Thank you for standing by, ladies and gentlemen, and welcome to the Dynagas LNG Partners conference call on the first quarter 2020 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. At which time, if you wish to ask a question, please press star and one on your telephone keypad and wait for your name to be announced. I must advise you that this conference is being recorded today, Friday, June 5th, 2020. Please be reminded that the company announced its results with a press release that has been publicly distributed. At this time, I would like to remind everyone that in today's presentation and conference call, Dynagas LNG Partners will be making forward-looking statements.
These statements are within the meaning of the Federal Securities laws. 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. The statements in today's conference call that are not historical facts, including, among other things, the expected financial performance of Dynagas LNG Partners business. Dynagas LNG Partners ability to pursue growth opportunities, Dynagas LNG Partners expectations or objectives regarding future and market charter rate expectations and, in particular, the effects of COVID-19 on the financial condition and operation of Dynagas LNG Partners and the LNG industry in general, may be forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934 as amended.
Matters discussed may be forward-looking statements which are based on the current management expectations that involve risks and uncertainties that may result in such expectations not being realized. I kindly draw your attention to slide two of the webcast presentation, which has the full forward-looking statement, and the same statement was also included in the press release. Please take a moment to go through the whole statement and read it. Now I'll pass the floor to Mr. Lauritzen. Please go ahead, sir.
Morning, everyone. Thank you for joining us in our first quarter and March 31st, 2020 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 on to slide three. We are pleased to report the results for the three months ended March 31st, 2020. Each of our six LNG carriers are operating under their respective term charters with an average remaining contract term of 8.3 years.
Despite the operational challenges the industry is facing with respect to the COVID-19 outbreak, we are pleased to report that all of our employees onshore as well as offshore are well and healthy. We are fortunate enough that the impact of the COVID-19 outbreak has been operationally manageable due to our manager's effective COVID-19 response plan, which has been successfully implemented with the support of our seafarers, charterers, employees, and to all, we are grateful to. For the first quarter of 2020, we reported net income of $7 million and Adjusted EBITDA of about $23.8 million, the latter which is in line with our previous estimate of an annualized EBITDA of approximately $95 million and which assumed that all of our vessels had been delivered pursuant to their respective long-term charters. Our revenues for the quarter were in line with the fourth quarter of 2019.
However, net income increased by 26%, primarily as a result of lower interest expense. As we seek predictability going forward and also pursuant to our general objective to manage cost of debt and reduce debt over time, we have made use of the current historically low interest rate environment and entered into a floating to fixed interest rate swap transaction effective from June 29th, 2020, until the existing $675 million credit facility expires in 2024. The swap provides for a fixed three-month LIBOR rate of 0.41% and effective interest rate cost of 3.41%, including margin applicable for our outstanding debt. This is a key development in the execution of our strategic plan as it de-risks our exposure to interest rates volatility while securing a low cost of debt until 2024.
Going forward, we intend to continue to reduce our debt, build equity over time, strengthen our balance sheet, and our position for future growth initiatives. We paid in February a quarterly cash distribution of 56 cents and a quarter per Series A Preferred Unit for the period from November 12th, 2019 to February 11, 2020, and a quarterly cash distribution of $0.546875 per Series B Preferred Unit for the period from November 22nd, 2019 to February 21st, 2020. Subsequent to the quarter, we also paid in May 2020 a quarterly cash distribution of 56 cents and a quarter per Series A Preferred Unit for the period from February 12th, 2020 to May 11th, 2020, and a quarterly cash distribution of $0.546875 per Series B Preferred Units for the period from February 22nd, 2020 to May 21st, 2020.
I will now turn the presentation over to Michael, who will provide you with further comments to the financial results.
Thank you, Tony. Moving on to slide four. We're pleased with the first quarter results with our vessels having achieved 99% utilization under their charter contracts. Net income for the quarter increased by 268% to $7.1 million over the first quarter of 2019, and was up 26% over the fourth quarter of 2019. Our Adjusted EBITDA increased by 9% to $23.9 million compared to the first quarter of 2019. The increase is attributed to two factors. Firstly, all of our vessels are delivered and trading under their long-term contracts at an average daily gross rate of about $63,100 per day per vessel, compared to $57,700 per day per vessel for the corresponding period in 2019, in which the Lena River was trading under a short-term contract prior to her delivery to Yamal in July of last year.
Secondly, our weighted average interest expense was reduced from 6.74% in the first quarter of 2019 to 4.89% in the first quarter of 2020, resulting in savings of about $4 million in loan interest for the quarter. This was attributable to lower LIBOR interest rates for this quarter compared to the first quarter of 2019. The reduction in the margin we are paying on our new $675 million credit facility compared to our prior debt instruments, and a decrease in our weighted average indebtedness from $723 million in the first quarter of 2019 to $662 million in the first quarter of 2020. For the quarter, we were marginally cash positive as the cash flow from our long-term contracts was utilized to service our amortizing debt and pay distributions to preferred unitholders. Moving on to slide five.
