Dynagas LNG Partners LP(DLNG) - 2019 Q4 - Annual Report

PART I This section provides key financial data, risk factors, and an overview of the partnership's business, organizational structure, and operational assets ITEM 3. KEY INFORMATION This section presents the partnership's selected historical financial data, highlighting key performance indicators and non-GAAP measures like TCE and Adjusted EBITDA, along with an extensive overview of associated risks A. SELECTED FINANCIAL DATA The partnership's selected financial data for the five years ending December 31, 2019, shows voyage revenues increasing to $130.9 million in 2019, while net income remained flat at $3.6 million, and Adjusted EBITDA decreased to $90.4 million Selected Financial Performance (2017-2019) | Financial Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Voyage Revenues (in thousands) | $130,901 | $127,135 | $138,990 | | Operating Income (in thousands) | $59,916 | $52,983 | $63,944 | | Net Income (in thousands) | $3,613 | $3,613 | $17,339 | | EPS (Common Unit) | $(0.22) | $(0.11) | $0.27 | | Adjusted EBITDA (in thousands) | $90,357 | $96,094 | $107,545 | | Cash distributions per common unit | $0.13 | $1.17 | $1.69 | Selected Balance Sheet and Cash Flow Data (As of Dec 31, in thousands) | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total Assets | $989,187 | $1,063,436 | $1,054,319 | | Total Long-term Debt (gross) | $663,000 | $722,800 | $727,600 | | Total Partners' Equity | $313,707 | $326,485 | $318,318 | | Net cash from operating activities | $43,177 | $42,994 | $59,339 | - Fleet utilization was 98.5% in 2019, a slight decrease from 100% in 2018, while the Time Charter Equivalent (TCE) rate increased marginally to $58,535 in 2019 from $57,972 in 2018[38] D. RISK FACTORS The partnership faces significant risks, including reliance on a small fleet and limited charterers, operational challenges, financial constraints from debt, industry volatility, and the impact of the COVID-19 pandemic - The fleet consists of only six LNG carriers, making the business highly sensitive to any operational limitations or off-hire time for any single vessel[50][51] - Revenue is concentrated among a few key charterers, with Gazprom accounting for 47%, Yamal for 31%, and Equinor for 16% of total revenues for the year ended December 31, 2019[56] - The $675 million Credit Facility restricts the partnership from paying distributions to its common unitholders while borrowings are outstanding, significantly impacting common unitholder returns[52][86][101] - The COVID-19 pandemic is identified as a material risk that could adversely affect global demand for LNG, charter rates, and disrupt operations through travel restrictions and potential workforce health impacts[66][67][68] - The partnership is exposed to risks from the planned phase-out of LIBOR after 2021, which could increase the cost of its variable rate indebtedness and affect its profitability[104][106] ITEM 4. INFORMATION ON THE PARTNERSHIP This section details the partnership's history, business strategy, operational assets, and an in-depth analysis of the international LNG shipping industry and its extensive environmental and safety regulations A. HISTORY AND DEVELOPMENT OF THE PARTNERSHIP Dynagas LNG Partners LP was formed in May 2013, completed its IPO in November 2013 with an initial fleet of three LNG carriers, and refinanced all existing debt with a new $675 million Credit Facility in September 2019 - The partnership was organized on May 30, 2013, and completed its IPO on November 18, 2013, with an initial fleet of three LNG carriers acquired from its Sponsor[355] - In September 2019, the Partnership entered into a $675 million Credit Facility to refinance its existing Term Loan B and its 2019 Senior Notes[360] B. BUSINESS OVERVIEW The partnership's strategy prioritizes debt repayment over fleet expansion, operating a fully contracted six-vessel LNG fleet with a $1.23 billion revenue backlog, while navigating a competitive market and evolving environmental regulations - The current business strategy focuses on capital allocation for debt repayment and strengthening the balance sheet, rather than pursuing immediate growth, due to an elevated cost of equity capital[361][363] Fleet Overview and Charter Details (as of April 16, 2020) | Vessel Name | Year Built | Capacity (cbm) | Ice Class | Propulsion | Charterer | Earliest Charter Expiration | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Clean Energy | 2007 | 149,700 | No | Steam | Gazprom | March 2026 | | Ob River | 2007 | 149,700 | Yes | Steam | Gazprom | March 2028 | | Amur River | 2008 | 149,700 | Yes | Steam | Gazprom | June 2028 | | Arctic Aurora | 2013 | 155,000 | Yes | TFDE | Equinor | July 2021 | | Yenisei River | 2013 | 155,000 | Yes | TFDE | Yamal | Q4 2033 | | Lena River | 2013 | 155,000 | Yes | TFDE | Yamal | Q2 2034 | - As of April 16, 2020, the fleet had an estimated contracted revenue backlog of approximately $1.23 billion, with an average remaining contract duration of about 8.5 years[365][393] - The partnership holds purchase options for its Sponsor's 49% interest in three 172,000 cbm ARC7 ice-class LNG carriers currently chartered to the Yamal LNG Project[374][378] - The company is subject to significant environmental regulations, including MARPOL Annex VI (IMO 2020) which mandated a reduction in sulfur emissions to 0.5% from January 1, 2020, and the BWM Convention for ballast water management[510][516][530] C. ORGANIZATIONAL STRUCTURE Dynagas