| B. | CAPITALIZATION AND INDEBTEDNESS |
Not applicable.
| C. | REASONS FOR THE OFFER AND USE OF PROCEEDS |
Not applicable.
The following risks relate
principally to the industry in which we operate and to our business in general. Other risks relate principally to the securities
market and ownership of our securities, including our common units, our 9.00% Series A Cumulative Redeemable Preferred Units or our Series
A Preferred Units and our 8.75% Series B Fixed to Floating Rate Cumulative Redeemable Perpetual Preferred Units or our Series B Preferred
Units. For a description of the changes to our general strategy, including the restriction on distributions to our common unitholders
under the terms and subject to the conditions of the $675 Million Credit Facility, please see "Item 4. Information on the Partnership—B.
Business Overview" and "Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—$675
Million Credit Facility." The occurrence of any of the events described in this section could materially and adversely affect our
business, financial condition, operating results or cash available for distribution on our units and the trading price of our securities.
Risks Relating to our Partnership
Our Fleet consists of only six LNG carriers.
Any limitation in the availability or operation of these vessels could have a material adverse effect on our business, results of operations
and financial condition and could significantly reduce or eliminate our ability to pay distributions on our outstanding units, including
our preferred units.
Our Fleet consists of only
six LNG carriers. If any of our vessels is unable to generate revenues as a result of off-hire time, early termination of the time charter
in effect or failure to secure new charters at charter hire rates as favorable as our average historical rates or at all, our future liquidity,
cash flows, results of operations, and ability to make quarterly and other distributions to the holders of our outstanding units, including
the preferred units, could be materially adversely affected.
Our ability to grow may be adversely affected
by cash distribution policy.
Our current business strategy
is to focus our capital allocation on debt repayment, and to prioritize balance sheet strength in order to reposition ourselves for potential
future growth if our cost of capital allows us to access debt and equity capital on acceptable terms. As such, our growth may not be as
fast as that of businesses that reinvest their available cash to expand ongoing operations. Our cash distribution policy is consistent
with the terms of our Partnership Agreement, which requires that we distribute all of our available cash quarterly.
Under the terms of
the $675 Million Credit Facility (as defined below),
the Partnership is restricted from paying distributions to its common unitholders while borrowings are outstanding under the $675 Million
Credit Facility. Subject to contractual restrictions, there is no guarantee that unitholders will receive quarterly distributions from
us as our cash distribution policy is subject to certain restrictions and may be changed or eliminated at any time. In addition, our cash
distribution policy may significantly impair our ability to meet our financial needs or to grow.
We currently derive all our revenue and
cash flow from a limited number of charterers and the loss of any of these charterers could cause us to suffer losses or otherwise adversely
affect our business.
We have derived, and
believe we will continue to derive, all of our revenues from a limited number of charterers, such as Gazprom, Equinor and Yamal. For
the year ended December 31, 2021, during which we derived our operating revenues from three charterers, Gazprom accounted for 45%,
Yamal accounted for 39% and Equinor accounted for 16% of our total revenues. All of the charters for our Fleet have fixed terms but
may be terminated early due to certain events, including but not limited to the charterer's failure to make charter payments to us
because of financial inability, disagreements with us or otherwise. The ability of each of our counterparties to perform its
respective obligations under a charter with us will depend on a number of factors that are beyond our control and may include, among
other things, general economic conditions, the condition of the LNG shipping industry, prevailing prices for natural gas, COVID-19
and other epidemics and pandemic, events in Russia and Ukraine or any resulting sanctions that may be imposed and the overall
financial condition of the counterparty. Should a counterparty fail to honor its obligations under an agreement with us, we may be
unable to realize revenue under that charter and may sustain losses, which may have a material adverse effect on our business,
financial condition, cash flows, results of operations and ability to pay any distributions, including reduced distributions, to our
unitholders.
In addition, a charterer may exercise its right
to terminate its charter if, among other things:
| · | the vessel suffers a total loss or is damaged beyond repair; |
| · | we default on our obligations under the charter, including prolonged periods of vessel off-hire; |
| · | war or hostilities significantly disrupt the free trade of the vessel; |
| · | the vessel is requisitioned by any governmental authority; or |
| · | a prolonged force majeure event occurs, such as war, political unrest or a pandemic which prevents the
chartering of the vessel, in each such event in accordance with the terms and conditions of the respective charter. |
In addition, the charter
payments we receive may be reduced if the vessel does not perform according to certain contractual specifications. For example, charter
hire may be reduced if the average vessel speed falls below the speed we have guaranteed or if the amount of fuel consumed to power the
vessel exceeds the guaranteed amount.
Furthermore, in depressed
market conditions, our charterers may no longer need a vessel that is then under charter or may be able to obtain a comparable vessel
at lower rates. As a result, charterers may seek to renegotiate the terms of their existing charter agreements or avoid their obligations
under those contracts. Furthermore, it is possible that third parties with whom we have charter contracts may be impacted by events in
Russia and Ukraine or the resulting sanctions, which could adversely affect their ability to perform. If our charterers fail to meet
their obligations to us or attempt to renegotiate our charter agreements, it may be difficult to secure substitute employment for such
vessel, and any new charter arrangements we secure may be at lower rates and may not be acceptable by our lenders.
