Q2 2017 Dynagas LNG Partners LP Earnings Call
Sep 05, 2017 AM EDT
DLNG - Dynagas LNG Partners LP
Q2 2017 Dynagas LNG Partners LP Earnings Call
Sep 05, 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
* Han Jang
Maxim Group LLC, Research Division - VP & Senior Equity 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 Dynagas LNG Partners Conference Call on the Second 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 that the conference is being recorded today.
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 second quarter ended June 30, 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 information to be useful in our press release.
The earnings for the financial quarter ended June 30, 2017 were within our expectations. There were particular cost items that fell into this particular quarter that affected the results. 50% of our fleet entered dry dock for their scheduled maintenance, loan fees related to the financing prior to the Term Loan B and the Clean Energy is trading on a relatively weak spot market until her delivery into her long-term charter in July 2018.
Turning to Slide 2. Clean Energy and Ob River completed their 5-year special surveys and related dockings in the second quarter. The Amur River commenced its 5-year special survey in the second and completed the same in the third quarter. We are satisfied that the class surveys, including dry dockings, were completed quickly and efficiently with only an average of 15 days between arrival to departure at the repair yard. The vessels are in a 5-year special survey cycle, meaning one would expect about 5 years between each such event.
In April 2017, the Clean Energy became available for employment. At which time, we entered into 2 consecutive short-term charters with Gazprom to employ the vessels through the end of August 2017. Following the expiration of these charters, the vessel is employed on an additional short-term charter with PetroChina and will continue to be employed on the short-term market until her 8-year contract with Gazprom from July 2018. Although we have been successful in applying the Clean Energy on the short-term market, such market has, although improving, turned out to be weaker than her long-term charter.
Our adjusted EBITDA for the period was reported at $22.9 million with corresponding adjusted income of $4.2 million. The partnership reported a net loss of $5.2 million, which includes $4.9 million of scheduled class surveys and dry dock costs for the 3 vessels and a one-off $2.6 million noncash charge associated with the refinancing of the debt that were in place prior to the Term Loan B.
Accordingly, cash distribution for the second quarter of 2017 of $0.42 in the quarter per common unit was paid on July 18, 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 for each of its Series A Preferred Units for the period from May 12, 2017 to August 11, 2017. 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. As anticipated, our financial results were impacted by the one-off charges of $7.5 million related to the fact that half of our 6 vessel fleet underwent their special survey and dry dock in the second quarter at a cost of $4.9 million and a one-off charge of $2.6 million related to the write-off of unamortized deferred loan fees associated with the partnership's prior indebtedness, which was refinanced with a Term Loan B in May of this year.
Please note that the partnership expenses class survey costs as incurred and that 2 of our vessels commenced and completed their class surveys in the second quarter. Therefore, the second quarter results include the full class survey dry dock costs for these 2 vessels.
The third vessel, the Amur River, commenced its dry dock in the second quarter and completed it in the third quarter. And, as a result, approximately half of the class survey cost for the Amur River has been charged in the second quarter, with the remaining to be reflected in next quarter's results.
Our operating results were also impacted by the lower revenues attributable to the Clean Energy, which is the only vessel in our fleet currently trading in the short-term market, pending for delivery into an 8-year charter next year; the off-hire days related to the 3 vessels that were dry docked; and the higher interest expense following our Term Loan B.
During the second quarter of this year, the partnership generated revenues of $32 million and adjusted net income of $4.2 million. For the same period of 2016, revenues amounted to $42.6 million and adjusted net income to $18.8 million. Our adjusted figures take into consideration the class survey costs and noncash items such as charter higher amortization, amortization of the fair value of acquired contractors, write-off of deferred loan fees.
For the quarter, we have 507 available days versus 546 in the same period in 2016. Our average fleet cash daily charter rate amounted to $66,900 per day per vessel, versus $81,300 per day per vessel for the same period in 2016 and utilization for the quarter amounted to 95%. The increase in vessel operating expenses from approximately $12,200 per day per vessel to $13,700 per day per vessel were attributable to the expenses incurred in preparation for the dry docking of the 3 vessels discussed earlier.
