Dynagas LNG Partners LP

Ladies and gentlemen, and welcome to the Dynagas LNG Partners conference call on the first quarter 2022 financial results. We have with us Mr. Tony Laurinson, Chief Executive Officer, and Mr. Michael Grigos, 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 1 on your telephone keypad. I must advise you that this conference is being recorded today. 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, Data Gas 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 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 Partners LNG ability to pursue growth opportunities, Dynagas Partners LNG expectations or objectives regarding future and market charter rate expectations, and, in particular, the effects of COVID-19 on the financial condition and operations of Dynagas Partners LNG and the LNG industry in general. May be forward-looking statements as such, Exchange Act of 1934 as amended. Matters discussed may be forward-looking statements which are based on current management expectations that involve risk 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 a full forward-looking statement. The same statement was also included in the press release. Please take a moment to go through the whole statement and read it. And now I'll pass the floor to Mr. Loretz. Please go ahead, sir.

Good morning, everyone, and thank you for joining us in our three-month and the 31st March 2022 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. We can move to slide three of the presentation. We are pleased to report the results for the three months and the 31st March, 2022. All six LNG carriers in our fleet are operating under their respective long-term charters. Our fleet reported 100 percent utilization for the first quarter of 22, and for the eighth, the consecutive quarter included. For the first quarter of 2022, we reported net income of 23.9 million, earnings per common unit of 57 cents, adjusted net income of 10 million, adjusted earnings per common unit of 19 cents, and adjusted EBITDA of 22.9 million. Our thoughts go out to everyone affected and suffering as a result of the crisis in Ukraine. We continue to closely monitor this ongoing situation, including the implications of economic sanctions, trade restrictions and other considerations that may affect our business. The partnership is currently in compliance with applicable U.S. and EU sanctions. It is our understanding that the current U.S. and EU sanctions regime have broadly exempted energy shipping and do not materially affect the business, operations, or financial conditions of the partnership. Also, the partnership's counterparties are performing all of their obligations under their respective time charters in compliance with all applicable U.S. and EU rules and regulations. Our vessels named Clean Energy, Ob River and Armour River are on charter to Gazprom Marketing and Trading of Singapore, which is owned indirectly by Gazprom Germania. Gazprom Germania, including its subsidiaries, has been placed under control of the German government, which company has also received a loan commitment of approximately €9.8 billion from the German government. Essentially, this all means that the three respective charters of Clean Energy, Orb River, and Armor River are now under German control as opposed to Russian control. The change in control has had no impact on our revenue. Sanctions legislation is changing rapidly, and the partnership is continuously monitoring the ongoing situation. I will now turn the presentation over to Michael, who will provide you with further comments to the financial results.

Thank you, Tony. Turning to slide four, our quarter results continue to reflect our stable contractually-based operating model, as our fleet continues to operate with 100 percent utilization. The quarter was mainly impacted by the special survey of our 2007 built LNG carrier, Clean Energy, which commenced on 16th March, was completed on April 15th, and which $2.6 million was attributable to this quarter. Vessel operating expenses were 10% higher versus Q1 2021, although they were 5% lower than the previous quarter. As a result, adjusted net income for the quarter decreased by 5.7% to $10 million compared to the first quarter of 2021, and adjusted EBITDA amounted to $22.9 million, a 4.2% decrease compared to the first quarter of 2021. Looking forward, we anticipate that next quarter's earnings will also be impacted, firstly, with the balance of the Clean Energy Special Survey and Dry Dog, which is anticipated to amount to $2.7 million, excluding the installation for the ballast water treatment plant, which will be capitalized. Please also note that the Amur River commenced its special survey and dry dock on June 26th, and the Ob River is expected to commence its special survey and dry dock on July 20th, with each vessel being expected to be off-fire for about 25 days. Moving to slide 5. As of the end of March, we had 555 million debt outstanding under our credit facility, all of which has been hedged with an interest rate swap leading to a fixed interest rate of 3.41% for the life of the loan until its maturity in September 2024. we are continuing our comprehensive deleveraging path, which commenced in the fourth quarter of 2019, having repaid, through the quarterly installments on our credit facility, $120 million in debt, resulting in a decrease in our net leverage to 4.7 times from 6.6 times and an increase in our book value of equity by 30 percent. Moving to slide six, In line with our strategy of using our contracted cash flow to reduce leverage for the quarter, we utilize 72% of our unlevered cash flow to service debt and interest payments. Excluding working capital changes, operating cash flow for the quarter was 15.8 million. After debt service payments, clean energy class survey costs, and payments to preferred unit holders, we generated a little under 600,000, excluding working capital changes. Our cash balance increased by about 9.6 million to 106 million, primarily due to working capital changes. Our per vessel quarterly break-even daily rate, including all operating G&A expenses, debt service payments, and class survey costs, amounted to $55,300, excluding preferred distributions, versus our fleet contracted time charter rates for the quarter, which amounted to about $62,200 per day per vessel. That wraps it up from my side.