If any of our charters
are terminated, we may be unable to re-deploy the related vessel on terms as favorable to us as our current charters, or at all. If
we are unable to re-deploy a vessel for which the charter has been terminated, we will not receive any revenues from that vessel,
and we may be required to pay ongoing expenses necessary to maintain the vessel in proper operating condition. Any of these
factors may decrease our revenue and cash flows. Further, the loss of any of our charterers, charters or vessels, or a decline
in charter hire under any of our charters, could have a material adverse effect on our business, results of operations, financial
condition and ability to make distributions to our unitholders and result in an event of default under our debt agreements.
Dry-dockings of our vessels require significant
expenditures and result in loss of revenue as our vessels are off-hire during the dry-docking period. Any significant increase in either
the number of off-hire days or in the costs of any repairs or investments carried out during the dry-docking period could have a material
adverse effect on our profitability and our cash flows. Given the potential for unforeseen issues arising during dry-docking, we may
not be able to predict accurately the time required to dry-dock any of our vessels. If one or more of our vessels is dry-docked longer
than expected or if the cost of repairs is greater than we had budgeted, there may a material adverse effect on our results of operations
and our cash flows, including any cash available for distribution to unitholders. We expect that the next scheduled dry-dockings for
all our vessels will be longer and more costly than normal as a result of the need to install ballast water treatment systems ("BWTS")
on each vessel in order to comply with regulatory requirements.
Due to the small size of
our Fleet, any delay in the completion time of the dry-dockings or overrun of costs caused by additional days of work could have a material
adverse effect on our business, results of operations and financial condition and could significantly reduce or eliminate our ability
to pay any distributions on either or both of our common or preferred units.
The Clean Energy completed
its scheduled dry-docking, as well as the installation of the BWTS in April 2022. The Ob River and the Amur River are scheduled to be
dry-docked and have the BWTS installed within 2022.
Our ability to raise capital to repay
or refinance our debt obligations or to fund our maintenance or growth capital expenditures will depend on certain financial, business
and other factors, many of which are beyond our control. The value of our common units may make it difficult or impossible for us to access
the equity or equity-linked capital markets. To the extent that we are unable to finance these obligations and expenditures with cash
from operations or incremental bank loans or by issuing debt or equity securities, our ability to make cash distributions may be diminished,
or our financial leverage may increase, or our unitholders may be diluted. Our business may be adversely affected if we need to access
sources of funding which are more expensive and/or more restrictive.
To fund our existing and
future debt obligations and capital expenditures and any future growth, we may be required to use cash from operations, incur borrowings,
and/or seek to access other financing sources including the capital markets. Our access to potential funding sources and our future financial
and operating performance will be affected by prevailing economic conditions and financial, business, regulatory and other factors, many
of which are beyond our control. If we are unable to access the capital markets or raise additional bank financing or generate sufficient
cash flow to meet our debt, capital expenditure and other business requirements, we may be forced to take actions such as:
| · | seeking additional debt or equity capital; |
| · | reducing distributions relating to our preferred units; |
| · | reducing, delaying or cancelling our business activities, acquisitions, investments or capital expenditures;
or |
| · | seeking bankruptcy protection. |
Such measures might not
be successful, available on acceptable terms or enable us to meet our debt, capital expenditure and other obligations. Some of these measures
may adversely affect our business and reputation. In addition, our financing agreements may restrict our ability to implement some of
these measures. Use of cash from operations and possible future sale of certain assets will reduce cash available for distribution to
unitholders.
Our ability to obtain bank financing or
to access the capital markets may be limited by our financial condition at the time of any such financing or offering as well as by
adverse market conditions. The value of our common units may not enable us able to access the equity or equity-linked capital
markets. Even if we are successful in obtaining the necessary funds, the terms of such future financings could limit our ability to
pay cash distributions to our unitholders or operate our business as currently conducted. In addition, incurring additional debt may
significantly increase our interest expense and financial leverage, and issuing additional equity securities may result in
significant unitholder dilution and would increase the aggregate amount of cash required to maintain our quarterly distributions,
which we currently only make to our preferred unitholders.
Major outbreaks of diseases (such as COVID-19)
and governmental responses thereto could adversely affect our business.
Since the beginning of calendar
year 2020, the COVID-19 pandemic has negatively affected economic conditions, the supply chain, the labor market, the demand for shipping
regionally as well as globally and may continue to impact our operations and the operations of our customers and suppliers. The COVID-19
pandemic has resulted in numerous actions taken by governments and governmental agencies in an attempt to mitigate the spread any resurgence
of the virus, including travel bans, quarantines, and other emergency public health measures, and a number of countries implemented lockdown
measures. These measures have resulted in a significant reduction in global economic activity and extreme volatility in the global financial
markets. If the COVID-19 pandemic continues on a prolonged basis or becomes more severe, the adverse impact on the global economy and
the rate environment for LNG carriers may deteriorate further and our operations and cash flows may be negatively impacted. The extent
of COVID-19's impact on our financial and operational results, which could be material, will depend on the length of time that the pandemic
continues and whether subsequent waves of the infection happen. Uncertainties regarding the economic impact of the COVID-19 pandemic are
likely to result in sustained market turmoil, which could also negatively impact our business, financial condition and cash flows. Governments
approved large stimulus packages to mitigate the effects of the sudden decline in economic activity caused by the pandemic; however, we
cannot predict the extent to which these measures will be sufficient to sustain the business and financial condition of companies in the
shipping industry.
