Q2 2016 Dynagas LNG Partners LP Earnings Call

Jul 29, 2016 AM EDT
DLNG - Dynagas LNG Partners LP
Q2 2016 Dynagas LNG Partners LP Earnings Call
Jul 29, 2016 / 02:00PM GMT 

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Corporate Participants
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   *  Tony Lauritzen
      Dynagas LNG Partners LP - CEO
   *  Michael Gregos
      Dynagas LNG Partners LP - CFO

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Conference Call Participants
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   *  Ben Nolan
      Stifel - Analyst
   *  Joe Nelson
      Credit Suisse - Analyst
   *  Fotis Giannakoulis
      Morgan Stanley - Analyst

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Presentation
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Operator   [1]
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 Thank you for standing by, ladies and gentlemen, and welcome to Dynagas LNG Partners conference call on the second quarter 2016 financial results. We have with us Mr. Tony Lauritzen, Chief Executive Officer and Mr. Michael Gregos, Chief Financial Officer of the Company.

 (Operator Instructions)

 I must advise you that this conference is being recorded today. At this time I would like to read the Safe Harbor statement.

 This conference call and slide presentation of the webcast certain forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties which may affect Dynagas LNG Partners' business prospects and results of operations. Such risks are more fully disclosed in Dynagas LNG Partners' filings with the Securities and Exchange Commission.

 And now I pass the floor to Mr. Lauritzen. Please go ahead, sir.

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 Tony Lauritzen,  Dynagas LNG Partners LP - CEO   [2]
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 Morning, everyone, and thank you for joining us in our second quarter ended 30 June 2016 earnings conference call. I'm joined today by our CFO, Michael Gregos.

 We have issued a press release announcing our results for the said period. Certain non-GAAP measures will be discussed on this call. We have provided a description of those measures as well as a discussion of why we believe this information to be useful in our press release.

 We are pleased to report the Partnership's earnings for the second quarter 2016, in particular were focused on the performance of our fleet from its safety, operational and technical point of view. And we are satisfied to report that during the period, our fleet again recorded 100% utilization, which we believe is reflective of the quality of our fleet and our managers' operational ability.

 The second quarter ended 30 June 2016 was strong. Our fleet's income is produced from last year time charted contracts with international companies who pay a fixed daily rate for the chartered vessels. As the charterers also pay the majority of variable costs, such as fuel, the Partnership enjoys a steady and visible cash flow that are not indexed to oil or gas prices.

 Turning to slide 2, a quarterly cash distribution for the second quarter of 2016 of $0.4225 per common and subordinated unit was paid on July 19, 2016 to all unit holders of record as of July 12, 2016. The cash distribution is equal to an increase of 15.8% of the Partnership's minimum quarterly distribution per unit.

 The Partnership has announced a cash distribution of $0.5625 per unit of its Series A preferred units for the period from May 12, 2016 to August 11, 2016. This distribution will be paid on August 12, 2016 to all unit holders of record as of August 5, 2016.

 Distributions on the Series A preferred units will be payable quarterly on the 12th day of February, May, August and November, an equivalent of $0.5625 per unit, provided the same is declared by the Partnership's board of directors.

 I will now turn the presentation over to Michael, who will provide you with further comments to the financial results.

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 Michael Gregos,  Dynagas LNG Partners LP - CFO   [3]
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 Thank you, Tony. Turning to slide 3 of the presentation, it was another quarter in which we continued to deliver positive financial results. Q2 2016 adjusted EBITDA amounted to $35 million, which was a significant increase of 27% compared to Q2 2015 as a result of the effect of the acquisition of our sixth LNG carrier, the Lena River in December 2015 and the lower than expected vessel operating expenses.

 For the quarter, we owned an average number of six vessels, versus five vessels in Q2 2015 and our fleet averaged charter hire gross of commissions on a cash basis amounted to about $81,300 per day per vessel. Our average operating expenses amounted to about $12,200 per day per vessel, which was significantly below our expectations due to seasonal factors.

