Dynagas LNG Partners LP (DLNG) 2014 Q1 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to Dynagas Energy Partners' conference call on the first-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 will be a presentation followed by a question-and-answer session. (Operator Instructions).

I must advise that this conference is being recorded today, Friday, May 16, 2014. 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 Energy Partners' business prospects and results of operations. Such risks are more fully disclosed in Dynagas LNG Partners' filings within 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 2013 earnings conference call. I am joined today by our CFO, Mr. Michael Gregos.

Turning to slide 3 of the presentation, I will review some of the recent highlights for our fleet of three LNG carriers. Yesterday, we issued a press release announcing our full quarterly results. Certain non-GAAP measures will be discussed on this call. 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.

We are pleased with the results for the first quarter of 2014. The Partnership reported distributable cash flow of $12.3 million in the first quarter of 2014. The Partnership also reported adjusted EBITDA for the first quarter of 2014 of $16.3 million compared to $16.8 million for the first quarter of 2013.

Finally, the Partnership reported net income attributable to unitholders of $11 million for the first quarter of 2014, compared to $11.2 million in the same period of 2013.

Turning to slide 4 -- on April 17 this year, we entered into a new 13-year time charter contract with Gazprom Marketing & Trading Singapore Pte for the Clean Force. In addition, we have entered into an agreement with BG Group to the current charter of the Clean Force to amend, at no cost to the Partnership, the expiration date of the current time charter contract from the third quarter of 2016 to the July 2015, at which time the new Gazprom contract will take effect. The new Gazprom charter is expected to increase our average TCE rates, calculated for a period of 12 months following its commencement, to about $78,200 from an average of about $76,150 per day per energy LNG carrier, based on the Partnership's three existing vessels.

This contract demonstrates the Partnership's strong commercial relationships. Not only will it increase our average contract term from three years to 6.8 years, but it also secured a very attractive rate throughout the 13-year term of the contract.

For our first quarter operations, we declared and paid on 12 May, 2014, a cash distribution of $0.365 per unit for the quarter ended March 31, 2014, which corresponds to an annual distribution of $1.46 per unit, and consistent with our cash distribution policy with the Partnership's current fleet of three vessels.

As you may know, we have recently announced the acquisition of our first drop-down LNG carrier from our sponsor, namely the Arctic Aurora, a 2013-built, 155,000 cubic, ice class LNG carrier. The Arctic Aurora acquisition is subject to the Partnership obtaining the funds necessary to pay the purchase price, and the satisfaction of certain closing conditions.

We have also entered into a $340 million new senior secured revolving credit facility, which is conditioned on the closing of Arctic Aurora acquisition. A portion of the amount will be drawn to partially finance the Arctic Aurora acquisition, and a balance to refinance the $214.1 million currently outstanding under our existing senior secured revolving credit facility that is secured by the three vessels in our fleets.

Turning to slide 5, we will discuss the Arctic Aurora acquisition. The Arctic Aurora will be acquired for an aggregate purchase price of $235 million. The acquisition will be funded with a contemplated public offering of our common units, and partial proceeds from the new $340 million senior secured revolving credit facility. The Arctic Aurora is a 2013-built, 155,000 cubic, [initial] ice class IA and winterized LNG carrier, currently operating under a five-year charter with Statoil of Norway that commenced in August 2013.

The Arctic Aurora acquisition is conditioned on the closing of our follow-on equity offering. The Board of Directors of the Partnership, and the Conflicts Committee of the Board, have approved the Arctic Aurora acquisition.

There are three key points I would like to highlight in connection with the Arctic Aurora acquisition. Firstly, the Arctic Aurora is expected to generate total contracted gross revenue of about $117.2 million, excluding revolving option to extend, and assuming full utilization for about 4.1 years which is the remaining term of the charter, based on the earliest contract expiration baked in for July 2018.

Secondly, during this initial term, annual gross revenues from the Arctic Aurora will be about $28.3 million. And, finally, annual net cash from operations will be about $21.7 million.

Following the completion of this acquisition, the Partnership's management intends to recommend to the Board an increase in the Partnership's quarterly cash distribution per unit of between $0.0225 and $0.0275; or annualized between $0.09 and $0.11 per unit; which would become effective for the distribution with respect to the quarter ending June 30, 2014, on a pro rata basis, after giving effect to the Arctic Aurora acquisition.

Therefore, pro forma, the Arctic Aurora acquisition, we anticipate our run rate annual distribution to increase from $1.46 to between $1.55 and $1.57 per unit, representing an increase of about 7%. Pro forma the acquisition, this provides for an effective yield of about 6.8% based on yesterday's closing price.