At this stage, we have experienced
some logistical challenges across our fleet. However, as of December 31, 2021, we have not experienced any material negative financial
impacts to our results of operations or financial position as a result of COVID-19. Effects of the current pandemic have or may include,
among others:
| · | deterioration of economic conditions and activity and of demand for shipping; |
| · | operational disruptions to us or our customers due to worker health risks and the effects of new regulations,
directives or practices implemented in response to the pandemic (such as travel restrictions for individuals and vessels and quarantining
and physical distancing); |
| · | potential delays in (a) the loading and discharging of cargo on or from our vessels, (b) vessel inspections
and related certifications by class societies, customers or government agencies and (c) maintenance, modifications or repairs to, or drydocking
of, our existing vessels due to worker health or other business disruptions; |
| · | reduced cash flow and financial condition, including potential liquidity constraints; |
| · | credit tightening or declines in global financial markets, including to the prices of our publicly traded
securities and the securities of our peers, could make it more difficult for us to access capital, including to finance our existing debt
obligations; |
| · | potential reduced ability to opportunistically sell any of our vessels on the second-hand market, either
as a result of a lack of buyers or a general decline in the value of second-hand vessels; |
| · | potential decreases in the market values of our vessels and any related impairment charges or breaches
relating to vessel-to-loan financial covenants; |
| · | potential disruptions, delays or cancellations in the construction of new vessels, which could reduce
our future growth opportunities; |
| · | due to quarantine restrictions placed on persons and additional procedures using commercial aviation and
other forms of public transportation, our crew has had difficulty embarking and disembarking on our ships. Although the restrictions have
on certain cases delayed crew embarking and disembarking on our ships, they have not far functionally affected our ability to crew out
vessels; |
| · | international transportation of personnel could be limited or otherwise disrupted. In particular, our
crews generally work on a rotation basis, relying largely on international air transport for crew changes plan fulfilment. Any such disruptions
could impact the cost of rotating our crew, and possibly impact our ability to maintain a full crew synthesis onboard all our vessels
at any given time. It may also be difficult for our in-house technical teams to travel to ship yards to observe vessel maintenance, and
we may need to hire local experts, which local experts may vary in skill and are difficult to supervise remotely for work we ordinarily
address in-house; and |
| · | potential non-performance by counterparties relying on force majeure clauses and potential deterioration
in the financial condition and prospects of our customers, joint venture partners or other business partners. |
The COVID-19 pandemic and
measures to contain its spread have negatively impacted regional and global economies and trade patterns in markets in which we operate,
the way we operate our business, and the businesses of our charterers and suppliers. These negative impacts could continue or worsen,
even after the pandemic itself diminishes or ends. Companies, including us, have also taken precautions, such as requiring employees to
work remotely and imposing travel restrictions, while some other businesses have been required to close entirely. Moreover, we face significant
risks to our personnel and operations due to the COVID-19 pandemic. Our crews face risk of exposure to COVID-19 as a result of travel
to ports in which cases of COVID-19 have been reported. Our shore-based personnel likewise face risk of such exposure, as we maintain
offices in areas that have been impacted by the spread of COVID-19.
Measures against COVID-19
in a number of countries have restricted crew rotations on our vessels, which may continue or become more severe. Delays in crew rotations
have led to issues with crew fatigue and may continue to do so, which may result in delays and additional costs relating to crew wages
paid to retain the existing crew members on board or other operational issues. We have incurred and may also incur additional expenses
associated with testing, personal protective equipment, quarantines, and travel expenses such as airfare costs in order to perform crew
rotations in the current environment.
Epidemics may also affect
personnel operating payment systems through which we receive revenues from the chartering of our vessels or pay for our expenses, resulting
in delays in payments. Organizations across industries, including ours, are rightly focusing on their employees' well-being, whilst making
sure that their operations continue undisrupted and at the same time, adapting to the new ways of operating. As such employees are encouraged
or even required to operate remotely which significantly increases the risk of cyber security attacks.
The occurrence or continued
occurrence of any of the foregoing events or other epidemics or an increase in the severity or duration of the COVID-19 or other epidemics
could have a material adverse effect on our business, results of operations, cash flows, financial condition, value of our vessels, and
ability to pay distributions.
The failure to consummate or integrate
acquisitions that we undertake in a timely and cost-effective manner, or at all, could have an adverse effect on our business, our plans
for growth and our financial condition and results of operations.
Future acquisitions (if
any) are dependent on, among other things, our continuing relationship with our Sponsor and other factors related to that relationship,
many of which are beyond our control including our ability to (i) maintain a potential drop-down pipeline of existing or newbuild vessels
from our Sponsor, (ii) obtain the required consents from lenders and charterers in connection with any potential acquisition of vessels
from our Sponsor, and (iii) finance our business through equity and
debt capital markets transactions at terms that are favorable to us, which is highly dependent on favorable market conditions. We currently
have no rights to acquire any vessel assets that are owned by our Sponsor.
Though our stock price has recovered to some
extent, in light of recent master limited partnership ("MLP") market volatility and the decrease in the value of our common
units and preferred units, it may be more difficult for us to complete an accretive acquisition.
