Dynagas LNG Partners LP(DLNG) - 2022 Q4 - Annual Report

PART I Item 3. Key Information This section details significant risks associated with the Partnership's operations, financial condition, industry, and securities Risk Factors This subsection comprehensively outlines operational, industry, securities, indebtedness, conflict of interest, and tax-related risks faced by the Partnership - The Partnership's fleet of only six LNG carriers makes its business highly susceptible to operational limitations or off-hire time[39] - A significant portion of revenue is derived from a limited number of charterers, with three charterers accounting for 100% of total revenues in 2022 (SEFE 43%, Yamal 41%, Equinor 16%)[41] - The Partnership's strategy prioritizes debt repayment and balance sheet strengthening, potentially slowing growth compared to peers focused on reinvestment[40] - The Partnership is restricted from paying distributions to common unitholders while borrowings are outstanding under its $675 Million Credit Facility[38][40] Item 4. Information on the Partnership This section provides a detailed overview of Dynagas LNG Partners LP, covering its history, business strategy, fleet, chartering, industry analysis, and organizational structure History and Development of the Partnership The Partnership was formed in May 2013, completed its IPO in November 2013, expanded its fleet to six LNG carriers by 2015, and maintains an active ATM offering program for its NYSE-listed units - The Partnership was organized on May 30, 2013, and completed its IPO on November 18, 2013, initially with three LNG carriers[264] - The Partnership has an active $30.0 million ATM offering program for common units, having sold 1,189,667 units for $3.3 million in net proceeds as of the report date[265] Business Overview The Partnership owns and operates six LNG carriers under long-term charters, focusing on debt repayment and balance sheet strengthening, with an average fleet age of 12.7 years and 6.3 years remaining charter term Fleet Details and Charter Information (as of April 21, 2023) | Vessel Name | Year Built | Cargo Capacity (cbm) | Ice Class | Propulsion | Charterer | Earliest Charter Expiration | Latest Charter Expiration | Latest Expiration (incl. options) | | :------------ | :--------- | :------------------- | :-------- | :--------- | :-------- | :-------------------------- | :------------------------ | :-------------------------------- | | Clean Energy | 2007 | 149,700 | No | Steam | SEFE | March 2026 | April 2026 | n/a | | Ob River | 2007 | 149,700 | Yes | Steam | SEFE | March 2028 | May 2028 | n/a | | Amur River | 2008 | 149,700 | Yes | Steam | SEFE | June 2028 | July 2028 | n/a | | Arctic Aurora | 2013 | 155,000 | Yes | TFDE | Equinor | August 2026 | September 2026 | n/a | | Yenisei River | 2013 | 155,000 | Yes | TFDE | Yamal | Q4 2033 | Q2 2034 | Q2 2049 | | Lena River | 2013 | 155,000 | Yes | TFDE | Yamal | Q2 2034 | Q3 2034 | Q4 2049 | - The estimated contracted revenue backlog is approximately $1.0 billion, with an average remaining contract duration of about 6.3 years, excluding extension options[272][284] - The Partnership's business strategy focuses on capital allocation towards debt repayment and balance sheet strengthening for future growth opportunities[269] Organizational Structure The Partnership, a Marshall Islands limited partnership, operates as a holding company, owning its six LNG carriers through wholly-owned subsidiaries under Dynagas Operating LP - The Partnership is a holding company owning vessels through wholly-owned subsidiaries in Marshall Islands and Malta, held under Dynagas Operating LP[455] Item 5. Operating and Financial Review and Prospects This section provides management's discussion and analysis of the Partnership's financial condition and operating results, covering revenues, expenses, liquidity, capital resources, and critical accounting policies Operating Results In 2022, voyage revenues decreased to $131.7 million due to dry-dockings, while net income slightly increased to $54.0 million, primarily driven by a derivative gain offsetting higher costs, with a stable TCE rate of $61,660 per day Selected Financial Highlights (Year Ended Dec 31) | Metric | 2022 | 2021 | | :----- | :--- | :--- | | Voyage revenues | $131.7M | $137.7M | | Operating income | $45.3M | $64.6M | | Net Income | $54.0M | $53.3M | | Earnings Per Common Unit | $1.15 | $1.14 | | Adjusted EBITDA | $89.5M | $97.0M | | TCE Rate | $61,660 | $61,684 | - Voyage revenues decreased by 4.4% in 2022 primarily due to fewer revenue-earning days from scheduled dry-dockings of three vessels[521] - Interest and finance costs increased by 30.4% to $27.9 million in 2022, driven by a higher weighted average interest rate despite reduced total debt[527] - A significant gain of $33.7 million was recognized on a derivative financial instrument in 2022, positively impacting net income compared to a $10.1 million gain in 2021[528] Liquidity and Capital Resources The Partnership's liquidity relies on operating cash flows and credit facilities, with $499.9 million outstanding debt under its $675 million credit facility maturing in September 2024, which restricts common unit distributions - As of December 31, 2022, $499.9 million of debt was outstanding