Earnings Call Transcript - DLNG Q3 2022

Operator, Operator

Thank you for standing by, ladies and gentlemen, and welcome to the Dynagas LNG Partners Conference Call on the Third Quarter 2022 Financial Results. With us we have Mr. Tony Lauritzen, Chief Executive Officer; and Mr. Michael Gregos, Chief Financial Officer of the company. At this time, all participants are in listen only mode. There will be a presentation followed by a question-and-answer session. I must advise you that this conference call is being recorded today. Please be reminded that the company announced its results with a press release that has been publicly distributed. At this time, I would like to remind everyone that in today's presentation and conference call, Dynagas LNG Partners will be making forward-looking statements. These statements are within the meaning of the federal securities laws. This conference call and slide presentation of the webcast contains certain forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. The statements in today’s conference call that are not historical facts, including, among other things, the expected financial performance of Dynagas LNG Partners’ business, Dynagas Partners LNG ability to pursue growth opportunities, Dynagas Partners LNG expectations or objectives regarding future market charter rate expectations and, in particular, the effects of COVID-19 on the financial condition and operations of Dynagas Partners LNG and the LNG industry in general, may be forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934, as amended. Matters discussed may be forward-looking statements, which are based on current management expectations that involve risks and uncertainties that may result in such expectations not being realized. I kindly draw your attention to slide two of the webcast presentation, which has the full forward-looking statement, and the same statement was also included in the press release. Please take a moment to go through the whole statement and read it. And now I pass the floor to Mr. Lauritzen. Please go ahead, sir.

Tony Lauritzen, CEO

Good morning, everyone, and thank you for joining us in our three months ended 30 September ’22 earnings conference call. I'm joined today by our CFO, Michael Gregos. We have issued a press release announcing our results for the third period. Certain non-GAAP measures will be discussed on this call and we have provided a description of those metrics, as well as a discussion of why we believe this information should be useful in our press release. Moving on to slide three of the presentation. We are pleased to report the results for the three months ended 30 September ’22. All six LNG carriers in our fleet are operating under their respective long-term charters. The fleet's utilization was 100% for the 10th consecutive quarter included. For the third quarter of ’22, we reported net income of $7.4 million, earnings per common unit of $0.12, adjusted net income of $4.5 million, adjusted earnings per common unit of $0.04, and adjusted EBITDA of $20 million. In terms of operational highlights relating to the third quarter of ‘22, we successfully completed the special service of Amur River and OB River, including ballast water installation in accordance with current regulatory requirements. Our hearts go out to everyone affected and suffering as a result of the crisis in Ukraine. We continue to closely monitor this ongoing situation, including the implications of economic sanctions, trading restrictions and other considerations that may affect our business. It is outstanding that the current U.S. and EU sanctions regime have broadly exempted LNG shipping and do not materially affect the business operations or financial conditions of the partnership. The balance sheet has one syndicated credit facility in place, one of the members in this credit facility was Amsterdam Trade Bank. However, following the designation of Amsterdam Trade Bank by all five as a Special Designated National (SDN), the Partnership, in agreement with all lenders, made a voluntary prepayment of $18.7 million from the $50 million restricted cash collateral, which was applied in prepayment of the entire participation of Amsterdam Trade Bank to the credit facility. Consequently, Amsterdam Trade Bank is no longer under the credit facility. The partnership’s counterparties are performing their obligations under their respective time charters in compliance with applicable U.S. and EU rules and regulations. Our vessels named Clean Energy, Ob River and Amur River are on charter to previous Gazprom Marketing and Trading of Singapore, which has been renamed Securing Energy for Europe Marketing and Trading, which we onwards will refer to as SEFE. On November 14, ’22, it was announced that the full ownership of Securing Energy for Europe GmbH and all of its subsidiaries, including SEFE has been transferred with immediate effect to the Federal Republic of Germany with the Federal Ministry of Economic Affairs and Climate Action, which has taken over as the 100% shareholder. Regulations are changing rapidly, and the partnership is continuously monitoring the ongoing situation. The line of ships is well positioned to take advantage of a strong market outlook for long-term charters or the Arctic Aurora opening up in Q3 and Q4, ’23. I will now turn over the presentation to Michael, who will provide you with further comments on the financial results.

