Thank you for standing by, ladies and gentlemen. And welcome to the Dynagas LNG Partners Conference Call on the Second Quarter 2020 Financial Results. We have with us, Mr. Tony Lauritzen, Chief Executive Officer; and Mr. Michael Gregos, Chief Financial Officer of the Company. At this point, all participants are in a listen-only mode.

There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today. At this time, I would like to read the Safe Harbor statement.

This conference call and slide presentation of the webcast contain 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 fully disclosed in Dynagas LNG Partners filings with the Securities and Exchange Commission. And now, I will pass the floor to Mr.

Lauritzen, Please go ahead, sir..

Good morning, everyone, and thank you for joining us in our 3 and 6 months ended 30 June 2020 earnings conference call. I’m joined today by our CFO, Michael Gregos. We have issued a press release announcing our results for the same 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. Moving on to slide 3. We are pleased to report results for the 3 months and 6 months ended 30 June 2020. Each of our six LNG carriers are operating under their respective term charters.

For the second quarter of 2020, we reported net income of $6.4 million and earnings per common unit of $0.10 after accounting for $3.4 million in non-cash mark-to-market interest rate swap losses. Adjusted net income and adjusted EBITDA were reported at $9.9 million and about $24.1 million, respectively.

And adjusted earnings were reported at $0.20 per common unit, excluding non-cash mark-to-market interest rate swap losses. This improved performance is attributable to an increase in voyage revenues and a decrease in interest and finance costs compared to the corresponding period of 2019, coupled with stable vessel operating costs during this period.

Despite the ongoing operational challenges the industry is going through with respect to COVID-19, we are pleased to report 100% utilization for the fleet for the second quarter of 2020.

The ongoing impact of COVID-19 has been operationally manageable due to our manager’s COVID-19 response plan, which has been implemented with the support of our seafarers, employees and charterers for which we are grateful.

In August 2020, we entered into an at-the-market offering program, pursuant to which the Partnership may offer and sell common units having an aggregate offering price up to $30 million of its common units. We expect that the ATM will be utilized selectively.

And to-date, the Partnership has issued and sold 122,580 common units, resulting in net proceeds of $0.4 million under this ATM program.

Going forward, we intend to continue our strategy of using our cash flow generation to delever our balance sheets, reinforce our liquidity and generate cash so as to build equity over time, which will enhance our ability to pursue future growth initiatives.

We paid in May 2020 a quarterly cash distribution of $0.5625 for Series A Preferred Units for the period from February 12, 2020 to May 11, 2020, and a quarterly cash distribution of $0.546875 for Series B Preferred Units for the period from February 22, 2022 to May 21, 2020.

Subsequent to the quarter, we also paid in August 2020 a quarterly cash distribution of $0.5625 for Series A Preferred Units for the period from May 12, 2022 to August 11, 2020 and quarterly cash distribution of $0.546875 for Series B Preferred Units for the period from May 22, 2022 to August 21, 2020.

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

Thank you, Tony. Turning to slide 4. We are pleased with the second quarter results. Net income for the quarter increased by close to 611% to $6.4 million over the second quarter of 2019.

Net income includes a non-cash unrealized mark-to-market loss to $3.4 million on our interest rates swap, which if excluded along with other minor non-cash terms, results in adjusted net income of $9.9 million, up 39% over the prior quarter and up 11 times over our second quarter 2019 adjusted net income.

Our adjusted EBITDA increased by 15% or $24 million, compared to the second quarter of 2019. Moving to slide 5.

The improvement in our financial performance compared with the same period last year is attributable firstly to all of our vessels having been delivered and trading without downtime under the long-term contracts, at an average daily gross rate of about $62,200 per day per vessel, compared to $55,100 per day per vessel for the corresponding period in 2019, and secondly, due to reduced financing costs.

Our weighted average interest expense was reduced from 6.73% in the second quarter of 2019 to 3.49% in the second quarter of 2020, resulting in cash interest savings of about $6.4 million for the quarter. This was attributable to lower LIBOR interest rates for this quarter compared to the second quarter of 2019.