Moving on to Slide 4 to discuss distributable cash flow and our coverage ratio. For the second quarter of 2017, our coverage ratio declined materially as anticipated as a result of the off-hire periods related to the 3 vessels that were dry docked, the materially lower earnings on the Clean Energy and higher interest costs following the Term Loan B refinancing.
We do caution not to place too much emphasis on the coverage ratio for the quarter and the near term since this metric is not a direct indicator of the partnership's ability to pay cash distributions. The distributable cash flow and coverage ratio of the partnership, in our opinion, are less of a guide since replacement and maintenance CapEx significantly exceed the partnership's principal payments of debt. This is relevant because despite this transitional period for the partnership as a result of the interim employment of the Clean Energy until she delivers into her long-term contract next year, the cash position of the partnership is strong and is further enhanced following our Term Loan B financing.
Our projected next 12-month cash flow breakeven, excluding cash distributions to common unitholders and plus dry docked surveys, but including preferred distributions, is about $42,500 per day per vessel; whereas the average gross contracted rate of our fleet contracted on term employment is close to $75,000 per day, excluding the Clean Energy, which is trading in the short-term market, pending for delivery to the Gazprom 8-year time charter.
Including our cash distributions to common unitholders, our cash flow breakeven is approximately $70,000 per day per vessel. And if we take into account the Clean Energy, even if you trade at the currently subdued spot rate until she delivers into a long-term contract, our average charter rate will still amount to about $65,000 per day, which is comfortably cushioned by our strong cash position.
Moving on to Slide 5 to discuss our attractive debt maturity and repayment profile. In May of this year, we demonstrated our ability to successfully tap the capital markets with the completion of our $480 million secured institutional Term Loan B, which significantly enhanced the sustainability of our current distribution, lower amortization, a more efficient covenant structure and extended maturity. Following this refinancing, our total debt amortization amounts to $4.8 million per year, a significant improvement over the $32.5 million per year debt amortization prior to the refinancing. It is self-evident that the reduced principal payment more than compensate for the slightly higher interest expense we pay on the Term Loan B. Our only other debt instrument is our 6.25% $250 million unsecured note, which matures in October 2019. Given our contract length of 10.2 years, which run significantly beyond the maturity date of our secured and unsecured indebtedness, we do not anticipate any difficulties refinancing our unsecured and secured debt.
Moving on to Slide 6, except for the Term Loan B and unsecured note, our capital structure includes a 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 56% of our total capitalization. As of June 30, we had about $74 million in cash on hand, $730 million in total debt, resulting in a net debt to last 12 months EBITDA of about 5.3x.
As we have previously stated, although we feel very comfortable with our leverage metrics, our leverage is on the higher end of our targets. Balance sheet protection is of paramount importance to us and any growth through acquisition of vessels will be accompanied with deleveraging.
Moving on to Slide 7. On July 18, we paid our 15th quarterly cash distribution. Since we went public in November 2013, we have paid approximately $208 million in cash distributions to our unitholders on $255 million of distributable cash flow. During that time, our common unit holders have received total cash distributions amounting to $5.94 per unit.
All in all, despite the drop in our distribution coverage, our balance sheet strength, strong liquidity and contracted revenue backlog will allow us to maintain the cash distribution in the near to medium term, which gives us the luxury to be patient with capital raises and distribution growth. This is a marathon and not a sprint.
That wraps it up from 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 8 to summarize the partnership's profile. Our fleet currently counts 6 high-specification and versatile LNG carriers with an average age of about 7.1 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 an international joint venture between TOTAL, CNPC, NOVATEK and the Silk Road Fund. Our contracted backlog is about $1.49 billion and our average remaining charter period is about 10.2 years, which compares well versus our peers. Our vessels have also served customers such as Qatargas, RasGas, Marubeni, Woodside, KOGAS, CPC, North West Shelf and several other major oil and gas companies. We, therefore, have a large customer base that we are able to contract with.