We believe that other acquisition
opportunities with parties that are related to our Sponsor and third-parties may arise from time to time, and any such acquisition
could be significant. Any acquisition of a vessel or business may not be profitable at or after the time of such acquisition and may be
cash flow negative or may not generate sufficient cash flow to justify the investment. In addition, any potential acquisition or investment
opportunity may expose us to risks that may harm or have a material adverse effect on our business, financial condition, results of operations
and ability to make cash distributions (reduced or at all) to our unitholders, including risks that we may:
| · | fail to realize anticipated benefits, such as new customer relationships, cost-savings or cash flow enhancements; |
| · | be unable to attract, hire, train or retain qualified shore and seafaring personnel to manage and operate
our growing business and Fleet; |
| · | decrease our liquidity by using a significant portion of available cash or borrowing capacity to finance
acquisitions; |
| · | significantly increase our interest expense or financial leverage if we incur additional debt to finance
acquisitions; |
| · | incur or assume unanticipated liabilities, losses or costs associated with the business or vessels acquired;
or |
| · | incur other significant charges, such as impairment of goodwill or other intangible assets, asset devaluation
or restructuring charges. |
Such acquisition and investment
opportunities may not result in the consummation of a transaction. In addition, we may not be able to obtain acceptable terms for the
required financing for any such acquisition or investment that arises. We cannot predict the effect, if any, that any announcement or
consummation of an acquisition would have on the trading price of our common units or preferred units.
Any future acquisitions
could present a number of anticipated as well as unanticipated risks, including the risk of incorrect assumptions regarding the future
results of acquired vessels or businesses or expected cost reductions or other synergies expected to be realized as a result of acquiring
vessels or businesses, the risk of failing to successfully and timely integrate the operations or management of any acquired vessels or
businesses and the risk of diverting management's attention from existing operations or other priorities. We may also be subject to additional
costs and expenses related to compliance with various international or domestic laws in connection with such acquisition. If we fail to
consummate and integrate our acquisitions from our Sponsor, in a timely and cost-effective manner, or at all, our business, plans for
future growth, financial condition, results of operations and cash available for distribution could be materially and adversely affected.
We are subject to certain risks with respect
to our contractual counterparties, and failure of such counterparties to perform their obligations under such contracts could cause us
to sustain significant losses, which could have a material adverse effect on our business, financial condition, results of operations
and cash flows.
We have entered,
and may enter in the future, into contracts, charters, newbuilding and conversion contracts with shipyards, debt agreements with financial
institutions, our Sponsor and other counterparts, interest rate swaps,foreign currency swaps, equity swaps and other agreements. Such
agreements subject us to counterparty risks. The ability of each of our counterparties to perform its obligations under a contract
with us will depend on a number of factors that are beyond our control and may include, among other things, general economic conditions,
the overall financial condition of the counterparty and work stoppages or other labor disturbances, including as a result of the ongoing
COVID-19 pandemic. Should a counterparty fail to honor its obligations under agreements with us, we could sustain significant losses,
which could have a material adverse effect on our business, financial condition, results of operations and cash flows. Furthermore,
it is possible that third parties with whom we have financing arrangements or charter contracts may be impacted by events in Russia and
Ukraine or any resulting sanctions that may be imposed which could adversely affect their ability to perform under such contracts. The
Partnership has learned that, on April 6, 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control ("OFAC")
designated Amsterdam Trade Bank NV (“ATB”) as a Specially Designated National (“SDN”) pursuant to Executive Order
14024. To our knowledge, ATB is among several lenders to our $675 Million Credit Facility representing an approximately 3.6% lender participation.
It is not yet known what impact ATB’s designation may have on our $675 Million Credit Facility or us and our operations, but such
designation may, among other things, require us to repay the portion of the loan under our $675 Million Credit Facility owed to ATB,
segregate payments due to be made to ATB, block (or otherwise facilitate blocking of) property or interests in property of ATB, modify
the $675 Million Credit Facility, seek consent from the other lenders or authorization from U.S. regulators (including OFAC) so that
the credit facility may be maintained in compliance with applicable sanctions and other laws, or otherwise subject us to other available
remedies of the lenders under the $675 Million Credit Facility.
We currently have a
limited number of lending arrangements and derive all our revenue and cash flow from a limited number of charterers and the loss of
any of these lending counterparties, including in connection with the prepayment of any of our outstanding indebtedness, or
our charterers could cause us to suffer losses or otherwise adversely affect our business.
We may not have sufficient cash from operations
following the establishment of cash reserves and payment of fees and expenses to enable us to pay distributions on our outstanding units.
Our Board of Directors makes
determinations regarding the payment of distributions in its sole discretion and in accordance with our Partnership Agreement and applicable
law, and there is no guarantee that we will make or continue to make distributions to our unitholders in the same amount that we have
in prior quarters or at all in the future. In addition, the markets in which we operate our vessels are volatile and we cannot predict
with certainty the amount of cash, if any, that will be available for distribution in any period and thus, we may pay distributions in
a lower amount or not all. The level of future cash distributions to our unitholders, which have been suspended with respect to our common
units by the Board of Directors of the Partnership will be subject to, among other factors, including, without limitation, the terms and
conditions contained in our existing or future debt agreements, market conditions and the cash we generate from operations.
Pursuant to the terms of the $675 Million Credit Facility, the Partnership is prohibited from paying distributions on its common units.