This slide shows our balance sheet metrics as of the end of Q1 and our scheduled debt repayments over the next years. In light of the current environment, we are extremely pleased we do not have any debt maturities until September 2024. We ended the first quarter with net debt to total book capitalization of 60% and total liquidity of $70 million. This amount includes $50 million of restricted cash related to our $675 million syndicated loan. The partnership's credit profile continues to improve with net debt to trailing 12-month Adjusted EBITDA of 6.3 x. Our debt figures have and will continue to improve following our global refinancing in which we replace high interest with low amortization debt with low interest amortizing debt. As previously advised, balance sheet protection is our top priority.
Given that we are paying $48 million per annum in principal payments, which is one and a half times our vessel book depreciation and 0.74 x our market cap as of yesterday's close, we expect to build equity and balance sheet capacity over time, and we expect our leverage metrics to gradually improve on a steady state basis, improving our break-even rates. Moving on to slide six. This slide provides you with the magnitude of cash savings from lower interest expense as a result of our refinancing in September 2019, and the general decline in LIBOR rates, which culminated with the fixing of all our floating interest rate exposure with an interest rate swap.
Just to put things in perspective, prior to our global refinancing, for the first quarter of 2019, we had a weighted average debt balance of $723 million, comprising mainly of low amortizing debt, for which we paid interest expense of $12.2 million. For the first quarter of 2020, we had a weighted average debt balance of $662 million and interest expense of $8.2 million, a reduction of 33% in interest expenses. We have seen a gradual reduction in our interest cost from about 7% in Q1 2019 to 4.89% in the first quarter of this year due to the general reduction of LIBOR rates.
Subsequent to the end of the first quarter, interest rates fell even further. We took advantage of a significant drop in swap rates and entered into an interest rate swap transaction for all of our outstanding debt starting from June 29th until our credit facility matures in September 2024, providing for a fixed three-month LIBOR rate of 0.41%, resulting in a fixed effective interest rate cost of 3.41%, including the margin, a 50% reduction from the first quarter of last year. For the moment, we have not acquired insurance in case LIBOR rates turn negative, meaning we would have to continue making payments under the interest rate swap if LIBOR rates turn negative, whereas under our credit agreements, we will not be getting the benefit of the negative LIBOR rates.
Once the interest rate swap kicks in on June 29th, we expect interest expense to amount to around $5.5 million per quarter compared to $8 million in the first quarter of this year and $12 million one year ago. Moving on to slide seven. In this slide, we show our fleet-wide cash flow break even per day per vessel versus our contracted time charter rates. For presentation purposes, we are utilizing Q1 figures for all metrics except for our interest cost, which we estimate versus the interest we expect once our interest rate swap commences on June 29th. After payment of debt service, we expect a gradual buildup of cash over time, barring unforeseen events, giving us the opportunity to consider our next steps forward. That wraps it up for me. I will pass over the presentation to Tony.
Thank you, Michael. Let's move on to slide eight. Our fleet currently counts six LNG carriers with an average age of about 9.8 years. We have a diversified customer base with substantial 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 $1.21 billion, equivalent to an average backlog of about $202 million per vessel, and our average remaining charter period is about 8.3 years, which compares well versus our peers. Moving on to slide nine. With Lena River delivered into her multi-year charter on the first of July 2019 with Yamal LNG, each of our six LNG carriers are fully delivered and operating under their respective term charters. Our fleet of LNG carriers are fixed on time charters with key energy companies.
We believe that the drivers for our charters were the characteristics of the fleet, including its ice class notations and our organization's track record. All of the vessels are employed on time charter contracts, under which the charterer pays all major voyage related variable costs such as fuel, canal fees, and terminal costs. Our counterparties are mainly asset-strong LNG producers that are typically able to forward program the vessels for a period of time, which gives us a certain degree of planning ability and cost control. We estimate our fleet to be 100% contracted in 2020, 92% in 2021, and 83% in 2022. Our earliest potential availability is the Arctic Aurora, which will be available in the second half of 2021, provided that Equinor does not exercise their option to extend the contract. So far, the vessel has served Equinor with good feedback and results.
The next available vessel after the Arctic Aurora may be the Clean Energy, which contract expires in 2026. The current charter market for LNG carriers is challenging, in particular due to the global COVID-19 virus situation, which is contributing to decreased LNG demand. We believe the current LNG shipping market may improve going forward, driven by increased industrial outputs and a move toward the winter season when gas is used for heating. Although our revenue have not been affected by the COVID-19 situation, as all of our vessels are employed on term contracts, we are monitoring the situation and outlook. From an operational point of view, we have taken strict measure to protect our seafarers, office staff and other stakeholders along the logistics chain. So far, we have not had any seafarers testing positive, to which we thank all people involved for their adherence and diligence.
