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Edited Transcript of DLNG earnings conference call or presentation 22-Mar-19 2:00pm GMT

Q4 2018 Dynagas LNG Partners LP Earnings Call

MONACO Apr 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Dynagas LNG Partners LP earnings conference call or presentation Friday, March 22, 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

* Donald Delray McLee

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Max Perri Yaras

Morgan Stanley, Research Division - Research Associate

* Michael Webber

Wells Fargo Securities, LLC, Research Division - Director & Senior Equity 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 Dynagas LNG Partners Conference Call on the Fourth Quarter 2018 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 this 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 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.

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

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

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Morning, everyone, and thank for joining us in our fourth quarter ended 31st December 2018 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 -- 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 to review the quarters and subsequent highlights. On October 23, 2018, the partnership completed a public offering of 2.2 million Series B 8.75% preferred units resulting in net proceeds of $53 million.

The Lena River completed its scheduled dry docking in late October 2018, and was rechartered to a major energy company prior to commence -- prior to the commencement of its multiyear charter with Yamal, which is expected to commence in the third quarter of 2019.

Adjusted EBITDA for the fourth quarter was reported at $21.6 million. Distributable cash flow for the quarter was reported at $5.5 million, and reported free cash flow of $109.9 million and available liquidity of $139.9 million as of December 31, 2018.

Subsequent to the quarter, on January 23 , 2019, we declared and subsequent paid a quarterly cash distribution of $0.5625 per Series A preferred unit for the period from November 12, 2018, to February 11, 2019. And on February 1, 2019 (inaudible) distribution of $0.7231 per Series B Preferred Units with respect to the period from October 23, 2018 to February 22, 2019.

On January 25, 2019, the partnership announced a reduced cash distribution to common unitholders of $0.0625 per common unit in respect of the fourth quarter of 2018, down from $0.25 per common unit in prior quarters, which was paid on February 14, 2019.

Our Board of Directors believe that the decision to reduce our cash distribution to common unitholders is necessary in order to retain more of the cash generated from the partnership's long-term contract to maintain a steady cash balance, and in particular, to facilitate the refinancing of the partnership's $250 million notes, which mature on October 30, 2019.

The level of future cash distributions to common unitholders will be subject to, among other factors, the final terms of the refinancing of the note, including but not limited to, the level of indebtedness incurred and the level of the debt amortization profile, if any. We believe that reduction of the cash distribution is not reflective of the partnership's underlying operational performance, with our LNG carriers continuing to generate stable and predictable long-term cash flows from long-term contracts with high-quality counter parties.

I will now turn the presentation over to Michael Gregos, 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. And moving on to Slide 4, where results for the quarter were within our expectations as operating expense was under dry docking of the Lena River was below budget. For the quarter, we generated $5.5 million in distributable cash flow, and $21.6 million in adjusted EBITDA.

For the quarter, we are very pleased with the performance of our manager, as we have 100% utilization and very competitive daily vessel, operating expenses, which came in at $11,500 per day per vessel, and the course of the dry dock of the Lena River end up at $2.4 million, which was $1 million below budget with only 17 of hire days.

For the quarter, average gross time charter hire on a cash basis amounted to about $57,500 per vessel per day, which we expect to increase to a run rate level of around $61,000 per day when the Lena River enters a long-term contract with Yamal in July of this year.

Our cash breakeven, excluding our distributions to preferred and common unitholders and our dry docking cost amounted to about $40,000 per day per vessel for the quarter. If we include distributions to common and preferred unitholders, our cash breakeven amounted to $49,000 per day per vessel.

Moving on to Slide 5 for the quarter, our distributable cash flow was $5.5 million, and after payment of distributions to preferred unitholders, distributable cash flow available to common unitholders was $2.9 million. And we paid $2.2 million in cash distributions to our common unitholders, resulting in a distribution coverage ratio of 1.32x.

For the quarter, we had a cash coverage ratio of 2.7x, with cash coverage representing adjusted EBITDA less interest cost, loan principal payments and preferred equity dividends divided by actual distributions to common unitholders.