under the $675 million Credit Facility, maturing in September 2024 with a $385 million balloon payment[224][539] - The $675 million Credit Facility includes restrictive covenants, prohibiting common unitholder distributions and requiring the Sponsor to maintain at least 30% common unit ownership[541][542] Cash Flow Summary (Year Ended Dec 31) | (In thousands of Dollars) | 2022 | 2021 | 2020 | | :------------------------ | :--- | :--- | :--- | | Net cash provided by operating activities | $57,324 | $79,591 | $68,603 | | Net cash used in investing activities | ($3,635) | — | — | | Net cash used in financing activities | ($70,836) | ($57,555) | ($59,830) | - The Partnership has an undrawn $30 million interest-free revolving credit facility with its Sponsor, extended until November 14, 2023[548] Item 6. Directors, Senior Management and Employees This section outlines the Board of Directors and senior management composition, executive compensation structure, board committee practices, and clarifies that the Partnership does not directly employ staff - The Board of Directors comprises five members: two appointed by the General Partner and three elected by common unitholders[578][590] - The Partnership does not directly employ executive officers; their services are provided by Dynagas Ltd. for an annual fee of €538,000 under an Executive Services Agreement[587][598] - The Board maintains three committees: Audit, Conflicts, and Compensation, each composed of independent directors[595][596] Item 7. Major Unitholders and Related Party Transactions This section identifies major unitholders and details significant related party transactions, including the Omnibus Agreement, vessel management agreements, and a $30 million revolving credit facility from the Sponsor Major Unitholders | Name of Beneficial Owner | Number of Units | Percentage | | :----------------------- | :-------------- | :--------- | | Dynagas Holding Ltd. | 15,595,000 | 42.4% | | Cobas Asset Management SGIIC SA | 4,833,397 | 13.1% | | Dell Loy Hansen | 3,563,020 | 9.7% | - The Partnership has an Omnibus Agreement with its Sponsor, including non-competition clauses and rights of first offer on certain LNG carriers[603][604] - The fleet is managed by Dynagas Ltd. under a Master Agreement, with technical management fees of $2,917 per day per vessel and commercial management fees of 1.25% of gross charter hire in 2022[618][619][620] Item 8. Financial Information This section references consolidated financial statements, discusses legal proceedings including a settled 2019 class action, and outlines the cash distribution policy, noting common unitholder distributions are suspended due to debt covenants - A 2019 class action lawsuit alleging false and misleading statements was settled, fully covered by insurance, with no admission of wrongdoing by the Partnership[646][649] - The Partnership's cash distribution policy requires quarterly distribution of available cash, but the $675 million Credit Facility currently restricts common unitholder distributions[650][651] - The subordination period for subordinated units expired on January 23, 2017, resulting in their conversion to common units[655] Item 9. The Offer and Listing. This section details the trading of the Partnership's common units, Series A Preferred Units, and Series B Preferred Units, all listed on the New York Stock Exchange Listing Details | Security | Trading Symbol | Exchange | | :------- | :------------- | :------- | | Common units | DLNG | NYSE | | Series A Preferred Units | DLNG PR A | NYSE | | Series B Preferred Units | DLNG PR B | NYSE | Item 10. Additional Information This section provides supplementary information, including material contracts, exchange controls, and detailed U.S. federal and Marshall Islands tax considerations for the Partnership and its unitholders - The Partnership has elected to be treated as a corporation for U.S. federal income tax purposes[675] - The Partnership believes it qualifies for the Section 883 exemption from U.S. federal income tax on its U.S.-source shipping income for 2022 by satisfying the "Publicly-Traded Test"[680][687] - Based on current operations, the Partnership believes it was not a Passive Foreign Investment Company (PFIC) for 2022 and does not expect to become one[701] - Under Marshall Islands law, the Partnership and its subsidiaries are not subject to tax on international shipping income, and non-resident unitholders are exempt from Marshall Islands tax on distributions or capital gains[716] Item 11. Quantitative and Qualitative Disclosures About Market Risk This section details the Partnership's exposure to market risks, including interest rate, foreign currency, and credit risk, noting interest rate swap usage and significant revenue concentration among three charterers - The Partnership manages interest rate risk with a floating-to-fixed interest rate swap, fixing the 3-month LIBOR at 0.41% on notional values matching the $675 million Credit Facility's debt amortization[726] - In 2022, approximately 32% of operating expenses and 44% of general and administrative expenses were non-U.S. dollar denominated, exposing the Partnership to foreign currency exchange risk[729] Revenue Concentration by Charterer (2022) | Charterer | 2022 Revenue % | | :-------- | :------------- | | SEFE (formerly Gazprom) | 43% | | Yamal | 41% | | Equinor | 16% | | Total | 100% | PART II Item 15. Controls and Procedures This section confirms management's assessment that disclosure controls and internal control over financial reporting were effective as of December 31, 2022, with no external attestation required as a non-accelerated filer - Management concluded that the Partnership's disclosure controls and procedures were effective as of December 31, 2022[739] - Based on the COSO framework, management concluded that internal controls over financial reporting were effective as of December 31, 2022[745] - The annual report does not include an attestation report on internal controls from the public accounting firm, as the Partnership is exempt as a non-accelerated filer[746] Item 16. Corporate Governance and Other Matters This section covers corporate governance, identifying the audit committee financial expert, confirming the Code of Business Ethics, detailing principal accountant fees, and noting exemptions from certain NYSE standards as a foreign private issuer - The Board of Directors has determined that Alexios Rodopoulos qualifies as an audit committee financial expert[748] - The Partnership has adopted a Corporate Code of Business Ethics and Conduct applicable to all employees, officers, and directors[749] Principal Accountant Fees (Ernst & Young) | Fee Type | 2022 | 2021 | | :------- | :--- | :--- | | Audit Fees | €136,500 | €147,000 | | Tax Fees | $8,400 | $8,000 | - As a foreign private issuer, the Partnership is exempt from certain NYSE corporate governance rules, including requirements for a nominating committee and unitholder approval for all equity-compensation plans[760][767] PART III Item 18. Financial Statements This section presents the Partnership's audited consolidated financial statements for 2020-2022, prepared under U.S. GAAP, including balance sheets, income statements, equity, and cash flows, along with accompanying notes - This item includes the audited consolidated financial statements for the years ended December 31, 2022, 2021, and 2020, along with the independent registered public accounting firm's report[766] Item 19. Exhibits This section lists all exhibits filed with the annual report, including organizational documents, material contracts like the Master Management Agreement and $675 million Credit Facility, and required certifications - A comprehensive list of exhibits is provided, including organizational documents, material contracts, and required certifications[769] Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Ernst & Young issued an unqualified opinion on the consolidated financial statements for the three years ended December 31, 2022, identifying vessel impairment assessment as a critical audit matter due to subjective future charter rate estimations - The independent auditor, Ernst & Young, issued an unqualified opinion on the consolidated financial statements for the three years ended December 31, 2022[779] - The audit identified vessel impairment assessment as a Critical Audit Matter, citing complexity and subjective judgment in forecasting future charter rates for non-contracted revenue days[783][784] Consolidated Financial Statements Tables The consolidated financial statements show total assets of $947.7 million and total partners' equity of $423.9 million as of December 31, 2022, with voyage revenues of $131.7 million and net income of $54.0 million for the year Consolidated Balance Sheet Highlights (As of Dec 31) | (In thousands of U.S. Dollars) | 2022 | 2021 | | :----------------------------- | :--- | :--- | | Cash and cash equivalents | $48,598 | $47,015 | | Vessels, net | $825,105 | $853,190 | | Total assets | $947,712 | $965,481 | | Current portion of long-term debt, net | $46,252 | $45,947 | | Long-term debt, net | $450,781 | $516,019 | | Total partners' equity | $423,931 | $381,484 | Consolidated Statement of Income Highlights (Year Ended Dec 31) | (In thousands of U.S. Dollars) | 2022 | 2021 | 2020 | | :----------------------------- | :--- | :--- | :--- | | Voyage revenues | $131,657 | $137,746 | $137,165 | | Operating income | $45,337 | $64,611 | $64,264 | | Gain/ (Loss) on derivative financial instrument | $33,655 | $10,104 | ($3,148) | | Net Income | $54,010 | $53,260 | $34,052 | Notes to the Consolidated Financial Statements The notes provide detailed explanations of accounting policies, related party transactions, the $675 million Credit Facility, derivative fair value measurements, future minimum lease payments, and the impact of the Russia-Ukraine conflict - In 2022, 41% of revenues were from Yamal, primarily trading from Russian ports; while current sanctions haven't directly impacted contracts, further sanctions could adversely affect results[800] - The Partnership expenses dry-docking and special survey costs as incurred, with $12.8 million expensed in 2022[792][827] - On October 12, 2022, the Partnership made a voluntary prepayment of $18.73 million on its $675 million Credit Facility to retire ATB's participation, resulting in a $2.1 million gain on debt extinguishment[876][877] - Future minimum contracted lease payments under non-cancelable time charters total $888.8 million as of December 31, 2022[891][892]