Now, I turn over the presentation to Mr. Michael Gregos, to provide you with a financial update.

Thank you, Tony. I start on slide 6. We were pleased with our operational and financial performance during the first quarter of 2014, which was in line with our forecast. Voyage revenues were $21 million for the first quarter of 2014 compared to $21.1 million for the first quarter of 2013, stability of revenues being the key characteristic of our Partnership due to our contract coverage.

Vessel operating expenses for the first quarter of 2014 decreased by 2.5% to $3.1 million, from $3.2 million for the first quarter of 2013. Operating expenses on a per vessel basis amounted to $11,500 per day for the first quarter of 2014 versus $11,863 per day in the same period in 2013.

As was expected, G&A expenses were higher for the first quarter of 2014 due to increased costs associated with being a public company, amounting to $580,000 compared to $23,000 for this corresponding period in 2013.

Net interest expense decreased by 19.6% to $1.9 million for the first quarter of 2014, mainly due to our lower debt outstanding as compared to the same period in 2013.

And that brings us down to net income attributable to Dynagas Partners of $11 million for the first quarter of 2014, or $0.37 per unit, compared to $11.2 million for the first quarter of 2013. The primary reason for the slight difference in net income are the higher G&A expenses, which were partially offset by lower interest expense.

Turning to slide 7 for an overview of our balance sheet, we have cash liquidity of $30.8 million as of 31st of March. We are in compliance with all of our debt covenants. Our outstanding interest-bearing debt on March 31, 2014, amounted to $214 million as a result of the significant deleveraging of our balance sheet following our IPO in November.

Under our existing revolving credit facility, we have a further $43 million of availability, which reduces by $5 million quarterly. Our debt is based on a floating rate interest rate, with our weighted average interest rate being approximately 3.1%. We believe our conservative capital structure gives us financial flexibility to execute our future growth strategy.

Turning to slide 8, EBITDA for the first quarter of 2014 was approximately $16.3 million. And distributable cash flow generated during the first quarter amounted to $12.2 million.

The quarterly distribution declared for the first quarter of 2014 and paid on May 12, of $0.365 per unit, is in line with our cash distribution policy and implies a coverage ratio of 1.12 times.

Now I turn the presentation to Mr. Tony Lauritzen, to provide you with a fleet and industry update.

Thank you, Michael. Moving to slide 9, pro forma the Arctic Aurora acquisition, the average age of our fleet decreases from 6.8 to 5.3 years of age, and our contract backlog increases from $535 million to $652 million. In addition, the acquisition of the Arctic Aurora broadens our customer base with yet another first-class counterpart, which gives them the flexibility to utilize its ice class -- the capabilities of the vessel.

Moving to slide 10, our fleet currently consists of three LNG carriers, two of which have ice class 1A notation. The ice class capabilities of the Clean Force, combined with our long-lasting relationship and operating performance, among other things, was an important factor in obtaining our 13-year charter with Gazprom.

Currently, for our three ships, we have 100% contract coverage on our fleet calendar date for 2014, 2015, and 2016, with first-class counterparts. And we further have a contracted coverage of 67% of our calendar date in 2017, a period we expect the LNG carrier market to be significantly tighter. We expect to acquire the Arctic Aurora following completion of our follow-on equity offering.

Following the 13-year Clean Force Gazprom charter, our initial fleet of three vessels are employed under multi-year charters with an average remaining term of about 6.8 years. Our average remaining charter term after the Arctic Aurora acquisition will be about 6.1 years. Our multi-year fleet employment profile, diversified first-class customer base, and a staggered maturity date of our charters provide solid cash flow visibility going forward.

Moving to slide 11, beyond our initial fleet, we have the right to purchase from our sponsor a further six optional vessels. Two of those vessels are already on the water and trading, and the remaining three are under construction, with delivery in 2014 and 2015. All optional vessels are high-specification, ice class, winterized, and extremely versatile.

These optional vessels include three vessels already chartered to first-class customers, with an average five years employment. Of the three chartered vessels, two are charted out to our existing chartered Gazprom, and one is chartered to Cheniere.

Moving to slide 13 for an industry update, from a supply point of view, it is conservatively expected with about 107 million tons of new energy will come to the market between now and 2020. This represents an astounding total increase of 47% compared to 2013 production.

The source of this commodity is primarily from the US, Australia, Africa, and Russia. We continue to believe that the Far East will remain the largest buyers going forward, meaning that the LNG carrier fleets' ton-mile requirements are expected to remain high.

