Business context and reporting period
Dynagas LNG Partners LP’s Form 20-F is an audited annual report for the fiscal year ended December 31, 2016—not a standalone fourth-quarter report. The Marshall Islands partnership owns and operates six LNG carriers, employed mainly on multi-year time charters. Financial statements are prepared under U.S. GAAP. Ernst & Young issued an unqualified audit opinion.
Key financial and operating metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Voyage revenue | $169.9 million | $145.2 million |
| Operating income / margin | $102.1 million / 60.1% | $88.1 million / 60.7% |
| Net income / margin | $66.9 million / 39.4% | $60.1 million / 41.4% |
| Adjusted EBITDA | $139.5 million | $113.2 million |
| Operating cash flow | $103.6 million | $96.9 million |
| Investing cash flow | $(37.5) million | $(205.0) million |
| Financing cash flow | $(32.8) million | $120.4 million |
| Gross long-term debt | $722.5 million | $688.3 million |
Cash and cash equivalents were $57.6 million at year-end, with a further $25.0 million classified as restricted cash. Current assets were $60.2 million and current liabilities $53.1 million, producing reported working capital of $7.1 million, versus a $25.5 million deficit in 2015. The filing says cash of approximately $82.6 million includes lender-required minimum liquidity.
Fleet utilization was 100% (99% in 2015); the TCE rate was $75,997 per available day, down from $77,559. Common-unit distributions were $0.4225 per unit each quarter in 2016; the Series A preferred distribution was $0.5625 per unit each quarter. The preferred units carry a 9% annual distribution rate.
Material changes versus prior year
- Revenue rose 17.0%, primarily because the Lena River contributed a full year after its late-2015 acquisition; revenue-earning days increased to 2,195.8 from 1,813.5.
- Operating expenses rose with the larger fleet, although daily operating expenses declined to $12,045 from $12,660. Depreciation increased 24.6% and interest and finance costs rose 25.1%, reflecting the added vessel and higher average debt.
- Net income increased 11.3%, slower than revenue growth; net margin declined from 41.4% to 39.4%.
- Debt increased by $34.2 million. The partnership drew the remaining $66.7 million under its term loan in January 2016, repaid a $35.0 million Sponsor advance, and made scheduled debt repayments.
- On January 23, 2017, after payment of the fourth-quarter distribution, 14.985 million Sponsor-held subordinated units converted one-for-one into common units. The Sponsor then held approximately 43.9% of common units.
Outlook, commentary, risks and unusual items
Management stated it expected existing funding sources and anticipated operating cash generation to cover fleet operations, scheduled debt service, preferred distributions and the minimum common distribution for at least the next 12 months. This is not a guarantee of future distributions. No numeric earnings or revenue guidance is provided.
As of December 31, 2016, the filing reported approximately $1.59 billion of minimum contractual charter revenue, including Yamal contracts, before brokerage commissions and assuming performance. The Yamal charters for the Yenisei River and Lena River are conditional and may be cancelled, amended or terminated if specified conditions are not met. The partnership reported a later estimated backlog of approximately $1.55 billion as of March 17, 2017, after charter-rate reductions expected to reduce combined future backlog for those vessels by approximately $14.6 million.
- Revenue and cash flow depended entirely on three charterers: Gazprom (66% of 2016 revenue), Shell (18%) and Statoil (16%). The fleet’s small size and charterer concentration increase the effect of vessel downtime or counterparty problems.
- Gross debt was $722.5 million, including $472.5 million exposed to floating rates; no interest-rate swaps were in place at year-end. Management estimated a 1 percentage-point LIBOR increase would reduce net income by approximately $5.0 million, although the disclosure refers to debt exposure during 2015.
- Debt covenants restrict distributions in specified circumstances. The partnership reported compliance with all financial and liquidity covenants at year-end. A substantial portion of debt is secured by fleet vessels; $250 million of 6.25% unsecured notes mature in October 2019.
- Potential acquisitions of Sponsor-controlled optional vessels could require substantial financing. The partnership had not secured acquisition financing as of the report date, and some options had near-term expiry dates or were under discussion for extension.
- The LNG shipping market faced weak short-term rates and vessel oversupply; the filing notes 2016 spot rates fell close to vessel operating costs. Other material risks include Yamal project delays, charter renegotiations, regulatory and environmental costs, currency movements, accidents, political disruption and reliance on the affiliated Manager.
- The partnership recorded no vessel impairment and disclosed no material pending legal proceedings or off-balance-sheet arrangements. Management assessed disclosure controls and internal controls over financial reporting as effective; auditor attestation of internal controls was not provided under the emerging-growth-company exemption.
Important facts for investors to verify
- Confirm the status and conditions of the Yamal charters, project schedule, and the reported charter backlog and rate reductions.
- Review debt amortization, 2019 notes refinancing plans, floating-rate exposure, covenant headroom and the distinction between unrestricted and restricted cash.
- Assess whether distributions remain supportable after debt service, maintenance and replacement capital needs, and the post-conversion increase in common units.
- Check the status, price, expiry and financing plans for optional-vessel purchase rights, including any extensions agreed with the Sponsor.
- Reconcile the annual filing’s year-end values with subsequent disclosures: the filing reports 20.505 million common units and 14.985 million subordinated units at December 31, 2016, before their January 2017 conversion.