Q1 2017 Dynagas LNG Partners LP Earnings Call

Jun 08, 2017 AM EDT
DLNG - Dynagas LNG Partners LP
Q1 2017 Dynagas LNG Partners LP Earnings Call
Jun 08, 2017 / 02:00PM GMT 

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

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Conference Call Participants
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   *  Benjamin J. Nolan
      Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Senior Analyst
   *  Fotis Giannakoulis
      Morgan Stanley, Research Division - VP, Research
   *  Han Jang
      Maxim Group LLC, Research Division - Analyst
   *  Hillary Cacanando
      Wells Fargo Securities, LLC, Research Division - Associate Analyst
   *  Joseph E. Nelson
      Crédit Suisse AG, Research Division - Research Analyst
   *  Randall Giveans
      Jefferies LLC, Research Division - Equity Associate

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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 the Dynagas LNG Partners Conference Call on the First Quarter 2017 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 the conference is being recorded today. And at this time, I would like to read the Safe Harbor statement.

 This conference call and the 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. 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 I now pass the floor to Mr. Lauritzen. Please go ahead, sir.

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 Tony Lauritzen,  Dynagas LNG Partners LP - CEO and Director   [2]
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 Morning, everyone, and thank you for joining us in our first quarter ended March 31, 2017 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 is -- this information to be useful in our press release.

 We are pleased to report the partnership earnings for the first quarter of 2017. In particular, we're focused on the performance of our fleet from a safety, operational and technical point of view, and we are satisfied to report that during the period, our fleet performed at 99% utilization, which we believe is reflective of the quality of our fleet and our managers' operational ability.

 The earnings for the financial quarter ended March 31, 2017, were within our expectations. Part of our strategic plan has been to enter into a longer-term charters for the employment of the vessels in our fleet. In general, long-term charters are priced at day rates below shorter-term contracts. Our revenues are derived from the employment of our vessels on a fixed multiyear charter contract. The revenues we earn under those charter contracts are earned on a fixed day-rate basis and not linked in any way to commodity price fluctuations.

 The partnerships earnings for the first quarter of 2017 were, as expected, below that of the first quarter of 2016, following our decision to reduce to charter higher on 2 vessels, the Yenisei River and the Lena River, in the short to medium term with effect from November 2016 in exchange for a long-term charter on the Clean Energy with the term from July 2018 through March 2026. The transactions increased our contracted backlog on a net basis.

 With our fleet, 86% contracted through 2017 and 75% contracted through 2018 and 2019. And with an estimated fleet-wide average remaining contract duration of 10.5 years, we intend to continue to focus on obtaining additional contract coverage, particularly in second half of 2017 and 2018 and managing our operating expenses and continuing the safe operations of our fleet.

 Turning to Slide 2. On May 18, 2017, the partnership successfully closed its $480 million Term Loan B transaction. The net proceeds of the Term Loan B, which has a term of 6 years and is secured by, among other things, the 6 energy carriers in our fleet, were used to repay in full our then outstanding secured debt with our commercial bank lenders. This refinancing provides the partnership with additional debt amortization flexibility and is expected to increase net cash flow and extends the maturity of our secured debt from 2020 and 2021 to 2023.

 A quarterly cash distribution for the first quarter of 2017 of $0.4225 per common unit was paid on April 28 to all unitholders of record as of April 21, 2017. The cash distribution is equal to an increase of 15.8% over the partnership's minimum quarterly distribution per unit. The partnership paid on May 12, 2017, a cash distribution of $0.5625 per unit of its Series A preferred units for the period from February 12, 2017, to May 12, 2017, to all unitholders of record as of May 5, 2017. Distributions on the Series A preferred units will be payable quarterly on the 12th day of February, May, August and November at an equivalent of $0.5625 per unit, provided the same is declared by the partnerships' Board of Directors.

 As the partnership has, in place, 2 long-term charters with Yamal LNG, we believe it would be appropriate to communicate that we have been informed the project development is going very well with first LNG production assumed for October 2017. The first of 3 trains is 91% complete as of March 31, 2019.

 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 good quarter, during which we continue to deliver positive financial results. As Tony mentioned, our revenues, EBITDA and distributable cash flow were driven by the transaction we announced in October of last year in which we secured long-term employment on the Clean Energy in exchange for an adjustment in the charter higher rate on 2 of our LNG carriers as part of a package deal with Gazprom, which was accretive to our contract backlog.

 For the quarter, we generated distributable cash flow of $18.6 million, a decrease of 18% from the first quarter of 2016, and our fleet average charter higher gross of commissions on the cash basis amounted to about $76,700 per day per vessel. We continue to operate at solid utilization levels with very competitive vessel operating expenses. Our average operating expenses amounted to about $12,350 per day per vessel, which, coupled with a 99% utilization for the quarter, showcases the operational capabilities of our manager at Dynagas Ltd.

 Our total cash flow breakeven, excluding cash distributions, amounted to about $47,000 per day per vessel. Going forward, we expect lower cash breakeven rates following our recently completed Term Loan B, which we will talk about.

