Dynagas LNG Partners (DLNG) Q3 2018 Earnings Conference Call Transcript

Dynagas LNG Partners (NYSE: DLNG)
Q3 2018 Earnings Conference Call
Nov. 16, 2018 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by, ladies and gentlemen, and welcome to the Dynagas LNG Partners conference call on the third-quarter 2018 financial results. We have with us Mr. Michael Gregos, chief financial officer of the company. [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 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 now I pass the floor to Mr. Gregos. Please go ahead, sir.

Michael Gregos -- Chief Financial Officer

Good morning, everyone, and thank you for joining us in our third-quarter earnings conference call. We have issued a press release announcing our results for the same period. Certain non-GAAP measures will be discussed on this call. And we have provided a description of those measures as well as a discussion of why we believe this information to be useful in our press release.

Moving on to Slide 3 and the recent developments, in August, the Yenisei River upon completion of its mandatory five-year special survey and dry docking was delivered earlier than anticipated to its charter contract with Yamal in order to serve the Yamal LNG project, with the firm charter period being extended from 15 years to fifteen and a half years. In addition, the Arctic Aurora entered its extended time charter contract with Equinor, and following this contract all of the partnership vessels are contracted as we will describe later in the presentation. On October 23rd, we closed our Series B preferred units offering and received net proceeds of $53 million. And on October 11th, the partnership announced a quarterly cash distributions of $0.25 per common unit in respect to the third quarter of 2018, which was paid on October 26th.

Moving on to Slide 4, the results of the quarter met our expectations as fleet utilization was 99% and operating expenses and the dry dock of the Yenisei River were below budget. For the quarter, we generated $7.5 million in distributable cash flow and $23.5 million in EBITDA. We are pleased with the performance of our manager as the vessel daily operating expenses came in at $11,600 per day per vessel for the quarter versus $11,200 for the corresponding period of 2017. And the cost of the dry dock of the Yenisei River ended up at $2.4 million, which is $1 million below the budget with only 16 off-hire days.

For the quarter, our average gross time charter hire on a cash basis amounted to about $60,000 per day per vessel whereas our cash breakeven, excluding our distributions to preferred and common unitholders and our dry docking costs amounted to about $40,000 per day. During the past two years, all of our vessels have completed their five-year mandatory class special surveys and dry docks while at the same time, they are gradually transitioning into their previously entered into long-term contracts. In October, the Lena River completed its dry dock and subsequently entered its interim prime charter with a U.S. energy producer pending for delivery to the Yamal contract next year.

Following the completion of the Lena River special survey and dry dock in October, the partnership has no scheduled dry docks until 2022. Moving onto Slide 5, for the quarter our distributable cash flow available to common unitholders after payments preferred unitholders amounted to $5.8 million, and we paid $8.9 million in cash distribution to our common unitholders, resulting in a distribution coverage ratio of 0.66 times. For the quarter, we had cash coverage ratio of one time with cash coverage representing adjusted EBITDA less interest, loan principal and preferred equity dividends, divided by actual distributions to common unitholders. As previously advised, our distribution coverage was expected to be -- need to be below one time with the current distribution being partly funded by cash on hand.

Moving on to Slide 6, there is a high level of visibility and predictability in our future cash flow generating capacity, given that all of our LNG carriers are employed in long-term contracts with an average contract duration of approximately 10 years. Our simplified debt structure is composed of $474 million Term Loan B, which is amortizing annually by $4.8 million and which are the floating interest rates, and $250 million unsecured notes, which mature in October 30, 2019 and which we expect to refinance in advance of their maturity. Our capital structure also consists of $130 million in preferred equity consisting over 9%, $75 million Series A preferred, and our 8.75%, $55 million Series B preferred issued last month. At the end of the quarter, we had liquidity of $89.5 million and the net debt to last 12 months EBITDA of 6.6 times.

Our net debt to total capitalization amounts to 62% pro forma or $55 million preferred equity issuance, which is an improvement in the previous quarter. With respect to the refinancing of our $250 million unsecured notes, we are exploring a number of alternatives and are keeping all of our options open. As part of this exercise, we are currently performing a strategic review, which will also encompass our financial objectives with respect to improving our financial credit profile, our liquidity, and growth prospects. Moving on to Slide 7, our fleet currently counts six high specification and versatile LNG carriers with an average age of about 8.3 years in an industry where expected useful economic lifetime is 35 years.

Our long-term contracts with Gazprom, Equinor, and Yamal LNG, a joint venture between Total, CNPC, Novatek, and the Silk Road Fund serve well-established LNG export projects in icebound areas. Our clients have entered into long-term offtake agreements with LNG users, and our vessels are vital to their efforts to monetize their production of natural gas. Our $1.4 billion in remaining contracted revenue and over 10 years of average remaining contract life provides the partnership to the benefit to stable cash flows and high utilization rates. Our contract backlog amounts to $230 million per vessel, which is best in class on a per vessel basis versus our peers.

