Dynagas LNG Partners LP (DLNG) 2019 Q1 法說會逐字稿

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. (Operator Instructions) I must advise you that the 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 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.

Now I pass the floor to Mr. Lauritzen. Please go ahead, sir.

Morning, everyone, and thank you for joining us in our first quarter ended 31st 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 said period. 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.

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 unitholders of $0.0625 in respect of the first quarter of 2019. We also paid in May a quarterly cash distribution of $0.5625 per Series A Preferred Unit for the period from February 12, 2019 to May 11, 2019, and a quarterly cash distribution of $0.546875 per Series B Preferred Units for the period from February 22, 2019 to May 21, 2019. On May 31, 2019, one of our vessels, the Lena River, completed her multi-month employment with a major energy company and is currently ballasting en route for delivery to her multiyear charter with Yamal LNG, which is all going 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, 5 out of our 6 LNG carriers were trading under their previously announced term -- time charters with the exception of the Lena River, which was trading under an interim short-term time charter pending for delivery into her 15-year 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 Gazprom contract and also her upcoming Yamal contract. Once the Lena River enters her 15th year of 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 quarters, primarily due to scheduled replenishment of spare parts for the Yenisei River; however, please note that the Yamal contracts are on an operating cost pass-through basis, meaning that our charters pay for all operating expenses as reasonably incurred.

Moving onto Slide 5. Distributable cash flow for the quarter amounted to $5.8 million, and common unit distributable cash flow coverage came in at 1.3x. Cash coverage for the quarter came in at 2.7x 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 advanced 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 the new lenders. The process of obtaining the requisite commitments have been quite long, which may be attributed to the size of the transaction and the number of banks involved. This refinancing transaction of our 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 distributions to common unitholders, but will not affect the distribution to the Series A and Series B preferred unitholders. This contemplated transaction if consummated as contemplated will also reduce our cost of debt compared to the cost of our current Term Loan B and achieve our objectives of delevering 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 have been instrumental in our ability to pursue this refinancing.

Moving on to Slide 7. As stated earlier, our LNG carriers are employed in long-term contracts. Once the Lena River enters her 15th year of 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 unitholders, 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 were $13.5 million or $54 million on an annualized basis, reflect our current nonamortizing 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, we are cautiously optimistic and hopeful we will conclude this refinancing within the next 2 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.

Thank you, Michael. Let's move to Slide 8 to summarize the partnerships profile. Our fleet currently counts 6 LNG carriers with an average age of about 8.8 years. We have a diversified customer base with 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 fleet of LNG carriers are fixed on long-term charters with international energy companies. We believe that drivers for our charters were the characteristics of the fleet, including its ice class notation and our organization's performance track record. All the vessels are employed on time charter contracts, under which the charter pays for all major voyage-related variable costs, such as fuel, canal fees and terminal cost. Our counterparties are mainly active strong energy producers that are typically able to forward program their 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, 100% in 2020 and 92% in 2021. The Lena River completed her charter with an undisclosed energy major on 31st of May 2019 in China, and the vessel has commenced her ballasting voyage to Europe, where the vessel would be delivered into her long-term charter with Yamal LNG on or about 1st of July 2019, all going well. The previous charters will pay a [ballast only vehicle to fuel and hire] from China to Singapore from which location the continued ballasting will be for the partnership's accounts. 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. So far the vessel has served Equinor with good feedback and result.

Moving on to Slide 10. We have a unique fleet and versatile fleet. 5 out of the 6 vessels in our fleet have ice class 1A notation. Therefore, the fleet can handle conventional energy shipping as well as operate in icebound and subzero areas. Initial capital expenditure for an ice class vessel is somewhat more expensive than conventional carriers. However, the operating cost between our ice class type carriers and conventional carriers are similar. To our knowledge, we estimate that the company together with our sponsor has a market share of about 82% for vessels with Arc-4 or equivalent ice class notation. To our knowledge, there are only 2 other LNG carriers in the world with equivalent notation, which are chartered out in the long term. We view the added ability to trade in icebound areas, an important advantage due to the increased production of LNG in icebound areas, and in particular along the northern sea routes. Yamal LNG has commenced production of their mega project and we also expect further projects to deliver in that region. We view the ability to perform conventional and niche operations as an 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 consist of groups of sister vessels, which we believe provides for overall relatively better economics and efficiencies. We have now reached the end of the presentation.

And I now open the floor for questions.