 Moving on to Slide 4 to discuss distributable cash flow and our coverage ratio. For the first quarter of 2017, our common units coverage ratio was 1.13x. However, going forward, we do expect our coverage ratio to sequentially decline over in the next couple of quarters as 3 of our steam turbine LNG carriers underwent or will complete their special survey and dry dock in the second and third quarter, and the Clean Energy is trading in the spot market until she is delivered into our 8-year Gazprom contract in about July 2018. On a longer-term basis, our coverage ratio will reflect not only our special survey and dry docks in 2017 and 2018, but also our lower long-term run rate EBITDA as some of our vessels roll off their existing time charters to their new longer-term contracts with lower time charter rates. Our distribution remains supported by our significantly increased contract backlog and our recently completed Term Loan B, which improved the partnership's net cash flow due to its lower repayment profile. Via dilution of our long-term run rate EBITDA, reflects our strategic decision to increase contract lengths, the visibility and sustainability of our long-term EBITDA and eliminate or minimize renewal risk at the cost of modestly lowering our EBITDA and distributable cash flow.

 Moving on to Slide 5 to discuss our recently completed institutional Term Loan B, which enables us to extend the maturity of our senior secured debt, simplify our capital structure by consolidating all our vessels under this Term Loan B with more relaxed covenants and more importantly, optimizes our debt service costs through these facilities much lower mandatory amortization, thereby improving our net cash flow and liquidity.

 As a summary, we entered into a 6-year of $480 million senior secured term loan. The proceeds of which were utilized to play all of our existing secured indebtedness with commercial ship lending banks with the remaining proceeds utilized to pay fees and for general corporate purposes. Following the refinancing, this new Term Loan B will be the only outstanding secured debt instrument in our capital structure with a maturity until 2023.

 The Term Loan B is priced at LIBOR plus 450 basis points and has mandatory principal repayment of 1% per annum, significantly improving our cash flow and ensuring sustainability of our current cash distribution. To showcase the significant cash savings from this refinancing, if we compare the debt service payments of our previous secured loan with this Term Loan B for the 12-month forward period from March 31, 2017, we estimate debt service cash savings of about $20 million for this 12-month period only. In addition, we will have lower principal payment in the amount of $108 million from the date of the closing of the Term Loan B up to Q1 2021, which was the maturity of our previous secured debt prior to this refinancing.

 Moving on to Slide 6, this slide shows our debt maturity profile before and after the Term Loan B, and as you can see, we now have in place a longer duration capital structure eliminating near-term maturities of our previous secured debt, which, prior to this refinancing, matured 2 to 3 years earlier. In addition, principal payments have been reduced from $32.5 million per annum to $4.8 million per annum, leading to the $108 million and less principal payments mentioned in the previous slides.

 As we stand today, we do not have any near-term maturities since our first maturity is our $250 million unsecured note, which matures in October 2019. Given our contract length, which launched significantly beyond the maturity date of our secured and unsecured debt, we do not anticipate any difficulties refinancing our unsecured and secured debt.

 Moving on to Slide 7, except for the Term Loan B, as I mentioned before, we have outstanding of $250 million unsecured notes and the perpetual $75 million, 9% preferred security, which we can redeem at our discretion at par from 2020 onwards. As of today, our total debt represents 55% of our total capitalization. As of March 31, prior to the refinancing, we had about $76 million in cash on hand and $714 million in total debt and total available liquidity of $106 million, resulting in a net debt-to-EBITDA of about 4.7x. We believe our leverage is supported by significant contract backlog going forward. Pro forma, the Term Loan B transaction, our net debt to last 12 months EBITDA is about 4.8x.

 Moving on to Slide 8, since we went public in November 2013, we have paid $193 million in cash distributions to our unitholders on $247 million of distributable cash flow. During that time, our common unitholders have received total cash distributions amounting to $5.50 per unit. We maintain our position that drop downs for the sake of increasing distributions at unattractive cost of equity will not increase shareholder value in the longer term. Key takeaways from my side is the balance sheet. Protection is our top priority, and any growth through drop downs will be affected to combine deleveraging and improved operating cash flow and distribution coverage.

 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 and Director   [4]
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 Thank you, Michael. Let's move on to Slide 9 to summarize the partnerships profile. Our fleet currently counts 6 high specification and versatile LNG carriers with an average age of about 6.8 years in an industry where expected useful economic lifetime is 35 years. We have a diversified customer base with substantial energy companies, namely Gazprom, Statoil and Yamal LNG, which the latter is a joint venture between TOTAL, CNODC, NOVATEK and the Silk Road Fund. Our contracted backlog amounts to about $1.52 billion and our average remaining charter period is about 10.5 years, which compares very well to our peers. Our vessels have also served in the past 2 customers, such as Qatargas, RasGas, Marubeni, woodside, KOGAS, CPC, North West Shelf and several other major oil and gas companies where, therefore, have a large customer base that we're able to contract with.

 Moving on to Slide 10. Our fleet of energy carriers are largely fixed on long-term charters with strong and reputable energy companies, and we have a low availability going forward. Drivers for the employment were the characteristics of the vessels, including its ice class notations and our organization's high-quality track record. The contractual relationship between our customers and the vessels are on a time charter party basis. Under a time charter party, the charter 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 cost, are for the charterers accounts. There are also no early termination rights for convenience for the charterer. Therefore, and coupled with our multiyear employment profile, the partnership enjoys visible and stable revenues that are not directly affected by oil or gas prices. We also have minimal capital requirements, which provides significant free cash flows. Compared to other shipping segments, LNG shipping is a highly industrial segment where owners and charterers work very closely together and mutual performance is key. Charterers typically program the vessels for its trade for long periods of time.