Moving on to Slide 9. Our fleet of LNG carriers are largely fixed on long-term charters with strong and reputable energy companies, and we have a very low availability going forward. Drivers for our charters were the characteristics of the fleet, including its ice class notations, and our organization's track record.
The contractual relationship between our customers and the vessels are on a time charter party 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. 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 have minimum capital requirements, which provides significant free cash flows.
Compared to other shipping segments, the LNG shipping is a highly industrial segment where owners and charterers work very close together and mutual performance is key. Charterers typically program the vessel forward straight for long periods of time.
In April 2017, Clean Energy became available for employment. At which time, we entered into 2 consecutive short-term charters to employ the vessels through the end of August 2017, followed by another short-term charter, and we expect to enter into additional charters for the Clean Energy prior to her delivery to Gazprom in July 2018. We have only entered a limited number of discussions on the general availability that we have in 2018, given that we believe the market is on an improving trend.
Let's move to Slide 10. Our sponsor, Dynagas Holding, owns a fleet of 9 LNG carriers, which are all on long-term contracts. Four of those LNG carriers are fully owned and trading. One of them, 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, a pool 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 Sinotrans and China LNG Shipping, 2 state-owned Chinese entities. These vessels are under construction in Korea and are chartered to Yamal LNG for between 26 and 28-year contracts each.
All vessels on the water and in the order book are fully financed and funded. All 9 vessels have contracts in place amounting to about $1.1 billion contract backlog. These optional vessels are dropdown candidates to the partnership.
Let's move to Slide 11. We have a unique fleet. Five 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're able to and have been successful in pursuing business opportunities in 2 different markets, namely conventional shipping and a unique market for icebound trade.
Initial capital expenditure of an ice class vessel is somewhat more expensive than conventional carriers. However, the operating cost between our ice class carriers and conventional carriers are very similar.
The company, together with our sponsor, has a market share of 75% for vessels with Arc-4 or equivalent ice class notation. There are only 3 other LNG carriers in the world with the 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 have a long track record in transiting LNG carriers through the Northern Sea Route, which gives a tremendous advantage, given that the large gas reserves located in the middle of this route that are being developed for export by the end of this year. We also expect further projects to be developed in that region.
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 provide for overall relative better economics and efficiency.
Let's move to Slide 13. In a summary, the market is in a place with substantial ongoing growth of LNG production coming from new LNG projects, primarily from the U.S. and Australia. 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 activity since Q3 2015. There appears to be sufficient demand for the new LNG from existing and new importers 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 576 vessels. The order book, counting 112 vessels, is about 24% of the world fleet. As much as 30% of the world fleet is below 140,000 cubic meters and aged. More importantly, these vessels are small, with average 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 vessels. Furthermore, 82% of the order book of 112 vessels has already been committed for employment. This means that there are very few newbuildings 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 newbuilds 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 and there are only a few yards in the world that has the experience and capability to build such vessels. And if we were to order today, our guess is that yards would be able to offer tonnage for delivery in the early 2020 at the very earliest.
Let's move to Slide 14. We are now in a period with strong growth in LNG production. It is conservatively forecasted that about 143 million tonnes of new annual LNG will come to the market between now and 2021. This means a total increase of 54% compared to 2016 production. It's 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 be from new and from European and Asia Pacific markets and, in particular, China. 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 the existing import markets will continue to increasingly rely on LNG as a price-competitive and clean energy resource.
Let's move to Slide 15. In first half of 2017, LNG production was up 12% 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 second half of 2017 with existing trains ramping up capacity and new project such as Cameron LNG, Wheatstone LNG and Yamal LNG 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 25 cargoes in the first half of 2017 compared to 12 for the full year of 2016. Sabine Pass LNG Train 1 to 4 are substantially complete and we assume that Train 5 is scheduled for completion in 2018 or early 2019.
