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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following is a discussion of the financial condition and results of operations of Dynagas LNG Partners LP for the three month periods ended March 31, 2018 and 2017. Unless otherwise specified herein, references to the "Partnership", "we", "our" and "us" or similar terms shall include Dynagas LNG Partners LP and its wholly owned subsidiaries, references to our "Sponsor" are to Dynagas Holding Ltd. and its subsidiaries. References to our "General Partner" are to Dynagas GP LLC and references to our "Manager" are to Dynagas Ltd., which is wholly owned by the chairman of our Board of Directors, Mr. Georgios Prokopiou. All references in this report to "Gazprom", "Equinor", "Yamal" and "PetroChina" refer to Gazprom Marketing and Trading Singapore Pte Ltd, Equinor ASA (previously named Statoil ASA), Yamal Trade Pte. Ltd. and PetroChina International (Singapore) Pte. Ltd. respectively, and certain of their respective subsidiaries or affiliates, who are our current or prospective charterers.

 

You should read the following discussion and analysis together with the unaudited interim condensed consolidated financial statements and related notes included elsewhere in this report. Amounts relating to percentage variations in period-on-period comparisons shown in this section are derived from the unaudited interim condensed consolidated financial statements included elsewhere in this report. The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control which could cause actual events or conditions to differ materially from those currently anticipated and expressed or implied by such forward-looking statements. For additional information relating to our management's discussion and analysis of financial condition and results of operation and a more complete discussion of the risks and uncertainties referenced in the preceding sentence, please see our Annual Report on Form 20-F for the year ended December 31, 2017, which was filed with the U.S. Securities and Exchange Commission, or the Commission, on March 9, 2018, and our other filings with the Commission.

 

Business Overview and Development of the Partnership

 

We are a growth-oriented limited partnership focused on owning and operating liquefied natural gas (LNG) carriers. Five of the six vessels in our fleet, which we refer to as our "Fleet", are currently employed on multi-year time charters, which we define as charters of two years or more, with international energy companies, such as Gazprom and Equinor, which provides us with the benefits of predictable cash flows and high utilization rates. We currently employ our one remaining LNG carrier on the short-term market on consecutive charters to PetroChina prior to its anticipated delivery to Gazprom in July 2018, when the vessel will commence employment under a charter with a term of approximately eight years.

We believe that we are well regarded by our charterers for our expertise and history of safety in conducting our operations. We intend to leverage our reputation, expertise and relationships with our charterers, our Sponsor and our Manager in growing our core business and pursuing further business and growth opportunities in the transportation of energy or other energy-related projects, including floating storage regasification units, floating power plants, LNG infrastructure projects, maintaining cost-efficient operations and providing reliable seaborne transportation services to our current and prospective charterers. In addition, as opportunities arise, we may acquire additional vessels from our Sponsor and from third-parties and/or engage in investment opportunities incidental to the LNG or energy industry. We believe that the options and rights provide to us under the Omnibus Agreement with our Sponsor provide us with significant built-in growth opportunities. The Partnership continously evaluates potential financing transactions and may enter into additional financing arrangements, refinance existing arrangements or arrangements that our Sponsor, its affiliates, or such third party sellers may have in place for vessels or businesses or other assets that we may acquire, and, subject to favorable market conditions, we may raise capital in the public or private markets, including through debt or equity offerings of our securities. However, we cannot assure you that we will grow or maintain the size of our Fleet or that we will continue to pay the per unit distributions in the amounts that we have paid in the past or at all or that we will be able to execute our plans for growth.

Pursuant to the Omnibus Agreement that we, and certain of our subsidiaries, have entered into with our Sponsor and our General Partner, we have the right but not the obligation, subject to certain terms and conditions, to acquire (i) our Sponsor's 100% ownership interest in four fully winterized LNG carriers, or the Initial Optional Vessels, and (ii) our Sponsor's ownership interest (which is currently 49.0%) in each of five entities jointly owned and operated by our Sponsor and two unrelated parties, which each own a 172,000 cubic meter ARC 7 LNG carrier, or the Additional Optional Vessels, after their respective delivery from the shipyard, at the period specified and as per the terms prescribed in the  Omnibus Agreement. We refer to the Initial Optional Vessels and the Additional Optional Vessels together as the Optional Vessels.

As of the date of this report, we have outstanding 35,490,000 common units, 35,526 general partner units and 3,000,000 9.00% Series A Cumulative Redeemable Preferred Units, or the Series A Preferred Units. Our Sponsor currently beneficially owns approximately 44.0% of the equity interests in the Partnership (excluding the Series A Preferred Units) and 100% of our General Partner, which owns a 0.1% General Partner interest in the Partnership and 100% of our incentive distribution rights. Our Sponsor does not own any Series A Preferred Units. In addition, we have outstanding $250.0 million aggregate principal amount 6.25% Senior Notes due 2019, or our 2019 Notes.

Securities Offerings

 

In June 2014, we completed our underwritten public offering of 4,800,000 common units at $22.79 common per unit, and on June 18, 2014, the underwriters in the offering exercised their option to purchase an additional 720,000 common units at the same price.

In September 2014, we completed our underwritten public offering of the 2019 Notes.

In July 2015, we completed our underwritten public offering of the Series A Preferred Units at $25.00 per unit.

 

Our common units, our Series A Preferred Units and our 2019 Notes trade on the New York Stock Exchange, or NYSE, under the symbols "DLNG", "DLNG PR A", and "DLNG 19", respectively.

 

Vessel Acquisitions

 

In June 2014, we completed the acquisition of the Arctic Aurora, a 2013-built ice class liquefied natural gas carrier, and the related time charter contract, from our Sponsor, pursuant to our right to acquire this vessel under the Omnibus Agreement in effect at that time, for a purchase price of $235.0 million. We funded the purchase price of this vessel using the net proceeds we received in the June 2014 offering of common units together with the proceeds we received from our $340 million senior secured revolving credit facility, which certain of our subsidiaries entered into with an affiliate of Credit Suisse (USA) LLC in 2014 and which has since been repaid in full.