 In April, 2017, the Clean Energy became available for employment, at which time, we entered into 2 consecutive short-term charterers to employ the vessels through the end of August 2017. Following the expiration of these charters, we expect to enter into additional charterers for the Clean Energy, prior to her delivery to Gazprom in July 2018. The short-term market is tightening, and we believe the market will be stronger by the time she again becomes available for a limited period of time. We have entered a limited number of discussions on the availability that we have in 2018, given that we believe the market is on an improving trend.

 Let's move to slide 11. Our sponsor, Dynagas Holding, owns a fleet of 9 LNG carriers, which are all on long-term contracts: 4 of those LNG carriers are fully owned and trading; one of those carriers, namely the Clean Ocean is chartered to Cheniere until 2020 and will thereafter deliver to Yamal LNG for a 15-year charter. The 3 Sister Vessels, Clean Planet, Clean Horizon and Clean Vision are currently employed in the Cool Pool and LNG pool joint venture equally owned by Dynagas, GasLog and Golar, which is also the world's largest provider of short-term tonnage. From 2019, these 3 vessels will deliver to Yamal LNG for minimum 15 years employment each. The 5 Arc-7 LNG carriers are 49% owned by our sponsor and 25.5% each by [China Trends] and China LNG Shipping, 2 state-owned Chinese entities. These vessels are on the construction in Korea and are chartered to Yamal LNG for between 26- and 28-year contract each. All vessels are in the water and in the order book are fully financed and funded. All 9 vessels have contracts in place amounting to a total $8.1 billion contracted backlog. These optional vessels are drop-down candidates to the partnership.

 Let's move to slide 12. We have a unique fleet, 5 out of the 6 vessels in our fleet have ice class 1A notation. It can handle conventional LNG shipping as well as operate in icebound and subzero areas. This means that we are able to and have been successful in pursuing business opportunities in 2 different markets, namely conventional shipping and the unique market for icebound trade. The initial capital expenditure for an ice class vessel is somewhat more expensive than a conventional carrier. However, the operating cost between our ice class-type carriers and conventional carriers are very similar. The company, together with our sponsor, has a market share of 82% for vessels with Arc-4 or equivalent ice class notation. There are only 2 other LNG carriers in the world with equivalent notation, which, to our knowledge, are chartered out on long-term contracts. We view the ability to trade in icebound areas as an important advantage due to the current and ongoing construction of LNG-producing terminals within icebound areas. Our fleet is regularly trading in icebound areas, and we are the only company with actual track record in transiting LNG carriers through the Northern Sea Route, which gives a tremendous advantage given the large gas reserves located in the middle of these routes that are being developed for export by the end of this year. We also expect further projects to be developed in that area.

 Further to that, our fleet is optimized for terminal compatibility, which is of significant importance in a market that is changing from a fixed route trade to a worldwide trade. The fleet consists of groups of sister vessels that provides for overall relatively better economics and efficiencies.

 Let's move to Slide 14 for an industry update. In short, the market is in a place where there are substantial volumes of additional LNG expected to be produced in the near to medium term. The world LNG carrier fleet is too small to carry those additional volumes in the long-term, and there are too many small and old technology vessels. Also, there has been a slowdown in the ordering of LNG carriers with marginal ordering activities since Q3 2015 and floating regasification projects creates accelerated demand for available LNG. The current LNG world fleet and the order book, including FSRUs and FSUs, totals about 574 vessels. The order book, counting 115 vessels, is about 25% of the world fleets. As much as 32% on the world of fleet is, on average, 22 years old. More importantly, these vessels are small with an average cargo size of about 135,000 cubic meters. This is well below the average cargo size. We expect that most of these undersized and aged vessels will fade out of the market and be replaced with larger and younger tonnage. As seen on the graph on the upper right side, almost all vessels built prior to 2006 are small turbine-driven vessels. Furthermore, 82% of the order book of 115 vessels has already been committed for employment. This means that there are very few new buildings that may be available to replace, on average, undersized and aged tonnage and to carry expected incremental LNG production. According to the order book, most new builds 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 of activity of LNG carriers. There are only very few yards in the world that has the experience and capability to build such vessels. And if one were to order today, our guess is that yards would be able to offer tonnage for delivery in late 2019 at the very earliest.

 Let's move to slide 15. We are now in a period with strong growth in LNG production. It is conservatively forecasted that about 146 million tons of new annual LNG will come to the market between now and 2021. This means the total increase of 55% compared to 2016 production. It is also assumed that project output on existing terminals may increase going forward adding additional supply. We assume that the majority of the new LNG is coming 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. It is likely that the Far East will remain the largest buyers going forward. However, the largest incremental demand growth may come from new and from European and Asia Pacific markets. We believe we will continue to see the emergence of new niche markets in areas such as South Asia, Middle East and South America where large volumes will be imported by FSRUs.

