Dynagas LNG Partners LP — FY 2015 Form 20-F
Reporting period: Fiscal year ended December 31, 2015; filed April 18, 2016. This is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared under U.S. GAAP. Amounts below are in U.S. dollars.
Business context
The Partnership owns and operates LNG carriers on multi-year time charters. Its fleet grew from five vessels at year-end 2014 to six after acquiring the 2013-built Lena River from its Sponsor in December 2015 for $240 million. Revenue is concentrated among three charterers: Gazprom (52%), BG Group (29%) and Statoil (19%).
Financial and operating performance
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Voyage revenue | $145.2 million | $107.1 million | +35.6% |
| Operating income | $88.1 million | $64.7 million | +36.3% |
| Net income | $60.1 million | $50.6 million | +18.8% |
| Basic and diluted earnings per common unit | $1.60 | $1.58 | +1.3% |
| Adjusted EBITDA (non-GAAP) | $113.2 million | $84.8 million | +33.6% |
| Operating cash flow | $96.9 million | $76.4 million | +26.8% |
| Time charter equivalent rate | $77,559/day | $75,733/day | +2.4% |
| Fleet utilization | 99% | 100% | Down 1 percentage point |
Revenue growth mainly reflected more vessel operating days following fleet expansion, rather than a major increase in daily rates. Operating margin was approximately 60.7%, compared with 60.4%; net margin declined to approximately 41.4% from 47.2%, as interest and finance costs rose 92.6% to $28.0 million. Vessel operating expenses increased 38.3% to $23.2 million, and depreciation increased 36.8% to $24.4 million, largely reflecting the larger fleet.
Balance sheet and liquidity: Total assets were $1.108 billion, total partners’ equity $367.8 million, and gross debt $688.3 million at year-end. Current assets were $25.8 million and current liabilities $51.4 million, a working-capital deficit of $25.5 million. The balance sheet reports $24.3 million of cash and $25.0 million of restricted cash; management separately described approximately $49.3 million as cash including minimum lender-required liquidity. These balances are not all freely available. The Partnership reported compliance with debt covenants and stated that expected sources of funds would cover operations, scheduled debt service and distributions for at least the next 12 months.
Debt comprised $305 million outstanding under a secured credit facility, $250 million of 6.25% senior notes due 2019, and $133.3 million drawn under a new secured term loan. The weighted-average debt interest rate rose to 4.5% from 3.8%; $438.3 million of debt was exposed to floating rates. Management estimated that a 1 percentage-point LIBOR increase would have reduced 2015 net income and cash flow by about $3.3 million. Operating cash flow funded part of the business, while investing cash outflow of $205.0 million primarily reflected the Lena River acquisition.
Common and subordinated unitholders received quarterly distributions of $0.4225 per unit, or $1.69 for the year. The 9% Series A preferred units were issued in 2015; the Partnership paid a prorated distribution in November and reported a subsequent distribution paid in February 2016. Distributions remain subject to board discretion, available cash, and debt restrictions.
Material changes and outlook
- The Lena River acquisition expanded the fleet and was financed with preferred-unit proceeds, term-loan borrowings, cash and a $35 million interest-free Sponsor advance. The advance was repaid in January 2016 using additional term-loan proceeds.
- At December 31, 2015, contracted minimum charter revenue backlog was $630.6 million, before brokerage commissions and without assumed off-hire. The filing later reported approximately $1.6 billion of estimated contracted backlog as of April 15, 2016, including future Yamal charters; the amounts use different dates and charter assumptions.
- In January 2016, Yamal charters were signed for the Yenisei River and Lena River, with expected commencement in 2019–2020 and initial terms of 15 years. Both are subject to conditions that could allow cancellation. In March 2016, Gazprom extended the Ob River’s existing charter to 2018 and entered a new 10-year charter to follow.
- No specific earnings or distribution guidance was provided. Management described the multi-year charter model as supporting stable cash flows but cautioned that growth, acquisitions and distributions are not assured. The Partnership retained options, but no acquisition financing had been secured at the filing date, for remaining Optional Vessels.
- The filing describes a weaker LNG shipping market: supply growth outpaced demand, and short-term LNG carrier rates fell sharply in 2015. Risks include charterer concentration, early charter termination, project delays or cancellation (particularly Yamal), vessel oversupply and lower future re-charter rates, floating-rate debt, covenant limits, and reliance on an affiliated Manager and Sponsor.
Unusual items and contingencies
- The Lena River acquisition included recognition of a $20 million above-market charter intangible asset; $218,000 was amortized against 2015 voyage revenue, with $19.8 million remaining to be amortized through 2018.
- Management reported no vessel impairment in 2015 or 2014 and stated that aggregate charter-free market values substantially exceeded carrying values. Vessel values remain volatile and impairment estimates depend on future rates, utilization and costs.
- The filing reported no known legal claims or contingent liabilities requiring disclosure or a provision, and no off-balance-sheet arrangements.
- The Sponsor’s related-party management agreements generate technical and commercial fees; 2015 management fees were $4.9 million, and total fleet-management expense was approximately $6.7 million. A change-of-control termination fee could be material.
Key facts investors should verify
- Whether Gazprom, BG Group and Statoil continue performing under their charters, and how much revenue remains dependent on each counterparty.
- Whether the Yamal project conditions are met and the Yenisei River and Lena River charters commence as scheduled.
- Unrestricted cash versus restricted cash, upcoming principal repayments, and continued compliance with liquidity, asset-coverage and other covenants.
- The sustainability of common and preferred distributions given debt service, fleet maintenance needs and weaker LNG spot and short-term charter markets.
- The terms, financing and related-party pricing of any future Sponsor-vessel acquisitions, along with the effect of rising interest rates and management fees.