Thank you, Michael. Let's move on to slide seven. Our fleet currently counts six 7G carriers with an average age of about 11.9 years. The charters of our vessels are Equinor of Norway, Gasprom Marketing and Trading of Singapore, and Yamal Trade of Singapore. As of 28 June 22, the fleet contract backlog is about $978 million, equivalent to an average backlog of about $163 million per vessel. And the fleet's average remaining charter period is about 6.6 years. Moving on to slide eight. Our strategy is to conclude long-term charters with reputable LNG producers. Our earliest potential availability will be in the third quarter of 23 for the Arctic Aurora. The next available vessel may be the Clean Energy, which contract expires in 2026. Bar any unforeseen events and vessel scheduled dry dockings, our fleet is 100% employed for the remainder of 22, 96% for the year 23, and 83% for 2024 and 2025. There is strong demand for LNG and term shipping. As such, we believe that the Arctic Aurora should be in a good position to benefit from this period market. All the vessels in our fleet are employed on time charter contracts, under which the charter pays major voyage-related variable costs, such as fuel, canal fees, and terminal costs. Two of the vessels, namely the Lena and Yenisei River, are under dry dock and OPEX cost pass-through contracts, and in general provide for protection for reasonable inflation in operating expenses. Let's move on to slide nine. Since September 2019, the partnership has repaid $120 million in debt, increased its cash balance from $66 to $106 million, decreased net leverage from 6.6 to 4.7 times, and increased book equity value by 30% to $403 million. The partnership's deleveraging efforts should continue to build equity value on a contractually structured basis as we continue to benefit from stable long-term cash flow visibility. The Russian-Ukraine situation has shed light on a fragile European energy infrastructure and a general global underinvestment into LNG production and receiving facilities. The EU's goal to replace 50 BCM of Russian pipeline gas imports with LNG imports has increased competition for LNG supply and shipping, which has resulted in a significant increase in time charter rates and periods. With the opening of the Arctic Aurora in Q3 2023, we believe the partnership will have exposure to strong shipping fundamentals. Some European countries are looking to accelerate their infrastructure development by chartering FSRUs. Germany, which currently does not have any LNG import facilities, has recently chartered four FSRUs for long-term charters, two of which are from the private fleet of Dynagas LTD. Eighty-seven percent of the new building order book has already been tied up with employment. which underlines a long-term demand for LNG. An LNG order placed today may give deliveries in 26, 27, or even later. Therefore, post-current charters, we believe the partnership has the potential to consider conversion of existing LNG carriers to SSIUs as an alternative to conventional LNG charters. Both alternatives will be considered. We believe the combination of the availability of the Arctic Aurora against a strong market and the further strengthening of our balance sheet places the partnership in a favorable position. We have now reached the end of the presentation, and I now open the floor for questions. Thank you.

Ladies and gentlemen, if you have a question or a comment at this time, please press the star, then the one key on your touch-tone telephone. Our first question comes from Nolan with Stiefel.

Yeah. Hey, Michael. Hey, Tony. Appreciate you taking my question. I guess I wanted to start a little bit on the vessels that are contracted, well, to Gazprom first, but you were pretty clear that there's no disruption to contract tenor or cash flows or anything else. Just Finishing that circle, I guess, should at some point sanctions be lifted, there's no... The contract, in that case, would still remain in place, and so there's no... This doesn't change anything at all with respect to the contracts that you have on the vessels. Is that correct?

That is correct, Ben. There's been no change whatsoever in the contractual structure. The Charter Party is identical... The only change is in the control side, not in the actual ownership side further up the chain. So the contractual structure, the charter party structure is exactly the same.

Okay, that's helpful. But the other one that was mentioned is the other two vessels, the Elena and the Enosu rivers, that are on contract to Yamal. I appreciate that that's not, or I believe that that is not a Russian entity, but could you maybe talk through that? Is that not subject to any legislation? Where do those two ships sit with respect to their contract structure?