Moving on to Slide 6 to our debt profile. We currently have total debt of $723 million, comprising of $473 million secured Term Loan B, which is amortizing annually by $5 million and has a floating interest rate and our $250 million unsecured notes, which mature end of October 2019.

Including our $55 million issuance in October of 2018 of Series B Preferred Equity, we have cash on hand of $110 million, and net debt-to-total-capitalization of about 65% as of 31st December, 2018.

We believe the financial strategy of having essentially non-amortizing debt in order to distribute to common unitholders all of the partnership's cash flow available after debt service and distributions to preferred unitholders is no longer workable. We are currently working on the refinancing of our $250 million notes, so as to reduce leverage over time and increase equity value. We believe the quality of our assets with our long-term time charters to quality counter parties are positive factors, which will enable us to achieve this objective.

As previously advised, our cash distributions to common unitholders may be revised depending on the final terms and conditions achieved for this refinancing.

Moving on to Slide 7, we believe our competitive advantage lies in our best-in-class revenue contract backlog, which amounts to about $230 million per vessel, along with our outstanding operational performance, as evidenced by our high utilization rate and very competitive operating expenses. The predictability and sustainability of our cash flows have underpinned our contract coverage, the 2 of our vessels being on contract, which protect us from rising operating costs, with the additional benefit of the dry docks, not only are paid by our charters but also allow the vessels to remain on hire during the dry docks. It is also noteworthy that we have no scheduled dry docks until 2022.

We believe the reduction in the cash distributions to common unitholders from $0.25 per unit per quarter to $0.0625 per unit per quarter was necessary to improve common unit distribution coverage, which has fallen below 1x in prior quarters, and to facilitate the refinancings of the partnership's $250 million notes, which we discussed earlier.

That wraps it up from my side. I will pass over the presentation 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 8. Our fleet currently counts 6-type specification and versatile LNG carriers with an average age of about 8.6 years. We have a diversified customer base with substantial energy companies, namely, Equinor, Gazprom, an undisclosed major U.S. producer and Yamal LNG, which the latter is a joint venture between TOTAL, CNPC, NOVATEK and the Silk Road Fund.

Our contracted time charter backlog is about $1.38 billion. And our average remaining charter period is about 9.5 years, which compares well versus our peers.

Moving on to Slide 9. During the last years, we have been very focused on securing long-term employment for the fleet. Our fleet is fixed on long-term charters with key energy companies. Drivers for our charters were the characteristics of the vessels, including their ice class notations and our organization's track record. All the vessels are employed on time charter contracts, under which the charter have paid all major voyage-related variable costs, such as fuel, canal fees and terminal costs, meaning we enjoy a visible and stable revenue.

Our counterparties are mainly active strong energy producers, which give the benefit that our customers are able to program their chartered vessels for long periods of time that results in relatively improved planning ability.

Our -- we are 98% contracted in 2019, 100% in 2020 and 92% in 2021. Our earliest availability is the Arctic Aurora, which potentially 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 very good results.

Moving on to Slide 10. We have a unique fleet, 5 out of the 6 vessels in our fleet have ice class 1A notations. The fleet can handle conventional LNG shipping as well as operating icebound and subzero areas. The initial capital expenditure for an ice class vessel is more expensive than conventional carriers, however, the operating cost between our ice class type carriers and conventional carriers are very similar. The company, together with our sponsor, has a market share of about 82% of existing vessels with Arc-4 or equivalent ice class notations.

To our knowledge, there are only 2 other LNG carriers in the world with equivalent notation which have chartered out on long term. We view the ability to trade in icebound areas as an important advantage due to the increased production of LNG in icebound areas, and in particular, along the Northern Sea Route.

Yamal LNG has recently commenced the production of their megaproject, and we also expect further projects to be developed in that region and other harsh environment areas going forward.

We view the ability to perform in niche operations as an important driver in securing attractive long-term charters going forward.

Further to that, our fleet is optimized for terminal compatibility, which is of significant importance in the market that is changing from a fixed route trade to a worldwide trade. The fleet consists of groups of sister vessels that 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today is from Donald McLee from Berenberg.