Let's move to Slide 16. With the U.S. projected to become one of the world's largest exporters of LNG, it is important to analyze where those volumes are being shipped so far. Sabine Pass produced 159 cargoes between February 2016 and 1st of August, 2017. 20% of the volumes went to South America; 25% to Central America, including Caribs; 14% to Europe, including Turkey; 21% to the Far East; 14% to the Middle East; and 6% to India and Pakistan.
Initial analysis indicates that Sabine Pass requires 1.7 vessels for each million tonne of LNG produced. At full production, Sabine Pass is expected to produce 27 million tonnes per annum. This means that one would require about 46 vessels fully utilized per annum to serve this terminal alone. If we conservatively estimate that the U.S. export will produce 69 million tonnes of LNG per annum within 2021, U.S. volumes may require about 117 vessels alone. That is equivalent to about 25% of the current world fleet.
Let's move to Slide 17. 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. From the year 2000 until 2017, infrastructure worth $990 billion has been constructed.
The Far East is still the largest consumer of LNG and demand is growing. The world's largest incremental importers of LNG in second half 2017 were China, Japan and South Korea. While Japan and Korea have long been relying on LNG as a resource, China completed its first LNG import terminal in 2008 and today have 13 completed LNG terminals and 10 under construction. Growth in Chinese LNG imports have averaged 17% per annum in the last 5 years. In 2016, China imported 26 million tonnes of LNG, equivalent to about 10% of 2016 world LNG production. This number is forecasted to grow to 33 million tonnes by end 2017, an equivalent of 25% year-on-year growth.
Let's move to Slide 18. LNG is becoming an increasingly important energy resource due to its environmentally friendly properties, its competitive pricing and availability. We experienced new import markets emerging. In particular, we have floating regasification terminals, which we term FSRU imports, that allows for quick market access.
In 2016, 22 million tonnes, equivalent to about 8% of worldwide production, were exported to new markets and the majority of those volumes were discharged into 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. And 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 54% within 2021 is estimated to outpace increase in LNG shipping capacity of 24% 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's fleet is largely ice classed and winterized, enabling the flexibility to pursue the best of 2 different markets, which has 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) Your first 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 [2]
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I had a few questions related to the Yamal project. The first is there's a little footnote in the presentation -- or in the press release that said that the charters are subject to certain conditions and would require waivers or whatnot. Is there anything incremental there? Or is that just sort of the way that it's always been and you don't expect there to be any issues?
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Tony Lauritzen, Dynagas LNG Partners LP - CEO and Director [3]
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Yes, Ben. Yes. That is something that has always been there and that footnote was related to, at time of concluding, in particular the 2 charters for the Yenisei and the Lena River, they form part of a package deal that our sponsor would do on other shipping class assets. So basically, since there was a package deal, Yamal just wanted to make sure that we perform on -- or that our sponsor perform on the other vessels as well, but nothing has changed there and everything is going well.
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Benjamin J. Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Senior Analyst [4]
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Okay. Good. So -- and then, related to that, I know -- obviously, Yamal has made good progress. When thinking through the time frame as to when your charters actually become effective, both obviously at the partnership level, but then also at the sponsor level, what hurdles need to be cleared and what exactly needs to happen in order for those to take effect? And do you have any sort of updates on exactly what's been taking place in Yamal?
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Tony Lauritzen, Dynagas LNG Partners LP - CEO and Director [5]
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Ben, sorry, did you mean related to those conditions on those vessels?
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Benjamin J. Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Senior Analyst [6]
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No. No. No. I mean, separately. I feel like...
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Tony Lauritzen, Dynagas LNG Partners LP - CEO and Director [7]
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Yes, just in general. Well, I mean, these vessels in the partnership and on the sponsor level is on a time charter basis with a defined time of delivery so the vessels will be delivered regardless of the status of the project. And the project is, as we understand, well-capitalized.
That being said, as far as we are aware, everything is going very well for Yamal, producing first cargo in October. So as with every project, there is a ramp-up period where you start to produce smaller quantities and you ramp up over time. So, I guess, that the hurdle for the project is to ensure that the terminal and all the equipment works so that the ships that they have, by then, taken the delivery off can be filled up and trade their cargo.