 Our total cash flow breakeven, excluding cash distributions, amounted to about $45,600 per day per vessel. Adjusted net income for the first quarter amounted to $18.8 million or $0.48 per common unit, after taking into account the Series A preferred units interest on the Partnership's net income.

 On slide 4, you can see the second quarter 2016 selected operational and financial data results versus the same period of 2015. The key takeaway is the financial performance for the quarter was significantly enhanced, following the Lena River acquisition with its related time charter.

 Moving on to slide 5 to discuss distributable cash flow and our coverage ratio, cash available to distribution is $22.6 million for the second quarter, as compared to $17.4 million for the second quarter of 2015, for the reasons mentioned before.

 When we deduct declared distributions to preferred unit holders, cash available for distributions to common, subordinated and GP unit holders amounts to $20.9 million for the quarter, which results in a very solid coverage ratio with respect to our common and subordinated unit holders of 1.39 times and which is significantly higher than our target coverage ratio.

 Moving on to slide 6, just a few words on our capital structure and liquidity. As of June 30, we had about $82 million in cash on hand and total liquidity of about $122 million, including undrawn amounts from our revolving credit facility with our sponsor.

 As of June 30, we had $738 million in total debt, which suggests net debt to Q2 2016 EBITDA on an annualized basis of 4.7 times.

 As we have previously stated, we have reached the higher end of our leverage targets, given that we acquired our last two vessels without issuing any common equity.

 While the higher leverage is supported by our significant contract backlog, going forward, as we see some normalcy returning to the MLP markets, we will seek to fund future growth with deleveraging of our balance sheet.

 Moving on to slide 7, this slide shows our total principal and balloon payments per annum. We do not have any near-term maturities since our first maturity is our $250 million unsecured note, which matures in October 2019 and thereafter are two secured facilities, which mature in late 2020 and 2021 respectively.

 Moving on to slide 8, this slide outlines our cash distribution history since we went public in November 2013. Since our IPO, we have paid total cash distributions to common unit holders of $4.25 per unit and our total cash distributions by about 16%. We consistently pay our cash distributions to our unit holders solely from our existing fleet contracted cash flow coverage, which is significant.

 In the medium to longer term, our cash distribution payout policy going forward will be a function of a number of factors being mainly the renewal rates with respect to the vessels, whose time charter contracts naturally expire, and our ability to resume our fleet growth through the drop down of the vessels owned by our sponsor with its long-term contracts attached.

 We continue to believe that our 12.5% cash distribution yield does not reflect our contract backlog and makes it challenging to issue common equity as a means to partly fund future growth. However, we are monitoring the situation as we see a sense of normalcy return to the MLP markets.

 That wraps it up for my side. I will pass the presentation over to Tony.

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 Tony Lauritzen,  Dynagas LNG Partners LP - CEO   [4]
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 Thank you, Michael. Let's move on to slide 9.

 The Partnership's fleet currently counts six high specification and versatile LNG carriers with an average age of about 6 years in an industry where expected useful economic lifetime is 35 years. Our vessels have unique features that enable them to operate as conventional LNG carriers, as well as operate in ice bound carriers that are restricted for conventional vessels. We have a wide customer base with energy companies, namely BG Group, now part of Shell, Gazprom, Statoil, and Yamal LNG. Our contract backlog is about $1.55 billion, and our average remaining charter period is about 10.1 years, which compares well to our peers.

 Moving on to slide 10, five out of the six vessels in our fleet have ice class 1A notation. Our fleet is fully contracted in 2016 and 88% in 2017, a sign we expect the LNG shipping market to have tightened due to the current ongoing construction and ramping up of new LNG production plans. We have a unique fleet, it can handle conventional LNG shipping, as well as operating ice bound in subzero areas. This means that we are able to, and have been successful in pursuing business opportunities in the two different markets, namely conventional shipping and a unique market for ice bound trade.