 We also believe that there are sufficient buyers for the new LNG to be absorbed. The majority of the new LNG export volumes have sale agreements or offtake agreements in place. We believe that existing import markets will continue to increasingly rely on LNG as a price competitive and Clean Energy resource.

 Let's move to Slide 16. In the first quarter of 2017, LNG production was up 13% from the comparable period of 2016. As expected, in particular, Australia and the U.S. have been the largest incremental producers so far and are expected to add significant further volumes going forward. The trend is expected to continue in the second half of 2017 with existing trains ramping up capacity and new projects being added. In March 2017, the industry saw the world's first cargo being produced by a floating LNG terminal, namely the PFLNG Satu, which gives confidence to floating LNG production technology. Angola LNG produced 13 cargoes in Q1 2017 compared to 12 cargoes for the full year of 2016. Sabine Pass LNG train 3 produced its first cargo in early 2017 and is now ready for commercial operations.

 Let's move to Slide 17. With the U.S. projected to become one of the world's largest exporters of LNG, it is worthwhile to analyze where those volumes have been shipped so far. Sabine Pass produced 96 cargoes between February 2016 and March 2017: 22% of the volumes went to South America; 21% to Central America, including the Caribs; 17% to Europe, including Turkey; 20% to the Far East; 14% to the Middle East; and 7% to India. Initial analysis indicates that Sabine Pass requires 1.77 vessels for every million tonne LNG produced. At full production, Sabine Pass is expected to produce 27 million tons per annum over 6 trains. This means that one would require about 48 vessels, fully utilized per annum to serve this terminal alone. If we conservatively estimate that the U.S. exports will produce about 69 million tons of LNG per annum within 2021, U.S. volumes may require about 122 vessels alone, which is equivalent to about 27% of the current world fleets.

 Let's move to Slide 18. Gas, coal and oil are by far the largest sources of energy today. Due to its environmentally friendly properties, gas is expected to outperform growth in both coal and oil. LNG is the fastest-growing subsegment of the gas industry because it provides flexibility as opposed to a rigid pipeline network. Since 1990, the number of countries importing LNG has grown from 9 to 36 and the number of exporters has grown from 8 to 19. Also, from the year 2000 until 2017, infrastructure costing close to $1 trillion has been constructed.

 The changes in the industry is evident in the way that LNG is traded. In the year 2000, there were only 43 country-to-country trading routes. By 2016, this number had increased to 255. And when we analyzed to trade on a port-to-port basis, the number increases to 616. Now this is exactly why our fleet has been designed for optimal terminal compatibility and versatility.

 Let's move to Slide 19. LNG is becoming an increasingly important energy resource, due to its environmentally friendly, its competitive pricing and availability. We experienced new import markets emerging in particularly a floating regasification terminals, which we term FSRU imports that allows for quick market access.

 In 2016, 22 million tons equivalent to 8% of the worldwide production were exported to new markets and the majority of those volumes were discharged in 2 FSRU terminals. Although most incremental demand going forward will come from land-based terminals, the FSRU landscape is interesting because it develops very quickly and is accelerating LNG demand growth. The FSRU market has grown steadily over the past years. In 2016, floating regas made up 15% of the total regas capacity. This number is expected to increase to 21% within 2021, which does not include the more than 40 proposed FSRU projects. In December 2016, Colombia joined the FSRU industry, followed by Turkey in January 2017. This year, FSRU projects are expected to come online in Ghana, Russia, Pakistan and Brazil.

 In summary, 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 the period prior to that, we believe that the short-term market in general may create competition to the long-term markets until sufficient LNG supply is outpacing LNG shipping capacity. The growth in LNG production set at 55% within 2021 is estimated to outpace increase in LNG shipping capacity set at 25% within the same period. A large portion of the new LNG will be delivered already within 2019, meaning we should expect the period ramping up to that point in subsequent years to result in an improved and increasingly healthy shipping market. Additionally, the partnership fleet is largely ice classed and winterized, enabling the flexibility to pursue the best of 2 different markets, which have proven to be a strong advantage so far.

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

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) From Wells Fargo, your first question comes from Hillary, and I hope I pronounce this properly, Cacanando.

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 Hillary Cacanando,  Wells Fargo Securities, LLC, Research Division - Associate Analyst   [2]
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 I guess, this question may be more appropriate for Dynagas Ltd., but I was wondering if you could talk a little bit about what's going on with Qatar and if there could be any potential impact on the Cool Pool from the ban -- from Qatari vessels entering the ports in other areas portside in our regions?

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 Tony Lauritzen,  Dynagas LNG Partners LP - CEO and Director   [3]
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 Well, thank you very much for the question. And yes, indeed. This is a question that, to be honest, is not so relevant for the partnership, at least not in the immediate term. What we've seen, in general, as a result on Monday when Saudi Arabia, UAE, Egypt, Bahrain, Yemen, severed diplomatic and trade ties with Qatar, this we think will have some consequences. It's difficult to say what those consequences are at this early point in time. But the reality is that last -- in the last 12 months or so, Qatar sent about 72 cargoes to Egypt and 15 cargoes to the UAE. It is yet to be seen if Qatar can now send cargoes to these countries. But if they cannot send cargoes to these countries, well then, logically, they should need to send those cargoes elsewhere and likely, those elsewhere locations will be much further away. And on the same note, these 2 countries, Egypt and UAE, they need to source their cargoes from elsewhere, which is also much further away. That could be United States. It could be Australia. It could be other places. So basically, I think that it will potentially result in increased ton-miles, as we call it. As you also alluded to, there are some complications in where can you idle your vessels before loading in Qatar, and that is something that is being assessed at the moment.