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Donald Delray McLee, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [2]

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Just to jump in, could you give some color on any progress around the debt refi. There's been limited updates over the past couple of quarters, despite debt sitting, it's probably the most significant near-term headwind. So any additional insight there would be appreciated?

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

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Yes, Donald. No, I mean, we're looking at various options across the capital structure. And we're actively working on them. We think Dynagas has a very strong credit story, and we will be able to achieve our objectives. But there's not much more that I can say at this point.

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Donald Delray McLee, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [4]

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Okay. Then maybe stepping away directly from the financing, and then more to some of the indirect options you might have. How has that group of options changed over the past year? Would a vessel sale be of potential consideration? Has there been any discussion of a loan or some type of other security issuance to the parent level?

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Tony Lauritzen, Dynagas LNG Partners LP - CEO & Director [5]

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No. A sale is not part of an option that we're looking at. As I said before, we are looking at various options, with across the spectrum of the capital structure. So what we're doing, essentially, is we're trying to find the most efficient solutions that will increase equity value in a sustainable manner. And we are lucky enough that we do have multiple options, given that we have quality assets with quality counterparties. And essentially, what we're doing is we're going through the terms and conditions of each option, and once they are all finalized then we will present them to our board for a final decision.

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Donald Delray McLee, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [6]

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Okay. And then, just one more on the level of the distribution cut. You mentioned a disconnect between equity pricing and what's going on in terms of the company's underlying operations. So I was curious maybe what's changed in the rationale for the degree of the cut this time around versus the other -- earlier cut back in April 2018?

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Tony Lauritzen, Dynagas LNG Partners LP - CEO & Director [7]

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Yes. When we -- I think it's important to see the cuts in the big picture. Of course, we wouldn't have liked to make 2 cuts. But when we go back in time a little bit, we're -- as an MLP, the MLP market kind of -- what's that word, very negatively affected by the crash in the oil price. So while after the crash in the oil price, the oil price recovered but the MLP sector really didn't. So when we did our previous cut, we had assumed that the MLP market broadly would improve going forward, and enable us and other MLPs to issue cheap equity, whereas, that didn't happen. And that is a reason why we had to make a second cut and a more severe cut, that goes hand-in-hand and enables us to discuss a wide range of refinancing options.

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Operator [8]

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Our next question is from Ben Nolan from Stifel.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [9]

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So I have a couple, but I'll I start with a real quick one just for modeling purposes. On the Lena River until the contract with Yamal starts, what's the -- can you maybe disclose what the rate you expect to earn on that? Would be in the interim period?

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Michael Gregos, Dynagas LNG Partners LP - CFO [10]

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Ben, it's Michael. No, we typically don't disclose the rates, especially for the short-term charter. I think the only thing we can say that once we enter the Yamal charter, the rate will be higher. So we will expect an uptick in, let's say, average or average time charter rates. As I said in the -- earlier, for the quarter, it was the $57,500 average. And once Lena River enters, we're going to be around $61,000.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [11]

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Okay, all right. Well, that's helpful. I can just back into it there. The next one is a little bit more -- maybe touching on the broader theme here. So, obviously, first and foremost, you have to refinance the notes, but then thinking about the company or the partnership from a longer-term perspective, pretty small -- and any growth might be a little bit challenging to come by via traditional means, given both, sort of, where you're at and where the MLP market is. Have you considered, at all, maybe doing some sort of something with the private company, a pretty substantial fleet over there with good contracts? And any thoughts or what are maybe the pluses or minuses from your perspective of maybe merging the public company and the private company together?

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Tony Lauritzen, Dynagas LNG Partners LP - CEO & Director [12]

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Ben, it's Tony. No, we don't have any comments to that. We haven't had any discussions of that kind. I think it's safe to say that what we're working on now is the refinancing, that will be our #1 target. And once that's out of the way then we'll see what is the best way of maintaining or growing the company.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [13]

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Okay. And then, lastly, just out of curiosity, and I know that it's not held at the partnership. But the private company does have 2 FSRUs on order. I was just curious maybe, Tony, if you could shed some light as to what the activity level is at the moment on trying to contract FSRUs?