Michael Gregos, CFO

Thank you, Tony. Moving to slide four. Net income for the fourth quarter decreased by 35% to $7.4 million compared to Q3 2021. This was due to the special survey dry-dock costs of $3.5 million for the Amur River and $3.9 million for the OB River, resulting in 67 scheduled off-hire days related to the dry-dock and an increase in interest finance costs of $2.1 million. This was partially offset by a realized and unrealized gain on our interest rate swap of $10.2 million, $2.5 million of which was realized. Adjusted net income, which excludes realized and unrealized gains on our interest rate swap for the quarter, was $4.5 million. If we add the realized gain from our interest rate swap quarterly cost payment of $2.5 million, adjusted net income would amount to $7.1 million. Adjusted EBITDA for the third quarter was $20 million, a decrease of $4.8 million reported to last year, mainly attributable to the off-hire days related to the aforementioned scheduled dry-docks. This year, we have completed the special survey and dry-docks of three turbine LNG carriers, including the installation of the ballast water treatment systems, with the total cost of the third special survey and dry-docks of our three steam turbine LNG vessels amounting to $16.4 million, resulting in 103 days of off-hire time. We’ve seen a $3.6 million impact on our Q1 P&L, $2.8 million in our second quarter P&L, and $7.4 million impacting our third quarter P&L. Of the total, $3.7 million relates to the installation of the ballast water treatment system, which has been capitalized. Moving to slide five, at the end of September, we had $531 million in debt outstanding, which was further reduced, totaling a $19 million debt repayment in October following the designation of one of our lenders as an SDN. As of today, our debt outstanding amounts to $512 million. We are seeing the benefits of our 0.41%, excluding the margin, fixed interest rate swap for the entire indebtedness outstanding with a term maturity in September 2024, with floating interest expense for the quarter of $7.2 million being offset by interest rate swap payments of $2.5 million for the quarter. We are continuing our comprehensive deleveraging path, which commenced in the first quarter of 2020, having repaid $163 million in debt, resulting in a decrease in our net leverage to 4.8 times from 6.6 times and an increase in book value of our equity of 33%. Moving to slide six. In line with our strategy of using our contracted cash flow to reduce leverage, for the quarter, we utilized 95% of our unlevered cash flow to service debt and interest rate payments. Excluding working capital changes, operating cash flow for the quarter was $16 million. Our cash balance decreased by about $2.5 million to $97.7 million, primarily due to our dry-docks and working capital changes. We expect that our Q4 2022 cash position will be impacted by the aforementioned $19 million debt repayment for Amsterdam Trade Bank and the supplement of outstanding payments following the completion of our aforementioned dry-docks. That wraps it up from my side. I will pass the presentation back to Tony.

Tony Lauritzen, CEO

Thank you, Michael. So let's move on to slide seven. Our fleet currently counts six LNG carriers with an average age of about 12.3 years. The charterers of our vessels are Equinor of Norway, SEFE of Singapore, and Yamal Trade of Singapore. As of today, December 12, ’22, the fleet's contract backlog is about $915 million, equivalent to an average backlog of about $152 million per vessel, and the fleet's average remaining charter period is about 6.2 years. Moving on to slide eight. Our strategy is to conclude long-term charters with reputable LNG producers. The earliest contracted redelivery date for any of our six LNG carriers is in the third or fourth quarter of ‘23 for the Arctic Aurora, with the second earliest contract redelivery in the first quarter of ‘26 for the Clean Energy, both subject to terms of the applicable charter. Barring unforeseen events and vessel scheduled dry-dockings, our fleet is 100% employed for the remainder of ‘22, 96% for the year ‘23, and 83% for ‘24 and ‘25. There continues to be strong demand for LNG time shipping. In particular, we believe the 150,000 to 160,000 cubic meter LNG carrier segment is ideal to supply LNG for the European FSRU market. As such, we believe the Arctic Aurora should be in a very good position to benefit from a strong period market. All the vessels in our fleet are employed on time charter contracts, under which the charter pays major voyage-related variable costs such as fuel, canal fees, and terminal costs. Two of the vessels, namely the Lena and Yenisei River, are under dry-dock and OpEx cost pass-through contracts, providing protection for reasonable inflation and operating expenses. Let's move on to slide nine. Since September 2019 until Q3 ‘22, the partnership has repaid $163 million in debt, decreased net leverage from 6.6 times to 4.8 times and increased book equity value by 33% to $460 million. The partnership’s deleveraging efforts should continue to build equity value on a contractual structure basis as we continue to benefit from stable long-term cash flow visibility and improved market conditions. The Russia-Ukraine situation has shed light on a fragile European energy infrastructure and general global underinvestment into LNG production and receiving facilities. The EU’s goal to replace 50 Bcm of Russian pipeline gas imports with LNG imports has increased competition for LNG supply and shipping. With the opening of the Arctic Aurora in Q3, Q4 ‘23, we believe the partnership will have exposure to strong shipping fundamentals. Some European countries are looking to accelerate their infrastructure development by chartering FSRUs. Germany, which currently does not have any land-based import facilities, has chartered FSRUs on long-term charters, two of which are from the private fleet of Dynagas. Post current charters, we believe the partnership has the potential to consider the conversion of existing LNG carriers to FSRUs as an alternative to conventional LNG charters. Both alternatives will be considered. We believe the combination of the availability of the Arctic Aurora against a strong market and the further strengthening of our balance sheet places the partnership in a favorable position. We have now reached the end of the presentation, and I now open the floor for questions. Thank you.