The reduction in the margin we are paying on our new $675 million credit facility compared to our prior debt instruments and a decrease in our weighted average indebtedness from $722 million in the second quarter 2019 to $651 million in the second quarter of 2020.

Full utilization and stable operating expenses have also contributed and as a result, our profitability has been on a positive trajectory the last couple of quarters due to the aforementioned reasons, with an improvement from an adjusted loss of $0.06 per common unit in Q2 2019 to an adjusted earnings per common unit of $0.20 in Q2 of 2020.

Turning to slide six. For the quarter, excluding working capital changes, we were cash positive as the cash flow from our long-term contracts was utilized to service our amortizing debt and pay distributions to preferred unit holders. For the quarter, we generated $8.1 million in operating cash flow compared to $7 million in Q2 2019.

And after debt service and distributions to preferred unit holders, we generated $3.5 million for the quarter, excluding working capital changes. From 29th June of this year, our 3.41%, including the margin, interest rate swap became effective, which translates to quarterly cash interest expense of approximately $5.5 million, $22 million annualized.

And to put this number in perspective, for the full year of 2019, our cash interest expense amounted to $46 million with these savings giving us the ability to amortize debt and reduce our leverage. Moving on to slide seven. This slide shows our balance sheet metrics as of the end of Q2 and our scheduled debt repayments over the next years.

We do not have any debt maturities until September 2024, giving us the time to consider our strategy going forward and how to maximize shareholder value on a sustainable basis. We entered the second quarter with net debt to total book capitalization of 60% and total cash of $63 million.

This amount includes $50 million of restricted cash related to our $675 million credit facility. The Partnership’s credit profile continues to improve with net debt to trailing 12-month adjusted EBITDA of 6 times.

Our debt figures and our cash breakeven levels have and will continue to improve, and same time next year, we expect our net debt to last 12 months EBITDA to come down to 5.5 times as we continue to repay $48 million per annum in principal payments. Moving on to slide 8.

In this slide, we show our fleet-wide cash flow breakeven per day per vessel versus our contracted time charter rates for the quarter.

Despite the significant reallocation of cash flow towards debt reduction, our lowest -- our lower cost of financing results in attractive cash breakeven rates of below $50,000 per day per vessel versus our $61,000 per day per vessel time charter equivalent.

To put this reallocation of cash flow in perspective, in Q2 2019, our total debt service per day was $24,500 per vessel, out of which $22,300 per day was the cash interest expense, whereas in Q2 of 2020 our per vessel debt service was about $32,500 per day, out of which debt repayments are about $22,000 per day and cash interest expense is about $10,500 per day.

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

Thank you, Michael. Let's move on to slide 9. Our fleet currently accounts 6 LNG carriers with an average age of about 10.1 years. We have a diversified customer base with substantial gas producers, namely Equinor Gazprom and Yamal LNG.

The fleet’s contract backlog is about $1.18 billion, equivalent to an average backlog of about $197 million per vessel, and the fleet average remaining charter period per vessel is about 8.1 years. We have a unique and versatile fleet. Five out of the six vessels in our fleet are assigned with ice class 1A notation.

Therefore, the fleet can handle conventional LNG shipping as well as operate in icebound areas. In general, we view the ability to perform conventional and niche operations as an important driver in securing attractive long-term charters. Moving on to slide 10.

Older vessels are employed on time-charter contracts under which the charters pays all major voyage-related variable costs such as fuel, canal fees and terminal costs. Two of the vessels are under OpEx cost pass-through contracts, and in general provide for protection for inflation in operating expenses.

Our counterparties are mainly asset-strong energy producers that are typically able to forward program the vessels for periods of time, which gives us a certain degree of planning ability and cost control.

Our earliest potential availability is the Arctic Aurora, which will be available in the third quarter of '21, provided that Equinor does not exercise their option to extend the contract. So far, the vessel has served Equinor with good feedback and results.

The next available vessel after the Arctic Aurora may be the Clean Energy, which contract expires in the year 2026. Based on current charter coverage and bar any unforeseen events and not taking into account scheduled dry dockings, the fleet is estimated to be a 100% contracted in 2020, 92% in 2021 and 83% in 2022, which remains unchanged until 2026.

