Dynagas LNG Partners LP (DLNG) Q1 2019 Earnings Report, Transcript and Summary

Thank you for standing by, ladies and gentlemen, and welcome to the Dynagas LNG Partners' Conference Call on the First Quarter 2019 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 will be a presentation followed by a question-and-answer session [Operator Instructions]. I must advise 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 provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties, which may differ and 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 now I pass the floor to Mr. Lauritzen. Please go ahead, sir.

Good morning, everyone. And thank you for joining us in our first quarter ended 31 March, 2019 earnings conference call. I'm joined today by our CFO, Michael Gregos. We have issued a press release announcing our results for the period. Certain non-GAAP measures will be discussed on this call. We have provided a description of those metrics, as well as a discussion of why we believe this information should be useful in our press release. Let’s move to Slide 3. Our net income was reported at about $1.9 million for the quarter and adjusted EBITDA was reported at $21.7 million. Distributable cash flow for the quarter ended up at $5.8 million. Furthermore, we reported free cash of $112.3 million and available liquidity of $142.3 million each as of March 31, 2019. Subsequent to the quarter, we paid in May 2019, a cash distribution to common unit holders of $0.0625 in respect of the first quarter of 2019. We also paid in May a quarterly cash distribution of $0.5625 for Series A preferred units for the period from February 12, 2019 to May 11, 2019, and the quarterly cash distribution of $0.541116 [$0.546875] (sic) for Series B preferred unit for the period from February 22, 2019 to May 21, 2019. On May 31, 2019, one our vessels, the Lena River, completed her multi-month employment with a major energy company and is currently ballasting enroute for delivery to her multi-year charter with Yamal LNG, which is all lined well expected to occur on about 1st of July, 2019. I will now turn the presentation over to Michael who will provide you with further comments to the financial results.

Thank you, Tony. Going to Slide 4 of the presentation, the operations of our fleet during the quarter were within our expectations with our vessels utilization being 100% and adjusted EBITDA amounting to $21.7 million. For the quarter, five out of our six LNG carriers were trading under their previously announced time charters with the exception of the Lena River, which was trading under an interim short term time charter standing for delivery for 15 years Yamal time charter in early July. Our EBITDA for the quarter reflects the fact that this interim short term Lena River time charter was at the lower contract rate than her previous gas from contracts, and also her upcoming Yamal contracts. Once the Lena River enters her 15 years Yamal contract, we expect a slight uptick in EBITDA to about $24 million per quarter, which we believe will be reflected in our financial results from the third quarter onwards. Operating expenses came in slightly higher compared to prior quarter, primarily due to scheduled replenishment of spare parts for the Yenisei River. However, please note that the Yamal time charter contracts are on an operating costs pass-through basis, meaning that our charters take all operating expenses as reasonably incurred. Moving on to Slide 5, distributable cash flow for the quarter amounted to $5.8 million, and common unit distributable cash flow coverage came in at 1.3 times. Cash coverage for the quarter came in at 2.7 times as a result of our minimal debt amortization. Slide 6, our top priority continues to be the refinancing of our $250 million unsecured notes, which are maturing in October 2019. We are in an advance stage with commercial banks and other capital sources to fund the payment due on the maturity date of our notes and refinance our $470 million Term Loan B. We are cautiously optimistic that we will be successful in concluding this financing transaction. However, we cannot assure you we will do so as we have not yet received the requisite commitments from all new lenders. The process of planning the requisite commitments have been quite long, which may be attributed to the size the transaction and a number of banks involved. This re-financing transaction require entire indebtedness, if consummated in its contemplated form will require the partnership to make significant quarterly debt repayments, restrict us from using part of our cash and eliminate distribution to common unit holders, but will not affect the distribution to the Series A and Series B preferred unit holders. This contemplated transaction is consummated as contemplated and will also reduce our cost of debt compared to the cost of our current Term Loan B, and achieve our objectives of de-levering and building equity value for the long-term. We believe this financing transaction is in the long-term interest of the partnership, and would like to mention that the quality of our fleet and the long-term charter cover we have secured for our vessels has been instrumental in our ability to pursue this refinancing. Moving on to Slide 7, as stated earlier, our LNG carriers are employed on long-term contracts. Once the Lena River enters her 16th year contract in the third quarter of this year, we estimate our 12 month forward run rate EBITDA will be about $96 million to $97 million per annum as previously described in prior presentations. If we deduct about $11.5 million in distribution to Series A and Series B preferred unit holders, we are left with about $85 million in cash flow available for debt service. Our current level of debt service payments, which for the quarter was $13.5 million or $54 million on an annualized basis, reflect our current non-amortizing debt and are not a guide of future debt service payments, which will increase materially if as part of our refinancing we transition to rapidly amortizing debt. To conclude, in terms of timing of our refinancing, of course we are committed and hopeful we will conclude this refinancing within the next two months. Although, we cannot give any assurances that this will be the case. That wraps it up from my side. I'll pass the presentation over to Tony.

