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Edited Transcript of DLNG earnings conference call or presentation 27-Sep-19 2:00pm GMT

Q2 2019 Dynagas LNG Partners LP Earnings Call

MONACO Oct 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Dynagas LNG Partners LP earnings conference call or presentation Friday, September 27, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael Gregos

Dynagas LNG Partners LP - CFO

* Tony Lauritzen

Dynagas LNG Partners LP - CEO & Director

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Conference Call Participants

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* Benjamin Joel Nolan

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Daniel Kelsh;UBS;Analyst

* Randall Giveans

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Thank you for standing by, ladies and gentlemen, and welcome to the Dynagas LNG Partners Conference Call on the Second Quarter 2019 Financial Results.

We have with us today 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 call 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 contain 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 that 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.

Now I would like to hand the floor over to Mr. Lauritzen. Please go ahead, sir.

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Tony Lauritzen, Dynagas LNG Partners LP - CEO & Director [2]

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Good morning, everyone, and thank you for joining us in our second quarter ended 30 June 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.

Moving on to Slide 3. Net income for the quarter was reported at $0.9 million, and adjusted EBITDA was reported at $20.9 million. Free cash was reported at $112.9 million and available liquidity of $142.9 million each as of June 30, 2019.

Subsequent to the quarter, on September 25, 2019, the partnership successfully closed and funded a syndicated 5-year $675 million senior secured term loan with leading international banks. Borrowings under the senior secured loan have already been utilized to repay in full on September 25 the partnership's outstanding $470 million senior secured Term Loan B and, together with cash on hand, will be utilized to repay in full the partnership's $250 million senior unsecured notes after maturity date on 30th of October 2019. Pursuant to the terms of the $675 million senior secured term loan, the partnership will not declare or pay distributions to common unitholders while borrowings are outstanding under the senior secured term loan.

We paid in August a quarterly cash distribution of $0.5625 for Series A preferred unit for the period from May 12, 2019, to August 11, 2019, and a quarterly cash distribution of $0.546875 for Series B preferred units for the period from May 22, 2019, to August 21, 2019.

Our vessel, the Lena River commenced her employment on her long-term charter with Yamal LNG on 1st of July 2019. In order to deliver the Lena River into the new charter, the vessel incurred a repositioning voyage, which took about 1 month, which reduced the fleet's utilization, which ended up at 94% for the quarter. Our fleet of LNG carriers are now fully delivered into all of their respective long-term charters.

I will now turn the presentation over to Michael who will provide you with further comments to the financial results.

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Michael Gregos, Dynagas LNG Partners LP - CFO [3]

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Thank you, Tony. Moving over to Slide 4 of the presentations. Our results for the quarter were within our expectations with adjusted EBITDA coming in at $21 million and utilization at 94% due to the repositioning of the Lena River with respect to its transition from its previous short-term interim contract to its Yamal 15-year contract, which commenced on July 1. Other than the Lena River repositioning, the partnership had no unscheduled off-hire days.

The Lena River interim short-term contract, which was concluded on May 31, was at a lower time charter rate than the present 15-year contract the Lena River is currently performing, resulting in an average daily hire per vessel gross commissions of $55,100 per day for the quarter. Following the entry of the Lena River into a long-term contract, we expect our average daily time charter hire to increase to about $62,000 per day per vessel. Therefore, going forward, we anticipate an uptick in our adjusted EBITDA to reflect this.

The increase in operating expenses to $12,630 per day per vessel reflects primarily increased operating expenses on the Yenisei River. However, please be reminded that the Yamal contracts are OpEx pass-through, meaning operating expenses are paid for by charters.

Interest and finance costs for the quarter amounted to $13.1 million. Post refinancing, we expect this cash interest expense to decrease considerably to around $8.5 million per quarter in the near term with current LIBOR rates resulting in significant cash savings.

Moving on to Slide 5. On September 25, we closed our syndicated $675 million senior secured term loan with major international shipping lenders. This global refinancing facility will be secured by, among other things, first priority mortgages on the 6 LNG carriers in the partnership's fleet. Borrowings under the term loan together with cash on hand have repaid on September 25 in full our $470 million outstanding senior secured Term Loan B and will be used to repay our $250 million 6 1/4% senior unsecured notes at their maturity date of 30th of October 2019. The new term loan is repayable over 5 years in 20 consecutive quarterly payments plus a balloon payment in year 5 based on a 14-year amortization profile and has a margin of LIBOR plus 300 basis points, significantly reducing our cash interest expense.

The terms of the term loan include financial covenants providing for the maintenance of maximum leverage ratios and minimum liquidity covenants, including the requirement for the partnership to maintain a minimum cash balance of $50 million throughout the life of the credit facility in the restricted collateral account. Under the terms of the term loan, the partnership will be prohibited from paying distributions to its common unitholders while borrowings are outstanding under the term loan. Scheduled distributions to preferred unitholders under the existing Series A preferred units and Series B preferred units will not be restricted provided there is no event of default while the term loan remains outstanding.