In September 2014, we completed the acquisition of the Yenisei River, a 2013-built ice class liquefied natural gas carrier, and the related time charter contract, from our Sponsor, pursuant to our right to acquire this vessel under the Omnibus Agreement in effect at that time, for a purchase price of $257.5 million. We funded the purchase price of this vessel using the net proceeds we received from our 2019 Notes offering, together with cash on hand.

In December 2015, we acquired the Lena River, a 2013-built ice class liquefied natural gas carrier, and the related time charter contract, from our Sponsor, pursuant to our right to acquire this vessel under the Omnibus Agreement in effect at that time, for a purchase price of $240.0 million. We funded the purchase price using the net proceeds we received from our offering of Series A Preferred Units, cash on hand and borrowings under our $200 million senior secured loan facility, which two of our vessel-owning subsidiaries entered into in December 2015 with ABN Amro NV and which has since been repaid in full.

Recent Events

Initial Optional Vessels- extension of purchase option exercise deadline

On March 30, 2018, we agreed with our Sponsor to further extend the deadline for exercising the purchase options relating to both the Clean Ocean and the Clean Planet granted to us under our Amended and Restated Omnibus Agreement with our Sponsor, or the Omnibus Agreement, from March 31, 2018 to December 31, 2018.

Reduction in quarterly common unit cash distribution and payment of first quarter 2018 common unit distribution:

On April 12, 2018, following a strategic review of our financial profile and distribution policy, our Board of Directors approved a reduction in the quarterly cash distribution on the Partnership's common units to $0.25 per common unit from $0.4225 per common unit, or from $1.69 per common unit to $1.00 per common unit on an annualized basis. The revised distribution level is expected to align the Partnership's cash distributions with its capacity to generate cash flow in the long term, to strengthen its balance sheet and to improve its distribution coverage ratio (which is its distributable cash flow available for distribution in proportion to actual cash distributed). The first quarterly common unit cash distribution at the reduced level was in respect of the first quarter of 2018 and was paid on May 3, 2018 to all common unitholders of record as of April 26, 2018.

Series A Preferred Units Cash Distribution

On April 24, 2018, our Board of Directors announced a cash distribution of $0.5625 per unit on our Series A Preferred Units for the period from February 12, 2018 to May 11, 2018. This cash distribution was paid on May 14, 2018, to all Series A Preferred unitholders of record as of May 5, 2018.

 

Our Fleet and Our Charters

 

As of May 29, 2018, our Fleet consisted of six LNG carriers with an average age of 7.8 years. Five of our six fleet vessels are contracted on multi-year time charters with major international energy companies such as Gazprom, Equinor and Yamal. One of our LNG carriers is currently trading in the spot market under consecutive short-term charters to Petrochina prior to its delivery to Gazprom in July 2018, when it will commence a time charter with a term of approximately eight years. As of May 29, 2018, the estimated contracted revenue backlog of our Fleet was approximately $1.46 billion with average remaining contract duration of 10.2 years. Our Fleet estimated contract backlog includes the charters of the Yenisei River and the Lena River with Yamal which are subject to the satisfaction of important conditions, which, if not satisfied, or waived by the charterer, may result in their cancellation or amendment before or after the charter term commences and in such case the Partnership may not receive the contracted revenues thereunder. The contracted revenue backlog of our Fleet excludes options to extend and assumes full utilization for the full term of the charter. The actual amount of revenues earned and the actual periods during which revenues are earned may differ from the amounts and periods described above due to, for example, off-hire for maintenance projects, downtime, scheduled or unscheduled dry-docking, cancellation or early termination of vessel employment agreements, and other factors that may result in lower revenues than our average contract backlog per day.

 

The following table sets forth summary information about our Fleet and the existing time charters relating to the vessels in our Fleet as of May 29, 2018:

 

* As used in this report, "TFDE" refers to tri-fuel diesel electric propulsion system.

 

 

(1)	In October 2016, we entered into a time charter contract with Gazprom for the employment of the Clean Energy for a firm period of seven years and nine months. The charter is expected to commence in July 2018.

(2)

In December 2017, we entered into a time charter contract with Equinor (previously named Statoil ASA) for the employment of the Arctic Aurora.  This charter will be in direct continuation of the vessel's current charter with Equinor (interrupted only by the vessel's mandatory statutory class five-year special survey and dry-docking) and will have a firm period of three years +/- 30 days.  Equinor will have the option to extend the charter term by two consecutive 12-month periods at escalated rates.

(3)

The Yenisei River and the Lena River are each contracted to commence employment with Yamal within six months and one year delivery windows starting from January 1, 2019 and July 1, 2019, respectively. We expect that these delivery windows will be narrowed by the charterers within the third quarter of 2018. The charter contracts for these two vessels with Yamal in the Yamal LNG Project each have an initial term of 15 years, which may each be extended by three consecutive periods of five years. Each of these time charter contracts is subject to important conditions, which, if not satisfied, or waived by the charterer, may result in their cancellation, early termination or amendment, before or after their charter term commences, in which case, we may not receive the contracted revenues thereunder.

(4)

In May 2018, we, through one of our wholly-owned subsidiaries, entered into a time charter contract with a major energy company for the employment of the Lena River. The charter is expected to commence in the third quarter of 2018, after the vessel undergoes its scheduled dry-docking and special survey repairs, and is expected to have a firm period of approximately fifteen months. The owners have the option to call upon the vessel's early redelivery within a specified period in advance of the required redelivery in order to meet the delivery requirements under our existing charter party agreement with Yamal for the employment of the Lena River, discussed above.

 

The following table summarizes our contracted charter revenues and contracted days for the vessels in our Fleet as of May 29, 2018 and for the each of the years ending December 31, 2018, 2019 and 2020:

 

(1)	Annual revenue calculations are based on: (a) the earliest redelivery dates possible under our charters, (b) no exercise of any option to extend the terms of those charters except for those that have already been exercised, if any, and (c) excluding planned periodical class survey repair days.

(2)	Assumes 25 scheduled dry-docking days for each of the Yenisei River and the Lena River which will undergo their scheduled special survey and dry-dock repairs in the third and fourth quarters of 2018.