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Tony Lauritzen, Dynagas LNG Partners LP - CEO & Director [14]

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Yes. So I think what we've seen is that FSRU market has gone through a little bit of the slowdown. Where there was, let's say, lack of real project visibility. That being said, we think that has changed now. Now we can say that we are actively looking at several projects for those FSRUs. So we've been hearing that, the market is pretty long on FSRUs potential. But when we actually starting to look at what is available for the various projects, no, it's not so easy to say. But what I can say is that, given now that the time till their delivery is, no, it's not that far away. I mean, there are in '21. It's more -- it's a more timely period to discuss the employment of those vessels going forward.

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Operator [15]

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Our next question is from Randy Giveans from Jefferies.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [16]

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Just 2 quick questions. So any updates on possible future drop downs, maybe, the Clean Planet, Clean Horizon, Clean Vision? Have all of those commenced their charters with Yamal?

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Tony Lauritzen, Dynagas LNG Partners LP - CEO & Director [17]

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Yes. When it comes to the visibility on drop downs and active commence for charters then, yes, they -- the majority of those vessels, they have commenced their charters with Yamal, apart from Clean Ocean that is on with Cheniere. Now on the question of visibility on drop downs, we're not able to provide information on that at this moment. Again, our main area of focus is the refinance and, thereafter, we will see how to maintain or grow the company.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [18]

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Sure. Okay. And then, I guess, any updates on the vessel that had some issues with the damaged hull in Russia? I think it was last quarter. Our understanding it had to return to the port on its maiden charter?

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Tony Lauritzen, Dynagas LNG Partners LP - CEO & Director [19]

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Yes. And so that vessel is held at a private level by the sponsor. No, that was an issue that was resolved. It was a, let's say, temporary technological -- or temporary technical issue. And the vessel was quickly repaired for that issue. And it's fully back in service.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [20]

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Okay. And just to clarify, you said no more dry docking till 2022? Is that correct?

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Tony Lauritzen, Dynagas LNG Partners LP - CEO & Director [21]

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Yes.

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Operator [22]

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(Operator Instructions) The next is from Max Yaras from Morgan Stanley.

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Max Perri Yaras, Morgan Stanley, Research Division - Research Associate [23]

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To get back to Donald's first couple of questions, can you walk through maybe some of the assumptions in the dividend cut. Is that based on proposed terms that maybe are already in place for some of the options? Is it based on a worst-case scenario? Just some color around that would be helpful.

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Tony Lauritzen, Dynagas LNG Partners LP - CEO & Director [24]

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I think it's based on -- it's a number which keeps, let's say, all the options open at this particular stage. And that's all I can mention...

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

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I think it's important to appreciate only. We cannot really give any guidance on the distribution going forward until -- because that will depend on the outcome of the refinancing of the notes.

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Max Perri Yaras, Morgan Stanley, Research Division - Research Associate [26]

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Okay, sure. And then, I know it's a bit out now, but the Term Loan B, have you looked at options yet on refinancing that? Or maybe can you refinance that at the same time that you do the upcoming note maturity?

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

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That is a possibility, yes.

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Max Perri Yaras, Morgan Stanley, Research Division - Research Associate [28]

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Okay. And then, just finally on the market, we've obviously, seen some near-term weakness in LNG prices, but looking out now the December 2020 curve has come down a little bit, can you give any color on your expectation for LNG prices? Or maybe some catalyst to get the rates back up a bit? Talking about JKM spot rates?

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

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Yes, so, I mean, first of all, we are termed out. In the sense that we don't have any availability in '21, so it's not the short-term market, but the immediate market is not so important for us. But nevertheless, what we've seen in the last 3 annual seasons is that we've seen more cyclicality. So around first, third and fourth quarter of the year, we see a real pickup in demand for LNG carriers, driven a lot by LNG going into the Far East. We believe that, kind of, cyclicality will continue going forward. Of course, it's not very easy to predict what the gas prices will be going forward. That's not our forte, that our charter's forte. But then, we do have noted that gas prices are on the spot, not on long-term but on spot, are very cheap now. So we would expect gas prices to increase going forward towards third and fourth quarter, in particular, driven by heating and industrial demand in the Far East during that time of the year. And that will have normally a direct impact on shipping, too.