 As an extension of the ability to operate in ice bound areas, we are the only Company in the world with the current capability and experience in transiting LNG carriers via the northern sea route, which we deem an important advantage due to the ongoing development of LNG production along this route.

 The contractual relationship between our customers and the vessels are on a time charter basis. Under a time charter party, the charterer pays a fixed day rate to the owner regardless if the vessel is being used or not. And all major variable costs, such as fuel costs are for the charterer's account. Therefore, and coupled with our multi-year employment profile, the Partnership enjoys visible and stable revenues that are not directly affected by oil or gas prices. Going forward, we will be focused on securing further contract coverage and ensuring high vessel utilization.

 Let's move on to slide 11. Our potential drop-down candidates count nine LNG carriers, all of those vessels have contracts in place amounting to multi-billion-dollar contract backlog. They are high specification ice class and winterized vessels. Four out of those vessels are Arc-4 type, 162,000 cubic meters and delivered from the yard.

 The remaining five are Arc-7 type, 172,000 cubic meters and currently under construction at DSME in Korea for delivery in 2017 and 2019. These last five vessels are 49% owned by our sponsor and 25.5% each by Sinotrans and China LNG shipping.

 Let's move to slide 13 for an industry update. In summary, the market is in a place where the gas market is in growth and expected to grow significantly in the next decades. There are substantial volumes of additional LNG expected to be produced in the near term to medium term. The world LNG carrier fleet is characterized by few vessels to carry those incremental volumes in the long term and there are many old technology vessels. There has also been a slowdown in the ordering of LNG carriers, with marginal activity since Q3 2015.

 The current existing LNG world fleet and the order book totals about 560 vessels. The order book is about 29% of the world fleets. About 32% of the world fleet is below 140,000 cubic meters, which we would define in general as too small. The size is also below the average cargo size of about 143,000 cubic meters. The average age of these undersized vessels are about 18 years.

 At some point, we expect that most of the undersized vessels and aged vessels will fade out of the market and be replaced with larger and younger tonnage. The order book, which stands at 29% compares below the 32% of the world's fleet, which is undersized and aged.

 Furthermore, 87% of the order book has already been committed to forward charters. This means that there are very few new buildings that may be available to facilitate the need to replace on average undersized and aged tonnage and to carry expected incremental LNG production.

 Moving on to slide 14. According to the order book, most deals will be delivered during the period 2017 and 2018, which is also a period we expect significant additional LNG production. We have seen a slowdown in ordering activity of LNG carriers. To our knowledge, there has only been recorded two orders since Q3 2015. There are only very few yards in the world that has the experience and capability to build LNG carriers, and if one were to order today, our guess is that the yards would be able to offer tonnage for delivery in 2018, or more realistic, 2019 at the earliest.

 Let's move to slide 15. World energy consumption has been steadily increasing over time and is projected to continue to do so. The largest sources of energy comes from coal, oil and gas, which collectively accounts for about 85% of all world energy production. It is anticipated that the world energy production will increase by 10% within end 2020 and by 30% within end 2035. From now until end of 2035, gas with 39% production growth is by far expected to outperform growth in coal at 40% and oil at 13%.

 Let's move to slide 16. Gas used to be referred to as an alternative fuel. In 1990, the gas market was about 56% of the oil market. Today the gas market is about 74% of the oil market and by the end of 2035, this number is expected to have increased to 90%.

 The LNG market is the fastest growing sub segment within the gas industry. More and more countries are dependent on LNG as an energy resource. As an example, in 1990, there were nine LNG trade routes. Today that number has increased to 232.

 Let's move to slide 17. We are now in a period dominated by strong LNG production growth. It is forecasted that 134 million tons of new annual incremental LNG will come to the market between now and 2020. This represents a total increase of 55% compared to 2015, about 280% compared to the year 2000 and about 660% compared to the year 1990.