 

We may not be able to perform under these contracts due to events within or beyond our control, and our counterparties may seek to cancel or renegotiate our contracts for various reasons.  In addition, as of March 31, 2018, we derived all of our revenues from three charterers, accounting for 75%, 20% and 5% our total revenues, respectively. Our inability or the inability of any of our counterparties to perform the respective contractual obligations may affect our ability to realize the estimated contractual backlog discussed above and may have a material adverse effect on our financial position, results of operations and cash flows and our ability to realize the contracted revenues under these agreements. Our estimated contract backlog may be adversely affected if the Yamal LNG Project, in which certain of our vessels are contracted to be employed, is abandoned or underutilized for any reason, including, but not limited, to changes in the demand for LNG. Readers are cautioned not to place undue reliance on this information. Neither our independent auditors nor any other independent accountants have compiled, examined or performed any procedures with respect to the information presented in the table, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the information in the table.

 

Operating results

 

Selected financial information

 

The following tables present selected unaudited consolidated financial and other data of the Partnership, at the dates and for the periods presented. All amounts are expressed in United States Dollars, except for Fleet data, unit and per unit data and Other Financial Data.

 

(1)	Voyage expenses include commissions of 1.25% of gross charter hire paid to our Manager and third party ship brokers.

 

(2)	Includes the Administrative Services Agreement fees and Executive Service Agreement fees charged by our Manager and excludes the daily management fees and commercial management fees.

 

(3)	Represents the number of vessels that constituted our Fleet for the relevant period, as measured by the sum of the number of days each vessel was a part of our Fleet during the period divided by the number of calendar days in the period.

 

(4)	Available Days are the total number of calendar days our vessels were in our possession during a period, less the total number of scheduled off-hire days during the period associated with major repairs or dry-dockings.

 

(5)

We calculate fleet utilization by dividing the number of our revenue earning days, which are the total number of Available Days of our vessels net of unscheduled off-hire days, during a period, by the number of our Available Days during that period. The shipping industry uses fleet utilization to measure a company's efficiency in finding employment for its vessels and minimizing the amount of days that its vessels are off-hire for reasons other than scheduled off-hires for vessel upgrades, dry-dockings or special or intermediate surveys.

 

(6)	Corresponds to a cash distribution of $0.25 and $0.4225 per common unit in respect of the first quarter of 2018 and 2017, respectively.

 

(7)	Corresponds to a cash distribution of $0.5625 per Series A Preferred Unit in respect of the first quarter of 2018 and 2017, respectively.

 

(8)	Non-GAAP Financial Information

 

TCE. Time charter equivalent rates, or TCE rates, is a measure of the average daily revenue performance of a vessel. For time charters, the TCE rate is calculated by dividing total voyage revenues, less any voyage expenses, by the number of Available Days during that period. Under a time charter, the charterer pays substantially all the vessel voyage related expenses. However, we may incur voyage related expenses when positioning or repositioning vessels before or after the period of a time charter, during periods of commercial waiting time or while off-hire during dry-docking or due to other unforeseen circumstances. The TCE rate is not a measure of financial performance under U.S. GAAP (non-GAAP measure), and should not be considered as an alternative to voyage revenues, the most directly comparable GAAP measure, or any other measure of financial performance presented in accordance with U.S. GAAP. However, TCE rate is standard shipping industry performance measure used primarily to compare period-to-period changes in a company's performance and assists our management in making decisions regarding the deployment and use of our vessels and in evaluating their financial performance. Our calculation of TCE rates may not be comparable to that reported by other companies. The following table reflects the calculation of our TCE rates for the periods presented (amounts in thousands of U.S. dollars, except for TCE rates, which are expressed in U.S. dollars and Available Days):

 

 

ADJUSTED EBITDA. We define Adjusted EBITDA as earnings before interest and finance costs, net of interest income, gains/losses on derivative financial instruments (if any), taxes (when incurred), depreciation and amortization, class survey costs and significant non-recurring items. Adjusted EBITDA is used as a supplemental financial measure by management and external users of financial statements, such as investors, to assess our operating performance. We believe that Adjusted EBITDA assists our management and investors by providing useful information that increases the comparability of our performance operating from period to period and against the operating performance of other companies in our industry that provide Adjusted EBITDA information. This increased comparability is achieved by excluding the potentially disparate effects between periods or companies of interest, other financial items, depreciation and amortization and taxes, which items are affected by various and possibly changing financing methods, capital structure and historical cost basis and which items may significantly affect net income between periods. We believe that including Adjusted EBITDA as a measure of operating performance benefits investors in (a) selecting between investing in us and other investment alternatives and (b) monitoring our ongoing financial and operational strength in assessing whether to continue to hold common units. Adjusted EBITDA is not a measure of financial performance under U.S. GAAP, does not represent and should not be considered as an alternative to net income, operating income, cash flow from operating activities or any other measure of financial performance presented in accordance with U.S. GAAP. Adjusted EBITDA excludes some, but not all, items that affect net income and these measures may vary among other companies. Therefore, Adjusted EBITDA as presented below may not be comparable to similarly titled measures of other companies. The following table reconciles Adjusted EBITDA to net income, the most directly comparable U.S. GAAP financial measure, for the periods presented:

 

Reconciliation of Adjusted EBITDA to Net Income		Three months ended March 31,
(In thousands of U.S.  Dollars)		2018				2017
Net Income		$	4,840			$	12,912
Net interest and finance costs (1)			11,882				8,890
Depreciation			7,476				7,476
Class survey costs			467				220
Amortization of fair value of acquired time charter			1,787				1,787
Charter hire amortization			138				(14	)
Adjusted EBITDA		$	26,590			$	31,271

 

 

(1)

Includes interest and finance costs (inclusive of amortization of deferred financing costs), net of interest income, if any.