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Operator [30]

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Our next question is from Michael Webber from Wells Fargo.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [31]

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I just wanted to loop back on the primary topic here, which is the refi. So I think Donald or Ben, kind of, touched on this, but -- so -- where is the sponsor in all of this right now? I can't imagine the sponsor wants to merge the entities now, but in terms of providing a backstop to refinancing effort, obviously, the sponsor's in control. There's some stuff you probably can't get into, but the sponsor's role in a refinancing process is pretty critical. So it's tough to leave it as just we can't talk about it. Is the sponsor willing to step in and be constructive in different ways, if needed?

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Tony Lauritzen, Dynagas LNG Partners LP - CEO & Director [32]

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Yes. We would absolutely think so. But that being said, we are in a positive way looking at the wide range of refinancing options. So that is the expected a course of action. And we think that, that refinance is not too far away.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [33]

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And Tony, I'm not trying to get cute with your words, but when you say that you would think so, this is a refinancing process, it's been going for 6 to 9 months. Do you -- does that mean you would know by now whether the sponsor is willing to step in? Or is that the conversation that's even happened yet?

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Tony Lauritzen, Dynagas LNG Partners LP - CEO & Director [34]

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Look, I don't think it -- that it's appropriate to, kind of, discuss this in this forum right now. But I'll...

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [35]

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You've got equity owners on the call, right? So it's, whether or not the sponsor -- you've had a conversation with the sponsor a little bit, to do backstop or support. I mean, it's not improper, it might not be convenient but it's not improper to talk about that.

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Tony Lauritzen, Dynagas LNG Partners LP - CEO & Director [36]

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No. I apologize if I word myself incorrectly. But the sponsor is very aware, very well aware. And the sponsor, yes, would be willing to support, if necessary, that is fair to say.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [37]

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All right. That's helpful. And I know you can't write checks for them, so I understand that but it's obviously critical for any kind of equity thesis.

Around the dividend, I guess, I'm just trying to think of maybe why you didn't cut it to 0? And then, I think Michael mentioned, and I don't want to take this out of context, but it'll be -- the cut -- you kind of let -- kind of came to a number, like it landed at the number that keeps the options open at this stage. Is the right way to think about that, that you cut it to a point where you still think common equity is a viable option to help refinance the bonds?

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Tony Lauritzen, Dynagas LNG Partners LP - CEO & Director [38]

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Yes. That's right. I mean, as we said, the various options are across the capital structure. So obviously, potentially, one spectrum of capital structure is equity -- or similar forms, preferred equity or what have you. So, yes, and it is important to have the distribution which can maintain that value. So that's why we ended up with this number, which we believe would be the number that makes sense and would be sustainable for the long term, given certain assumptions, but obviously, that -- it could turn out to be different in practice.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [39]

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Got you. And then, forgive me if you've mentioned this already. And it's kind of an overly simplistic question. But in terms of -- as you stand today, like the time frame around when you think of kind of alleviate the overhang from the refinancing risk, is that something you're thinking about getting done in the second quarter?

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Michael Gregos, Dynagas LNG Partners LP - CFO [40]

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I think, certainly, a possibility. I -- we can't guarantee anything, but it's certainly a possibility, yes.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [41]

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Okay, so it's possible. Maybe would you consider it likely or is it more likely sometime in Q3, kind of in the summer?

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Michael Gregos, Dynagas LNG Partners LP - CFO [42]

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No. I think it's likely, yes.

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Operator [43]

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Unfortunately, we have no time for any further questions. I will hand the call back to Mr. Lauritzen and Mr. Gregos for closing remarks.

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Michael Gregos, Dynagas LNG Partners LP - CFO [44]

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Okay. So thank you, all, for your time and for listening in on our earnings call. And we look forward to speaking with you, again, on our next call. Thank you very much.

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Operator [45]

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Thank you very much, gentleman. Ladies and gentlemen, that does conclude the call for today. Thank you all for participating, you may now disconnect.