Operator, Operator

Thank you. At this time, we'll be conducting a question-and-answer session. Thank you, and our first question is from the line of Ben Nolan with Stifel. Please proceed with your question.

Ben Nolan, Analyst

Hi, Tony, Michael. Hope you both are doing well. The only current variable is the Arctic Aurora that you mentioned. Do you have any insight into the timing or the aggressiveness of charters in their efforts to secure arrangements? Given that you indicated there is strong appetite and it should align well with the FSRU market in Europe, would you prefer to wait until things are a bit closer, or would you be inclined to act sooner if opportunities arise?

Tony Lauritzen, CEO

Yes. Thank you, Ben. That's a good question. Look, we see appetite for FSRUs right now. We see several interests for the position. Actually, our LNG is quite different from other shipping segments, and it has a longer time view and is further forward-fixing. So, I would expect that, that will be in the next quarter that the vessel will probably be locked in or secured.

Ben Nolan, Analyst

Okay. That's helpful. And switching gears maybe, so you talked about the prepayment of debt. I assume that doesn't change anything in terms of the terms of the loan or your ability to do things with your cash like pay dividends or whatever? For now, it's still just a lower principal amount basically. Is that fair?

Michael Gregos, CFO

Yes, that's correct. We just used the funds from a restricted cash collateral account to pay this debt, and that’s the only thing that changed.

Ben Nolan, Analyst

Okay. Regarding the refinancing of that facility, we're still some time away. If it comes due in mid-2024, I would speculate that in about six months, you might be considering refinancing. What is your perspective on the collateral value? The LNG market is currently favorable, and while new builds are more costly, there seems to be less interest in steam turbine ships. How has your view on the ability to refinance that debt and the value of the underlying assets shifted over the past year?

Tony Lauritzen, CEO

Yes, Ben. I can address the question regarding the steam turbine. Our vessels are currently tied up in time charters with Securing Energy for Europe, as I mentioned in the presentation. There is strong demand for smaller vessels to support the European market concerning FSRU needs. It's challenging to utilize large two-stroke 174,000 cubic meter LNG ships to fulfill FSRU requirements or transfer all of that cargo into an FSRU. Therefore, we are observing interest in smaller ships. Our turbine ships are quite large, at 150,000 cubic meters, which may not align perfectly with the demand for smaller vessels. Additionally, I want to note that they are contracted until 2026 and 2028, respectively.

Michael Gregos, CFO

Yes, that's a good point, Tony. I think, Ben, remember three years ago when we refinanced this debt, we had a $675 million facility. By the time this comes up for renewal, it’s going to be $415 million, so that's going to be less than $70 million per vessel. I think we're in a much better position. Obviously, the market fundamentals are also materially better than that. We're not going to wait until the last minute; we will start looking at the refinancing as time passes very quickly. It's already 2022, so I think within six months of 2023, we will be looking into refinancing.

Ben Nolan, Analyst

Okay. Yes, that's what I assume. I appreciate the color. Thanks, guys.

Michael Gregos, CFO

Thank you.

Tony Lauritzen, CEO

Thank you.

Operator, Operator

Thank you. At this time, I'll turn the call over to Tony Lauritzen for closing remarks.

Tony Lauritzen, CEO

We would like to thank you for your time and for listening in on our earnings call. We look forward to speaking with you again on our next call. Thank you very much.

Operator, Operator

This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation.