Dynagas LNG Partners LP

And now, I pass the call to Mr. Lauritzen.

Please go ahead, sir.

Morning, everyone, and thank you for joining us in our first quarter 2014 earnings conference call. I'm joined today by our CFO, Mr.

Michael Gregos.

Turning to Slide 3 of the presentation, I will review some of the recent highlights for our fleet of 3 LNG carriers. Yesterday, we issued a press release announcing our full quarterly results.

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 should be useful in our press release.

We are pleased with the results for the first quarter of 2014. The Partnership reported distributable cash flow of $12.3 million in the first quarter of 2014.

The Partnership also reported adjusted EBITDA for the first quarter of 2014 of $16.3 million compared to $16.8 million for the first quarter of 2013. Finally, the Partnership reported net income attributable to unitholders of $11 million for the first quarter of 2014 compared to $11.2 million in the same period of 2013.

Turning to Slide 4. On April 17 this year, we entered into a new 13-year time charter contract with Gazprom Marketing & Trading Singapore Pte for the Clean Force.

In addition, we have entered into an agreement with BG Group, the carrier charter of the Clean Force, to amend at no cost to the Partnership the expiration date of the current time charter contract from the third quarter of 2016 to July 2015, at which time the new Gazprom contract will take effect. The new Gazprom charter is expected to increase our average TCE rates calculated for a period of 12 months following its commencements to about $78,200, from an average of about $76,150 per day per LNG carrier based on the Partnership's 3 existing vessels.

This contract demonstrates the Partnership's strong commercial relationships, not only did it increase our average contract term from 3 years to 6.8 years, but it also secured a very attractive rate throughout the 13-year term of the contract.

For our first quarter operations, we declared and paid on 12 May 2014 a cash distribution of $0.365 per unit for the quarter ended March 31, 2014, which corresponds to an annual distribution of $1.46 per unit and consistent with our cash distribution policy with the Partnership's current fleet of 3 vessels. As you may know, we have recently announced the acquisition of our first drop-down LNG carrier from our sponsor, namely the Arctic Aurora, a 2013 built, 155,000 cubic ice class LNG carrier.

The Arctic Aurora acquisition is subject to the Partnership obtaining the funds necessary to pay the purchase price and the satisfaction of certain closing conditions.

We have also entered into a $340 million new Senior Secured Revolving Credit Facility which was conditioned on the closing of Arctic Aurora acquisition. A portion of the amount will be drawn to partially finance the Arctic Aurora acquisition and the balance to refinance the $214.1 million currently outstanding under our existing Senior Secured Revolving Credit Facility that is secured by the 3 vessels in our fleet.

Turning to Slide 5, we will discuss the Arctic Aurora acquisition. The Arctic Aurora will be acquired for an aggregate purchase price of $235 million.

The acquisition will be funded with a contemplated public offering of our common units and partial proceeds from the new $340 million Senior Secured Revolving Credit Facility. The Arctic Aurora is a 2013 built, 155,000 cubic meter, Ice Class 1A and winterized LNG carrier, currently operating under a 5-year charter with Statoil of Norway that commenced in August 2013.

The Arctic Aurora acquisition is conditioned on the closing of our follow-on equity offering. The Board of Directors of the Partnership and the Conflicts Committee of the Board have approved the Arctic Aurora acquisition.

There are 3 key points I would like to highlight in connection with the Arctic Aurora acquisition. Firstly, the Arctic Aurora is expected to generate total contracted gross revenue of about $117.2 million, excluding revolving option to extend and assuming full utilization for about 4.1 years, which is the remaining term of the charter based on the earliest contract expiration dating of July 2018; secondly, during this initial term, annual gross revenues from the Arctic Aurora will be about $28.3 million; and finally, annual net cash from operations will be about $21.7 million

Following the completion of this acquisition, the Partnership's management intend to recommend to the board an increase in the Partnership's quarterly cash distribution per unit of between $0.0225 and $0.0275, or annualized between $0.09 and $0.11 per unit, which would become effective for the distribution with respect to the quarter ending June 30, 2014 on a pro rata basis after giving effect to the Arctic Aurora acquisition. Therefore, pro forma the Arctic Aurora acquisition, we anticipate our run rate annual distribution to increase from $1.46 to between $1.55 and $1.57 per unit, representing an increase of about 7%.

Pro forma the acquisition, this provides for an effective yield of about 6.8% based on yesterday's closing price.

Now I turn over the presentation to Mr. Michael Gregos to provide you with the financial update.