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 Hillary Cacanando,  Wells Fargo Securities, LLC, Research Division - Associate Analyst   [4]
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 That's very helpful. And then just another question on Arctic Aurora. I guess, that charter expires in July 2018. And I was wondering, other than Yamal, can you just talk about any other like viable Arctic projects that, that vessel could potentially be marketed to? I know there's a talk about Arctic LNG 2 moving forward. There's -- I think there's Auckland Train 3 expansion, but I just wasn't sure if those projects were delayed or if they were on target for, I guess, later -- startup in the early 2020s.

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 Tony Lauritzen,  Dynagas LNG Partners LP - CEO and Director   [5]
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 Well, thank you very much for the question. Yes, so the Arctic Aurora has the flexibility to trade as a conventional LNG carrier as efficient and competitive as any other conventional LNG carrier or she can serve icebound trades. Yes, a company like Yamal LNG could be a user of a vessel like that in order to lift in the Northern Sea Route. Just to enter the Northern Sea Route, you need to have minimum ice class 1A or the equivalent Arc-4 ice class notation. And as we mentioned in our presentation, the partnership and our sponsor controls 82% of that market, and there are, to our knowledge, only 2 other vessels with that equivalent notation. And as far as we know, they are on long-term charters. And so provided a company like Yamal LNG would have requirement for a vessel like that, we think that would be a good fit. Another taker is -- or potential taker is, of course, Statoil, where the vessel is onto now. This is the only ice class 1A vessels in the Statoil fleet. So that gives them a lot of flexibility. It is also the largest vessel in Statoil's fleet and also the only TFDE vessel in Statoil's fleet. So it is arguably the most efficient and largest vessel that they have in their fleet. So that will be a possibility as well. When it comes to other projects that specifically need ice class carriers beyond this, for example, as you've said, Arctic LNG 2, this is, of course, quite a lot ahead in time and we wouldn't market that vessel for these kind of projects just yet.

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Operator   [6]
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 Now your next question from Stifel comes from the line of Ben Nolan.

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 Benjamin J. Nolan,  Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Senior Analyst   [7]
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 So the -- I have a few questions, but the first really revolves around the cash flows and obviously, having done this term loan and the subsequent improvement in available cash flow of $20 million is pretty important. But at least based on my calculations, the differential based on the contract rollover is probably more than that, more than the $20 million savings. Just curious how you guys -- now that, that term loan is done with and you're taking a look at the cash flows as they are in supporting the distribution, as I assume, is of the utmost priority, how are you thinking through sort of your options to cover or bridge this period of time until the Yamal contracts really begin to sort of generate cash flow? Are you where you need to be? Or are there other things that, in your view, might need to be done in order to support the distribution?

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 Michael Gregos,  Dynagas LNG Partners LP - CFO   [8]
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 Ben, I think what we did with the Term Loan B pretty much addresses what we had to do in order to sustain the distribution for the next couple of years. So I think it does -- as you mentioned, there is a reduction in our -- our revenues will be reduced as we enter into, let's say, our longer-term contracts and it's only natural that the more that security becomes, obviously you have to pay a price for security and this EBITDA will drop. So this is a natural evolution of the company. So for us, it was an opportunistic financing, which gave us the opportunity to improve our liquidity significantly for the next couple of years. And during this interim period until the Yamal charters commence, I think we're pretty much fine.

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 Benjamin J. Nolan,  Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Senior Analyst   [9]
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 Okay. So there -- in your view, there's nothing else that needs to be done in order to maintain distribution, that's all fixed equally?

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 Michael Gregos,  Dynagas LNG Partners LP - CFO   [10]
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 Yes, yes, yes.

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 Benjamin J. Nolan,  Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Senior Analyst   [11]
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 Okay, that's helpful. And then -- well, actually, associated with that, I was curious if you have swapped out the interest or thinking of fixing the interest associated with term loan?

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 Michael Gregos,  Dynagas LNG Partners LP - CFO   [12]
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 No, we haven't swapped it out yet. We're thinking about it, but we haven't done yet. It's still under consideration.

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 Benjamin J. Nolan,  Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Senior Analyst   [13]
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 Okay. And then, Tony, maybe for you, you had talked about the obsolescence to the older vessels and some of those rolling off. As they roll off contract and are replaced with newer vessels that's effectively a portion of the order book is kind of already spoken for as replacements. I'm curious if you've began to see that happen. I mean, I think, perhaps, it may have been a little bit in Algeria, but is that thesis really beginning to come to bear and at the end of the day, is it possible at all to quantify how many vessels are likely to be sort of pushed to the side in your view?

