Business context and reporting period
Dynagas LNG Partners LP filed an annual Form 20-F for the fiscal year ended December 31, 2014; this is not a standalone fourth-quarter report. The Partnership owns and operates LNG carriers on multi-year time charters. Its fleet grew from three to five vessels in 2014 after acquiring Arctic Aurora and Yenisei River from its Sponsor. The financial statements are prepared under U.S. GAAP and audited by Ernst & Young (Hellas), which issued an unqualified opinion.
Financial and operating performance
| Metric | 2014 | 2013 | Change / context |
|---|---|---|---|
| Voyage revenue | $107.1 million | $85.7 million | Up 25.0%, mainly from the two vessel acquisitions |
| Operating income | $64.7 million | $55.4 million | Operating margin approximately 60.4%, versus 64.6% |
| Net income | $50.6 million | $45.6 million | Up 10.8%; net margin approximately 47.2%, versus 53.2% |
| Adjusted EBITDA | $84.8 million | $64.7 million | Up 30.9%; non-GAAP measure |
| Basic and diluted earnings per common unit | $1.58 | $2.95 | Lower, principally reflecting a substantially higher weighted-average unit count |
| Operating cash flow | $76.4 million | $44.2 million | Up 72.9% |
| Investing cash flow | $(404.5) million | $0 | Primarily the two vessel acquisitions |
| Financing cash flow | $334.4 million | $(38.5) million | Included debt and equity financing, debt repayments, and distributions |
| Time-charter equivalent rate | $75,733 per day | $76,706 per day | Down 1.3%; fleet utilization remained 100% |
| Total assets | $887.4 million | $488.7 million | Increase reflects fleet expansion |
| Total debt | $575.0 million | $214.1 million | $325.0 million secured floating-rate facility and $250.0 million 6.25% notes due 2019 |
At year-end, reported cash and cash equivalents were $11.9 million and restricted cash was $24.0 million; together these total approximately $35.9 million, consistent with the liquidity discussion. Current assets were $14.3 million against current liabilities of $33.2 million, a working-capital deficit of approximately $18.9 million. The Partnership reported compliance with debt covenants at December 31, 2014. The senior secured facility required $24.0 million minimum liquidity; the notes required at least $20.0 million aggregate free liquidity.
Material changes versus the prior comparable period
- The fleet expanded from three to five vessels, adding revenue and operating costs. Voyage revenue rose $21.4 million, while vessel operating expenses increased $4.9 million and depreciation increased $4.2 million.
- General and administrative expenses rose to $2.0 million from $0.4 million, mainly because the Partnership operated as a public company for a fuller year and incurred related-party executive and administrative service fees.
- Interest and finance costs rose to $14.5 million from $9.7 million. The weighted-average debt interest rate increased to 3.8% from 2.4%.
- Common units outstanding at year-end increased to 20.505 million from 14.985 million, following a 5.52 million-unit public offering. The Partnership also issued $250 million of 6.25% senior notes and entered a new $340 million secured credit facility.
- The vessel acquisitions from the Sponsor were accounted for as transactions under common control. The aggregate $88.1 million excess of purchase price over vessels’ book value was recorded as a preferential deemed dividend to the Sponsor, reducing partners’ equity.
- A new 13-year Gazprom charter for Clean Force is expected to begin in July 2015, following early termination of its BG Group charter. The change resulted in a $0.9 million non-cash charge for accelerated charter amortization.
Outlook, commentary and risks
Management stated that available funding and expected operating cash flows should be sufficient for at least the next 12 months to operate the fleet, meet scheduled principal and interest payments, and make at least the minimum quarterly distribution. This is not a guarantee: distributions remain subject to Board discretion, cash availability, reserves, debt covenants and operating performance. The minimum quarterly distribution is $0.365 per unit. Distributions for the first three quarters of 2014 were $0.365, $0.365 and $0.39 per unit; the fourth-quarter 2014 distribution of $0.4225 was approved in January 2015 and paid in February 2015. The reported $1.2946 per unit for 2014 cash distributions declared and paid includes the prorated 2013 fourth-quarter distribution paid in February 2014.
Management reported that short-term LNG carrier rates weakened in 2014 as fleet supply grew faster than demand; the industry’s average short-term rate for a 155,000-cbm vessel was reported at $48,000 per day. The Partnership’s fixed, multi-year charters provide contracted revenue, but expose it to charterer performance, early termination and renewal or re-chartering risks. Minimum contractual charter revenue was reported at $690.5 million as of December 31, 2014, before brokerage commissions and without assumed off-hire; this is not a forecast or assurance of collection.
- Customer concentration is substantial: BG Group, Gazprom and Statoil represented 50%, 36% and 14% of 2014 revenue, respectively.
- Interest-rate exposure is material: $325 million of debt was floating-rate and unhedged at year-end. Management estimated a 1 percentage-point LIBOR increase would have reduced 2014 net income and cash flow by approximately $2.8 million.
- The Partnership depends on five vessels, an affiliated Manager and a small number of charterers. Debt covenants, debt service and restricted cash may constrain distributions and future investment.
- The Partnership had rights, but no obligation, to acquire remaining Sponsor vessels. It had not secured financing for potential acquisitions as of the report date; any loan novation would require lender consent.
- Other risks include LNG shipping oversupply and market volatility, rising crew and maintenance costs, vessel downtime, environmental and regulatory requirements, geopolitical disruption and sanctions, insurance limitations, and conflicts of interest with the Sponsor and affiliated Manager.
No specific financial guidance for a future reporting period is provided. The filing says there were no material legal proceedings known to management and no off-balance-sheet arrangements. Management concluded disclosure controls and internal control over financial reporting were effective; the external auditor did not attest to internal controls because the Partnership was an emerging growth company.
Important facts for investors to verify
- Reconcile the distinction between $11.9 million unrestricted cash and $24.0 million restricted cash, and assess covenant liquidity requirements and working-capital needs.
- Review debt amortization, the $200 million secured-facility balloon due in 2021, the $250 million notes due in 2019, and sensitivity to LIBOR changes.
- Confirm charter terms, renewal and early-termination options, the timing and economics of the Clean Force Gazprom charter, and actual charterer payment performance.
- Assess the $88.1 million deemed dividend and related-party vessel acquisition pricing, management fees, expense reimbursements and governance protections.
- Distinguish distributions declared from those paid in each calendar year, and evaluate whether cash generation supports distributions after debt service, reserves and maintenance spending.
- Consider the assumptions behind contracted-revenue disclosures and vessel valuations, along with fleet supply growth and re-chartering prospects.