Dynagas LNG Partners LP — FY 2018 Form 20-F
Reporting period: Year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report; the filing discusses the fourth-quarter distribution decision made in January 2019. Financial statements are prepared under U.S. GAAP.
Business context
The Partnership owns and operates six LNG carriers, all employed or contracted for multi-year charters. Its business is highly concentrated among a small group of energy-company charterers and depends on vessel operations, charter performance and access to financing.
Financial and operating performance
| Metric | 2018 | 2017 |
|---|---|---|
| Voyage revenue | $127.1 million | $139.0 million |
| Operating income | $53.0 million | $63.9 million |
| Net income | $3.6 million | $17.3 million |
| Net income per common unit | $(0.11) | $0.27 |
| Operating cash flow | $43.0 million | $59.3 million |
| Adjusted EBITDA | $96.1 million | $107.5 million |
| TCE rate | $57,972 per day | $63,249 per day |
| Fleet utilization | 100% | 98% |
Revenue fell 8.5%, operating income 17.1%, and net income 79.2% year over year. Operating margin was approximately 41.7% versus 46.0% in 2017; net margin was approximately 2.8% versus 12.5%. Revenue and TCE declined despite full fleet utilization. The filing attributes lower revenue mainly to lower charter rates on the Arctic Aurora, Lena River and Ob River. Higher interest expense also weighed on earnings: interest and finance costs rose 9.1% to $50.5 million, with the weighted-average debt interest rate increasing to 6.4% from 5.4%.
Vessel operating expenses declined 7.5% to $25.0 million, and daily operating expenses decreased to $11,435 from $12,359. Dry-docking and special survey costs rose to $7.4 million from $6.2 million; all three TFDE vessels underwent scheduled surveys and dry-docking in 2018. No fleet impairment was recorded.
Balance sheet, debt and liquidity
- At year-end, cash and cash equivalents were $109.9 million, total assets $1.063 billion, and partners’ equity $326.5 million.
- Gross debt was $722.8 million: $472.8 million under the secured Term Loan B and $250.0 million of unsecured 6.25% notes due October 30, 2019. The Term Loan B is secured by the six-vessel fleet and matures in 2023.
- Working capital was a deficit of $159.8 million, principally because the $250 million notes were classified as current. Management said cash and forecast operating cash flow would not be enough to repay the notes at maturity.
- The Partnership reported compliance with debt covenants at December 31, 2018, including a minimum free-liquidity covenant of $20 million. A $30 million interest-free Sponsor revolver was available and undrawn.
- Operating cash flow decreased 27.5% to $43.0 million. Investing cash outflow was $0.4 million; financing cash outflow was $0.1 million after $53.1 million of net Series B preferred-unit proceeds offset distributions and scheduled debt repayments.
The auditor issued an unqualified opinion on the financial statements but included a going-concern emphasis paragraph. Management and the auditor cited substantial doubt tied to the working-capital deficit and the 2019 notes maturity. The statements assume the Partnership continues as a going concern and do not include adjustments that might result if it cannot do so.
Distributions, outlook and material changes
- Common-unit distributions were reduced in April 2018 from $0.4225 to $0.25 per quarter. In January 2019, the Board cut the fourth-quarter 2018 distribution to $0.0625 per unit, citing the need to preserve cash and facilitate refinancing. The filing states the cut could be further reduced or distributions eliminated.
- Series A preferred distributions are cumulative at 9.00%; Series B distributions are cumulative at 8.75% fixed through November 22, 2023, then floating at three-month LIBOR plus 5.593%, if not redeemed. The filing reports no dividend arrearages at year-end.
- Management was exploring refinancing or other capital-raising options for the 2019 notes, including debt, equity or a combination, but had not secured committed financing as of the filing date. The Series B offering generated $53.0 million net, potentially available to partially repay the notes.
- Management reported estimated contracted revenue backlog of approximately $1.36 billion as of the filing date, including $0.18 billion of variable Yamal-related hire and operating-cost components. Backlog assumes full utilization and excludes extension options; certain Yamal charters remain subject to conditions that could permit cancellation or amendment.
- Charterer concentration remained high: Gazprom contributed 69% of 2018 revenue, Equinor 18%, Yamal 8%, PetroChina 3% and another major energy company 2%. Floating-rate debt exposure was $472.8 million; a 1% LIBOR increase was estimated to reduce annual net income by about $4.8 million.
- The filing identifies ballast-water treatment, emissions rules and other regulatory requirements as potential sources of costs. It states the six vessels did not comply with the updated IMO ballast-water D-2 guideline at the filing date; compliance timing and cost could affect results.
Most important facts for investors to verify
- Whether the $250 million 2019 notes were refinanced, repaid or otherwise addressed, and the resulting debt terms, covenants and liquidity.
- Whether cash generation and covenant headroom support distributions, especially the cumulative preferred-unit obligations, under the reduced common distribution.
- The status and enforceability of Yamal charter conditions, including the conditions affecting the Yenisei River and Lena River, and the realizability of reported backlog.
- Exposure to the largest charterers and the ability to replace or re-charter vessels if a customer or contract is lost or modified.
- Required ballast-water and emissions investments, associated costs and compliance schedules, plus sensitivity to floating interest rates.