LNG Partners LP is a Marshall Islands limited partnership and holding company that owns its six-vessel LNG fleet through wholly-owned subsidiaries, primarily Dynagas Operating LP - The Partnership is a holding company that owns its vessels through separate wholly-owned subsidiaries incorporated in the Marshall Islands and Malta, with Dynagas Operating LP as the primary operating subsidiary[571] ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section provides management's analysis of the partnership's financial performance and condition, detailing results of operations, liquidity, capital resources, cash flows, contractual obligations, and recent developments A. RESULTS OF OPERATIONS For the year ended December 31, 2019, voyage revenues increased by 3.0% to $130.9 million, while vessel operating expenses rose 13.6% to $28.4 million, and interest and finance costs increased 16.0% to $58.6 million Comparison of Results of Operations (in thousands) | Item | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | Voyage Revenues | $130,901 | $127,135 | 3.0% | | Vessel Operating Expenses | $28,351 | $25,042 | 13.6% | | Dry-docking Costs | $0 | $7,422 | -100.0% | | Interest and Finance Costs | $58,591 | $50,490 | 16.0% | | Net Income | $3,613 | $3,613 | 0.0% | - The increase in 2019 voyage revenues was driven by new charters for the Clean Energy and Yenisei River, partially offset by lower charter rates for the Ob River and Arctic Aurora and positioning time for the Lena River[624][625] - The significant increase in interest and finance costs in 2019 was primarily due to the accelerated amortization of deferred financing fees associated with the refinancing of the Term Loan B[633] B. LIQUIDITY AND CAPITAL RESOURCES The partnership's liquidity relies on operating cash flows and debt financing, highlighted by a new $675 million Credit Facility in 2019 that restricts common unitholder distributions, with $66.2 million in cash as of December 31, 2019 - In September 2019, the Partnership entered into a new 5-year, $675 million senior secured term loan to refinance its Term Loan B and 2019 Senior Notes[652] - A significant covenant of the new $675 million Credit Facility is the restriction on paying distributions to common unitholders while the loan is outstanding, though preferred unitholder distributions are permitted if no event of default occurs[646][653] Cash Flow Summary (in thousands) | Cash Flow Activity | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net cash from Operating Activities | $43,177 | $42,994 | $59,339 | | Net cash from Investing Activities | $0 | $(409) | $0 | | Net cash from Financing Activities | $(86,888) | $(132) | $(74,470) | - As of December 31, 2019, the Partnership had $663.0 million of debt outstanding and access to an undrawn $30.0 million revolving credit facility from its Sponsor[651][658] F. CONTRACTUAL OBLIGATIONS As of December 31, 2019, the partnership had total contractual obligations of $817.7 million, primarily consisting of $663.0 million in long-term debt and $131.7 million in estimated interest payments Contractual Obligations as of December 31, 2019 (in thousands) | Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt | $663,000 | $48,000 | $96,000 | $519,000 | $0 | | Interest on long term debt | $131,738 | $31,800 | $57,471 | $42,467 | $0 | | Management fees & commissions | $20,536 | $8,324 | $2,733 | $2,597 | $6,882 | | Executive services fee | $2,344 | $604 | $1,208 | $532 | $0 | | Administrative services fee | $40 | $40 | $0 | $0 | $0 | | Total | $817,658 | $88,768 | $157,412 | $564,596 | $6,882 | ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section outlines the corporate governance structure, including the five-member board of directors and senior management, noting that executive officer services are provided by the Manager, Dynagas Ltd., and the partnership has no direct employees - The board consists of five members: Georgios Prokopiou (Chairman), Tony Lauritzen (CEO), Levon Dedegian, Alexios Rodopoulos, and Evangelos Vlahoulis[702] - The partnership has no direct employees, with executive officers and administrative staff provided by the Manager, Dynagas Ltd., through Executive and Administrative Services Agreements[711][722] - The board has three key committees: an Audit Committee, a Conflicts Committee to review related-party transactions, and a Compensation Committee[719][721] ITEM 7. MAJOR UNITHOLDERS AND RELATED PARTY TRANSACTIONS This section details the ownership structure, with the Sponsor holding a 43.9% stake, and outlines key related party agreements, including the Omnibus Agreement and various management service agreements, which create potential conflicts of interest Major Unitholders (as of April 16, 2020) | Name of Beneficial Owner | Number of Common Units | Percentage | | :--- | :--- | :--- | | Dynagas Holding Ltd. (Sponsor) | 15,595,000 | 43.9% | | Cobas Asset Management SGIIC SA | 3,690,128 | 10.4% | - The Omnibus Agreement with the Sponsor provides the Partnership with rights of first offer and purchase options for certain LNG carriers, including the 'Optional Vessels', and contains non-competition clauses[729][731][737] - The Partnership pays its Manager, Dynagas Ltd., a daily technical management fee ($3,075 per day per vessel in 2019), a 1.25% commercial management fee on gross charter hire, an executive services fee (€538,000 per annum), and an administrative services fee ($10,000 per month)[749][750][755][758] - The Partnership Agreement contains