop downs on average

Okay. And then just my final question is, you’d mentioned that you guys are expecting a short term improvement in rate. I just want to understand a little bit better, is that conditional on anything, say an improvement in commodity prices or is that seasonality or what’s the logic behind that?

Going forward, as we see more incremental volumes coming to the market needing to lift that by vessels, we do think that that will increase the charter rates on the short term market going forward. We think that basically new incremental LNG, coupled with vessels that are coming off charters that are not as competitive and quite small, we think that these two items are the main drivers behind charter rate improvement on the short term market.

To go on that point, in term of incremental volumes coming online versus the order book of 150 vessels, how does the timing of those two things line up in terms of when the current order book comes online? Do you have a sense for that?

Yeah. On slide 15 on the graph there to the right you’ll see that there we have the growth let’s say over time in the fleet. And we do -- according to our analysis also, we expect actually a substantial amount of LNG, maybe equal to 60 million ton or so to be delivered per annum by the end of 2016, maybe slide into 2017. We think that it could be quite a prompt improvement in charter rates. The reason for that is that most of these Australian projects are very well underway as we understand the, let’s say the least developed project is more than 50% complete. We do expect this project to come on stream on time.

Okay, great. It sounds like starting really with 2016, it sounds like the incremental volumes really begin to exceed the existing order book. Is that fair to say?

Yeah. I think -- yeah, 2015, 2016, I think that’s fair to say. But also we have to figure in that also that in the existing fleet there are a substantial number of vessels that are let’s say sub-standard in today’s market. We think that could also be a driver for improvement in rates earlier.

Okay, terrific. That’s really helpful. Thank you for the time.

Our next question is from the line of Theresa Chen from Barclays Capital. Please go ahead.

Good morning. I have yet another question on that slide 15 regarding the supply and demand for LNG carriers. The shortfall of 112 vessels by 2019, in terms of your competitive advantage in ice class winterized vessels, what percentage or how many of those vessels do you think will necessitate that specific feature?

In the order book today there are very, very few vessels that have the notation that we have except from the fleet that has been contracted to Yamal LNG which is something that we call ARC7 type vessels that are even more heavier ice class than ours. But these vessels are only to be operated in ice bound areas and cannot efficiently be used outside ice bound areas. We have not really seen -- I think maybe one other vessel has been ordered that potentially has ice class winterization features similar to our vessels. I think that on a worldwide fleet basis, our partnership and our sponsors’ fleet would completely dominate that market.

Okay. And also with regard to the 405 vessels in the existing fleet, you've spoken about 30% of that is substandard due to size. How many more do you think of that 405 would be substandard by 2019 due to age? How many of them do you think will need to be scrapped?

I don’t know if all the ones that are substandard need to be scrapped. Maybe some of them will be used as floating storage solutions or having these trades etc. But by the time we -- I don’t think that it will change too much the number as we go into 2019 because we are not really looking at age, we are looking at size. And I think that the actual number of vessels being let’s say below 139,900 cubic meters, which we have based this on, there will still be as many potentially in 2019, unless they get scrapped as you say. I do think that we will see scrapping activity accelerating into the next years, but in what magnitude is very difficult to say. But certainly, if we were the owners of 1970s, 80s, the tonnage that was 120,000 cubic meters, I think that unless you have a very dedicated project for them, I wouldn’t see it as very feasible to project these ships on long-term with major companies.

Got it. Thank you very much.

At this time there are no further questions.

Thank you, everybody. We would like to thank you for your time and for listening in on our earnings calls. Thank you very much.