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Benjamin J. Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Senior Analyst [8]
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Okay. So with respect, I suppose, to the 2 -- at the sponsor level, the 2 Arc-7s, they're coming online later this year. If the -- whether or not the project's working, you guys are going to be paid? That's correct?
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Tony Lauritzen, Dynagas LNG Partners LP - CEO and Director [9]
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That's correct. That's correct. And that's further guaranteed by shareholders of the project.
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Benjamin J. Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Senior Analyst [10]
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Right. Okay. And then, lastly for me, just sort of thinking through how this big, new wave of Yamal vessels and contracts come in. Obviously, it's been a bit of a chicken and the egg issue in terms of dropdown schedules and so forth, but do you feel any additional sort of pressure or momentum to maybe start to find a way to grow the fleet in order to get the ball rolling on the dropdown of these Yamal vessels? Or how exactly are you thinking through where you stand in that respect?
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Michael Gregos, Dynagas LNG Partners LP - CFO [11]
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Ben, this is Michael. No, nothing has really changed from our perspective. We feel that we're in a pretty good position. We have the luxury to wait. We don't want to do something which is -- would put us in a worse off position in the future. And when I say -- mean something is that we don't issue equity which is prohibitively expensive. So we are in a position where the distribution, the current distribution is safe. And we believe that the best way forward is to be patient and be opportunistic also when the time comes.
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Operator [12]
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And your next question from Crédit Suisse comes from the line of Gregory Lewis.
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Joseph E. Nelson, Crédit Suisse AG, Research Division - Research Analyst [13]
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This is Joe Nelson on for Greg today. Just first question for me. In your prepared remarks, you talked about any future dropdown growth coming with deleveraging and as well as looking to this opportunity to fortify your balance sheet. I'm just wondering, as we think about the balance sheet, do you have any target leverage in mind as to where you'd prefer the balance sheet to be either now and then as far as any future acquisitions or dropdowns are concerned?
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Michael Gregos, Dynagas LNG Partners LP - CFO [14]
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Well, we do have leverage targets. In order to attain these targets, you -- first of all, we would have to dropdown a couple of ships. And second of all, there would have to be a larger mix then of equity rather than debt. I think, ideally, we would like to be somewhere in the 4.5x to 5x range. That would be our, let's say, long-term targets.
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Joseph E. Nelson, Crédit Suisse AG, Research Division - Research Analyst [15]
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Okay. And then, second one, maybe a little bit more market-related. You mentioned that maybe some of the conversations you're having now with some of your counterparties regarding term employment isn't as, I guess, maybe as rewarding as you'd like it to be. I mean, what do you think we need to see to really get the time charter market perking up here and maybe reflecting some of the improvements that we've seen in activity in the spot market so far this year?
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Tony Lauritzen, Dynagas LNG Partners LP - CEO and Director [16]
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Yes. I think we need to see the markets continue on the same path which it is now. I mean, with -- on the short-term market, we've seen an improvement during the last 3 months or so, I would say. And there is a lot more activity in general on the short term. For example, in July and August, I think we had almost record numbers of short-term fixtures. If we look at, for example, the entire 2016, you had about 270 spot market fixtures. And year-to-date, we're up in 2014 already. So I believe that we're on the right track with utilization being up, with charter rates in general being on an improving trend. This is the result of increased supply of LNG. In the past, we would see these trends being as a result of, let's say, all this charge in the market, et cetera, but is there a little -- so these spaces, we think, is strictly a result of more LNG coming.
So I think that we just have to be patient as a result of more and more LNG coming. I mean, every quarter there is more. Within 2019, we would have pretty substantial volumes already been added to the market with relatively limited shipping supply. And also given that the world fleet is consisting of many aged vessels, small vessels, inefficient vessels, I think that we are on the right trend. And that's exactly what we said just earlier, as you commented, that we think it's better to sit back and wait a little bit for the availability that we would potentially have in 2018 instead of entering too many discussions on that right now.