 

Principal Factors Affecting Our Results of Operations

 

The principal factors which have affected our results and are expected to affect our future results of operations and financial position, include:

 

·

Ownership days. The number of vessels in our Fleet is a key factor in determining the level of our revenues. Aggregate expenses also increase as the size of our Fleet increases;

 

·

Charter rates. Our revenue is dependent on the charter rates we are able to obtain on our vessels. Charter rates on our vessels are based primarily on demand for and supply of LNG carrier capacity at the time we enter into the charters for our vessels, which is influenced by LNG market trends, such as the demand and supply for natural gas and in particular LNG as well as the supply of LNG carriers available for profitable employment. The charter rates we obtain are also dependent on whether we employ our vessels under multi-year charters or charters with initial terms of less than two years. As of the date of this report, five of the six vessels in our Fleet are employed under multiyear time charters with staggered maturities, which will make us less susceptible to cyclical fluctuations in charter rates than vessels operated on charters of less than two years. As of the date of this report, one of our LNG carriers is trading under a short-term contract prior to its delivery to Gazprom in July 2018, when it will commence a time charter with a term of approximately eight years. However, we will be exposed to fluctuations in prevailing charter rates when we seek to re-charter our vessels upon the expiry of their respective current charters and when we seek to charter vessels that we may acquire in the future;

 

·

Utilization of our Fleet. Historically, our Fleet has had a limited number of unscheduled off-hire days. However, an increase in annual off-hire days would reduce our utilization. The efficiency with which suitable employment is secured, the ability to minimize off-hire days and the amount of time spent positioning vessels also affects our results of operations. If the utilization of our Fleet is reduced, our financial results would be affected;

 

·

Daily operating expenses. The level of our vessel operating expenses, including crewing costs, insurance and maintenance costs. Our ability to control our vessel operating expenses also affects our financial results. These expenses include commission expenses, crew wages and related costs, the cost of insurance, expenses for repairs and maintenance, the cost of spares and consumable stores, lubricating oil costs, tonnage taxes and other miscellaneous expenses. In addition, factors beyond our control, such as developments relating to market premiums for insurance and the value of the U.S. dollar compared to currencies in which certain of our expenses, primarily crew wages, are paid, can cause our vessel operating expenses to increase;

 

·

Our ability to complete the scheduled dry-dockings of our three vessels in 2018 on time;

 

·

Our ability to exercise the options to purchase the Optional Vessels;

 

·

The timely delivery of the vessels we may acquire in the future;

 

·

Our ability to maintain solid working relationships with our existing charterers and our ability to increase the number of our charterers through the development of new working relationships;

 

·

The performance of our charterers' obligations under their charter agreements;

 

·

The effective and efficient technical management of the vessels under our management agreements;

 

·

Our ability to obtain acceptable equity and debt financing to fund our capital commitments;

 

·

The ability of our Sponsor to fund its capital commitments and take delivery of the Optional Vessels currently under construction;

 

·

Our ability to obtain and maintain regulatory approvals and to satisfy technical, health, safety and compliance standards that meet our charterer's requirements;

 

·

Economic, regulatory, political and governmental conditions that affect shipping and the LNG industry, which include changes in the number of new LNG importing countries and regions, as well as structural LNG market changes impacting LNG supply that may allow greater flexibility and competition of other energy sources with global LNG use;

 

·

Our ability to successfully employ our vessels at economically attractive rates, as our charters expire or are otherwise terminated;

 

·

Our access to capital required to acquire additional ships and/or to implement our business strategy;

 

·

Our level of debt, the related interest expense, our debt amortization levels and the timing of required  principal installments;

 

·

The level of our general and administrative expenses, including salaries and costs of consultants;

 

·

Our charterer's right for early termination of the charters under certain circumstances;

 

·

Performance of our counterparties, which are limited in number, including our charterers ability to make charter payments to us; and

 

·

The level of any distribution on all classes of our units.

 

Results of Operations

 

Three months ended March 31, 2018 compared to the three months ended March 31, 2017

 

Voyage revenues

 

Voyage revenues, adjusted for charter hire amortization and the amortization of the fair value of acquired time charter, decreased by $5.0 million, or 12.3%, to $35.8 million in the three months ended March 31, 2018, as compared to $40.9 million in the same period of 2017. This decrease was predominantly due to the lower revenues earned on the Clean Energy which has been employed in the short-term market since the third quarter of 2017, in comparison to the corresponding quarter of 2017 during which the vessel was fully utilized at significantly higher charter rate. In July 2018, the Clean Energy will be delivered to Gazprom to commence a charter with a term of approximately eight years.

 

Voyage expenses- including voyage expenses to related party

 

Voyage expenses (including the commercial management fee equal to 1.25% of the gross charter hire we pay our Manager as compensation for the commercial services it provides to us) decreased by $0.3 million, or 28.8%, to $0.6 million in the three months ended March 31, 2018, from $0.9 million in the corresponding period of 2017.

 

This decrease in voyage expenses is primarily due to:

 

(i)

the lower commercial fees charged on the Clean Energy which were commensurate with the lower charter rate earned on the vessel during the first quarter of 2018 in comparison to the corresponding quarter of 2017, as further discussed above, and

 

(ii)

no bunker consumption expenses having been incurred on any of our Fleet vessels in the first quarter of 2018 due to the full utilization of our Fleet during that period.

 

Vessel operating expenses

 

Vessel operating expenses were $6.3 million, which corresponds to a daily rate of $11,741 per LNG carrier in the three months ended March 31, 2018, as compared to $6.7 million, or a daily rate of $12,352 per LNG carrier  in the three months ended March 31, 2017. This decrease is primarily associated with crewing and technical efficiencies achieved during the first quarter of 2018 as compared to the corresponding period of 2017.

 

Dry-docking and special survey costs

 

Dry-docking and special survey costs amounted to $0.5 million during the three months ended March 31, 2018, as compared to $0.2 million incurred in the same period in 2017.  The three TFDE vessels in our Fleet, the Arctic Aurora, the Yenisei River and the Lena River, are scheduled to be dry-docked in the second and third quarters of 2018. The costs incurred in the first quarter of 2018 relate to preliminary peripheral expenditures with regards to the upcoming scheduled dry-docking repairs.

 

General and Administrative Expenses- including related party costs

 

During the three month periods ended March 31, 2018 and 2017, we incurred general and administrative expenses of $0.6 million and $0.4 million, respectively. The $0.2 million, or 42.3%, increase in the first quarter 2018 as compared to the same period in 2017 is mainly associated with increased legal costs which were incurred in the period as part of our recurring business. General and administrative expenses are comprised of legal, consultancy, audit, executive services, administrative services and Board of Directors remuneration fees as well as other miscellaneous expenditures essential to conduct our business.