provisions that modify and limit the fiduciary duties of the General Partner and directors to unitholders, allowing them to consider the interests of other parties, such as the Sponsor, when resolving conflicts of interest[761][768] ITEM 8. FINANCIAL INFORMATION This section covers legal proceedings, including a putative class action lawsuit filed in May 2019, and the partnership's cash distribution policy, which is significantly limited by the $675 million Credit Facility's restriction on common unit distributions - A putative class action lawsuit was filed against the Partnership in May 2019, alleging violations of the Securities Exchange Act related to statements about new charter agreements and distribution sustainability, which the Partnership believes are without merit[781] - The Partnership's cash distribution policy is to distribute all available cash quarterly, but this is subject to board discretion and significant restrictions, with the $675 million Credit Facility prohibiting cash distributions to common unitholders while outstanding[783][795] ITEM 10. ADDITIONAL INFORMATION This section provides supplementary details, focusing on material U.S. and Marshall Islands tax considerations for unitholders, including the partnership's election to be taxed as a corporation and its qualification for the Section 883 exemption - The Partnership has elected to be treated as a corporation for U.S. federal income tax purposes[817] - The Partnership believes it qualifies for the Section 883 exemption, which exempts its U.S.-source shipping income from U.S. federal income tax, by satisfying the 'Publicly-Traded Test'[821][828] - There is a risk the Partnership could be classified as a Passive Foreign Investment Company (PFIC), which would have adverse U.S. federal income tax consequences for U.S. unitholders, though management believes it is not a PFIC based on current operations and counsel's opinion[352][840][843] - Under current Marshall Islands law, the Partnership is not subject to tax on income, and unitholders are not subject to Marshall Islands tax on distributions or capital gains[858] ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The partnership is exposed to market risks including interest rate risk on its $663.0 million floating-rate debt, foreign currency exchange risk, and significant credit risk due to high revenue concentration from a few major charterers - The Partnership has significant exposure to interest rate risk, with $663.0 million in floating-rate debt as of December 31, 2019, where a 1% increase in LIBOR would have decreased 2019 net income by an estimated $5.3 million[867][868] - The Partnership is exposed to foreign currency risk as approximately 26% of its operating expenses and 32% of G&A expenses in 2019 were in non-U.S. dollar currencies[870] Charterer Revenue Concentration | Charterer | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Gazprom | 47% | 69% | 72% | | Yamal | 31% | 8% | - | | Equinor | 16% | 18% | 19% | | Major energy company | 6% | 2% | - | | Total from Top 4 | 100% | 97% | 91% | ITEM 15. CONTROLS AND PROCEDURES Management concluded that the partnership's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2019, with no material changes reported during the period - Management concluded that the Partnership's disclosure controls and procedures were effective as of December 31, 2019[880] - Based on an evaluation using the COSO framework, management concluded that the Partnership's internal controls over financial reporting were effective as of December 31, 2019[886] ITEM 16G. CORPORATE GOVERNANCE As a foreign private issuer, the partnership is exempt from certain NYSE corporate governance standards, including requirements for a nominating/corporate governance committee, a three-member audit committee, and regular executive sessions for non-management directors - The Partnership, as a foreign private issuer, follows home country (Marshall Islands) practice in lieu of certain NYSE corporate governance requirements[900] - Significant differences from NYSE standards include not having a nominating/corporate governance committee, an audit committee of two members instead of three, and no requirement for regular executive sessions of non-management directors[900][902][903] PART III This section contains the audited consolidated financial statements for Dynagas LNG Partners LP for the fiscal years ended December 31, 2019, 2018, and 2017 ITEM 18. FINANCIAL STATEMENTS This section contains the audited consolidated financial statements for Dynagas LNG Partners LP for the fiscal years ended December 31, 2019, 2018, and 2017, prepared in conformity with U.S. GAAP and audited by Ernst & Young (Hellas) Consolidated Balance Sheet Summary (in thousands) | Account | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Current Assets | $18,172 | $112,963 | | Vessels, net | $916,697 | $947,377 | | Total Assets | $989,187 | $1,063,436 | | Total Current Liabilities | $64,635 | $272,742 | | Total Long-term Debt (net) | $607,672 | $461,062 | | Total Partners' Equity | $313,707 | $326,485 | Consolidated Income Statement Summary (in thousands) | Account | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Voyage Revenues | $130,901 | $127,135 | $138,990 | | Operating Income | $59,916 | $52,983 | $63,944 | | Net Income | $3,613 | $3,613 | $17,339 | - The financial statements were prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP) and audited by Ernst & Young (Hellas) Certified Auditors Accountants S.A.[921]