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Operator [17]
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(Operator Instructions) Now, this question from Wells Fargo comes from the line of Hillary Cacanando.
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Hillary Cacanando, Wells Fargo Securities, LLC, Research Division - Associate Analyst [18]
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Just wanted to get your thoughts around counterparty risk as it relates to Yamal and Gazprom, just given the fresh round of sanctions on Russia. And do you have any concerns that, perhaps in the future, LNG exports to Western countries could be under sanctions with -- in the future? I mean, is that a possibility, do you think? Or do you have any concerns around counterparty risk?
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Tony Lauritzen, Dynagas LNG Partners LP - CEO and Director [19]
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No. We've -- first of all, we're a company who would always be sanctions-compliant so it's important for us to look carefully into these matters. We haven't discovered any breach of sanctions in the contracts that we have. And we believe that, in particular, gas is extremely important for Europe. Russia is one of the biggest supplier of gas to Europe. And if gas were to be sanctioned, that would be a big problem for Europe in our opinion. So we don't think that it's realistic that gas exports would be sanctioned.
And when we look at general counterparty risk, we think that Gazprom is one of the big gas giants out there with a tremendous amount of infrastructure. When it comes to Yamal LNG, as you particularly asked about, this is an international joint venture between TOTAL, NOVATEK, CNPC and the Silk Road Fund, which jointly must be some of the biggest players in the industry. So we believe that we have very strong counterparties. And yes, we do not believe that there will be sanctions affecting our charters.
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Hillary Cacanando, Wells Fargo Securities, LLC, Research Division - Associate Analyst [20]
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Okay. That was helpful. Also just wanted to get clarification on dry docking. You said you're not expecting dry docking and special surveys for another 5 years. So what about the other 3 vessels in the fleet, the Yenisei River, Lena River and the -- what was the other one? Clean...
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Tony Lauritzen, Dynagas LNG Partners LP - CEO and Director [21]
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The Arctic Aurora?
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Hillary Cacanando, Wells Fargo Securities, LLC, Research Division - Associate Analyst [22]
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Yes. Arctic Aurora, I'm sorry. Are they going to go through special surveys next year or are they done? And when you said 5 years, are you referring to just the 3 that just went through dry docking or -- and the other 3 remaining has to go dry docking next year? Or are you clear for the next 5 years?
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Michael Gregos, Dynagas LNG Partners LP - CFO [23]
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No. What we meant was we're clear for the next 5 years for the 3 vessels that underwent their dry dock now. We have another 3 dry docks next year. And as I said before, we should expect, in the next quarter, a charge of -- for the one vessel, which completed its dry dock in the third quarter, there should be a small charge in that quarter.
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Hillary Cacanando, Wells Fargo Securities, LLC, Research Division - Associate Analyst [24]
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I see. So next year, should -- just for modeling purposes, should we be expecting dry docking in the second quarter of 2018 as well? All in one quarter or...
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Michael Gregos, Dynagas LNG Partners LP - CFO [25]
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Yes. Yes. That's right. Yes.
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Operator [26]
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And your next question from Jefferies comes from the line of Randy Giveans.
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Randall Giveans, Jefferies LLC, Research Division - Equity Associate [27]
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I just have a few quick modeling questions and then one kind of a strategy question. So following up on Hillary's questions here, the Amur River, how many days of the dry docking were in 2Q versus 3Q? I mean, have you started in 2Q and ended this quarter?
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Michael Gregos, Dynagas LNG Partners LP - CFO [28]
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Well, they're evenly split. I mean, all the dry docks, they took about 15 days on average per vessel. So I would say half in one quarter and half in the other quarter.
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Randall Giveans, Jefferies LLC, Research Division - Equity Associate [29]
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Okay. And then looking at vessel OpEx, the 2Q average went up to about $13,720 a day, and I know that includes some technical maintenance expenditures for the dry docking. But outside of that, what's a good run rate going forward, knowing that the shipper guarantees expire, I guess, in 4Q '16?