 

Management fees- related party

 

During each of the three-month periods ended March 31, 2018 and 2017, we incurred $1.6 million and $1.5 million in management fees, respectively, or a daily fee of $2,898 and $2,814 per vessel per day, respectively. The 3% increase in management fees in the first quarter 2018 as compared to the same period in 2017 is consistent with the annual daily increase prescribed in our management agreements.

 

Depreciation

 

Depreciation expense amounted to $7.5 million during both the three months ended March 31, 2018 and 2017.

 

Interest and finance costs

 

For the three months ended March 31, 2018 and 2017, interest and finance costs were $12.0 million and $8.9 million, respectively. The increase of $3.2 million, or 35.5%, in period interest and finance costs is commensurate with the increase in the weighted average interest for the first quarter of 2018 which was mainly the result of the increased costs associated with the $480.0 million institutional senior secured term loan B facility due in 2023 (the "Term Loan B") which the Partnership entered into on May 18, 2017.

Significant Accounting Policies and Critical Accounting Policies

 

There have been no material changes to our significant accounting policies since December 31, 2017. For a description of our critical accounting policies and all of our significant accounting policies, see Note 2 to our audited consolidated financial statements included in our Annual Report on Form 20-F for the year ended December 31, 2017, which was filed with the Commission on March 9, 2018.

 

Recent Accounting Pronouncements

 

For information related to recent accounting pronouncements in 2018, please see Note 2 to our unaudited interim condensed consolidated financial statements included elsewhere in this report.

 

Liquidity and Capital Resources

 

We operate in a capital-intensive industry and we expect to finance the purchase of additional vessels and other capital expenditures through a combination of borrowings from debt transactions, cash generated from operations and equity and debt financings. Our liquidity requirements relate to servicing the principal and interest on our debt, paying distributions, when, as and if declared by our Board of Directors, funding capital expenditures and working capital and maintaining cash reserves for the purpose of satisfying a certain liquidity covenant contained in our 2019 Notes. Our funding and treasury activities are intended to maximize investment returns while maintaining appropriate liquidity. For the three months ended March 31, 2018, our principal sources of funds were our operating cash flows. In accordance with our Partnership Agreement, we are required to distribute all of our available cash to unitholders each quarter. We frequently monitor our capital needs by projecting our fixed income, expenses and debt obligations, and seek to maintain adequate cash reserves to compensate for any budget overruns. Our short-term liquidity requirements are primarily the servicing of our existing debt and funding working capital, including vessel operating expenses and payments under our management agreements. Our long-term liquidity requirements relate to funding capital expenditures, including the acquisition of additional vessels and the repayment of our long-term debt. In accordance with our business strategy, other liquidity needs may relate to funding potential investments (including investments in the Optional Vessels or other third-party acquisitions) and maintaining cash reserves against fluctuations in operating cash flows. Because we distribute all of our available cash, we expect that we will rely upon external financing sources, including bank borrowings and the issuance of debt and equity securities, to fund acquisitions and other expansion capital expenditures.

As of March 31, 2018, we reported cash of $61.4 million (including free cash liquidity requirements imposed by our 2019 Notes), which represented a decrease of $6.1 million, or 9.0%, from December 31, 2017. As of March 31, 2018, we had available liquidity of $91.4 million, which includes our reported cash and the $30.0 million borrowing capacity under our $30 Million Revolving Credit Facility with our Sponsor, which is available to us at any time until November 2018 and remains available in its entirety as of the date of this report.

 

Our aggregate outstanding indebtedness as of March 31, 2018, was $726.4 million, which is gross of unamortized loan fees and includes the Term Loan B and our 2019 Notes. As of the same date, we had available borrowing capacity of $30.0 million under our $30 Million Revolving Credit Facility with our Sponsor, discussed above. As of March 31, 2018, we were in compliance with all of the covenants contained in our debt agreements.

 

As of March 31, 2018, we reported a working capital surplus of $44.2 million as compared to a working capital surplus of $47.5 million as of December 31, 2017, which represents a decrease of $3.3 million, or 6.9 %. Working capital is equal to current assets minus current liabilities, including the current portion of long-term debt.

During the three months ended March 31, 2018, we generated net cash from operating activities of $11.9 million, as compared to $18.2 million in the same period of 2017, which represents a decrease of $6.3 million, or 34.7%. This decrease in net cash from operating activities was mainly attributable to the decrease in period net income compared to the same period in 2017 mostly due to (i) the decrease in period revenues primarily arising from the lower revenues we earned in the period on the Clean Energy, as discussed above, and (ii) the increased interest costs for servicing the Term Loan B that we entered into in May 2017.

On April 18, 2018, we announced that, following a strategic review of our financial profile and distribution policy, our Board of Directors approved a reduction in the quarterly cash distribution on our common units to $0.25 per common unit from $0.4225 per common unit, or from $1.69 per common unit to $1.00 per common unit on an annualized basis. The revised distribution level is expected to align our cash distributions with our capacity to generate cash flow in the long term, to strengthen our balance sheet and to improve our distribution coverage ratio (which is its distributable cash flow available for distribution in proportion to actual cash distributed). The first quarterly common unit cash distribution at the reduced level was in respect of the first quarter of 2018 and was paid on May 3, 2018 to all common unitholders of record as of April 26, 2018.

Under the Omnibus Agreement with our Sponsor, we have the right, but not the obligation, to acquire from our Sponsor, among other potential assets, (i) the remaining four Initial Optional Vessels, and (ii) our Sponsor's ownership interest (which is currently 49.0%) in five entities, each of which owns an Additional Optional Vessel.

Two of the Additional Optional Vessels were delivered in the fourth quarter of 2017 and first quarter of 2018, respectively. The remaining three Additional Optional Vessels are scheduled to be delivered in the first quarter of 2019. To the extent we exercise any of these options we may incur additional payment obligations. As of the date of this report, we have not secured any financing in connection with the potential acquisition of any of the remaining Initial Optional Vessels or the Additional Optional Vessels from our Sponsor since it is uncertain if and when such purchase options will be exercised, if at all.

Taking into account the overall LNG market conditions, we believe that our current sources of funds and those that we anticipate to internally generate for a period of at least the next twelve months will be sufficient to fund the operations of our Fleet, and to meet our normal working capital requirements, service our principal and interest debt, and make at least the required distribution on our Series A Preferred Units in accordance with our Partnership Agreement.