In the event of a default under the $675 Million Credit Facility, the Partnership is prohibited from paying distributions to its preferred
unitholders.
As noted above, the amount
of cash we can distribute on our common and preferred units depends in part on the amount of cash we generate from our operations, which
may fluctuate from quarter to quarter based on the risks described in this section, including, among other things:
| · | the rates we obtain from our charters; |
| · | the level of our operating costs, such as the cost of crews and insurance; |
| · | the continued availability of natural gas production; |
| · | prevailing global and regional economic and political conditions, including the any economic downturns
caused by the spread of the novel COVID-19 virus; |
| · | currency exchange rate fluctuations; and |
| · | the effect of governmental regulations and maritime self-regulatory organization standards on the conduct
of our business. |
In addition, the actual
amount of cash available for distribution to our unitholders will depend on other factors, including:
| · | the level of capital expenditures we make, including for maintaining or replacing vessels, building new
vessels, acquiring secondhand vessels and complying with regulations; |
| · | the number of unscheduled off-hire days for our Fleet and the timing of, and number of days required for,
scheduled dry-docking of our vessels; |
| · | our debt service requirements and restrictions on distributions contained in our debt instruments; |
| · | the level of debt we will incur to fund future acquisitions; |
| · | fluctuations in interest rates; |
| · | fluctuations in our working capital needs; |
| · | the expected cost of and our ability to comply with environmental and regulatory requirements, including
with respect to emissions of air pollutants and greenhouse gases, as well as future changes in such requirements or other actions taken
by regulatory authorities, governmental organizations, classification societies and standards imposed by our charterers applicable to
our business; |
| · | our ability to make, and the level of, working capital borrowings; |
| · | the performance of our subsidiaries and their ability to distribute cash to us; and |
| · | the amount of any cash reserves established by our Board of Directors. |
The amount of cash we generate
from our operations may differ materially from our profit or loss for the period, which will be affected by non-cash items. We may also
incur expenses or liabilities or be subject to other circumstances in the future that reduce or eliminate the amount of cash that we have
available for distributions. As a result of this and the other factors mentioned above, we may make cash distributions during periods
when we record losses and may not make cash distributions during periods when we record earnings.
Our future operational success depends
on our ability to expand relationships with our existing charterers, establish relationships with new charterers and obtain new time charter
contracts, for which we will face substantial competition from established companies with significant resources and potential new entrants.
We have secured an estimated
contract backlog of $1.0 billion for the vessels in our Fleet as of the date of this annual report, $0.14 billion of which is a variable
hire element contained in certain time charter contracts with Yamal. The hire rate on these time charter contracts with Yamal is calculated
based on two components—a capital cost component and an operating cost component. The capital cost component is a fixed daily amount.
The daily amount of the operating cost component, which is intended to pass the operating costs of the vessel to the charterer in their
entirety including dry-docking costs, is set annually and adjusted at the end of each year to compensate us for the actual costs we incur
in operating the vessel. Dry-docking expenses are budgeted in advance within the year of the dry-dock and are reimbursed by Yamal immediately
following a dry-docking. The actual amount of revenues earned in respect of such variable hire rate may therefore differ from the amounts
included in the revenue backlog estimate, which is calculated based on the budget agreed at the inception of the contract, due to the
yearly variations in the respective vessels' operating costs. Notwithstanding our current estimated contracted backlog, one of our principal
objectives is to enter into additional multi-year time charters upon the expiration or early termination of our existing charter arrangements,
and we may also seek to enter into additional multi-year time charter contracts in connection with an expansion of our Fleet. The process
of obtaining multi-year charters for LNG carriers is highly competitive and generally involves an intensive screening procedure and competitive
bids, which often extends for several months. We believe LNG carrier time charters are awarded based upon a variety of factors relating
to the ship and the ship operator, including:
| · | size, age, technical specifications and condition of the ship; |
| · | efficiency of ship operation and reputation for operation of highly specialized vessels; |
| · | LNG shipping experience and quality of ship operations; |
| · | shipping industry relationships and reputation for customer service; |
| · | technical ability and reputation for operation of highly specialized ships; |
| · | quality and experience of officers and crew; |
| · | the ability to finance ships at competitive rates and financial stability generally; |
| · | relationships with shipyards and the ability to get suitable berths; |
| · | its willingness to assume operational risks; |
| · | construction management experience, including the ability to obtain on-time delivery of new ships according
to customer specifications; and |
| · | competitiveness of the bid in terms of overall price. |
We expect substantial competition
for providing marine transportation services for potential LNG projects from a number of experienced companies, including other independent
ship owners as well as state-sponsored entities and major energy companies that own and operate LNG carriers and may compete with independent
owners by using their fleets to carry LNG for third-parties. Some of these competitors have significantly greater financial resources
and larger fleets than we have. A number of marine transportation companies, including companies with strong reputations and extensive
resources and experience, have entered the LNG transportation market in recent years, and there are other ship owners and managers who
may also attempt to participate in the LNG market in the future. This increased competition may cause greater price competition for time
charters. As a result of these factors, we may be unable to expand our relationships with existing charterers or to obtain new time
charter contracts on a profitable basis, if at all, which could have a material adverse effect on our business, financial condition, results
of operations and cash flows, including cash available for distributions to our unitholders.