Thank you, Tony. I start on Slide 6.

We were pleased with our operational and financial performance during the first quarter of 2014, which was in line with our forecast. Voyage revenues were $21 million for the first quarter of 2014 compared to $21.1 million for the first quarter of 2013.

Stability of revenues being a key characteristic of our Partnership due to our contract coverage. Vessel operating expenses for the first quarter of 2014 decreased by 2.5% to $3.1 million from $3.2 million for the first quarter of 2013.

Operating expenses on a per vessel basis amounted to $11,500 per day for the first quarter of 2014, versus $11,862 per day in the same period in 2013.

As was expected, G&A expenses were higher for the first quarter of 2014 due to increased costs associated with being a public company, amounting to $580,000 compared to $23,000 for this corresponding period in 2013. Net interest expense decreased by 19.6% to $1.9 million for the first quarter of 2014, mainly due to our lower debt outstanding as compared to the same period in 2013.

And that brings us down to net income attributable to Dynagas Partners of $11 million for the first quarter of 2014, or $0.37 per unit, compared to $11.2 million for the first quarter 2013. The primary reason for the slight difference in net income are the higher G&A expenses which were partially offset by lower interest expense.

Turning to Slide 7 for an overview of our balance sheet, we have cash liquidity of $30.8 million as of 31st of March. We are in compliance with all of our debt covenants.

Our outstanding interest-bearing debt on March 31, 2014 amounted to $214 million as a result of the significant deleveraging of our balance sheet following our IPO in November.

Under our existing revolving credit facility, we have a further $43 million of availability which reduces by $5 million quarterly. Our debt is based on a floating rate interest rates, with our weighted average interest rate being approximately 3.1%.

We believe our conservative capital structure gives us financial flexibility to execute our future growth strategy.

Turning to Slide 8, EBITDA for the first quarter of 2014 was approximately $16.3 million, and distributable cash flow generated during the first quarter amounted to $12.2 million. The quarterly distribution declared for the first quarter of 2014 when paid on May 12 of $0.365 per unit, is in line with our cash distribution policy and implies a coverage ratio of 1.12x.

Now I turn the presentation to Mr. Tony Lauritzen to provide you with the fleet and industry update.

Thank you, Michael. Moving to Slide 9.

Pro forma the Arctic Aurora acquisition, the average age of our fleet decreases from 6.8 to 5.3 years of age, and our contract backlog increases from $535 million to $652 million. In addition, the acquisition of the Arctic Aurora broadens our customer base with yet another first-class counterpart which gives them the flexibility to utilize an ice class -- the capabilities of the vessel.

Moving to Slide 10. Our fleet currently consists of 3 LNG carriers, 2 of which have Ice Class 1A notation.

The ice class capabilities of the Clean Force, combined with our long-lasting relationship and operating performance, among other things, was the important factor in obtaining our 13-year charter with Gazprom. Currently for our 3 ships, we have 100% contract coverage on our fleet calendar dates for 2014, 2015 and 2016 with first-class counterparts.

And we further have a contracted coverage of 67% of our calendar date in 2017, a period we expect the LNG carrier market to be significantly tighter. We expect to acquire the Arctic Aurora following completion of our follow-on equity offering.

Following the 13-year, Clean Force Gazprom charter, our initial fleet of 3 vessels are employed under multiyear charters, with an average remaining term of about 6.8 years. Our average remaining charter term after the Arctic Aurora acquisition will be about 6.1 years.

Our multiyear fleet employment profile, diversified, first-class customer base and a staggered maturity dates of our charters provide solid cash flow visibility going forward.

Moving to Slide 11. Beyond our initial fleet, we have the right to purchase from our sponsor further 6 optional vessels; 2 of those vessels are already on the water and trading, and the remaining 3 under construction, with delivery in 2014 and 2015.

All optional vessels are high-specification, ice class winterized and extremely versatile. These optional vessels include 3 vessels already chartered to first-class customers with an average 5 years employment.

Of the 3 chartered vessels, 2 are chartered out to our existing charter Gazprom and 1 is chartered to the Cheniere.

Moving to Slide 13 for an industry update. From a supply point of view, it is conservatively expected that about 107 million tons of new LNG will come to the market between now and 2020.

This represents an astounding total increase of 47% compared to 2013 production. The source of this commodity is primarily from the U.S., Australia, Africa and Russia.

We continue to believe that the Far East will remain the largest buyers going forward, meaning that the LNG carrier fleet ton mile requirements are expected to remain high.