Although the China market for LNG carriers has been challenging, in particular due to the global COVID-19 situation, which has contributed to decreased LNG demand, we have seen some improvement in the current LNG shipping spot market, driven by a decline in cancellations of U.S.

cargoes, improved gas pricing, and potentially moving closer to the winter season when gas is typically used for heating. We are monitoring how and if this improvement will affect the long-term market going forward.

Although, our revenues have not been affected by the COVID-19 situation as all our vessels are employed on term contracts, we are monitoring the situation and outlook. From an operational point of view, we are taking strict measures to protect our seafarers, office staff and other stakeholders along the logistics chain.

So far, we have not had any seafarers testing positive to COVID-19, which we thank all involved for their adherence, patience and diligence. Let's move to slide 11.

We are and have been focused on securing long-term charter contracts in order to benefit from stable income, high-utilization and minimizing working capital requirements with regards to bunkering cost. In Q4 2013, our average remaining charter period was 3.2 years, which peaked in Q3 to 16 at 11 years and which is currently standing at 8.1 years.

Compared to employing our fleet on the sport market, our strategy has by far outperformed in terms of income and although not shown in the graph utilization.

We also believe the strategy to employ the vessels on term contracts has minimized our working capital requirements as under the spot market to fuel remaining on board, completion of a charter typically -- typically had to repurchase by the owner.

Given the results, we will continue to pursue our strategy of operational excellence that puts us in a position to pursue term charters at first priority. Moving on to slide 12.

Our operating expenses have been relatively stable from inception of the Partnership, highlighting our focus on managing our cost base while preserving a safe and effective fleet. Our utilization since inception has stood at levels above 95%.

The combination of high utilization rates and competitive operating expenses give evidence of a well-performing manager and enables the Partnership to maximize the available income and profit margins available from the charter contracts. Let's move to slide 13.

We are an established and experienced LNG shipping company, known as a reliable service provider, able to operate in particularly harsh environments. Our fleet is unique and provides for trading versatility. Our focus has always been and continues to be on operational performance, which translates into high utilization, cost control and stable income.

Our vessels are concluded on term contracts whose cash flow can, and is largely utilized to organically reduce debt. At this time, we're amortizing our debt with $48 million per annum and we expect that the reduction of debt will reduce our breakeven cost over time.

We expect that the solid contract revenue backlog of $1.18 billion and significantly reduced interest expense would allow us to start building up cash organically.

All of these factors we believe will allow us to delever our balance sheets, reinforce our liquidity and generate cash so as to build up equity value over time, which will enhance our ability to pursue future growth initiatives and navigate through a market with potentially competitive gas pricing.

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

[Operator Instructions] The first question comes from the line of Randy Giveans from Jefferies. Please ask your question..

Gentlemen, how's it going?.

Hi. We're good. Thank you..

Excellent. All right. Two questions for me. I guess, first, on the ATM program.

Do we have plans for that in terms of timing or expect the use of proceeds? And with that, could that be used to maybe offset or repurchase some of the preferreds, which are trading at a relatively steep discount or would that only be to build the balance sheet for additional dropdowns?.

Yes. No, that's a great question, Randy. Well, I think ATM program, it's going to be used very opportunistically and selectively. I mean, we've already had it first July. We haven't raised that much money. We are very mindful of the price at which we're going to raise the money and dilution.

So, I think the intent of the ATM is going to give us the opportunity to raise the capital opportunistically when we believe the timing and the pricing is reasonable. Now, you're absolutely right. I think, the money that will be raised, probably right now the best use of proceeds is the buyback of the preferreds.

So, we do expect that that will be a very good use of proceeds. Now, as far as timing is concerned, as I said, we don't know. It depends on where the share price is and how we feel if it's the right time to issue shares..

Got it. Okay. And then, I guess second question, for the Arctic Aurora, when does that option has to be declared or rejected? I know there's an option period starting, I think, next July.