(Operator Instructions) We will now take our first question that comes from the line of Sandy Burns from Stifel.

Just wondering to follow up on your commentary about the financing. You mentioned the size of transaction, a number of banks has 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 counterparty risk, the 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?

No. Thank you. That's a good question. There's nothing unusual in the process. And typically this is a very large transaction, let's say, for the commercial -- banking market. So when there are many banks involved, each bank has its own time line and its own processes. So we have to satisfy all these banks' processes and time lines. And that's -- I think it's a number of banks primarily, which is -- which are involved in this quite large transaction, which is the reason for the process taking a bit longer than usual.

Could you share with us like an estimate of how many banks you're talking about, over 10, over 20 or something you rather not provide?

Well, yes, I can you give some color. There's just 3 lead banks, and how many banks we will end up with we don't know yet. It could be up to 10 banks. It could be, possibly.

Okay. And one last question from me, just also in terms of what you are working on with this -- 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 6 vessels that are at DLNG?

The financing is strictly over the 6 vessels of DLNG, has nothing to do with the parent.

We will now take -- our next question is from the line of Mike Webber from Wells Fargo.

So I wanted to ask affecting your release around, once you're 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 to go to 0. What realistic liquidity would you guys have to play with to go out and look at new business? And how would you position debt, and I got the question, just staring and trying to figure out what ammunition you're playing with in that scenario?

Yes. No, listen, I mean, our plan is that -- there was a slide in the presentation which shows we have, let's say, essentially $85 million of cash available for debt service. And we do envision the majority of that cash being used for servicing of debt and principal and interest. I think -- we believe that as we utilize our secured cash flow to pay down debts, 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 attractively priced debt and equity, and thereafter be focused to grow the partnership.

Right. So you're talking about organically delevering after the refinancing to the point where the currency is viable to then go out and grow. I mean that seems like that would be a pretty elongated time frame?

Well, I mean, we have these fixed 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.

Right. Yes, it's just kind of the direction I'm going is with the relationship with the parent. And I asked this last quarter, and just to kind of follow-up on it in terms of what role is the parent playing right now in facilitating the refinancing. And then I guess, I've got a follow up to that, but just within the context of -- we haven't had any moving pieces in 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 in trying to facilitate a refinancing to kind of stop the bleeding versus being willing to step in to sell assets once the equity is devalued?

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

Great. And putting note, it's tough for you to speak for the people, but if I look at the last 2 to 3 years and I look at the -- if I just look at equity chart, at some point I would have thought the sponsor would -- the idea that the sponsor is required to step in, is it literally the precipice of a default that -- in which the sponsor feels compelled to step in? At what point is there a trigger where they say, hey, "Maybe I want to protect this equity value," because we have been hearing the same thing for a couple of years and the stock going down one direction.

Well, listen, I mean, the sponsor is owned by a very traditional shipping family, which it doesn't typicality speculate or invest in certain stock, and this is the reason -- 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 far-fetched that you say regarding a default. I mean, in practice -- in reality, the free flow of our common unit is very limited. And the sponsor accumulating more shares could further limit the trading liquidity of our common units. And the sponsor does have a significant and material holding in the partnership. It owns 44% of the partnership's common units.

I understand that. But I'm just trying to think about the context which we should think about the relationship with the sponsor if there's less -- there's no willingness. I guess, I mean, you can take -- you can frame in that kind of a traditional ownership structure, but there is not a willingness to step in to backstop the existing equity value at any point in the last several years, but then maybe once we get past refinancing, they're willing to take back devalued equity for a dropdown. It doesn't -- for other common shareholders, I'm trying to think about how I would think about that relationship?

Well, I mean, that's an opinion you had. I mean, the reality is that the partnership on its own can stand on its own legs. It does not require the sponsor support. You're getting the impression that we need the sponsor support, but we do not 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 as its financial resources allow.

There appears to be no further questions at this time. Speaker, please continue.

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

Sorry, we just have one further question. It's from Randy Giveans.

So a quick question for me. Just trying to get in expected timing for the current distribution in terms of when the last one will be paid. Would that be possibly this quarter or whether it be another 1 or 2 payments before you have to discontinue that distribution?

Yes. 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 in the next 2 months. So we'll be able to answer that question at that point in time.

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

Yes. It's still on schedule. The vessel has been released from her previous charter and is en route ballasting to Europe actually will deliver on or about 1st of July, all going well, to Yamal LNG.

No further questions now, please continue.

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.