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 Tony Lauritzen,  Dynagas LNG Partners LP - CEO and Director   [14]
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 Yes, thank you, Ben, for that question. We haven't quantified it. It is something that we're looking at. So we don't have a number on that yet. But yes, I think we've started to see that, to a smaller degree, that younger tonnage and technology is preferred versus older technology, and I think what is -- where that is evident, we -- I think we estimate that more than 21st -- let me see, yes, about more than 20 vessels over the first gen, as we call it, are idling at this time, which is quite a high number. And the shorter-term market and the spot market is, I think, it's kind of -- until the market has improved substantially, the shorter-term market is covering up for those long-term contracts that we expect to be firmed up as the market is evolving. But indirectly, I think we see exactly what you're asking for in the idling of the older ships.

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 Benjamin J. Nolan,  Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Senior Analyst   [15]
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 And then last for me, and I'll turn it over. Any new thoughts or developments as it relates to how you guys, including the sponsor level, are thinking through sort of your potential participation in the FSRU market?

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 Tony Lauritzen,  Dynagas LNG Partners LP - CEO and Director   [16]
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 No, I mean we've communicated previously that this is something that our sponsor is very much in discussions about, and I do expect that to be firmed up in the not-too-distant future.

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Operator   [17]
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 Now your next question from Morgan Stanley, comes from the line of Fotis Giannakoulis.

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 Fotis Giannakoulis,  Morgan Stanley, Research Division - VP, Research   [18]
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 Tony, I want to go back to the impact of the situation in Qatar, not so much for the short term, but for the long-term impact of this decision. How do you think that the blockade will impact the decisions of Qatari customers and the decision of Qatar to bring additional production, either by the recent lifting of the moratorium of the North Field and also the impact on the Golden Pass liquefaction Terminal?

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 Tony Lauritzen,  Dynagas LNG Partners LP - CEO and Director   [19]
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 Yes, thank you, Fotis. And yes, that's a really good question. What we -- I mean, of course, we can't speak for Qatar. They're very powerful as the biggest producer in the world of LNG. And beyond the Arab nation, of course, they have a lot of support worldwide and very strong buyers. There's no doubt about that. And with the blockage, they can, I'm sure, sell all their cargoes elsewhere. But of course, it does raise some questions. If you're a buyer of LNG, I think it would be reasonable to look at diversifying your portfolio of origin if it's too heavily based on Qatar volumes. I think that is to be potentially expected. When it comes to, for example, the further output of volumes from Qatar or the Golden Pass Terminal, I'm not so sure that it will have too much of an impact for the reasons I just mentioned that they can sell their cargo elsewhere. As far as we understand, to increase production out of Qatar, it wouldn't take such a big cost. And also, when it comes to Golden Pass, I'm sure that they will find other ways around it, and I'm not so sure that those volumes are destined to the Middle Eastern countries.

------------------------------
 Fotis Giannakoulis,  Morgan Stanley, Research Division - VP, Research   [20]
------------------------------
 That's very helpful. You've showed in one of your slides the age composition of the fleet. There are quite a few vessels that they are quite old, around 30 years old. Many of them, they are sitting idle. But I noticed that half of them, they are still in the market. They are probably not idle. Can you tell us, if these vessels -- what kind of utilization these vessels have, if these vessels are coming out of the market will have a meaningful impact on the supply demand?

------------------------------
 Tony Lauritzen,  Dynagas LNG Partners LP - CEO and Director   [21]
------------------------------
 Yes. So for example, when we look at, I mean, several of the vessels are actually laid up. So I think 24 of those vessels are actually in layup. So they're not being utilized and not moving. But as you say, yes, other vessels of similar type are being used. I think that the ones that are being used are the ones that are on long-term charters. They haven't been redelivered or for some reason, maybe they're particularly good for that trade. But the reality is that these very old and in particular, very small and heavy-consuming vessels, they are just not able to compete with larger vessels and newer technology. And it's just a matter of time before these vessels will fade out of the markets.

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 Fotis Giannakoulis,  Morgan Stanley, Research Division - VP, Research   [22]
------------------------------
 And how many new building vessels equivalent these vessels are in terms of trade? How many vessels do we need in order to replace these vessels? Are we -- I noticed that there are around 25 vessels, the ones that are old and not sitting idle. Do we need 20 or 15? How many of them?

------------------------------
 Tony Lauritzen,  Dynagas LNG Partners LP - CEO and Director   [23]
------------------------------
 Yes, that's a very good question. So let's say that there are 25 sitting out to be replaced. So let's say, they take 130,000 cubic each.

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 Fotis Giannakoulis,  Morgan Stanley, Research Division - VP, Research   [24]
------------------------------
 Well, I get what you're trying to do. So it's going to be proportional to the size, you mean?

------------------------------
 Tony Lauritzen,  Dynagas LNG Partners LP - CEO and Director   [25]
------------------------------
 Yes, I think so. I think that would be the way to think about it. But of course, there are many other factors that comes into play, but that would be the rational way of thinking about it.

------------------------------
 Fotis Giannakoulis,  Morgan Stanley, Research Division - VP, Research   [26]
------------------------------
 One last question about the drop-down of the Yamal vessels. As we all know, this kind of drop-downs, they are heavily dependent on the capital markets and the stock price to the degree that they will take place with common equity. Can you give us some alternatives -- alternative thoughts that you have? How are you going to drop them down if the equity capital markets are not that receptive for a -- in a meaningful way to allow you to do these drop-downs? What kind of other alternative do you have? Is the sponsor willing to receive equity, doing some preferred or other forms of securities? Can you describe a little bit of your thoughts?