This global refinancing streamlines our debt structure and significantly improves our financial profile as debt amortization increases from less than 1% of total debt outstanding to about 7% of total debt outstanding, resulting in a gradual deleveraging of the business and allowing the partnership to build equity value over time.

This concludes my part of the presentation. I will now pass the presentation on to Tony.

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Tony Lauritzen, Dynagas LNG Partners LP - CEO & Director [4]

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Thank you, Michael. Let's move on to Slide 6. Our fleet currently counts 6 LNG carriers with an average age of about 9.1 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 contracted backlog is about $1.31 billion, equivalent to an average backlog of about $218 million per vessel. And our average remaining charter period is about 9 years, which compares very well versus our peers.

Moving on to Slide 7. Our fleet of LNG carriers are fixed on time charters with key energy companies. We believe that drivers for our charters were the characteristics of the fleets, including their ice class notations and our organization's operational performance track record. All of the vessels are employed on time charter contracts under which the charter pays all major voyage-related variable costs such as fuel, canal fees and terminal costs. Our counterparties are mainly active strong energy producers that are typically able to forward program the vessels for periods of time, which gives us a certain degree of planning ability and cost control.

We estimate our fleet now to be 100% contracted in 2019, 100% in 2020 and 92% in 2021. With the Lena River having been delivered into her long-term charter with Yamal LNG, our earliest potential rechartering availability is 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 results.

Moving on to Slide 8. We have a unique and versatile fleet. 5 out of the 6 vessels in our fleet are assigned with ice class 1A notation. Therefore, the fleet can handle conventional LNG shipping as well as operate in icebound and subzero areas. Initial capital expenditure for an ice class vessel is more expensive than conventional carriers. However, we estimate the operating costs 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 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 ability to trade in icebound area as an important advantage due to an increased production of LNG in such areas and, in particular, along the Northern Sea Route.

Yamal LNG has commenced the production of their mega project, and we also expect further projects to be developed in that region. 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 a value to our charters, and the fleet consists of groups of sister vessels that provides for overall better economics, operations, preventive maintenance and redundancy.

Moving on to Slide 9. We believe our company has many attractive features. Our fleet is relatively young compared with the world average and provides for trading versatility. The new financial profile of the company is simple and provides us with a competitive cost of debt and with a clear path towards gradual deleveraging through a significant annual debt amortization. The partnership has in place long-term charter contracts with international energy companies, generating cash flows that will be channeled too with the amortization requirements of the financing facility, which we believe will result in building equity value over time and beyond this, position the company for future growth.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [2]

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This is Ben Nolan from Stifel. Can you hear me?

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Tony Lauritzen, Dynagas LNG Partners LP - CEO & Director [3]

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Yes, Ben.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [4]

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Well, first, congratulations on the financing. Took a while, but I would say successful certainly with respect to the terms. I did want to dig in a little bit on that if I could. So with respect to, clearly, common dividends are restricted so long as there's a balance on the loan. Was curious if there's also restrictions on acquisitions, not that maybe you would do those right away, but are those also restricted under the terms of loan?

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Michael Gregos, Dynagas LNG Partners LP - CFO [5]

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No. Acquisitions are not restricted provided, of course, that pro forma of the acquisitions, we can meet the financial covenants, which are in the loan agreement.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [6]

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Okay. Very -- and then also, are there any restrictions on prepayment or early retirement or anything of that sort? Or you're free to...

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Michael Gregos, Dynagas LNG Partners LP - CFO [7]

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No. No. No, we're free to do...

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [8]

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Good. And then also just curious, you didn't list it in there, could you maybe talk through maybe the profile of the lenders, maybe specifically who they are at least, maybe in general the types of lenders that were part of the transaction?

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Michael Gregos, Dynagas LNG Partners LP - CFO [9]

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We cannot mention the names specifically, but it's a large group of household name of banks, huge banks which are household names. It's a large number of banks involved in this syndicated facility. But unfortunately, I can't tell you specifically which banks they are other than they're household names.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [10]

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Okay. No, that's fine, just trying to get a sense. And then with all that said, the financing is out of the way, the groundwork and the rules of the game appear to sort of be now set. Seems like in the near term, cash flow has to go to repaying debt. But in longer term, curious, how do you envision the partnership developing? What's the grand scheme or the hope of where you want to be and how long and how you intend to get there from sort of a broader strategic sense?