Any charter termination would likely have
a material adverse effect on our business, financial condition, results of operations and cash flows.
Our vessels are
employed with only three different charterers. Our existing and future charterers have and will likely have the right to terminate
our current or future charters in certain circumstances, such as loss of the ship or damage to it beyond repair, defaults by us in
our obligations under the charter, or off-hire beyond allowances contained in the charter agreement. In addition, two of our
charterers, Gazprom and Yamal, trade primarily from LNG ports and to the best of our knowledge are owned or controlled by Russian
entities. Due to the recent ongoing conflicts between Russia and the Ukraine, the United States (“U.S.”), European Union
(“E.U.”), Canada and other Western countries and organizations announced and enacted from February 2022 until the date
of this report, numerous sanctions against Russia. The recent conflict between Russia and Ukraine is, however, still ongoing, which
may result in the imposition of further economic sanctions in addition to the ones already announced by the United States, Europe,
amongst other countries which could adversely affect our charterers and result to the early termination of our time charter
contracts with Gazprom and Yamal.
A termination right under
one vessel's time charter would not automatically give the charterer the right to terminate its other charter contracts with us. However,
a charter termination could materially affect our relationship with the customer and our reputation in the LNG shipping industry, and
in some circumstances the event giving rise to the termination right could potentially impact multiple charters that we have entered with
the same charterer. Accordingly, the existence of any right of termination could have a material adverse effect on our business, financial
condition, results of operations and cash flows, including cash available for distribution to our common and preferred unitholders.
Our future capital needs are uncertain
and we may need to raise additional funds in the future.
Our future funding requirements
will depend on many factors, including the cost and timing of vessel acquisitions, the cost of retrofitting or modifying existing ships
as a result of technological advances, changes in applicable environmental or other regulations or standards, customer requirements or
otherwise. Our ability to obtain bank financing or to access the capital markets for future offerings may be limited by our financial
condition at the time of any such financing or offering, as well as by adverse market conditions that are beyond our control.
Obtaining additional
funds on acceptable terms may not be possible. If we raise additional funds by issuing equity or equity-linked securities, our
unitholders may experience dilution or reduced or no distributions per unit. Debt financing, if available, may involve covenants
restricting our operations or our ability to incur additional debt, or to pay distributions consistent with our past practices or
otherwise. In addition, we are subject to a number of restrictions in our existing debt agreement, which include, among others,
a restriction from paying distributions to our common unitholders while borrowings under the facility are outstanding, and our
preferred unitholders, if there is an event of default while the facility remains outstanding. Pursuant to the terms of the
$675 million Credit Facility, it is considered a change of control, which could allow the lenders to declare the facility payable
within ten days, if, among other things, (i) Dynagas Holdings Ltd. ceases to own 30% of our total common units outstanding,
(ii) any person or persons acting in consent (other than certain permitted holders as defined therein) own a higher percentage of
our total common units than in Dynagas LNG Partners LP ("Parent") than our Sponsor and/or have the ability to control,
either directly or indirectly, the affairs or composition of the majority of the board of directors or the board of managers of the
Parent, (iii) Mr. Georgios Prokopiou ceases to be our Chairman and/or member of our board, or (iv) Dynagas GP LLC ceases to be our
general partner. The terms and conditions of our existing debt agreement therefore, if applicable, limit or prevent us from
issuing new equity that may reduce our Sponsor's ownership percentage below the required 30%.
We may lack sufficient cash
to pay distributions to our unitholders at a reduced level or at all due to our current and future funding requirements, refinancing needs,
decreases in net revenues or increases in operating expenses, principal and interest payments on outstanding debt, tax expenses, working
capital requirements, maintenance and replacement capital expenditures or anticipated or unanticipated cash needs. Any debt or additional
equity financing raised may contain unfavorable terms to us or our unitholders. If we are unable to raise adequate funds, we may have
to liquidate some or all of our assets, or delay, reduce the scope of, or eliminate some or all of our fleet expansion plans. Any of these
factors could have a material adverse effect on our business, financial condition, results of operations and cash flows, including cash
available for distributions to our common and preferred unitholders.
We are exposed to volatility in the London
Interbank Offered Rate, or LIBOR, and if volatility in LIBOR occurs, it could affect our profitability, earnings and cash flow.
LIBOR is the subject of
recent national, international and other regulatory guidance and proposals for reform. These reforms and other pressures may cause LIBOR
to be eliminated or to perform differently than in the past. The consequences of these developments cannot be entirely predicted, but
could include an increase in the cost of our variable rate indebtedness and obligations. The amounts outstanding under our $675 Million
Credit Facility have been, and amounts under additional credit facilities that we may enter in the future will generally be, advanced
at a floating rate based on LIBOR, which has been volatile in prior years, which can affect the amount of interest payable on our debt,
and which, in turn, could have an adverse effect on our earnings and cash flow. In addition, in recent years, LIBOR has been at relatively
low levels, and may rise in the future as the current low interest rate environment comes to an end. Our financial condition could be
materially adversely affected at any time that we have not entered into interest rate hedging arrangements to hedge our exposure to the
interest rates applicable to our credit facilities and any other financing arrangements we may enter into in the future. Moreover, even
if we enter into interest rate swaps, such as the floating to fixed interest rate swap transaction with Citibank N.A. entered into in
May of 2020 and effective from June 29, 2020, or other derivative instruments for purposes of managing our interest rate exposure, our
hedging strategies may not be effective and we may incur substantial losses. For more information on the interest rate swap transaction
referenced in the immediately preceding sentence, please see "Item 11. Quantitative and Qualitative Disclosures about Market Risk—Interest
Rate Risk."