------------------------------
 Michael Gregos,  Dynagas LNG Partners LP - CFO   [27]
------------------------------
 Yes. I mean, let's not forget that when we're talking about the Arc-7s, which are the vessels which are to be -- there are 2 vessels, which are coming end of this year, we're talking about our 49% interest in that -- in those vessels. As you correctly say, we are heavily dependent on where our equity is trading because, as I mentioned, we do want to deleverage going forward. So we do envision more equity than debt and as we financed new acquisitions. I think we'll have to cross that bridge when we get there. We have time until these ships are delivered. When we actually get there, I think that the sponsor is willing to the MLP in order to -- in order for the MLP to grow. So that's as specific as I can get at this particular point.

------------------------------
Operator   [28]
------------------------------
 Now your next question from Crédit Suisse comes from the line of Gregory Lewis.

------------------------------
 Joseph E. Nelson,  Crédit Suisse AG, Research Division - Research Analyst   [29]
------------------------------
 This is -- it's Joe Nelson on for Greg today. Maybe just one quick one for me on the market. Tony, you mentioned the market is turning. You were able to sign the Clean Energy, it looks like in a couple of short-term charters through -- it looks like through -- maybe through mid-summer and mid to end of summer. I mean just -- it's just kind of conceptually, help -- are you starting to see more length to some of these charters that are coming out into the market and -- on our terms improving? And are you seeing any more -- I guess the charter is getting more active maybe in looking at length now that it seems that the market is starting to improve.

------------------------------
 Tony Lauritzen,  Dynagas LNG Partners LP - CEO and Director   [30]
------------------------------
 Yes, thank you very much. That's a very good question. We've seen -- as a result of a very good world LNG output, we've seen that, in general, the supplier vessels is just much thinner than what most market participants thinks. We've seen some fixtures being done very lately at extremely high levels compared to what we've seen before. So we seize these sudden spikes. But in general, we're also seeing that the market is tightening. We see improved rates -- improved charter rates now versus, let's say, a month ago and even 3 weeks ago. As a result and in particular with -- also, as a result of the Qatar situation, we are starting to see that several charters are getting nervous about the actual availability of vessels and are inquiring for term tonnage, not necessarily the multiyear ones always, but definitely, we see that there are discussions taking place within these organizations whether they should strictly rely on the spot markets or if they should have a larger term cover.

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 Joseph E. Nelson,  Crédit Suisse AG, Research Division - Research Analyst   [31]
------------------------------
 Great. And maybe just one more, Michael, this might be more for you. You guys have done a good job. You got the new loan out. You're pushing maturities out. And I think you know that really just leads to the senior unsecured as your only real kind of medium-term maturity. Is it too early to begin having discussions on what a possible outcome might be for that or those things? You're sort of already actively looking at that now that the term loan is in place.

------------------------------
 Michael Gregos,  Dynagas LNG Partners LP - CFO   [32]
------------------------------
 No, thank you. No, it's a bit too early. I mean, this is a noncall on notes. So I think we're going to start actively looking at it about a year prior, so we're talking early 2018. But we don't anticipate any difficulties, I mean, by the time that this note matures, all our vessels would be under a long-term contracts. The Yamal charters will commence, so we don't anticipate any difficulties on that front.

------------------------------
Operator   [33]
------------------------------
 Now your next question from Jefferies comes from the line of Randy Giveans.

------------------------------
 Randall Giveans,  Jefferies LLC, Research Division - Equity Associate   [34]
------------------------------
 So one quick market question and one quick modeling question. So first, looking at the Clean Energy, what kind of spot rates and utilization levels are you seeing and expecting on short-term market over the next, let's say, 12 months?

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 Tony Lauritzen,  Dynagas LNG Partners LP - CEO and Director   [35]
------------------------------
 Yes. I mean, so basically the vessel is available from end August until the July 2018 when she goes on a longer-term contract. So we are in discussions about what will happen after August. We're looking at several opportunities there. So ideally, what we want to see is that the vessel goes on a charter that just fills that gap in its entirety. But it's too soon to do anything right now. As we said it earlier, the market is tightening, it's improving. When it comes to rates, et cetera, it's not something that we can really say what we expect here on the phone. But yes, we're also not too eager to jump into a deal too quickly because we kind of see that day by day. There are more uncertainties in the market. There are more interesting things going on. There is an improvement. So maybe pace, just to wait a little bit.

------------------------------
 Randall Giveans,  Jefferies LLC, Research Division - Equity Associate   [36]
------------------------------
 Sure. And then you say you entered into 2 consecutive short-term charters. What rate levels is that as for summer?

------------------------------
 Tony Lauritzen,  Dynagas LNG Partners LP - CEO and Director   [37]
------------------------------
 Yes, we haven't given any guidance on those levels as of now. But basically, the vessel were charted almost immediately upon her availability for 2 consecutive charters. There may be a very small gap in between those 2 charters, but we're also seeking out some potential -- one potential cargo to fill that minor gap in between the 2 consecutive charters.