So, I guess, what’s the timing of that? And then, what is the kind of expected rate in the re-charter market if that option is not exercised?.

Yes. Thank you, Randy. These are good questions. When it comes to the exact timing of the option, I don't think we have communicated what it is, for the reason that potentially there will be competition for the extension. That being said, options are typically declarable, let's say 3 to 9 months prior to the expiration of the firm period.

So, it won't be too long until we have to start thinking about what to do. When it comes to the rates expectations, this is also too early for us to think about. We have seen second quarter of this year, which was pretty bad when it comes to charter rate.

This obviously was driven partly by a lot of LNG around and disruption on the demand side due to COVID. So, that being said, what we've seen now in the last few weeks, I think it started in kind of August onwards is an improvement in the spot chartering market that is driven by a decline in the U.S.

cargo cancellations, improved gas pricing and higher demand. So, we've seen a pretty significant improvement on the spot side. I cannot say that we have seen this affecting the term market yet and I don't think it's been tested so much. So, we're going to wait until the end of the year or well into next year before we start marketing the vessel..

Got it. Okay. Well, I'll check in later then. Thanks for the time..

Thank you..

Thank you..

Thank you. Next question comes from the line of Ben Nolan with Stifel. Please ask your question..

Hi. Good morning, guys. So, I have a couple. One, I wanted to follow on to Randy's question as it relates to the potential of buying back preferred, the using the ATM proceeds to be able to do that.

I'm curious, is there any restrictions in your covenants of your loan agreement that prohibit cash being used for preferred buybacks, or are you -- available to do that with cash flow in excess of your minimum required liquidity?.

Well, we're permitted to use proceeds of the ATM to buy back the preferred. We cannot buy back the preferred with existing cash on hand, so..

Okay..

Yes..

Okay. No, that's very clear and helpful. I appreciate it, Michael. My next question is sort of bigger, longer term, big picture. Obviously, the sponsor still has quite a lot of LNG exposure. And I don’t know what sort of future aspirations are there to grow it or not.

But, from a big picture perspective, how do you think the Partnership here sort of fits into that broader portfolio of LNG? Is it still sort of an integral part of the big long-term plan, and are there future or longer term aspirations? Obviously, not at the moment, but longer term aspirations of continuing to drop down assets, or do you think that maybe those are taking different paths, the sponsor and the Partnership?.

Thank you, Ben. So, as we've communicated, we've made a very conscious decision putting the Company on the path towards reducing debt and building equity value over a period of time. And so far, that strategy seems to be working well. We do not have the means at present to acquire a vessel or a significant fraction of one from the parent.

That is why we are focused on reducing our debt going forward. So, as an alternative to that and it’s exactly as we said, it could be to utilize the ATM selectively and opportunistic and from the proceeds of that to potentially buy back some preferreds and thereby reducing our cost of capital.

So, look, our strategy may be appear a bit boring at present. However, a conscious and steady building of equity value over time is very descriptive of what we are doing..

Right. And I appreciate that. And I guess, the question is less about sort of now. And I think, it's pretty clear that you're limited in your options at the moment.

But maybe, Tony, if you could talk to the aspirations of Dynacom, the parent to continue to grow and build on the LNG side, if that is the aspiration? And longer-term, is it still the focus of the group to eventually -- after the balance sheet is sorted out, to eventually incorporate Dynagas Partners into that growth strategy?.

Yes. Thank you, Ben. Look, on the parent side, there is still very much an interest to continue to grow in the LNG sector. And as you know, sometime ago some new buildings were placed in [indiscernible] for some larger vessels. So, I think that underpins the ambition to continue to grow in the market.

I mean, of course, for the Partnership, at some point, we have to grow too. That is just a question of time. But yes, of course, the aspiration is to grow over time..

[Operator Instructions] There doesn’t appear to be any further questions. If I can hand the conference back to the CEO, Tony Lauritzen, please go ahead..

Yes. Thank you to everyone for listening in on our earnings call. We look forward to speak to you again on our next call. And in the meantime, stay safe. Thank you very much..

Thank you. That does conclude our conference for today. Thank you for participating. You may now all disconnect..