The production figures are conservative, and increased production in existing projects has not been included. U.S.

production included in this projection has been estimated to about 30 million tons coming from Sabine Pass, Freeport, Lake Charles and Cove Point. We believe the total production from such projects may turn out to be higher and additional U.S.

projects may well be granted licenses and add to the export volumes.

When we compare LNG supplies with LNG carrier shipping capacity available from now until 2020, we remain confident that the market for shipping will tighten. From 2018 onwards, we expect prospects for LNG carriers to be in particular strong, leading to higher charter rates.

It is worth to mention that part of our competition, being vessels that come off charter going forward, is on average of significantly older age than our fleet. In particular, vessels that come off charter in the years 2017 and 2018 are, on average, 16 and 16 years old, respectively.

And furthermore, they carry an average carrying capacity of about 135,000 -- 134,000 cubic meters. This should give a relative preference to our fleets.

The potential rechartering possibilities of our fleets will be in 2017 and beyond, which we expect to be a period of high worldwide fleet utilization, which will further be supported by Russian Arctic LNG coming onstream and requiring ice class vessels.

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

So I wanted to get a little bit more color about just the market in general for LNG projects, specifically ones coming online over the next few years. I've been reading a little bit more about potential approval delays, just sort of the red tape that exists, especially in the U.S.

Obviously, you've got long-term charters, so you're not directly impacted by any short-term delays. But just kind of wanted to get your thoughts on sort of how that's impacting the market in general.

Yes, I mean at the moment, it is not impacting the current market at the moment, because these are future projects, right? But of course, the more production that will come out of the United States, the better it is for the shipping markets.

We feel confident that certainly, the big terminals that are well ahead in their approval process that they would get their full licensing. We are, of course, aware of that, the list of terminals that have made application to get full approvals are -- is very long.

We don't expect all terminals to get their approvals in place, at least not in the first stage. We think it will ramp up quite gradually.

So first, I will probably provide a handful of serious terminals with a full licensing. And then I think it will be judged, how is this affecting the pricing of U.S.

gas? And then they will see forward if they will do further approvals.

But I think it's worth to mention that even just one big terminal, if you have one big terminal with 14 million to 16 million tons of LNG produced annually, that corresponds to a significant amount of vessels needed. And actually, we don't need so many U.S.

terminals to be approved to have a robust market. We have -- in our analysis here, which we mentioned earlier, we have estimated initially 30 million tons from U.S.

production in aggregate, which means that's just a few terminals would be required to add up to that -- to those volumes.

Great. Makes sense.

And just on the vessels that are still in the pipeline, I noticed that the Clean Planet is scheduled to be delivered in Q3 of this year but doesn't have the contract attached to it. So just trying to get a little bit more color on sort of how to expect for those vessels that don't have contracts yet, sort of what that timeline between when a charter gets attached to a vessel compared to when it's delivered, if there's any sort of any way to think about that?

Okay, yes. So the construction of the Clean Planet is going very well.

Everything is on schedule, so that vessel will come out, as you said, in third Q 2014 this year. We are currently in discussions with several counterparts.

There are in the market out now several tenders for, let's say, medium contracts for this kind of tonnage. We are also in discussion on a few aftermarket opportunities for employment of the vessel.

We do expect the vessel to be deployed on a contract of about 5 years. But we are also utilizing the spot market in order to get to the right levels that we want to fix on.

If we cannot achieve the right charter rates now, then we will trade the vessels voyage by voyage a little bit, and then conclude them on long-term charters, which then would make the vessels relevant for drop-down candidates.

And then last one, I just want to get a little bit more information about the, basically, the expected acquisition prices of the vessels in the pipeline. Is that something that's known at this point for when the drop-down does occur, or is it more of a moving target kind of based on the charter attached to it, or the market at the time, that sort of thing?

Yes, so as [indiscernible] correctly said it is a moving target, it does depend on what the charter rate is and many other factor. So it's hard to pinpoint from now a value of these vessels going forward.

I want to ask also about the market, and we saw that you extended this vessel, the Clean Force, at a very attractive rate of around $70,000, if I'm not mistaken. But this vessel is relatively older vessel compared to the vessels that they -- you are expecting to drop down in the future.

What would be the equivalent rate for a vessel like that? And how would the rate change if the duration were not 13 years and we're talking about a 5-year contract?

Yes, that's a very good question. It is very difficult to apply -- to say this vessel achieved X, so this other vessel should achieve Y.