 

Estimated Maintenance and Replacement Capital Expenditures

 

Our Partnership Agreement requires our Board of Directors to deduct from operating surplus each quarter estimated maintenance and replacement capital expenditures, as opposed to actual maintenance and replacement capital expenditures in order to reduce disparities in operating surplus caused by fluctuating maintenance and replacement capital expenditures, such as dry-docking and vessel replacement. Because of the substantial capital expenditures we are required to make to maintain our Fleet, currently, our annual estimated maintenance and replacement capital expenditures for purposes of estimating maintenance and replacement capital expenditures will be $16.9 million per year, which is composed of $4.2 million for dry-docking and $12.7 million, including financing costs, for replacing our vessels at the end of their useful lives. The $12.7 million for future vessel replacement is based on assumptions and estimates regarding the remaining useful lives of our vessels, a long term net investment rate equivalent to our current expected long-term borrowing costs, vessel replacement values based on current market conditions and residual value of the vessels at the end of their useful lives based on current steel prices. The actual cost of replacing the vessels in our Fleet will depend on a number of factors, including prevailing market conditions, hire rates and the availability and cost of financing at the time of replacement. Our Board of Directors, with the approval of the Conflicts Committee, may determine that one or more of our assumptions should be revised, which could cause our Board of Directors to increase or decrease the amount of estimated maintenance and replacement capital expenditures. We may elect to finance some or all of our maintenance and replacement capital expenditures through the issuance of additional common units which could be dilutive to existing unitholders.

 

Our Borrowing Activities

 

As of March 31, 2018, our outstanding borrowings relate to the Term Loan B and our 2019 Notes. We are currently evaluating potential refinancing transactions with respect to the Notes, which may include, among other things, the repayment, refinancing or exchange of the Notes, or a combination of the foregoing. For further information relating to our secured and unsecured debt, please see Note 5 to our annual consolidated financial statements included in our Annual Report for the year ended December 31, 2017 as filed with the Commission on March 9, 2018, and Note 5 to our unaudited interim condensed consolidated financial statements included elsewhere in this report.

Distributions

 

Distributions on Common Units

 

On January 18, 2018, we paid a cash distribution for the fourth quarter of 2017 of $0.4225 per common to all common unitholders of record as of January 11, 2018.

 

On May 3, 2018, we paid our first quarterly common units cash distribution at the reduced level of $0.25 per common unit in respect of the first quarter of 2018, as discussed above, to all common unitholders of record as of April 26, 2018.

 

Distributions on Series A Preferred Units

 

On February 12, 2018, we paid a cash distribution for the period from November 12, 2017 to February 11, 2018, of $0.5625 per unit to all Series A Preferred unitholders of record as of February 5, 2018.

On May 14, 2018, we paid a cash distribution for the period from February 12, 2018 to May 11, 2018, of $0.5625 per unit to all Series A Preferred unitholders of record as of May 5, 2018.

 

Cash Flows

 

The following table summarizes our net cash flows from/(used in) operating, investing and financing activities and our cash and cash equivalents for the three month periods ended March 31, 2018 and 2017:

 

Operating Activities

 

Net cash from operating activities amounted to $11.9 million for the three months ended March 31, 2018, as compared to $18.2 million for the same period in 2017. This decrease was directly correlated with the decrease in period net income, as discussed above.

 

Net cash from operating activities amounted to $18.2 million for the three months ended March 31, 2017, compared to $23.6 million for the same period in 2016. This decrease was directly correlated with the decrease in period net income and, to a lesser degree, due to the working capital negative cash movement between the compared periods.

 

Investing activities

 

No cash was used in investing activities during both the three month periods ended March 31, 2018 and 2017.

Financing activities

 

Net cash used in financing activities was $17.9 million during the three months ended March 31, 2018 and  consisted of: (i) distributions paid to our limited partners and preferred unitholders during the period of $16.7 million (see "Distributions" above) and (ii) payment of $1.2 million of regular principal installment under the Term Loan B.

Net cash used in financing activities was $24.8 million for the three months ended March 31, 2017, comprised of (i) distributions paid to our unitholders during the period of $16.7 million and (ii) payment of $8.1 million of regular principal installments under our secured loan facilities.

Contractual Obligations

 

The following table sets forth our contractual obligations and their maturity dates as of March 31, 2018:

 

 

(1)

Our variable rate long-term debt outstanding as of March 31, 2018, bears variable interest at a margin over LIBOR. The calculation of interest payments has been made assuming interest rates based on the one-month period LIBOR, the LIBOR specific to our Term Loan B facility as of March 31, 2018 and our applicable margin rate.

 

 

 

(2)

Under the terms of the management agreements, we currently pay our Manager a management fee of $2,898 per day per vessel which is subject to an annual increase of 3% and to further annual increases, if any, by an amount to be agreed between us and our Manager, to reflect material unforeseen costs of providing the management services, which amount is required to be reviewed and approved by our Conflicts Committee. The management agreements also provide for commissions of 1.25% of charter-hire revenues arranged by the Manager. The agreements will terminate automatically after a change of control of the applicable shipping subsidiary and/or of the owner's ultimate parent, in which case an amount equal to fees of at the least 36 months and not more than 60 months, will become payable to the Manager.

 

(3)

On March 21, 2014, we entered into an executive services agreement with our Manager (the "Executive Services Agreement"), with retroactive effect to the date of the closing of our IPO, pursuant to which our Manager provides us with the services of our executive officers, who report directly to our Board of Directors.  Under the Executive Services Agreement, our Manager is entitled to an executive services fee of €538,000 per annum, for the initial five year term, payable in equal monthly installments.  The agreement has an initial term of five years and will automatically be renewed for successive five year terms unless terminated earlier.  The calculation of the contractual services fee set forth in the table above assumes an exchange rate of €1.0000 to $1.2325, the EURO/USD exchange rate as of March 31, 2018 and does not include any incentive compensation which our Board of Directors may agree to pay.

 

(4)

On December 30, 2014 and with effect from the IPO closing date, we entered into an administrative services agreement with our Manager (the "Administrative Services Agreement"), according to which we are provided with certain financial, accounting, reporting, secretarial and information technology services, for a monthly fee of $10,000, plus expenses, payable in quarterly installments. The agreement can be terminated upon 120 days' notice granted either by the Partnership's Board of Directors or by the Manager as per the provisions of the agreement.