 We assume that the majority of new energy is come from terminals already under construction, meaning a high probability of project materialization. The source of this new LNG is primarily from Australia, North America, Southeast Asia and Russia. We continue to believe that the Far East will remain the large buyers going forward, however growth may also come from European markets. We also believe we will continue to see the development of new niche markets in areas, such as South Asia, Middle East and South America.

 We believe that there are sufficient buyers for the new LNG to be absorbed, the majority of the new LNG export volumes have sales agreements or off take agreements in place. We believe that existing import markets will continue to increasingly rely on LNG as a price competitive and clean energy resource. When we compare LNG supply to LNG shipping capacity available from now and forward, we remain confident that the market outlook for shipping looks favorable in the long term, in particular from 2018 and onwards.

 In the period prior to that, we believe that the short-term market in general may create competition to the long-term market until sufficient LNG supply is outpacing LNG shipping capacity. The growth in LNG production set at 55% within 2020, is estimated to outpace increasing LNG shipping capacity set at 29% within the same period. The majority of the new LNG will be delivered already within 2019, and as mentioned earlier, yards can likely deliver vessels from 2019 onwards, meaning we should expect the subsequent years to result in healthy shipping markets.

 Additionally, the Partnership's fleet is ice classed and winterized, enabling the flexibility to pursue the best of two different markets, which has proven to be a strong advantage so far.

 We have now reached the end of the presentation, and we open the floor for questions.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) Ben Nolan, Stifel.

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 Ben Nolan,  Stifel - Analyst   [2]
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 I have a handful of questions. Number one is I was curious if you maybe, Tony, you could give an update on where things are in the spot market. Obviously I know the Partnership doesn't have any spot vessels, but you guys are the managers of the clean pools. So was curious if where utilizations are running for modern and tri fill ships. And if you're beginning to see any momentum with respect to an improvement in the spot market.

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 Tony Lauritzen,  Dynagas LNG Partners LP - CEO   [3]
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 We're now in a place where -- from the start of the year until end of June, we have seen about 11 million tons of new incremental LNG. And that's -- I mean that's within our estimate, but finally we're starting to see some results of that.

 Q1 in the spot market was a very tough period. Q3 has been substantially better. In the last few weeks, we have really started to see a pickup of both volume and rate and utilization. So we believe that the market is pointing in the right direction, the spot market still needs some further time to improve to levels that would be, let's say, normalized levels. We do still believe, as we have said before, that the end of this year will be substantially different from the beginning of the year and we think that given the last weeks' development, we are on a good track for that.

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 Ben Nolan,  Stifel - Analyst   [4]
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 And then switching gears a little bit -- that was helpful. Switching gears a little bit, has there been any change in the thinking with respect to the clean energy? I know that it comes off contract in the early part of next year. And you guys have kicked around a number of options in terms of maybe finding a new long-term employment for it, maybe doing some sort of a conversion into an FSRU. Maybe swapping it out for one of the other vessels at the sponsor level that does have longer-term contracts. Any update that you might have on the thinking for that vessel?

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 Tony Lauritzen,  Dynagas LNG Partners LP - CEO   [5]
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 No, we haven't crystallized in what direction we will opt to go. The studies are well underway of how to potentially convert that vessel into a regasification vessel. We have all, that being said, started to see some potential interest on the vessel for just conventional chartering. So we do think that it's too early to engage in real discussions just yet on that vessel, simply because the market is improving as we're going. So we would still like to keep the options open.

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 Ben Nolan,  Stifel - Analyst   [6]
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 And along those lines, to the extent that there is a market developing and the momentum is going upwards and you could find good employment for it going forward, how do you think about the rate differential for a steam powered ship, such as that, versus a more modern trifuel vessel? How should we think about what one can earn relative to the other as the market improves?