Our indebtedness accrues
interest based on LIBOR, which has been historically volatile. The publication of U.S. Dollar LIBOR for the one-week and two-month U.S.
Dollar LIBOR tenors ceased on December 31, 2021, and the ICE Benchmark Administration (“IBA”),
the administrator of LIBOR, with the support of the United States Federal Reserve and the United Kingdom’s Financial Conduct Authority,
announced the publication of all other U.S. Dollar LIBOR tenors will cease on June 30, 2023. The United States Federal Reserve concurrently
issued a statement advising banks to cease issuing U.S. Dollar LIBOR instruments after 2021. As such, any new loan agreements we enter
into will not use LIBOR as an interest rate, and we will need to transition our existing loan agreements from U.S. Dollar LIBOR to an
alternative reference rate prior to June 2023.
In response to the anticipated
discontinuation of LIBOR, working groups are converging on alternative reference rates. The Alternative Reference Rate Committee, a committee
convened by the Federal Reserve that includes major market participants, has proposed an alternative rate to replace U.S. Dollar LIBOR:
the Secured Overnight Financing Rate, or “SOFR.” At this time, it is not possible to predict how markets will respond to SOFR
or other alternative reference rates. The impact of such a transition from LIBOR to SOFR or another alternative reference rate could be
significant for us. The counterparties to our derivative financial instruments have been major financial institutions, which helped us
to manage our exposure to nonperformance of our counterparties under our debt agreements. We have not entered into any derivative instruments
such as interest rate swaps since our IPO.
In order to manage our exposure
to interest rate fluctuations under LIBOR, SOFR or any other alternative rate, we have and may from time to time use interest rate derivatives
to effectively fix some of our floating rate debt obligations. No assurance can however be given that the use of these derivative instruments,
if any, may effectively protect us from adverse interest rate movements. The use of interest rate derivatives may affect our results through
mark to market valuation of these derivatives. Also, adverse movements in interest rate derivatives may require us to post cash as collateral,
which may impact our free cash position. Interest rate derivatives may also be impacted by the transition from LIBOR to SOFR or other
alternative rates. We expect our sensitivity to interest rate changes to increase in the future if we enter into additional debt agreements
in connection with our potential acquisition of other vessels from affiliated or unaffiliated third-parties.
We have previously entered
into and may selectively in the future enter into derivative contracts to hedge our overall exposure to interest rate risk exposure. Entering
into swaps and derivatives transactions is inherently risky and presents various possibilities for incurring significant expenses. The
derivatives strategies that we employ in the future may not be successful or effective, and we could, as a result, incur substantial additional
interest costs and recognize losses on such arrangements in our financial statements. Such risk may have an adverse effect on our business,
financial condition, results of operations and cash flows.
We are a non-accelerated filer, and we
cannot be certain if the reduced disclosure requirements applicable to us will make our common stock less attractive to investors.
We are currently a "non-accelerated
filer", as those terms are defined in the Securities Act. Accordingly, we take advantage of certain exemptions from various
reporting requirements that are applicable to other public companies that are not a "non-accelerated filers," in particular,
reduced disclosure obligations regarding exemptions from the provisions of Section 404(b) of the Sarbanes-Oxley Act of 2002 requiring
that independent registered public accounting firms provide an attestation report on the effectiveness of internal control over financial
reporting. Decreased disclosures in our SEC filings due to our status as a "non-accelerated filer" may make it harder for investors
to analyze our results of operations and financial prospects.
We cannot predict if investors
will find our common units less attractive if we rely on exemptions applicable to smaller reporting companies and non-accelerated filers.
If some investors find our common units less attractive as a result, there may be a less active trading market for our common units and
our share price may be more volatile.
The control of our General Partner may
be transferred to a third-party without unitholder consent.
Our General Partner may
transfer its General Partner interest to a third-party in a merger or in a sale of all or substantially all of its assets without the
consent of the unitholders. In addition, our Partnership Agreement does not prohibit the ability of the members of our General Partner
from transferring their respective membership interests in our General Partner to a third-party.
Our Sponsor and its affiliates may compete
with us.
Pursuant to the Omnibus
Agreement with our Sponsor and our General Partner, our Sponsor and its affiliates (other than us, and our subsidiaries) generally have
agreed, for the term of the Omnibus Agreement, not to acquire, own, operate or contract for any LNG carriers acquired or placed under
contracts with an initial term of four or more years. The Omnibus Agreement, however, contains significant exceptions that may allow our
Sponsor or any of its affiliates to compete with us in certain circumstances, which could harm our business. For example, our Sponsor
and its affiliates, subject to the restrictions contained in the Omnibus Agreement, could own and operate LNG carriers under charters
of four years or more that may compete with our vessels if we do not acquire such vessels when they are offered to us pursuant to the
terms of the Omnibus Agreement. See "Item 7. Major Unitholders and Related Party Transactions—B. Related Party Transactions."
Mr. Tony Lauritzen, our Chief Executive
Officer, Mr. Michael Gregos, our Chief Financial Officer, and certain other officers do not devote all of their time to our business,
which may hinder our ability to operate successfully.