 

 

Supplemental Information

 

ARCTIC LNG CARRIERS Ltd. and its operating subsidiaries

The following table sets forth summary financial information of Arctic LNG Carriers Ltd., our wholly owned subsidiary and borrower under the Term Loan B and each of its vessel owning subsidiaries which is a subsidiary guarantor of the Term Loan B (collectively "Arctic LNG Carriers"), as at and for the period presented, which is derived from the unaudited financial statements of Arctic LNG Carriers and are presented in connection with certain reporting requirements governing the Term Loan B.

Arctic LNG Carriers reconciliation of net income to Adjusted EBITDA

We define Adjusted EBITDA as earnings before interest and finance costs, net of interest income (if any), gains/losses on derivative financial instruments (if any), taxes (when incurred), depreciation and amortization (when incurred), class survey costs and significant non-recurring items (if any). Adjusted EBITDA is used as a supplemental financial measure by management and external users of financial statements, such as our investors, to assess our operating performance.

 

Adjusted EBITDA is not a measure of financial performance under U.S. GAAP, does not represent and should not be considered as an alternative to net income, operating income, cash flow from operating activities or any other measure of financial performance presented in accordance with U.S. GAAP. Adjusted EBITDA excludes some, but not all, items that affect net income and these measures may vary among other companies. Therefore, Adjusted EBITDA as presented below may not be comparable to similarly titled measures of other companies.

⁽¹⁾ Includes interest and finance costs (inclusive of amortization of deferred financing costs), net of interest income, if any.

 

	Page
Consolidated Condensed Balance Sheets as of March 31, 2018 (unaudited) and December 31, 2017	F-3
Unaudited Interim Condensed Consolidated Statements of Income for the three month periods ended March 31, 2018 and 2017	F-4
Unaudited Interim Consolidated Statements of Cash Flows for the three month periods ended March 31, 2018 and  2017	F-5
Notes to the Unaudited Interim Condensed Consolidated Financial Statements	F-6

		Note				March 31, 2018				December 31, 2017
ASSETS
CURRENT ASSETS:
Cash and cash equivalents						$	61,401			$	67,464
Trade receivables							113				155
Prepayments and other assets							1,152				1,103
Inventories							1,827				799
Due from related party			3				1,635				883
Total current assets							66,128				70,404
FIXED ASSETS, NET:
Vessels, net			4				970,230				977,298
Total fixed assets, net							970,230				977,298
OTHER NON CURRENT ASSETS:
Due from related party			3				1,350				1,350
Above-market acquired time charter contract			7				3,480				5,267
Total assets						$	1,041,188			$	1,054,319
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt, net of unamortized deferred financing fees of $2,137 and $2,145, respectively			5			$	2,663			$	2,655
Trade payables							6,767				4,497
Due to related party, current			3				241				72
Accrued liabilities							3,820				4,051
Unearned revenue							8,408				11,623
Total current liabilities							21,899				22,898
NON-CURRENT LIABILITIES:
Deferred revenue							1,543				1,405
Long-term debt, net of current portion and unamortized deferred financing fees of $10,298 and $11,102, respectively			5				711,302				711,698
Total non-current liabilities							712,845				713,103
Commitments and contingencies			8				—				—
PARTNERS' EQUITY:
Common unitholders (unlimited authorized; 35,490,000 units issued and outstanding as at March 31, 2018 and December 31, 2017)			9				233,210				245,055
Preferred unitholders (3,450,000 authorized; 3,000,000 Series A Preferred Units issued and outstanding as at March 31, 2018 and December 31, 2017)			9				73,216				73,216
General Partner (35,526 units issued and outstanding as at March 31,2018 and December 31, 2017)			9				18				47
Total partners' equity							306,444				318,318
Total liabilities and partners' equity						$	1,041,188			$	1,054,319

						Three months ended March 31,
		Note				2018				2017
REVENUES:
Voyage revenues			7			$	33,904			$	39,092
EXPENSES:
Voyage expenses (including related party)			3				(621	)			(872	)
Vessel operating expenses							(6,340	)			(6,670	)
Dry-docking and special survey costs							(467	)			(220	)
General and administrative expenses (including related party)			3				(629	)			(442	)
Management fees-related party			3				(1,565	)			(1,519	)
Depreciation			4				(7,476	)			(7,476	)
Operating income						$	16,806			$	21,893
OTHER INCOME/(EXPENSES):
Interest and finance costs			5, 11				(12,045	)			(8,890	)
Interest income							163				—
Other, net							(84	)			(91	)
Total other expenses							(11,966	)			(8,981	)
Partnership's Net Income						$	4,840			$	12,912
Common unitholders' interest in Net Income						$	3,149			$	9,988
Preferred unitholders' interest in Net Income						$	1,688			$	1,688
Subordinated unitholders' interest in Net Income						$	—			$	1,208
General Partner's interest in Net Income						$	3			$	28
Earnings per unit, basic and diluted:			10
Common unit (basic and diluted)						$	0.09			$	0.32
Weighted average number of units outstanding, basic and diluted:			10
Common units							35,490,000				31,660,500

						Three months ended March 31,
		Note				2018				2017
Cash flows from Operating Activities:
Net income:						$	4,840			$	12,912
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			4				7,476				7,476
Amortization of deferred financing fees			11				811				486
Deferred revenue amortization							138				(14	)
Amortization of fair value of acquired time charter			7				1,787				1,787
Changes in operating assets and liabilities:
Trade receivables							42				24
Prepayments and other assets							(49	)			(174	)
Inventories							(1,028	)			46
Due from/to related party							(583	)			369
Trade payables							1,863				1,075
Accrued liabilities							(229	)			(238	)
Unearned revenue							(3,215	)			(5,589	)
Net cash provided by Operating Activities						$	11,853			$	18,160
Cash flows from Investing Activities:
Vessel acquisitions and other additions to vessels' cost							—				—
Net cash from/ (used in) Investing Activities						$	—			$	—
Cash flows from Financing Activities:
Payment of securities registration and other filing costs							(2	)			—
Distributions declared and paid							(16,714	)			(16,715	)
Repayment of long-term debt			5				(1,200	)			(8,125	)
Net cash used in Financing Activities						$	(17,916	)		$	(24,840	)
Net decrease in cash and cash equivalents							(6,063	)			(6,680	)
Cash and cash equivalents at beginning of the period							67,464				57,595
Cash and cash equivalents at end of the period						$	61,401			$	50,915
SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing activities
Other additions to vessels' cost							408				—