Yeah, exactly. So the counterparty to, you know, on the land on the Yenisei River are Singaporean entities. It is a company called Yamal Trade, P-T-E-L-T-E-D, which is... always was. Now, you know, this company is ultimately a, you know, owned by a joint venture company, which is, you know, which is, you know, the majority is owned by Novatec. Then you have CNPC, Total, and the Silk Road Fund, That's right. There is no sanctions to that company that affects the partnership.

Okay. And with respect to those vessels, really all of your vessels, are you guys still lifting cargoes from Russian facilities, whether it's Yamal Hall or Sakhalin or what have you?

Yeah, exactly. So, you know, so from at this moment, the company is not, I mean, the, you know, the charter of the Bob River and the Armour River is not instructing the vessels to lift any vessels. any cargo out of Sakhalin. Now these vessels are, let's say, rather under the instruction of Gaspar Marketing and Trading to serve their portfolio. When it comes to the Lena and the Yenisei River, we expect that potentially these vessels will lift cargo out of Sabetta, you know, into the summer. But I don't believe it's, you know, open yet for these vessels, you know. to do so. But, yes, I mean, these vessels are under the full instruction of the charge

And I think that scores me away on all things Russia here. I'm curious, lastly, you talked about the possibility of converting perhaps the Arctic Aurora into an FSRU when it comes off contract in a year and a half or so. Is that... I guess appreciating that at the moment most people are looking for quick fixes, and that would probably not be available for maybe two and a half years or so. But is that something that you're currently out trying to market? And is it something that you feel like, you know... I don't know, later this year or sooner, just because I know there's long lead time items and other things that would need to be ordered in order for conversion to take place.

Thank you, Ben, for the question. For the Arctic Aurora, which contract expires in September, October next year, to be honest, she comes open before we could have the long lead items available. So what we are foreseeing with the Arctic Aurora, you know, is more realistically to charter her as a conventional carrier from the time that she comes open. And actually September, October, from a seasonality point of view, it's a vacancy. That's what we are most likely thinking with the Arctic Aurora. Now, when it comes to the new building market, if you place an order today, you'll be lucky to get a 26th position. And now, more realistically, you will get a 27th position. And we have even started to hear about 28 positions, too. There is a real tightness in the shipbuilding market. And the shipyards are really preferring to build... repeat designs, ordinary carriers, nothing out of the ordinary. So what we see more likely is an opportunity potentially for the clean energy when she comes open in the 2026. She is a very good candidate for an FSAU conversion. She has very big boilers, which is required in a closed-loop configuration. So we have previously done a and could be further marketed. When it comes to a timeline, we don't have a timeline on it. We are just kind of in discussion with a couple of projects that could have a potential interest in the ship. But we would evaluate both using her as an FSAU

Is it your cash balance is continuing to build, the debt balance is continuing to fall, and you're creating equity? Are you any closer to being in a position to think about growth at all? And if so, how would you envision that manifesting? Is this something where maybe you could order a vessel? I don't know. It might be too expensive. But, or, you know, thinking about maybe perhaps drop-downs, or are we still at this point in de-levering mode and too early to really be serious about any growth capital?

Yeah, hi, Ben. This is Michael. No, I think we haven't changed our strategy. I mean, each quarter that passes... You know, the partnership is stronger than the previous quarter as a part of this deleveraging process. You know, when we want to make a move, we have to be as strong as possible. And, you know, we have to solve for acquiring a vessel which is accretive and would not increase leverage. And that is also in light of, you know, there will be some equity required for fleet expansion. So we're getting there slowly, but, you know... You know, future growth is something that's definitely on our minds.

Would you think about ordering a new vessel? I mean, you're creating cash, you're building it. You know, there's no need to do a drop-down and have something that's immediately cash-flowing. You could certainly incubate something at this point and wouldn't need the parent for that. Is that at all a possibility for you?

Yeah, I mean, look, we are basically looking at all options, and we don't exclude that one. So, I mean, we couldn't share any color on it now. I do agree with you that shipbuilding prices are getting very expensive. Also, you know, slot availability is extremely tight. But it is an alternative that could be considered. Okay.

Very good. I appreciate it.

Thank you, guys. Thank you. Thank you. And this concludes the Q&A portion of today's call. I'd like to turn it back over to Tony for any closing remarks.

Thank you all 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.

Ladies and gentlemen, this concludes today's presentation. You may disconnect and have a wonderful day.