It's almost impossible because it so much depends on what is exactly available at those days, what vessel is optimal for the counterpart and it is -- thereby, we can establish how much they're willing to pay for it. I would say that for an equivalent charter with an equivalent counterpart on our newbuildings, they should be able to achieve significantly above what we achieved for this particular charter.

I think this is also reflected in the vessel that we have already concluded on a sponsor level with the same counterparts. Of course, these charters are shorter, but at the same time, they will conclude it at a period of 5 years, which is a substantial period.

So I think it's too difficult actually to assign a specific number to the newbuildings versus the Clean Force, but I would say that it should be substantially higher.

Can you remind us, in these long-term contracts, especially this new 13-year extension, what is the agreement regarding operating expenses? Are there any provisions that they protect you from unusual hikes of expenses due to inflation?

No. That's also a very good question.

The -- there is no operating expense inflation adjuster in the charter. That being said, we think that we have a very good control over our cost.

I think that was also evidenced by the quarterly results now. So we feel confident that we can control the cost levels, going forward.

And if you had to give us some guidance what has been historically the escalation of the expenses in the industry and, particularly, within your group, how shall we think about inflating the expenses in the future?

Yes, I think our internal expectations will be 1% to 2% per year.

Okay. One more question.

You seem to be experts on Russian gas. You had a very close relationship with Gazprom.

There is a lot of discussion about the developments in the Ukraine. How does this impact the market in terms of redirection of cargoes, approval processes and also about your ability to trade your vessels?

Well, at this moment, we haven't seen any impact at all in any way, so I think that's the answer.

And do you think that there might be anything -- any other suppliers for Europe that they can change the trading partners?

I don't really think so. When we look at Europe, we're primarily looking at Germany, right, because, I mean, this is the biggest economy in Europe and it's also the biggest importer of Russian pipeline gas.

So if we would see potentially more cargoes directed to Europe, I think it would be primarily to Germany. The problem is that in Germany, there is no LNG import terminal.

It doesn't exist. So I think that also explains why we haven't really seen any difference in trade movements at all.

Our expectation is that we'll continue to see the cargoes going to the Far East. The Far East is the highest paying market at the moment together with South America.

Given the disruption that equity assurance tends to have in the equity prices, is there any thought to sort of over-equitizing the first drop-down so that you only need to come once this summer?

Well, I mean, given the fact right now that we're not shelf-eligible, I mean, this the process that we're going to be taking for this particular drop-down. I mean, obviously, 1 year after the time of the IPO, things are going to be a lot different.

We will be able to execute our transactions a lot quicker and not have this exposure in the market, let's say, for such a long time.

Okay. So it looks like -- maybe I misread the slide, but there's potential for another drop-down in -- what was it, October?

Is that what you indicated? [indiscernible]

No, no, no. The drop-down is not in October.

I mean, we have -- the drop-down will happen as soon as practically possible. I can't pinpoint an exact time, but it's going to be sooner than that.

It should be within the next couple of weeks.

Okay. Well, I was talking about the second drop-down scheduled for -- if not October, for Q3.

So I guess the point is that, that will be independently financed ideally once you're shelf-eligible?

Yes, correct, correct, yes. The equity portion there, yes.

And then just in terms of the valuation on the upcoming drop-down here, we're fairly used to, in the MLP space, seeing drop-downs in the sort of 9 to 11x for pipelines that are often contracted 10 to 20 years out. This is an asset that's only contracted 5 years out.

Could you give us some commentary on how, as you worked through the Conflicts Committee, how you came to the valuations that you did? And along with that comment on the valuation relative to your estimate of the NAV of the asset, as well as the cost to build?

Yes. Well, I mean, obviously, the Conflicts Committee engaged an independent external financial advisor, and there were various valuation methodologies followed, just in terms of cash flow, replacement cost analysis, comparables we looked at on a new EBIT to EBITDA basis.

So obviously, NAV was also an important aspect of it. I think as we have communicated before, I mean, the price of the vessel was more or less in line with the guidance we had already given to the market.

I mean, we have guided around 10 to 11x. We actually dropped this vessel down at a slightly lower multiple than that.

Right. I guess specifically then, what was the estimated NAV that you looked at for the vessel?

Well, if you get the latest independent broker valuation, that's pretty much the number that you're going to get.

So you're saying that the price paid was roughly the NAV?

Right.

Well, I would like to thank everybody for your time and for listening to us. So if you have any further questions, do not hesitate to give us a call.

Thank you very much for your time, and yes, goodbye.