Thanks you Michael. Let's move on to Slide 8 to summarize the partnership's profile. Our fleet currently accounts six LNG carriers with an average age of about 8.8 years. We have a diversified customer base within international energy companies namely Equinor, Gazprom and Yamal LNG, which the latter is a joint venture between Total, CNPC Novatek and the Silk Road Fund. Our contract backlog is about $1.35 billion and our average remaining charter period is about 9.3 years. Moving on to Slide 9, our fleets of LNG carriers are fixed on long-term charters with international energy companies. We believe the drivers for our charters were the characteristics of the fleet, including their Ice Class notation and our organization's performance track record. All the vessels are employed on time charter contracts under which the charter paid for all major voyage-related variable costs such as fuel, canal fees and terminal costs. Our counterparties are mainly active strong LNG producers that are typically able to forward program the vessels for periods of time, which gives us a degree of planning ability and cost control. Our fleet is estimated to be 98% contracted in 2019, a 100% in 2020 and 92% in 2021. The Lena River completed her charter with an undisclosed energy major on 31th of May 2019 in China, and the vessel has commenced her ballasting voyage through Europe where the vessel will be delivered into her long term charter the Yamal LNG on or about 1st July, 2019 all going well. The previous charterers will pay a ballast bonus equal to fuel and hire from China to Singapore from which the location the continued ballasting will be for the partnership's accounting. Our earliest vessel availability is now the Arctic Aurora, which will be free in 2021 provided that Equinor does not exercise their option to extend the contract. And so far the vessel has served Equinor with good feedback and results. Moving on to Slide 10. We have a unique fleet and versatile fleet. Five out of the six vessels in our fleet have ice class 1A notation. Therefore, the fleet can handle conventional L&G shipping, as well as operate in ice bound and subzero areas. Initial capital expenditures for an ice class vessel is somewhat more expensive than conventional carriers. However, the operating costs between our ice class type carriers and conventional carriers are similar. To our knowledge, we estimate that the company together with our response has a market share of about 82% for vessels with Arc-4 or equivalent ice class notations. To our knowledge, there are only two other LNG carriers in the world with the equivalent notation, which are chartered out in the long-term. We believe the added ability to trading ice bound areas, an important advantage due to the increased production of LNG in ice bound area and in particular along the northern sea routes. Yamal LNG has commenced production of their mega project, and we also expect further projects to be developed in that region. We view the ability to perform conventional and meet operations as important driver in securing long-term charters. Our fleet is designed for wide terminal compatibility, which we believe is of importance in a market that is changing from a fixed route trade to a worldwide trade, and the vessel and the fleet consists of group of sister vessels, which we believe provide for overall relatively better economics and efficiency. We have now reached the end of the presentation. And I now open the floor for questions.

Thank you [Operator instructions]. And our first question comes from the line of Sandy Burns from Stifel. Please go ahead your line is now open.

Just wanted to follow up on your commentary about the financing, you mentioned the size of transaction and number of banks have been -- some of the issues you've been facing in completing it. Wondering if you could just maybe give some further color in terms of the process and why some of these institutions are taking as long as they have? Is it the counterparty risk, macro environment, perceived concerns about the vessel quality? Any other color you can provide in terms of how the process is working its way through?

There is nothing unusual in the process. And typically, with the very large transaction, let's say, for the commercial or that banking market. So when there are many banks involved, each bank has its own timeline and its own processes. So we have to satisfy all these banks' processes and timelines. And I think it’s the number of banks primarily, which are involved in this quite large transaction, which is the reason for the processing taking a bit longer than usual.

Could you share with us an estimate of how many banks are you talking about over 10, over 20, or something you'd rather announce otherwise?

I can give you some color. There's three lead banks and how many banks we will end up with, we don’t know yet but it could be up to 10 banks, it could be possibly.

And one last question from me just also in terms of what you are working on with the group of lenders. Does any of this involve any of the vessels up at the parent at this point in time, or the financing is strictly against the six vessels that are at DLNG?

The financing is strictly over the six vessels of DLNG, it has nothing to do with the parent.

Thank you. We'll now take our next question from the line of Mike Webber from Wells Fargo. Please go ahead your line is now open.

