Earnings Call: Q1 2019

Jun 6, 2019

You for standing by, ladies and gentlemen, and welcome to the Dynagas LNG Partners Conference Call on the Q1 2019 Financial Results. We have with us Mr. Tony Lauritzen, Chief Executive Officer and Mr. Michael Gregos, Chief Financial Officer of the company. 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 within the Securities and Exchange Commission. Now I pass the floor to Mr. Lauritzen. Please go ahead, sir. Good morning, everyone, and thank you for joining us in our Q1 ended 31st March 2019 earnings conference call. I'm joined today by our CFO, Michael Gregor. 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 BRL 1,900,000 for the quarter, and adjusted EBITDA was reported at $21,700,000 Distributable cash flow for the quarter ended up at $5,800,000 Furthermore, we reported free cash of BRL 112,300,000 and available liquidity of BRL 142,300,000 each as of March 31, 2019. Subsequent to the quarter, we paid in May 2019 a cash distribution to common unitholders of 0 point 0 $6 in the quarter in respect to the Q1 of 2019. We also paid in May a quarterly cash distribution of 0.56 dollars and a quarter for Series A preferred unit for the period from February 12, 2019 to May 11, 2019 and a quarterly cash distribution of $0.64.1116 per Series B Preferred Unit 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 balancing en route for delivery to her multiyear charter with Yamal LNG, which is all going well, expected to occur on about 1st 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 $21,700,000 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 Yamau time charter in early July. Our EBITDA for the quarter reflects the fact that this interim short term Lena River time charter was at a lower contract rate than her previous Gascon contract and also the upcoming Yamal contract. Once the Lena River enters her 15 year Yamal contract, we expect a slight uptick in EBITDA to about $24,000,000 per quarter, which we believe will be reflected in our financial results from the 3rd quarter onwards. Operating River. However, please note that the amount of time charter contracts are on an operating cost pass through basis, meaning that our charters pay for all operating expenses as reasonably incurred. Moving on to Slide 5. Distributable cash flow for the quarter amounted to $5,800,000 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 $250,000,000 unsecured notes, which are maturing in October 2019. We are in an advanced phase with commercial banks and other capital sources to fund the payment due on the maturity date of our notes and refinance our $470,000,000 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 commitment from all new lenders. The process of obtaining the requisite commitments have been quite long, which may be attributed to the size of the transaction and a 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 a 15 year contract in the Q3 of this year, we estimate our 12 month forward run rate EBITDA will be about €96,000,000 to €97,000,000 per annum as previously described in prior presentations. If we deduct about ZAR 11,500,000 in distribution for Series A and Series B preferred unitholders, we are left with about ZAR 85,000,000 in cash flow available for debt service. Our current level of debt service payments, which for the quarter was $13,500,000 or $54,000,000 on an annualized basis, reflect our current non amortizing debt and our NOFA 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 in my slide, I'll pass the presentation over to Thierry. Thank you, Michael. Let's move on to Slide 8 to summarize the partnership's 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, maybe Equinor, Gazprom and Zalmar LNG, which the latter is a joint venture between Total, CECP, Novatek and the Silk Road Fund. Our contract backlog is about BRL 1,350,000,000 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 that drivers for our charters were the characteristics of the fleet, including its ice class notation and our organization's performance track record. All vessels are employed on time charter contracts under which the charter pays for all major voyage related variable costs, such as fuel, penalties and terminal costs. Our counterparties are mainly asset strong LNG producers that are typically able to forward program 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% through 2020 and 92% in 2021. The Lena River completed her charter with an undisclosed energy major on 31st May, 2019, in China, and the vessel has commenced her ballasting voyage to Europe where the vessel will be delivered into her long term charter with Yamal LNG on or about 1st July 2019, all going well. The previous charterers will pay a ballast bonus equal to fewer and higher 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 our option to extend the contract and so far that we have served Equinor with good feedback and results. Moving on to Slide 10. We have a unique fleet, a versatile fleet. 