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Tony Lauritzen, Dynagas LNG Partners LP - CEO & Director [11]

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Yes. Thank you, Ben. Well, I mean as you mentioned, now that the overhand of the refinancing is lifted, we hope that the market will be able to better assess the quality and prospects of the partnership. And of course, the elimination of the distribution to common unitholders was a painful measure. However, looking ahead, it allows the partnership to build equity value over time, which we hope will be eventually reflected in our unit price. And at that time, we will consider what are the best options for the partnership to finance further growth opportunities.

Obviously, our common unit price makes it unattractive to issue equity to fund acquisitions, although the decision at the end of the day depends on the use of capital and how value additive it is to the company. So repeating myself, at present, we believe immediate value growth will come from an increasing equity value as a result of the amortization profile of the new term loan facility. I think that's what we can say for now.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [12]

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Okay. But in a long term and maybe looking at some of the assets still held at the sponsor, I mean you're not in a position to do anything about it now, but eventually, those are still potential acquisition targets or hopeful acquisition targets, I suppose. Yes?

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Michael Gregos, Dynagas LNG Partners LP - CFO [13]

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Yes. I mean, listen, looking ahead further to the future, we can consider growth opportunity from dropdowns or third-party vessels. Following the completion of our refinancing and the elimination of our common distribution, we believe that whatever growth initiatives we undertake, they have to be financed in a way which can increase shareholder value. So we have to see where our common unit price will settle over time in order to evaluate growth initiatives, whether they be from our sponsor's vessels or third-party vessels.

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Operator [14]

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(Operator Instructions)

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [15]

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Randy Giveans of Jefferies. I guess 2 quick questions for me. Obviously, there's no allowances for distributions here until, I guess, 2024 or as long as there's a balance on the loan. Any opportunities for unit repurchases? Or are those also disallowed?

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Michael Gregos, Dynagas LNG Partners LP - CFO [16]

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No. No, they're not -- unit repurchases are not disallowed. No. There are certain minimum liquidity covenants that we have. We have to have a certain level of minimum liquidity, but as long as we meet those, they're not disallowed, no.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [17]

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And is there any authorization for repurchases right now?

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Michael Gregos, Dynagas LNG Partners LP - CFO [18]

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At this stage, no. At this stage, no.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [19]

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Okay. And then I guess with 100% contracting, pretty fixed expenses, obviously, the interest expense coming down, pretty straightforward model, I guess the only maybe driver of changes would be off-hire expectations either in the back half of this year, 2020? Can you give some updated kind of dry docking guidance around those vessels for the next maybe 2 years?

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Michael Gregos, Dynagas LNG Partners LP - CFO [20]

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Well, the next 2 years, we don't have any scheduled dry dockings. Our first dry dockings commence 2022, 3 vessels in 2022 and 3 vessels in 2023.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [21]

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Okay. And then I guess just last question. You mentioned some opportunities looking at further dropdowns either from your sponsor or from a third party. Is there a preferred dropdown kind of candidate or term you're looking out, maybe the larger 172,000 cubic meters or the smaller 162,000s? Or is it completely just price dependent?

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Michael Gregos, Dynagas LNG Partners LP - CFO [22]

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No. No. There's no preferred vessel at this stage. As we said earlier, we've just completed our refinancing. We're going to have to see where our market cap settles over time and evaluate growth initiatives from there. And as we said, it can be the dropdowns from our sponsor or it could be third-party vessels. We don't have any specific vessels in mind from our sponsor's fleet.

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Operator [23]

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(Operator Instructions)

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Daniel Kelsh;UBS;Analyst, [24]

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This is Dan Kelsh from UBS Wealth Management doing the call. Congrats again on the refinancing. I did want to ask if you guys had any plans to upstanding your rating with Moody's and S&P. Or if your new lenders just don't require that, is this something you might move on from?

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Michael Gregos, Dynagas LNG Partners LP - CFO [25]

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Yes. No, that's being withdrawn. The ratings are being withdrawn. We no longer need those ratings. So they're being withdrawn, yes.

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Daniel Kelsh;UBS;Analyst, [26]

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Okay. And just as a separate follow-up is question. The person prior to me asked about kind of repurchasing common equity, but have you ever thought about repurchasing any of your preferred either just knowing that it's at a discounted face? Is that something that could be viewed as accretive?

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Michael Gregos, Dynagas LNG Partners LP - CFO [27]

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Well, right now we had our -- we were really focused on our refinancing. So at this stage, we have to think about all our options and how we're going to see. We haven't really thought about it, to tell you the truth.

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Operator [28]

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There are no further questions. Please continue.

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Tony Lauritzen, Dynagas LNG Partners LP - CEO & Director [29]

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Thank you very much. We would like to thank you for your time and for listening in on our earnings call. We look forward to speaking with you again on our next call. Thank you very much.

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Operator [30]

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Thank you very much. That does conclude the conference for today. Thank you for participating. You may all disconnect.