So I wanted to ask you that you're expecting to release around once you are through with the refinancing being able to focus on new projects. And if we make the assumption that you’re able to refinance the near term maturity and the distribution is good at zero. So what realistic liquidity would you guys have to play with to go out and look at new business, and how would you facilitate that? It’s not I got a question, it's just I'm just trying to figure out what remuneration you're playing with in that scenario?

Our plan is that there was a slide in the presentation which showed we have, let’s say, essentially $85 million of cash available for that service. And we do envision the majority of that cash being used to service debt and principal and interest. I think once we deliver -- as we utilize our secured cash flow to pay down debt, our capital structure will improve. And eventually we believe that these actions will, in the longer term, lead to an increase in our equity value, which might give us an opportunity to issue attractive new price debt and equity and thereafter be focused to grow the partnership.

So you’re talking about organically de-levering at the refinancing point where currency is viable to then go out to grow. And that just seems like that being pretty elongated timeframe…

We have these six assets. They are on automatic pilot essentially significantly reducing debt. And it will give us an opportunity to, as we deleverage, to improve our capital structure and then thereafter we’ll be able to look at growth prospects.

The direction I was going is with the relationship with the parent, and I asked this last quarter and just to follow up on it in terms of. What role is the parent playing right now in facilitating the refinancing? And then I've got a follow up to that. But just within the context of -- any moving pieces to the story for a couple of years now, and the parent has been there. So I guess I'm trying to think about the context of what role the parent is playing now and facilitate the re-financing to stop the bleeding versus being, want to step in to sell assets once the equity is devalued?

Well, Mike, the sponsor has the material holding in the partnership, since it owns 44% of the partnership's common unit. And it has not bought or sold one common units since the partnership's IPO in 2013. So, although, we cannot speak for the sponsor, we believe that if it is required, the sponsor will consider supporting the partnership as part of the sponsor's financial resources allow. And we think it's still premature to comment on what form of support this could take given at this stage the financing transaction we work does not require the sponsor's financial support. Although, we have to add as they're asking that the sponsor's longstanding relationship and reputation in the banking sector have been instrumental in this process. And also, having said that under the contemplated financing, the sponsor is required to maintain certain ownership stake in the partnership.

And we know it's tough for you to speak for the people, but if I look at the last two to three years and I look at the equity chart, at some point, I would have thought that sponsor would -- the idea that the sponsor is required to step in. Is it literally the precipice of the default in which the sponsor feels compelled to step in? And at what point is there a trigger where they say, hey, maybe I want to take this equity value, because we have been hearing the same thing for a couple of years and stock going on one direction…

Well, I mean, the sponsor is owned by a very traditional shipping family, which it doesn't typically speculate or invest in stock. And this is one of the reasons why the sponsor has not bought or sold one share since the partnership's inception. I think it's a little farfetched what you say regarding a default. I mean, in reality the free flow of our common units is very limited. And the sponsor is accumulating more shares prefer the limit trading of our common units. And the sponsor does have a significant material holding in the partnerships. It owns 44% of the partnership's common units.

I understand that. But I'm just trying to think about context, which we think about the relationship with the sponsor if there is no willingness. I guess, you can frame it as a traditional ownerships structure but they're not going to step in to back stop the existing equity value at any point in the last couple years. But then maybe once we get past the refinancing, they are willing to take back the de-valued equity for a drop down. It doesn't seem as for other common shareholders as we think about how I would think about that relationship?

Well, I mean, that's an opinion you have. I mean the reality is the partnership on its own can stand on its own legs. It does not require the sponsor support. Given the impression that we need the sponsor support but we do need it. I mean, this financing can be done on our own. And as Tony said, if it is required, the sponsor will support the partnership as far it's financial resources allow.

It appears we've no further questions at this time. Speaker, please continue.

Well, thank you to all for listening in on our conference call. And we look forward to speaking with you next time.

Sorry, we just have one further question from Randy Giveans. Your line is now open.

So quick question from me just time to get an expected timing for the current distribution in terms of when the last one will be paid. Will that be passing this quarter or will there be another one or two payments before you have to discontinue that distribution?

I mean, that will depend on when the outcome of this refinancing. I can't really comment on that. As we said before, we hope this refinancing is finalized during the next two months. So we will be able to answer that question at that point in time.

And then one more question. Any updates on Yamal LNG projects, specifically with the Lena River that’s supposed to commence, I believe next month. Is that still on schedule?

Yes, still on schedule. The vessel has being released from her previous charter and in route ballasting to Europe actually will deliver on or about first of July all going well in to Yamal LNG.

No further question [Technical Difficulty].

Thank you very much to all.

Thank you. That does conclude the conference for today. Thank you all for participating. And you may now disconnect.