The production figures are conservative, and increased production in existing projects has not been included. US production included in these projections has been estimated to about 30 million tons coming from Sabine Pass, Freeport, Lake Charles, and Cove Point. We believe that the total production from such projects may turn out to be higher, and additional US projects may well be granted licenses, and add to the export volumes.

When we compare LNG supply to the LNG carrier shipping capacity available from now until 2020, we remain confident that the market for shipping will tighten. From 2018 onward, we expect prospects for LNG carriers to be in particular strong, leading to higher charter rates.

It is worth to mention that part of our competition being vessels that come off charter, going forward, is an average of significantly over-aged than our fleet. In particular, vessels that come off charter in the years 2017 and 2018 are on average 16 and 15 years older, respectively; and, furthermore, they carry an average carrying capacity of about 134,000 cubic meters. This should give a relative preference to our fleet.

The potential re-chartering possibilities of our fleet will be in 2017 and beyond, which we expect to be a period of high worldwide fleet utilization. This will further be supported by Russian Arctic energy coming onstream and requiring ice class vessels.

We have now reached the end of our first-quarter presentation, and I now open the floor for questions.

(Operator Instructions). Taylor Mulherin, Deutsche Bank.

I wanted to get a little bit more color about just the market in general for LNG projects; specifically, ones coming online over the next few years. I have been reading a little bit more about potential approval delays, just sort of that red tape that exists, especially in the US. Obviously, you have got long-term charters, so you are not directly impacted by any short-term delays. But just kind of wanted to get your thoughts on how that is impacting the market in general.

At the moment, it is not impacting the current market at the moment, because these are future projects. So but, of course, the more production that will come out of the United States, the better it is for the shipping markets.

We feel confident that, certainly, the big terminals that are well ahead in their approval process, that they will get the full licensing. We are, of course, aware of that -- the list of terminals that have made application to get full approvals is very long. We don't expect all terminals to get their approvals in place, at least not in the first stage. We think it will ramp up quite gradually.

So, first, I will probably provide a handful of serious terminals with a full licensing, and then I think it will be judged, how is this affecting the pricing of US gas? And then they will see forward if they will do further approvals.

But I think it is worth to mention that, even just one big terminal, if you have one big terminal with 14 million to 16 million tons of LNG produced annually, that corresponds to a significant amount of vessels needed. And, actually, we don't need so many US terminals to be approved, to have a robust market.

We have, in our analysis here -- which we mentioned earlier -- we have estimated initially 30 million tons from US production in aggregate, which means that is just a few terminals would be required to add up to those volumes.

Great. Makes sense. And just on the vessels that are still in the pipeline, I noticed that the Clean Planet is scheduled to be delivered in Q3 of this year. But it doesn't have the contract attached to it. So just trying to get a little bit more color on how to expect for those vessels that don't have contracts yet; what that timeline between when a charter get attached to a vessel, compared to when it is delivered -- if there is any sort of way to think about that.

Okay. Yes. So the construction of the Clean Planet is going very well. Everything is on schedule. So that vessel will come out, as you said, in third quarter 2013, this year. We are currently in discussions with several counterparts. There are in the market out now several tenders for, let's say, medium contracts for this kind of tonnage. We are also in discussion on a few off-the-market opportunities for employment of the vessel.

We do expect the vessel to be employed on a contract of about five years. But we are also utilizing the stock market in order to get to the right levels that we want to fix on. If we cannot achieve the right charter rates now, then we will trade the vessels, voyage by voyage, a little bit; and then continue them on long-term charters, which then would make the vessels relevant for dropdown candidates.

Thanks. And a last one -- I just want to get a little bit more information about, basically, the expected acquisition price of the vessels in the pipeline. Is that something that is known, at this point, for when the dropdown does occur? Or is it more of a moving target based on the charter attached to it, or the market at the time, that sort of thing?

Yes. So as [Carragi] correctly said, it is a moving target. It does depend on what the charter rate is, and many other factors. So it is hard to pinpoint, from now, a value of these vessels going forward.

Makes sense. Okay. Thanks for your time.

Fotis Giannakoulis, Morgan Stanley.

Congratulations for the smooth execution of the first dropdown. I want to ask also about the market. And we saw that you extended this vessel, the Clean Force, at a very attractive rate of around $70,000, if I am not mistaken. But these vessels lease a relatively older vessel compared to the vessels that you are expecting to drop down in the future.

What would be the equivalent rate for a vessel like that? And how would that rate change if the duration were not 17 years, and we are talking about the five-year contract?

Yes. That is a very good question. It is very difficult to apply -- to say this vessel achieved X, so this other vessel should achieve Y. It is almost impossible. Because it so much depends on what is exactly available at those dates, what vessel is optimal for the counterpart. And it is -- thereby, we can establish how much they are willing to pay for it.