Let's move on to slide 10. We have a unique and versatile fleet. Five out of the six vessels in our fleet are assigned with ice class 1A notation. The fleet can handle conventional LNG shipping as well as operate in icebound and subzero areas. The initial CapEx for an ice class vessel is more expensive than conventional carriers. We estimate that the operating cost between our ice class type carriers and conventional carriers to be very similar. To our knowledge, the company together with our sponsor has a market share of about 82% for vessels with ARC4 or equivalent ice class notation. 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 view the ability to trade in icebound areas as an important advantage due to the increased production of LNG in such areas, and in particular, along the northern sea routes. In general, we view the ability to perform conventional and niche operations as an important driver in securing attractive long-term charters. Furthermore, our fleet is optimized for terminal compatibility, which we believe is of value to our charterers, and the fleet consists of groups of sister vessels that provides for overall better economic operations, preventive maintenance, and redundancy. Let's move to slide 11. We are a premier LNG shipping company, renowned as a reliable service provider able to operate in harsh environments. Our fleet is relatively young compared with the world average and provides for trading versatility.
We are now in the fortunate position of having a fleet of LNG carriers on term contracts whose cash flow can be utilized to organically reduce debt, and without any debt maturities until 2024. Given that there is visibility on the earnings for the coming year, barring any unscheduled events, we expect earnings per common unit to amount to $0.63 per unit, which equates to a forward P/E ratio of 3 x based on yesterday's closing price. Based on the same closing price, our current market cap is less than the cash on our balance sheet, which we find noteworthy. We expect that our solid contract revenue backlog and significantly reduced interest rate expense will allow us to slowly start building up cash organically in the tune of about $3 million per quarter.
All these factors we believe will position the partnership to be stronger in the future, allowing us to consider future growth. We have now reached the end of the presentation. I now open the floor for questions.
Okay. If you have a question, please press star one on your telephone keypads. Your first question comes from Randy Giveans from Jefferies.
Howdy, gentlemen. How's it going?
Good, Randy. How are you?
Great. You mentioned briefly, you're getting paid on all your contracts, 100% utilization. Revenue's flat, that's clear. Have there been any changes in fleet functionality, right? With all the production shut-ins, some of the high inventory levels in Asia and Europe. Are there more vessels ballasting for longer? Just kind of asking about the operations of the vessels.
Thank you, Randy. That's a good question. I would say in the early part of the COVID-19 situation, I would say that there were more interruptions than today. There was a period where we saw many cargos going into China, or originally that were going to China, were redirected. It could cause some waiting time until we knew whether discharge port would be, et cetera. There were interruptions in terms of if you had discharged in China, then the vessel couldn't call another port until at least 14 days had passed. Clearly, there are disruptions as a result of this epidemic. This will probably continue for a while. We are seeing that the logistical change is going more smoothly now than what it was previously.
Okay. Clearly the spot market's been pretty volatile, pretty weak now in recent months. How has the market for maybe three, five, or up to seven-year time charters responded to that? Secondly, how will the Qatari order of, I think it was 100 LNG carriers, how do you see that impacting the market in the coming years?
Yeah, thank you. No, definitely the spot market has been challenging, with unhealthy charter rates, to put it that way. What we see now is that although charter rates are low, the volume and the activity is quite good. We don't have any spot vessels in the market. We don't see day to day exactly what the situation is. Obviously, what we're doing is to prepare going forward for the Arctic Aurora, which potentially comes open second half of next year. That's what we're focused on. I think that this low LNG charter rates that we see in the spot now, it's also driven by very low gas pricing environment. When we look at the forward gas prices into the winter, when normally there's more gas demand, they are richer and they are better. We think that the market is going to improve with that.
When it comes to your question, how do we see the three, five, and seven-year markets? I think that also there is some activity picking up. There was a period that I guess there was no demand for it. Now we see that there are some discussions. We have not entered into any of these discussions ourselves. We are starting to hear that there is potentially some long-term buying interest, again, in gas. Although, we have to caution and say this is still early days. When it comes to the question of the Qatari order, I think that we view that in a positive way. We would potentially have seen projects that would push things out or maybe don't go for FIDs. I think that what we're seeing now on the Qatari order, it's positive. It means that the big players are there to stay.