5 out of the 6 vessels in our fleet have ice Class 1A notation. Therefore, the fleet can handle conventional LNG shipping as well as operate in ICE bound and subzero areas. Initial capital expenditure 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 sponsor, has a market share of about 82% for vessels with ARC IV or equivalent ice class notation. To our knowledge, there are only 2 high LNG carriers in the world with equivalent notation, which are charted out in the long term. We view the added ability to trade in ice bound areas, an important advantage due to the increased production of LNG in ice bound areas and in particular along the Northern Sea routes. Yamal LNG has commenced production of their mega projects, and we also expect further projects to be developed in that region. We view the ability to perform conventional and lease 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 consists of groups of sister vessels, which we believe provides for overall relatively better economics and efficiency. We have now reached the end of the presentation, and I now open the floor for questions. We will now take our first question. It comes from the line of Sandy Burns from Stifel. Please go ahead. Your line is now open. Hi. Good morning, everyone. Just wanted to follow-up on your commentary about the financing. You mentioned the size of transaction, the 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. No, 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 or the 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. Okay. Could you share with us like an estimate of how many banks? Are you talking about over 10, over 20? Or something you rather not provide? Well, yes, I can give you some color. There's 3 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. Okay. And one last question for 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 fixed vessel of DLNG. It has nothing to do with the parent. Okay, great. Thank you, and good luck with everything. Thank you. Thank you. Thank you. Our next question is from the line of Mike Webber from Wells Fargo. Please go ahead. Your line is now open. Good morning, guys. How are you? Good morning. Good morning. So I wanted to ask you, is I'm not testing 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 facilitate that? It's not a gotcha question. I was trying to just kind of stare at this kind of 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 that showed we have, let's say, essentially $85,000,000 of cash available for debt service. And we do envision the majority of that cash being used for service debt and principal and interest. I think once we believe that as we utilize our secured cash flow to pay down debt, Our capital structure will improve. And eventually, we believe that these options will, in the longer term, lead to an increase in our equity value, which might give us an opportunity to issue a rapidly priced debt in 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, it seems like that would be a pretty long dated time frame. Yes. I mean, we have these fixed assets. They're on automatic pilot essentially significantly to reduce some 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. The kind of direction I'm going is 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 there hasn't been 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 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 a material holding in the partnership. It has owned 44% of the partnership's common units, and it has not bought or sold 1 common unit 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 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. And also having said that, the under the contemplated financing, the sponsor is required to maintain a certain ownership stake in the partnership. Great. And it's tough for you to speak for the people. But if I just look at the last 2 to 3 years and I look at the if I just look at the 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've been hearing the same thing for a couple of years and the stock won't go in one direction. Well, listen, I mean, the sponsor is owned by a very traditional shipping family, which doesn't typically speculate investing in And this is why the reason one of the reasons I responded, I have not bought or sold one share since the partnership's inception. I think it's a little hard pressed, let me say, regarding a default. I mean, in practice, in reality, the free float of our common unit is very limited. And if the sponsor accumulate accumulating more shares, could further limit the trade and liquidity of our common units. And the sponsor does have a significant and material holding in the partnership. It's only 44% of the partnership's coming units. No, no, 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 a there's no willingness, I guess, you can frame it as kind of traditional ownership structure, but there's not a willingness to step in to backstop the existing equity value at any point in the last couple of years. But then maybe once we get past the refinancing, they're willing to take back devalued equity for a dropdown. It doesn't see 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 have. I mean, the reality is that the partnership on its own can stand on its own legs. It does not require the sponsor support. We're giving 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 in on our conference call, and we look forward to speaking with you next time. We just had one further question. It's from Randy Giveans. Your line is now open. Okay. Howdy, gentlemen. How are you? Good. Thank you. So, yes, quick question for me. Just trying to get an expected timing for the current distribution in terms of when the last one will be paid. Will that be possibly this quarter? Or will there 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. And as we said before, we hope this refinancing is finalized within 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 Nena River that's supposed to commence, I believe, next month? Is that still on schedule? Yes. It's still on schedule. Investo has been released from her previous charter and is handworks balancing towards Europe, where she will deliver on or about 1st July all going well to Yamal LNG. Perfect. All right. Hey, well, that's it for me. Thank you. Thank you very much. No further questions. Now please continue.