Our fleet is fully contracted through 2020 and 92% contracted in 2021 assuming that Equinor does not exercise its option to expand the Arctic Aurora contract. Beyond 2021, 80% of our fleet is contracted until 2026 in which one charter expires. Thereafter, we have two charter expires 2028 and two in 2034. Moving on to Slide 8, the drivers for our long-term charters were the unique characteristics of our high specification fleet, including their Ice Class capabilities and our managers' track record.

Our fleet is able to operate across the globe, including in icebound areas and under the harshest weather conditions. This means that we are able to and have been successful in pursuing business opportunities in two different markets, mainly the conventional shipping and the unique market for icebound trades. Moving on to Slide 9, the partnership together with our sponsor has a market share of 80% for vessels with Arc-4 or equivalent Ice Class notations. We have hugely ability to trading in icebound areas as an important advantage due to the current and ongoing construction of LNG production terminals within icebound areas, and in particular, the Northern Sea route where Yamal LNG has recently commenced production.

We also expect further projects to be developed in that region. The initial capital expenditure from 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 very similar. We also expect further projects to be developed in that region.

We view the ability to perform niche operations as an important driver in securing attractive long-term charters going forward. We have inserted an industry slide in the presentation as an appendix. Since Tony Lauritzen, unfortunately, cannot be on this call, we have now reached the end of this presentation and I now open the floor to questions. 

Questions and Answers:

Operator

Thank you. [Operator instructions] Thank you. We will now take our first question. Please go ahead.

Your line is open.

Randy Giveans -- Jefferies -- Analyst

This is Randy Giveans at Jefferies. Am I connected here?

Michael Gregos -- Chief Financial Officer

Yes, hi.

Randy Giveans -- Jefferies -- Analyst

Great. All right. There's a little pause there. So I guess a few quick questions.

So regarding the Lena River, does the current contract go all the way through until the multiyear contract at the Yamal starts? And what kind of ranges that until then, like is there any all-time between the end of the current contract and the start of the Yamal?

Michael Gregos -- Chief Financial Officer

That's right. The contract that goes up till the moment that the Yamal charter is expected to commence, in July of next year, given that we understand that the Yamal meet the Lena River as soon as possible. So we don't expect any significant downtime between the two contracts.

Randy Giveans -- Jefferies -- Analyst

Perfect. OK. And then with that, what is the kind of rate of the current one?

Michael Gregos -- Chief Financial Officer

Well, I can't disclose the rate. I mean that the rate is lower than what -- than the rate that she was trading in under the Gazprom contract. All I can say is that this picture was done at the very early stages before the LNG spot market took over.

Randy Giveans -- Jefferies -- Analyst

OK. That's fair. Now are you seeing any spot rate differential? Or how much is the spread for a steam versus kind of the DFDE vessel?

Michael Gregos -- Chief Financial Officer

Well, because all of our vessels -- all of our vessels are employed, we -- and are trading under long-term contracts, we don't have any spot exposure, so any of the information that we have is not enough first-hand information. But we have seen steam turbines earning $100,000 a day in the spot market, and very modern ex-Viet maybe type vessels earning double that.

Randy Giveans -- Jefferies -- Analyst

Right. OK.

Michael Gregos -- Chief Financial Officer

That's what we have seen others doing. But because we're fully contracted, we don't have this stock exposure.

Randy Giveans -- Jefferies -- Analyst

Sure. Just trying to get a read there for the market. I guess two more quick questions. Now with the capital that you have, is an additional dropdown, maybe the Clean Ocean or another vessel likely in the next three to six months?

Michael Gregos -- Chief Financial Officer

I think our immediate focus is the refinancing of our notes. That's our immediate focus, so I can't really comment on when exactly we're going to do a dropdown.

Randy Giveans -- Jefferies -- Analyst

OK. And I guess lastly, is there any -- with the whole $250 million kind of still outstanding for refinancing that, but obviously all of your vessels, like you said fully contracted for many years. Is there any concerns, fears, questions about the current level of the distribution?

Michael Gregos -- Chief Financial Officer

Well, listen, I mean, I can only give you a general answer here. I mean, we are reviewing how to maximize value going forward. As I said, the refinancing of our notes is a high priority, but we also are concerned that we're getting a little to no credit for the current distribution. And our current equity yield has kind of hindered our ability to grow, so we will be looking at how distribution can be used to improve the equity value over time.

Randy Giveans -- Jefferies -- Analyst

OK. What about unit repurchases with that current yield of 14%?

