DORIAN LPG LTD. quarterly report, Q1 FY2018

Dorian LPG Ltd. — Form 10-Q Summary

Business context and reporting period. Dorian LPG owns and operates very large gas carriers (VLGCs) transporting LPG worldwide. Its fleet comprised 22 VLGCs, including 19 ECO-design vessels. The filing covers the three months ended June 30, 2017, the first quarter of the company’s fiscal year ending March 31, 2018; comparative results are for the three months ended June 30, 2016. Financial statements are unaudited.

Key financial metrics

Metric	Q1 FY2018	Q1 FY2017
Revenue	$41.0 million	$50.5 million
Operating income (loss)	$(0.3) million	$12.4 million
Net income (loss)	$(6.7) million	$(1.3) million
Loss per share, basic and diluted	$(0.12)	$(0.02)
Adjusted EBITDA (non-GAAP)	$17.5 million	$29.6 million
Net cash from operating activities	$12.4 million	$29.8 million
Cash and cash equivalents at period end	$35.4 million	$47.3 million

At June 30, 2017, total assets were $1.71 billion, total liabilities $739.8 million, and shareholders’ equity $969.8 million. Debt obligations were $742.4 million gross, or $720.3 million net of deferred financing fees; $45.7 million was classified as current. Restricted cash was $18.1 million. Current assets totaled $78.0 million, including $37.4 million due from related parties and $2.7 million of prepaid expenses and other receivables.

Operating margin was approximately (0.7)% versus 24.6% in the prior-year quarter; net margin was approximately (16.3)% versus (2.6)%. TCE rate was $22,735 per operating day versus $26,398, and fleet utilization was 89.6% versus 94.2%. Daily vessel operating expense rose to $8,434 from $8,040.

Material changes versus the prior comparable period

• Revenue declined $9.5 million, or 18.8%, mainly because lower net pool revenues reflected a weaker average TCE rate. Time-charter revenue was essentially unchanged.
• Operating expenses increased $3.3 million to $42.0 million. Vessel operating costs rose 4.9%, while general and administrative expenses rose 52.1% to $8.5 million, including $2.3 million of employee cash bonuses and higher stock compensation.
• Net loss widened to $6.7 million. A $4.1 million gain on early debt extinguishment partially offset interest, derivative losses and the operating shortfall.
• Operating cash flow fell $17.4 million, to $12.4 million. Cash nevertheless increased by $18.3 million, principally reflecting $32.8 million of restricted cash released and financing activity.

Liquidity, debt and financing

• In May 2017, the company amended its $758 million 2015 Debt Facility. The amendment relaxed certain covenants, released $26.8 million of restricted cash for debt payments and fees, and changed the restricted-cash requirements. It also temporarily restricts dividends and share repurchases until an equity offering with at least $50 million of proceeds or May 31, 2019, whichever occurs first.
• In June 2017, Dorian borrowed $97.0 million under a secured bridge loan and used the proceeds principally to repay the RBS facility at 96% of outstanding principal. The bridge loan matures on or before August 8, 2018; its interest margin steps up from LIBOR plus 2.50% to 8.50% over the loan term.
• The bridge loan includes a minimum consolidated liquidity covenant of $50 million, including at least $10 million freely available and unencumbered at the parent, as well as leverage, interest-coverage, equity, current-liquidity and collateral-value tests. The filing does not state a clear covenant-compliance calculation.
• Management expects operating needs, debt service and maintenance costs to be funded from cash on hand and operations, but says additional debt or equity financing or facility modifications may be needed if those sources are insufficient; availability and acceptable terms are not assured.
• Operating cash flow was positive, but lower year-over-year. Investing cash inflow included the release of restricted cash; financing cash outflow reflected debt repayments, financing costs and treasury-stock purchases, partly offset by the bridge borrowing.

Outlook, commentary, risks and unusual items

• Management cited increased bunker costs as the principal reason TCE rates declined, despite relatively flat spot-market rates. Higher maintenance needs, replenishment of vessel supplies and crew wage increases contributed to higher vessel operating costs.
• No quantitative earnings or revenue guidance is provided. Management intends to maintain a mix of multi-year time charters, shorter charters, spot voyages and contracts of affreightment, and may consider vessel acquisitions.
• As of July 24, 2017, 18 of 22 vessels were in the Helios Pool. Pool revenue depends on pool results, vessel operating days and assigned pool points. Receivables from the pool were $56.3 million at quarter-end, including $19.8 million of working capital; maximum stated exposure to pool losses is limited to pool receivables.
• Management identified impairment indicators in independent vessel appraisals but recorded no impairment after estimating future vessel cash flows. Its sensitivity analysis indicated a 40% reduction in assumed 10-year average spot TCE rates would trigger an estimated $159.4 million impairment on 19 vessels; a 30% reduction would not trigger an impairment under that analysis.
• Interest-rate exposure remains: the company had hedged $513.1 million of the 2015 facility principal. A hypothetical 20-basis-point LIBOR change was estimated to change annual interest expense on unhedged interest-bearing debt by approximately $0.5 million.
• Other disclosed risks include LPG shipping supply and demand, charter rates and vessel values, customer and pool performance, financing and covenant compliance, operating costs, regulation, maritime hazards and insurance. The company reported no material legal claims requiring disclosure or accrual and no impairment charge for the quarter.
• Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

• Whether the company complied with all liquidity, interest-coverage, leverage, equity and collateral covenants, and how covenant liquidity treats cash held by Helios Pool.
• The outlook for charter rates, bunker costs, pool distributions and utilization, given lower TCE rates and operating cash flow.
• The maturity and escalating cost of the bridge loan, upcoming debt repayments, and the company’s ability to refinance or raise capital on acceptable terms.
• The collectability and concentration of related-party and Helios Pool receivables, including the $56.3 million pool balance.
• The assumptions supporting vessel recoverability and the potential for impairment if future charter rates or vessel values weaken.
• The effect of dividend and share-repurchase restrictions, and expected drydocking, survey and ballast-water-system costs.