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 Tony Lauritzen,  Dynagas LNG Partners LP - CEO   [7]
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 That's exactly the -- that's a very difficult question, keeping in mind that we don't -- I mean we see the market is on an improving trend and the way that it works is that when less and less vessels are available, then the features of that vessel's become less and less important.

 So we haven't carved out any expectations as a differential between a turbine ship and trifuel ships. I think it would be improper for us to comment on that as well because I think it would potentially give charterers too much information.

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 Ben Nolan,  Stifel - Analyst   [8]
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 And then last one for me and I'll turn it over, there's been quite a bit of noise lately about the Yamal project being expanded. Assuming they would need more shipping capacity for that, when would those discussions begin? And I assume obviously you guys would want to be party to at least the discussions. At what point does that ball start to roll?

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 Tony Lauritzen,  Dynagas LNG Partners LP - CEO   [9]
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 Well I mean we know for their existing project I don't think it's a secret because it's been in the press, is that they still haven't concluded the procurement of shipping of the existing project as it is today. So we still have to see how that will be filled and then we'll take a stand on the -- on onward business. But I think that given the relationship and I think we should be in a good position to charter vessels going forward, whether that be to Yamal or other top tier performers.

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Operator   [10]
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 Gregory Lewis, Credit Suisse.

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 Joe Nelson,  Credit Suisse - Analyst   [11]
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 This is Joe Nelson on for Greg today. Just to start, can you comment on the depth to the charter market at this point? You guys had some success earlier this year getting some longer-term charters. How active is that market right now?

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 Tony Lauritzen,  Dynagas LNG Partners LP - CEO   [12]
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 Given that the short-term market has been subdued for some period of time, then it has been -- it's a direct competition to the long-term market. So normally you would see medium-term charters or long-term charters, that market being more active when the spot market is healthier. Now that we have started seeing an improvement in the spot market and we really believe that the consensus in the market, given all the production that is coming, is that the shipping market in general is tightening going forward.

 We have in the last, let's say couple of months, we've seen more inquiries, more discussions around their long-term -- or the medium and long-term charters. And we think that will continue so that liquidity in the long-term charters will be improved versus what it is today.

 I mean right now, I mean in the last quarters, we -- well in the last quarter, we hadn't really seen many long-term charters. I think maybe the only one is GasLog that concluded a term charter with a top tier major.

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 Joe Nelson,  Credit Suisse - Analyst   [13]
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 And then just as we think about the spot market, you made some comments earlier about you're seeing a pickup there. What's behind that? I mean is it basin specific, or is it demand from a certain region? How should we be thinking about that?

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 Tony Lauritzen,  Dynagas LNG Partners LP - CEO   [14]
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 I think, I mean we see in particular activity in the Atlantic, in the Middle East, maybe less so in the Far East. I think it's a direct result of increased production.

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 Joe Nelson,  Credit Suisse - Analyst   [15]
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 Just you have a slide here kind of calling out the supply coming online in 2016 through 2020. I mean given about two-thirds of that is being constructed in Korea right now, I mean what are your thoughts about how realistic some of these delivery timelines are and as far as is it really the supply, given everything we're seeing right now in the shipyards in Korea?

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 Tony Lauritzen,  Dynagas LNG Partners LP - CEO   [16]
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 Oh, I think that the -- I mean to show that we speak about the same thing, you mean the LNG order book, and a substantial part of that's coming from Korea. We think that all of that will be delivered. We think that yes, some of the yards are having troubles. But that will mean that hanging onto valuable LNG orders I think will be the first thing that they would ensure that they perform on.

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 Joe Nelson,  Credit Suisse - Analyst   [17]
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 And just one quick one for me on the model. When are your next scheduled dry dockings?

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 Michael Gregos,  Dynagas LNG Partners LP - CFO   [18]
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 We have most likely two vessels in 2017.

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Operator   [19]
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 Fotis Giannakoulis, Morgan Stanley.