Company Name	Country of incorporation	Vessel Name	Delivery Date from shipyard	Delivery date to Partnership	Year Built	Cbm Capacity
Pegasus Shipholding S.A. ("Pegasus")	Marshall Islands	Clean Energy	March 2007	n/a	2007	149,700
Lance Shipping S.A. ("Lance")	Marshall Islands	Ob River	July 2007	n/a	2007	149,700
Seacrown Maritime Ltd. ("Seacrown")	Marshall Islands	Amur River	January 2008	n/a	2008	149,700
Fareastern Shipping Limited ("Fareastern")	Malta	Arctic Aurora	July 2013	June 2014	2013	155,000
Navajo Marine Limited ("Navajo")	Marshall Islands	Yenisei River	July 2013	September 2014	2013	155,000
Solana Holding Ltd. ("Solana")	Marshall Islands	Lena River	October 2013	December 2015	2013	155,000

	Country of incorporation	Purpose of incorporation
Dynagas Equity Holding Limited ("Dynagas Equity")	Liberia	Holding company that owns all of the outstanding share capital of Arctic LNG Carriers Ltd. ("Arctic LNG").
Dynagas Operating GP LLC ("Dynagas Operating GP")	Marshall Islands	Limited Liability Company in which the Partnership holds a 100% membership interest and which has 100% of the Non-Economic General Partner Interest in Dynagas Operating LP.
Dynagas Operating LP ("Dynagas Operating")	Marshall Islands	Limited partnership in which the Partnership holds a 100% limited partnership interest and which owns 100% of the issued and outstanding share capital of Dynagas Equity.

Dynagas Finance Inc.	Marshall Islands	Wholly owned subsidiary of the Partnership whose activities are limited to co-issuing the Senior Unsecured Notes discussed under Note 5 and engaging in other activities incidental thereto.
Arctic LNG	Marshall Islands	Wholly owned subsidiary of the Partnership which is directly wholly owned by Dynagas Equity and which owns all of the issued and outstanding share capital of Pegasus, Lance, Seacrown, Fareastern, Navajo, Solana and Dynagas Finance LLC.
Dynagas Finance LLC	Delaware	Wholly owned subsidiary of Arctic LNG and co-borrower of the Term Loan B discussed under Note 5.

		Three months ended March 31,
		2018				2017
Included in voyage expenses
Charter hire commissions (a)		$	448			$	510
Included in general and administrative expenses – related party
Executive services fee (d)		$	164			$	143
Administrative services fee (e)		$	30			$	30
Management fees-related party
Management fees (a)		$	1,565			$	1,519

		Period/Year ended
		March 31, 2018				December 31, 2017
Assets:
Working capital advances granted to the Manager (a)		$	1,635			$	883
Security deposits to Manager  (a)		$	1,350			$	1,350
Liabilities included in Due to related party:
Executive service charges due to Manager (d)		$	164			$	—
Administrative service charges due to Manager (e)		$	30			$	30
Other Partnership expenses due to Manager		$	47			$	42
Total liabilities due to related party, current		$	241			$	72

	Vessel Cost				Accumulated Depreciation				Net Book Value
Balance December 31, 2017		$	1,167,500			$	(190,202	)		$	977,298
Other additions to vessels' cost			408				—				408
Period depreciation			—				(7,476	)			(7,476	)
Balance March 31, 2018		$	1,167,908			$	(197,678	)		$	970,230

			Period/ Year Ended
Debt instruments	Borrowers-Issuers		March 31, 2018				December 31, 2017
$480 Million Term Loan Facility	Arctic LNG and Dynagas Finance LLC			476,400				477,600
$250 Million Senior Unsecured Notes	Dynagas Partners and Dynagas Finance			250,000				250,000
Total debt			$	726,400			$	727,600
Less deferred financing fees				(12,435	)			(13,247	)
Total debt, net of deferred finance costs			$	713,965			$	714,353
Less current portion, net of deferred financing fees			$	(2,663	)		$	(2,655	)
Long-term debt, net of current portion and deferred financing fees			$	711,302			$	711,698

Period/Year ending December 31,		Amount
2018 (April to December 2018)		$	3,600
2019			254,800
2020			4,800
2021			4,800
2022			4,800
2023 and thereafter			453,600
Total long-term debt		$	726,400

Period/ Year ending December 31,		Amount
2018 (period)		$	81,483
2019			123,152
2020			137,906
2021			126,930
2022			115,917
2023 and thereafter			889,188
Total		$	1,474,576

Period/ Year ending December 31,		Amount
2018			4,782
2019			6,537
2020			6,752
Total		$	18,071

		Total Quarterly Distribution Target Amount		Unitholders				General Partner				Holders of IDRs
Minimum Quarterly Distribution		$0.365			99.9	%			0.1	%			0.0	%
First Target Distribution		up to $0.420			99.9	%			0.1	%			0.0	%
Second Target Distribution		above $0.420 up to $0.456			85.0	%			0.1	%			14.9	%
Third Target Distribution		Above $0.456 up to $0.548			75.0	%			0.1	%			24.9	%
Thereafter		above $0.548			50.0	%			0.1	%			49.9	%

		Three Months Ended March 31,
		2018				2017
Partnership's Net income		$	4,840			$	12,912
Less:
Net Income attributable to preferred unitholders			1,688				1,688
Net Income attributable to subordinated unitholders			—				1,208
General Partner's interest in Net Income			3				28
Net income attributable to common unitholders		$	3,149			$	9,988
Weighted average number of common units outstanding, basic and diluted			35,490,000				31,660,500
Earnings per common unit, basic and diluted		$	0.09			$	0.32

		Three months ended March 31,
		2018				2017
Interest expense (Note 5)		$	11,196			$	8,362
Amortization of deferred financing fees			811				486
Other			38				42
Total		$	12,045			$	8,890