They believe in the market that they're in. It's important for them to build market share. That means more product. Of course, they will order ships against this expansion. At the same time, I don't think that we'll see a lot of speculative orders going forward. I think now that if we look back at the last wave of LNG orders, I think it was almost an all-time high in speculative orders. I mean, there's no reason why projects wouldn't pick those available vessels going forward to their projects. Yeah.
Okay, I guess one quick question for you specifically. Slide six, for Dynagas. I think it looks like there's a $6 million guidance for the second quarter. Is this down from the $8.7 million in the first quarter, or is it hard to tell the exact numbers on that chart there?
Yeah. It's down because we fixed at lower rates in the first quarter. I mean, LIBOR was going down after the first quarter was completed. Yeah. Yeah, we expect a lower interest expense in the second quarter compared to the first quarter.
Okay. I know the $3.41, that doesn't start till end of the quarter, right? June 29th?
Right. Yeah. I mean, we're going to get the benefit of that, essentially after June 30th. Yeah.
Got it. Yep. All right. Well, hey, thanks, and congrats on that deal.
Thank you.
Your next question comes on the line of Ben Nolan with Stifel.
Hey, thanks. Michael, Tony, hope you guys are well. I want to follow up a little bit on hedge or really the interest rate expense. It looks like subsequent to the hedge taking effect, you guys are going to save, I don't know, somewhere around $10 million a year, first of all, is that correct, relative to where we are now? Secondly, or in conjunction with that, how does that cash savings, which should increase the rate of leverage reduction, how does that change, or does it change sort of the timeline as to when you guys can be a little bit more active, looking at maybe growth opportunities or just the pace at which you don't have to be as laser-focused on debt reduction?
Yeah. No, you're right. If you look at our Q1 interest, it's around $8 million, and then once the swap arrives per quarter, once the swap starts, it's going to be around $5.5 million per quarter. There are some savings there. The situation is that we're going to build up some free liquidity, over our restricted cash, $15 million. It's a slow process. We are in an environment, where although we are insulated to a certain extent, we do want to retain some free liquidity as a protection, in case there's an operational issue or something unexpected occurs. What we're going to do would also depend on our valuation.
As I said, we have a focus on organically de-leveraging, and it's a little too early to discuss the prospects for fleet expansion, given that fleet expansion is going to require an equity component, and this is subject to specific use of proceeds and what our valuation looks like. We are thinking about what are we going to do with this free liquidity and how we could utilize it to increase unit holder value.
Okay. Is there any capacity? Does this hasten your ability to refinance that debt, would you think?
Listen, I think this is probably the cheapest debt that we see public shipping LPs having. Having a 3.41% total cost of debt is something I don't think that is going to be easy to be replicated. No, we're not looking to refinance.
Yeah.
Our debt, because I don't think we're going to be able to get anything cheaper.
Yeah. I would tend to agree with that. Just to make sure, you said first quarter interest was around $8 million, so there's, what, three-quarters of a million dollars or so of other fees that we should model those to continue as well going forward, correct?
Yeah.
Okay. All right. All right, good. I guess to that end, while you're a little bit limited in terms of your ability to do anything in sort of longer term, that excess cash flow grows but grows slowly. Is there any ability to maybe do a little partial, let's say, buy a quarter of a ship from the parent company or something like that, or is that also still sort of off the table?
I think that it goes back to what we were discussing earlier. Listen, our market cap is below $100 million. Even a quarter of an LNG carrier, which is a very high-value asset, it's something extremely immaterial given where our equity value is being placed on by the market. It's a bit of, I can't really respond to you. It is a bit too early to discuss these type of things. We have to see, first of all, where we end up in terms of what the market thinks our equity is worth, because that's a crucial component of this discussion. We just can't go out and issue equity at any price.
Sure. No, I understand. Well, Michael, hats off to you. I think that is the best interest rate hedge that I have seen. Also, Tony, hats off to you that those Gazprom contract renegotiations from a few years ago are looking better and better all the time. That does it. Thanks a lot, guys.
Thank you very much.
Your next question comes from Liam Burke from B. Riley.
Yes, thank you. You published the cash break-even rate of the fleet at roughly a little over $50,000 a day. Obviously, you've got a floor or pretty close to a floor in your interest or cash interest expense. Are there any operational benefits that you can reap going forward to move that number down?
Not really. There could be a slight variation up or down, but I don't think it's going to have a material effect.
Okay. I just want to verify, you have no dry docking till 2022?
Yeah. Correct. Yes.
Until 2022, you have no meaningful CapEx to bounce off your cash flow from operations. Is that right?
Yep. Correct.
Okay, great. Thank you.
Thank you very much.
I will now turn the call back over to Mr. Tony, our President.
If there are no further questions, we would like to thank you for your time and for listening in on our earnings call. We look forward to speak with you again on our next call. Thank you very much, and stay safe.
This concludes today's conference. You may now disconnect.