I would say that, for an equivalent charter, with an equivalent counterpart on our newbuildings, they should be able to achieve significantly above what we achieved for this particular charter.

I think this is also reflected in the vessels that we have already concluded on a sponsor level with the same counterparts. Of course, these charters are shorter. But, at the same time, they were concluded at a period of five years, which is a substantial period.

So I think it is too difficult, actually, to assign a specific number to the newbuildings versus the Clean Force. But I would say that it should be substantially higher.

Thank you very much for your answer. Can you remind us, in these long-term contracts, especially this new 13-year extension, what is the agreement regarding operating expenses? Are there any provisions that they protect you from unusual hikes of expenses due to inflation?

No. That is also a very good question. There is no operating expense inflation adjuster in the charter. That being said, we think that we have a very good control over our costs. I think that was also evidenced by the quarterly results now. So we feel confident that we can control the cost levels going forward.

And if you were to give us some guidance, say, what has been historically the escalation of the expenses in the industry, and particularly within your group, how should we think about inflating the expenses in the future?

Yes. I think our internal expectations will be 1% to 2% per year.

Okay. Thank you very much. One more question. You seem to be experts on Russian gas. You have a very close relationship with Gazprom. There is a lot of discussion about the developments in the Ukraine.

How does this impact the market in terms of any direction of cargoes approval processes, and also about your ability to trade your vessels?

Well, at this moment, we haven't seen any impact at all, in any way. So I think that is -- yes, that is the answer.

And do you think there might be anything -- any other suppliers for Europe that they can change the trading partners?

I don't really think so. You know, when we look at Europe, we are primarily looking at Germany, because this is their biggest economy in Europe, and it is also the biggest importer of Russian pipeline gas. So if we would see potentially more cargoes directed to Europe, I think it will be primary to Germany.

The problem is that, in Germany, there is no LNG imports terminal. It doesn't exist. So I think that also explains why we haven't really seen any difference in trade movement at all.

Our expectations is that we will continue to see the cargoes going through the Far East. The Far East is the highest-paying market at the moment, together with South America.

Thank you very much for your answers.

Matt Niblack, HITE.

Given the disruption that equity issuance tends to have in the equity price, is there any thought to over-equitizing the first dropdown so that you only need to come once this summer?

Well, given the fact, right now, that there we are not shelf-eligible, this is the process that we are going to be taking for this particular dropdown. Obviously, one year after the time of the IPO, things are going to be a lot different. We will be able to execute our transactions a lot quicker, and not have this exposure in the market for such a long time.

Okay. So it looks like, maybe an [as friend] aside, but there is potential for another dropdown in October. Is that we you indicated? (multiple speakers)

The dropdown is on in October. I mean, we have the -- the dropdown will happen as soon as practically possible. I can't pinpoint an exact time, but it is going to be sooner than that. (multiple speakers) We should be within the next couple of weeks.

Okay. Well, I was talking about the second dropdown scheduled for October for Q3. So I guess the point is that that will be independently financed, ideally, once you are shelf-eligible?

Yes. Correct. Correct. Yes. (multiple speakers) The equity portion there, yes.

And then, just in terms of the valuation on the upcoming dropdown here, we are fairly used to, in the MLP space, seeing dropdowns in the sort of 9 to 11 times for pipelines that are often contracted 10 to 20 years out. This is an asset that is only contracted five years out.

Could you give some commentary on how, as you worked through the Conflicts Committee, how you came to the valuation that you did. And, along with that comment on the valuation, relative to your estimate of the NAV of the asset, as well as the cost to build.

Yes. Well, obviously, the Conflict Committee engaged an independent external financial advisor. And there were various valuation methodologies followed, just in terms of cash flow, replacement cost analysis, comparables we looked at on a new EBIT to EBITDA basis. So obviously, NAV was also an important aspect of it.

I think, as we have communicated before, the price of the vessel was more or less in line with the guidance we had already given to the market. We had guided around 10 to 11 times. We actually dropped this vessel down at a slightly lower multiple than that.

Right. I guess, specifically, then, what was the estimated NAV that you looked at for the vessel?

If you get the latest independent broker valuation, that is pretty much the number that you are going to get.

So you are saying that the price paid was roughly the NAV?

Right.

Okay. Great. That is a helpful clarification. Thank you.

(Operator Instructions). There are no further questions at this time. Please continue.

All right. I would think like to thank everybody for your time, and to listening to us. So if you have any further questions, do not hesitate to give us a call. Thank you very much for your time. Goodbye.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.