------------------------------
 Randall Giveans,  Jefferies LLC, Research Division - Equity Associate   [38]
------------------------------
 Got it. Okay. And then as to the modeling question, so which quarters will the Clean Energy, Ob River and Amur River be dry docked? Specifically, how many days in 2Q versus 3Q?

------------------------------
 Michael Gregos,  Dynagas LNG Partners LP - CFO   [39]
------------------------------
 Yes, the Clean Energy has been dry docked already. So that's done. That was in the second quarter. The Ob River is underway, as we're speaking. She's on the dry dock, and we -- the remaining steamed turbine vessel is going to be next month. And the cost, it's about -- our guidance remains unchanged. It's about 20 days to 22 days off hire and $1.5 million to $2 million cost.

------------------------------
Operator   [40]
------------------------------
 Now from Maxim group, you're next question comes from the line of James Jang.

------------------------------
 Han Jang,  Maxim Group LLC, Research Division - Analyst   [41]
------------------------------
 I just have a couple of quick questions. In terms of the new Term Loan B, is the lending environment getting a lot tighter? It seems there are a few refinancings done by other firms at much lower rates. I was wondering 450 basis points, it seems a little high.

------------------------------
 Michael Gregos,  Dynagas LNG Partners LP - CFO   [42]
------------------------------
 No, I think it was a good result. It was more or less in line with our expectations when we launched the transaction. So I think comparing it to other deals that we've seen, which is within the sector, within the industry, we -- I think we did much better than many of our peers, even though, essentially, we're a very different company than our shipping peers. But the market is definitely open. There's no doubt about that. And they're definitely receptive. But for us, I think it was a very good result given that the amortization is -- profile was reduced significantly, the covenant structure has improved significantly. And obviously, there is a price that you have to pay for everything. There's a price for flexibility, and we were more than willing to pay this price. It's a price worth paying.

------------------------------
 Han Jang,  Maxim Group LLC, Research Division - Analyst   [43]
------------------------------
 Okay, that's fair. And my last question is there's news of the Australian government looking to restrict some LNG exports to protect domestic pricing, and that's probably not a short-term event. But do you see that -- do you see something like this going through by the Australians, especially with LNG export being such a big part of their economy?

------------------------------
 Tony Lauritzen,  Dynagas LNG Partners LP - CEO and Director   [44]
------------------------------
 Yes, that's really a very good question, and it's a question that is difficult to answer because these are discussions that are ongoing between the government and certain projects in Australia. As we understand, it doesn't affect all projects. It's kind of specifically related to LNG projects on the East Coast, where the argument is that is drawing on volumes that should have been kept for the domestic market. So we're not sure what kind of impacts this will have if it materializes at all, but I think that indicates that there are volumes that should have been exported that are no longer exported. I think the result is that those buyers that were expecting to buy those volumes, they would need to source from elsewhere. And in the Pacific basin, it's not so easy to find a big producer that has available LNG. So they probably have to look at some resourcing from some locations that are much further away. So in general, we -- if this materializes, we would expect it to be positive for shipping, but at the same time, we are realistic and we think it will be highly unreasonable for volumes to be withheld for domestic use. There are volumes that falls under SPA to an existing buyer. I do think already that those volumes that are under existing SPAs, that they are excluded. That is kind of our understanding. But these are all topics that are being discussed right now. So what we can only say is that it indicates that there is less product coming out of Australia when, ideally, that should come from somewhere else. If it comes, for example, from the United States, then obviously the ton-miles will -- for that trade would be much, much higher.

------------------------------
 Han Jang,  Maxim Group LLC, Research Division - Analyst   [45]
------------------------------
 Okay, great. And just one more question, just one more follow-up. So in terms of the drop down, the next vessels that you guys prefer to drop-down, would it be fair to say it will be the Yamal Arc-7's? Or would something like the Clean Ocean be a better candidate?

------------------------------
 Michael Gregos,  Dynagas LNG Partners LP - CFO   [46]
------------------------------
 Well, the more immediate candidate would be the Clean Ocean. That would be the -- yes, yes.

------------------------------
 Han Jang,  Maxim Group LLC, Research Division - Analyst   [47]
------------------------------
 Okay, got you. And on the Arc-7 sea trials, everything's gone well, right? There hasn't been any hiccups.

------------------------------
 Tony Lauritzen,  Dynagas LNG Partners LP - CEO and Director   [48]
------------------------------
 No, I mean, so with respect to the vessels that are going under sea trials on the sponsor level, they have not yet performed sea trials, that is something that is coming up now very soon. But we understand and what we've already set from the sea trials and the ice trials of the first vessel, which is not under our sponsor control. As far as we were told, the ice trials and sea trials went well.

------------------------------
Operator   [49]
------------------------------
 And as there are no further questions, I shall pass the floor back to you for closing remarks.

------------------------------
 Tony Lauritzen,  Dynagas LNG Partners LP - CEO and Director   [50]
------------------------------
 Thank you. We would like to thank you for your time and for the listening in on our earnings call. We look forward to speak with you again on our next call. Thank you very much.

------------------------------
Operator   [51]
------------------------------
 Thank you very much, sir, and with many thanks to both our speakers today. That does conclude our conference. Thank you all for participating, and you may now disconnect. Thank you, gentlemen.




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