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Michael Gregos, Dynagas LNG Partners LP - CFO [30]
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Yes. I mean, if you exclude the dry docks, there wouldn't have been a material difference in the operating expenses versus other quarters. I think, on average, we should be talking around $12,000 for the steam turbine and maybe $13,000 for the diesel fuel, the dual fuel vessels.
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Randall Giveans, Jefferies LLC, Research Division - Equity Associate [31]
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Okay. And I then I guess a strategy question. Obviously, the coverage ratio is a significant factor by the dry docking. And it may not get above 1 through 2018 kind of in our model. So how long can it stay below 1, keeping the distribution at that $0.4225 per quarter? We're talking cost of distribution to net debt, can you maintain that? Obviously, it's been 1.4 or so all throughout 2015. So is that enough savings to kind of keep the distribution at least constant through 2018?
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Michael Gregos, Dynagas LNG Partners LP - CFO [32]
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Yes. As I mentioned before, there's actually a disconnect in the distribution, the coverage ratio and our actual ability to pay a distribution on a cash basis. I did mention that the distribution, the way we are now, is safeguarded for the near term and that certainly includes 2018 and longer.
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Operator [33]
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Now, from Maxim Group, your next question comes from the line of James Jang.
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Han Jang, Maxim Group LLC, Research Division - VP & Senior Equity Analyst [34]
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I just have a quick question on the Vladivostok LNG plant. Have you heard any news of that because I don't think they stopped bunkering? But do you think that might get rekindled probably...
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Tony Lauritzen, Dynagas LNG Partners LP - CEO and Director [35]
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When you say Vladivostok LNG plant, you mean the...
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Han Jang, Maxim Group LLC, Research Division - VP & Senior Equity Analyst [36]
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The Gazprom one.
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Tony Lauritzen, Dynagas LNG Partners LP - CEO and Director [37]
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Well, the Sakhalin one, yes. I mean, there -- and when you say bunkering, what do you mean? LNG bunkering or...
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Han Jang, Maxim Group LLC, Research Division - VP & Senior Equity Analyst [38]
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Yes. So, I mean, on -- I don't think it's a -- I don't believe it's the Sakhalin one. I think it was the shelved one, the Vladivostok one. I think that was back in, I think, '13, they start to plan for it. It was supposed to go online in '18. And then, they shelved it, I think, in '15 or '16?
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Tony Lauritzen, Dynagas LNG Partners LP - CEO and Director [39]
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Yes. Sorry. I misunderstood your question. I think we're talking about it already producing one. No, we don't have any news on what the status is.
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Han Jang, Maxim Group LLC, Research Division - VP & Senior Equity Analyst [40]
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Okay. And with the Russian -- with the power of Siberia pipeline, that's kind of being curtailed a bit. Do you think there's going to be additional Arctic LNG export capacity needed possibly in '18? Or are you guys kind of still keeping with the same model in terms of export demand just from Sakhalin and Yamal?
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Tony Lauritzen, Dynagas LNG Partners LP - CEO and Director [41]
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Yes. I mean, so basically now, we're looking at the existing terminal, which is the Sakhalin Energy Investment Company one; and then from Yamal, which is starting in October this year. And if you're referring to LNG exports beyond that from the Arctic, I mean, there are discussions of additional projects that is too early to discuss on a shipping level now. We think that would be kind of a 2018 discussion, but we know that there are specific projects being discussed for additional exports out of the Arctic.
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Han Jang, Maxim Group LLC, Research Division - VP & Senior Equity Analyst [42]
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Okay. Great. And aside from the Arc-7s that are on order now, have you seen any upticks from the shipyards in terms of additional ice class LNG carriers?
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Tony Lauritzen, Dynagas LNG Partners LP - CEO and Director [43]
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No, we have not.
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Operator [44]
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And at this point, if there are no further questions, I shall hand back to the speakers for closing remarks.
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Tony Lauritzen, Dynagas LNG Partners LP - CEO and Director [45]
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Well, thank you to everyone 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 [46]
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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 and you may now disconnect. Thank you, Mr. Lauritzen and Mr. Gregos. Thank you.
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