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 Fotis Giannakoulis,  Morgan Stanley - Analyst   [20]
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 I also want to follow-up on the market and the improvement that you have noticed. Can you give us some numbers about the chartering activity that you have seen as of late? And how many vessels right now, they are idle or the market is over supplied compared to what it was in the previous quarter?

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 Tony Lauritzen,  Dynagas LNG Partners LP - CEO   [21]
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 To give specific numbers on that, it's always a little bit difficult. But we've seen examples of, for example, one of the largest competitors to independent owners previously was projects. There was subletting their vessels in the market. Now we've seen that largely there are very few sub vessels available for these opportunities, because the vessels are being claimed back to their original projects. And that's creating an improvement pretty much immediately in the market.

 When it comes to activity levels, well as we said before, Q3 has been a lot more active than Q1. We believe -- yes, Q3, now that we're in, is also very active. And without giving any actual numbers, we believe that if the market continues like this, maybe by the end of the year we could have a record of spot fixtures. But that is yet to be seen.

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 Fotis Giannakoulis,  Morgan Stanley - Analyst   [22]
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 And I also want to ask about the re-chartering of your earliest deliveries, particularly about the Arctic Aurora, since clean energies is a steam vessel. We saw the charter of GasLog recently starting in 2019. That was a very high number. This vessel Arctic Aurora is -- the current conduct expires a year earlier than compared to the GasLog vessel. What would be the discount, or do you think there would be interest in extending this vessel at the similar level? Or starting in 2018? Or you think that you might have to operate the vessel in the spot market for a short period of time and have a long-term contract starting a little bit later?

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 Tony Lauritzen,  Dynagas LNG Partners LP - CEO   [23]
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 In general, we see a big contango in the market. So the levels that we see -- so GasLog fixing 2019 on -- with (inaudible) was quite appropriate. When it comes to the Arctic Aurora, that is perhaps slightly earlier, that vessel has a particular structure built into it where the charter has a revolving option and can extend 12 months at a time at an agreed rate, which is always slightly higher than the current rate and they'll continue to get those options provided that they declare options.

 So we believe, well actually we know that vessel has performed extremely well. Statoil is utilizing that vessel very well. The only TSD vessel in Statoil's fleet, so it's a vessel that is important to them. Of course we have to leave it in their decision if they will extend or not, but I believe that the current structure that is on the ship is very favorable to the charterer.

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 Fotis Giannakoulis,  Morgan Stanley - Analyst   [24]
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 One last question for Michael. And I'm trying to understand how you have calculated the maintenance CapEx of the last vessel from the previous quarter. If I'm not mistaken, the increase in the maintenance CapEx was something like $400,000 in the first quarter compared to the fourth quarter. What is the thinking behind this calculation?

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 Michael Gregos,  Dynagas LNG Partners LP - CFO   [25]
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 The actual calculation, so the dropdown to the Lena River is the methodology is identical to the methodology for the remaining vessels. We haven't done anything different. So it's exactly the same methodology as far as both of the dry dock CapEx reserves and the replacement CapEx reserves.

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 Fotis Giannakoulis,  Morgan Stanley - Analyst   [26]
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 Can you give us an insight about what is the reinvestment rate that you have used in order to calculate the maintenance CapEx on the second tier?

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 Michael Gregos,  Dynagas LNG Partners LP - CFO   [27]
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 Yes, it's 6%.

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Operator   [28]
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 (Operator Instructions) Now as there are no further requests for questions, gentlemen, I shall pass the floor back to you for closing remarks.

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 Tony Lauritzen,  Dynagas LNG Partners LP - CEO   [29]
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 We would like to thank you for your time and for listening in on our earnings call. We look forward to speak with you again on our next call. Thank you very much.

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Operator   [30]
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 Thank you very much indeed, gentlemen. And with many thanks to our speakers today, that does conclude the conference. Thank you all for participating. You may now disconnect.




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