Michael Gregos -- Chief Financial Officer

Well, unit repurchases, when we have, as I said, when we have a bond to refinance. They're not exactly on the top of our list right now. As I said, our top priority is to refinance the bonds. And given our contract coverage, we are in a very fortunate position.

We are in a very strong position. Our ships have fixed-rate contract, our operating expenses are predictable, so we know more or less what we expect to generate in terms of the cash on steady state basis over the next couple of years.

Randy Giveans -- Jefferies -- Analyst

All right. Well, that's it for me. Thanks again.

Michael Gregos -- Chief Financial Officer

Thank you.

Operator

Thank you. We will now take our next question. Please go ahead. Your line is open.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

Yes. Hello. This is Fotis Giannakoulis from Morgan Stanley. I would like to ask you about the impact that you might have noticed in the market from the increase in the Henry Hub price the last few weeks.

I understand that you do not have vessels actively employed in the spot market, but I assume your customers, they transport cargos worldwide, if you have seen any impact on the spot trade on the one hand and if you think that this can have any implications for the producers around the world and giving new momentum to projects in Russia, given your strong relationship there?

Michael Gregos -- Chief Financial Officer

Yes -- no, Fotis, hi. We don't really have that much spot exposure, so the information that we have on the impact of the -- we haven't seen -- we don't have any first-hand information on what the short-term impact have been on the shipping side only by the increase of Henry Hub. Having said that, obviously, an increase in Henry Hub is being very supportive for future LNG projects, and it's definitely -- it underpins the positive fundamentals of this industry.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

And do you think that projects outside of the U.S., they might have tried to take advantage of this increase? Do you see more momentum on projects like the Arctic project, the expansion in Russia? And also, Qatar has announced that they are going to bring online a large expansion in next few years. Are there any discussions right now for potentially securing tonnage with a long-term contract is something that you would be able to participate?

Michael Gregos -- Chief Financial Officer

Definitely. On the Arctic LNG 2, that's a project, which will happen. There are a few transitions for the exports of LNG coming out of Russia. And given how the Yamal project materialized in very, very difficult circumstances, we can feel very, very confident that these projects will materialize irrespective of where Henry Hub prices are.

I mean, these are projects which will happen. And obviously, given the relationship, we would very much hope to be a part of this process to provide shipping for this project. Now as far as Qatar is concerned, obviously, Qatar is the largest producer in the world. And there are ambitions in the Russians to increase LNG production dramatically, but we haven't seen anything from our side and any shipping requirements from the Qatari side.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

And I have found that your sponsor is involved in the FSRU market with new billing FSRUs. In the last couple of years that has been a market with a very little activity, if any. Has this changed? Do you see projects reaching FID and contracts being awarded? How is the situation there? What is the supply demand market in the FSRU market?

Michael Gregos -- Chief Financial Officer

Yes. So we have FSRUs for delivery in 2021. I mean, there are projects out there which we're looking at. There is activity.

Obviously these projects, they take the long time to materialize. And we have seen -- there may be a compression in the economics of these projects, and also on the period side but it's also very specific on the project-by-project basis.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

And one last question, given your group's involvement across different sectors and also your focus on the LNG, I guess one of your peers was questioning the available returns on long-term LNG sipping contracts. They think that they are not very attractive buying an LNG carrier and putting it into a multiyear contract. Is this your view? Do you see that there is some return compression or some increase in the cost of capital that makes long-term charters not particularly attractive? Is there any sort of a potentially given the strengthening of the spot market trying to have a more exposure in the spot market if it's possible?

Michael Gregos -- Chief Financial Officer

It's true. I mean, on the conventional shipping side, I mean, the deals that we have seen, the economics are not something that we would do. But -- so it is true that there are very slim margins in, let's say, in the conventional LNG business, and this is why we're very active in this niche Ice Class trade where the economics are obviously much better. The spot market is very interesting.

I mean, obviously, everyone knows that the spot market is extremely strong. Obviously, we're not actively involved in this market, but -- and I cannot say that we will actively get involved in this market. But all I can say that it is -- we believe that at least in 2019, the spot market will continue and maybe in 2020, we will see a reversion to more normalized rates.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

Thank you very much, Michael.

Michael Gregos -- Chief Financial Officer

Thank you. Bye.

Operator

[Operator instructions] Thank you. There are currently no questions in the queue, sir.

Michael Gregos -- Chief Financial Officer

OK. Thank you for -- so that wraps it up for the third quarter call. Thank you very much. And we'll see you next quarter.

Operator

[Operator signoff]

Duration: 24 minutes

Call Participants:

Michael Gregos -- Chief Financial Officer

Randy Giveans -- Jefferies -- Analyst

Fotis Giannakoulis -- Morgan Stanley -- Analyst

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