Business context and reporting period
Dynagas LNG Partners LP filed this Form 20-F for the fiscal year ended December 31, 2017; it is an annual report, not a standalone fourth-quarter filing. The Marshall Islands partnership owns and operates six LNG carriers and reports under U.S. GAAP. Five vessels were employed on multi-year charters at the report date; the Clean Energy was on short-term employment before an expected Gazprom charter in July 2018. The filing was signed March 9, 2018.
Key financial and operating metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Voyage revenue | $139.0 million | $169.9 million |
| Operating income | $63.9 million | $102.1 million |
| Net income | $17.3 million | $66.9 million |
| Basic and diluted common-unit earnings | $0.27 | $1.69 |
| Operating margin | 46.0% | 60.1% |
| Net margin | 12.5% | 39.4% |
| Adjusted EBITDA (non-GAAP) | $107.5 million | $139.5 million |
| Operating cash flow | $59.3 million | $103.6 million |
| Cash and cash equivalents at year-end | $67.5 million | $57.6 million |
| Gross debt | $727.6 million | $722.5 million |
| Current assets / current liabilities | $70.4 million / $22.9 million | $60.2 million / $53.1 million |
| Fleet utilization | 98% | 100% |
| TCE rate | $63,249 per day | $75,997 per day |
2017 investing cash flow was nil; financing used $49.5 million, including $66.9 million of distributions and debt repayments, partly offset by the release of $25.0 million of restricted cash. Year-end working capital surplus was $47.5 million, versus $7.1 million in 2016. Management stated that available and expected funds should cover operations, normal working capital, debt service and required preferred distributions for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue fell 18.2%, mainly because the Clean Energy earned lower rates and had lower utilization while between charters, charter rates on the Yenisei River and Lena River were reduced from November 2016, and three steam-turbine vessels underwent dry-docking in 2017.
- Operating income decreased 37.4% and net income decreased 74.1%. Interest and finance costs rose 32.3% to $46.3 million; drivers included higher weighted-average interest rates (5.4% versus 4.4%), refinancing costs and a $2.6 million deferred-loan-fee write-off. Dry-docking and special-survey expense increased to $6.2 million from $0.1 million.
- Operating cash flow decreased 42.7%. Adjusted EBITDA also declined, while TCE fell about 16.8%.
- In May 2017, the Partnership refinanced its prior secured bank facilities with a $480 million senior secured Term Loan B due May 2023. It repaid $464.4 million of prior debt and paid $12.6 million of transaction fees and expenses. The refinancing reduced near-term scheduled debt service and released restricted cash, but gross debt remained high.
- The subordination period expired in January 2017; 14.985 million Sponsor subordinated units converted one-for-one into common units. Weighted-average common units rose to 34.5 million from 20.5 million, affecting per-unit comparisons.
Outlook, management commentary, risks and unusual items
- Management reported an estimated $1.48 billion of contracted revenue backlog and 10.3 years of average remaining charter duration as of March 8, 2018, including charters not yet commenced. These estimates depend on charter performance and conditions, particularly for the Yamal charters.
- The Clean Energy was expected to begin an approximately eight-year Gazprom charter in July 2018. The Arctic Aurora had a new three-year Statoil charter expected to start in the third quarter of 2018, with two one-year extension options. The Yenisei River and Lena River were expected to enter 15-year Yamal charters after delivery windows beginning in 2019; their existing charters were expected to end in 2018. The Partnership anticipated spot-market employment during the interim, exposing it to volatile rates and possible idle time. Yamal charter conditions could permit cancellation, termination or amendment.
- Three TFDE vessels were scheduled for dry-docking in the second and third quarters of 2018. Management expected these dockings to take longer and cost more than the 2017 steam-vessel dockings, potentially reducing revenue and cash flow.
- Management’s growth plan included possible acquisitions of Sponsor-related Optional Vessels, but the Partnership had not secured financing for those purchases and was not obligated to exercise the options. Deadlines for certain options were approaching or had been extended; acquisitions, pricing, financing and required consents remained uncertain.
- Common distributions were maintained at $0.4225 per unit for each 2017 quarter, or $1.69 for the year; the fourth-quarter payment was made in January 2018. Series A preferred distributions were $0.5625 per unit each quarter, consistent with the 9% stated rate. Distributions remain discretionary and subject to cash availability, debt covenants and Board decisions. The common-unit minimum quarterly distribution is $0.365; the preferred units are senior to common units for distributions but subordinate to debt.
- Debt and liquidity risks include $250 million of 6.25% unsecured notes due October 30, 2019, floating-rate exposure on much of the debt, secured-loan financial covenants and restrictions on distributions. A 1% LIBOR increase was estimated to reduce 2017 net income by about $4.8 million. The Partnership reported covenant compliance at year-end.
- Revenue is highly concentrated: Gazprom accounted for 72% of 2017 revenue, Statoil 19%, Shell 6% and PetroChina 3%. Other significant risks include charterer or project disruption, LNG market and vessel-value volatility, Sponsor and Manager dependence and related-party conflicts, regulatory and environmental costs, and operating or dry-docking overruns.
- The filing reported no material legal proceedings known to management, no defaults or distribution arrearages, and no impairment losses. The auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal controls over financial reporting were effective; the auditor did not attest to internal-control effectiveness because the Partnership was an emerging growth company.
Important facts for investors to verify
- Confirm the 2019 notes refinancing or repayment plan, covenant headroom, debt-service requirements and sensitivity to LIBOR.
- Track completion, cost and off-hire duration of the 2018 TFDE dry-dockings and resulting cash flow.
- Verify that the Yenisei River and Lena River meet Yamal charter conditions, their interim employment is secured, and their expected charter commencement windows remain achievable.
- Assess whether the reported $1.48 billion backlog remains supportable, including counterparty performance and project-specific cancellation conditions.
- Review the sustainability of common and preferred distributions after debt service, maintenance needs and any acquisitions.
- Evaluate any Optional Vessel acquisition proposals for price, financing, lender and charterer consent, and potential dilution or added leverage.
- Consider customer concentration and related-party management fees, contractual escalation terms and governance protections.