Mr. Tony Lauritzen, our
Chief Executive Officer, Mr. Michael Gregos, our Chief Financial Officer, and certain other officers who perform executive officer functions
for us, are not required to work full-time on our affairs and are involved in other business activities with our Sponsor and its affiliates,
which may result in their spending less time than is appropriate or necessary to manage our business successfully. Based solely on the
anticipated relative sizes of our Fleet and the fleet owned by our Sponsor and its affiliates over the next twelve months, we estimate
that Mr. Lauritzen, Mr. Gregos, and certain other officers may spend a substantial portion of their monthly business time on our business
activities and their remaining time on the business of our Sponsor and its affiliates. However, the actual allocation of time could vary
significantly from time to time depending on various circumstances and needs of the businesses, such as the relative levels of strategic
activities of the businesses. As a result, there could be material competition for the time and effort of our officers who also provide
services to our General Partner's affiliates, which could have a material adverse effect on our business, financial condition, results
of operations and cash flows.
Unitholders have limited voting rights,
and our Partnership Agreement restricts the voting rights of our unitholders that own more than 4.9% of our common units.
Unlike the holders of common
stock in a corporation, holders of common units have only limited voting rights on matters affecting our business. On those matters that
are submitted to a vote of common unitholders, each record holder of a common unit may vote according to the holder's percentage interest
in us of all holders entitled to vote on such matter, although additional limited partners interests having special voting rights could
be issued.
Holders of the Series A
Preferred Units and Series B Preferred Units generally have no voting rights. However, holders of Series A Preferred Units and Series
B Preferred Units have limited voting rights as described under "—Voting Rights."
Except as described below
regarding a person or group owning more than 4.9% of any class or series of limited partner interests then outstanding, limited partners
on the record date will be entitled to notice of, and to vote at, meetings of our limited partners and to act upon matters for which approvals
may be solicited.
We will hold a meeting of
the limited partners every year to elect one or more members of our Board of Directors and to vote on any other matters that are properly
brought before the meeting. Any action that is required or permitted to be taken by our limited partners, or any applicable class thereof,
may be taken either at a meeting of the applicable limited partners or without a meeting if consents in writing describing the action
so taken are signed by holders of the number of limited partner interests necessary to authorize or take that action at a meeting. Meetings
of our limited partners may be called by our Board of Directors or by limited partners owning at least 20% of the outstanding limited
partner interests of the class for which a meeting is proposed. Limited partners may vote either in person or by proxy at meetings. The
holders of a majority of the outstanding limited partner interests of the class, classes or series for which a meeting has been called,
represented in person or by proxy, will constitute a quorum unless any action by the limited partners requires approval by holders of
a greater percentage of the limited partner interests, in which case the quorum will be the greater percentage.
Each record holder of a
unit may vote according to the holder's percentage interest in us, although additional limited partner interests having special voting
rights could be issued. However, to preserve our ability to be exempt from U.S. federal income tax under Section 883 of the Code, if at
any time any person or group, other than our General Partner and its affiliates, or a direct or subsequently approved transferee of our
General Partner or its affiliates or a transferee approved by the Board of Directors, acquires, in the aggregate, beneficial ownership
of more than 4.9% of any class or series of our limited partner interests then outstanding, that person or group will lose voting rights
on all of its limited partner interests of such class or series in excess of 4.9%, except for the Series A Preferred Units and Series
B Preferred Units, and such limited partner interests will not be considered to be outstanding when sending notices of a meeting of limited
partners, calculating required votes (except for nominating a person for election to our Board of Directors), determining the presence
of a quorum, or for other similar purposes. The voting rights of any such limited partner interests in excess of 4.9% will effectively
be redistributed pro rata among the other limited partner interests (as applicable) holding less than 4.9% of the voting power of such
class or series. Our General Partner, its affiliates and persons who acquired limited partner interests with the prior approval of our
Board of Directors will not be subject to this 4.9% limitation except with respect to voting their common units in the election of the
elected directors. Units held in nominee or street name account will be voted by the broker or other nominee in accordance with the instruction
of the beneficial owner unless the arrangement between the beneficial owner and his nominee provides otherwise.
Any notice, demand, request
report, or proxy material required or permitted to be given or made to record holders of common units, Series A Preferred Units or Series
B Preferred Units under the Partnership Agreement will be delivered to the record holder by us or by the transfer agent.
Our Partnership Agreement limits the duties
our General Partner and our directors and officers may have to our unitholders and restricts the remedies available to unitholders for
actions taken by our General Partner or our directors and officers.
Our Partnership Agreement
provides that our Board of Directors has the authority to oversee and direct our operations, management and policies on an exclusive basis.
The Partnership Act states that a member or manager's "duties and liabilities may be expanded or restricted by provisions in the
Partnership Agreement." As permitted by the Partnership Act, our Partnership Agreement contains provisions that reduce the standards
to which our General Partner and our directors and our officers may otherwise be held by Marshall Islands law. For example, our Partnership
Agreement:
| · | provides that our General Partner may make determinations or take or decline to take actions without regard
to our or our unitholders' interests. Our General Partner may consider only the interests and factors that it desires, and it has no duty
or obligation to give any consideration to any interest of, or factors affecting us, our affiliates or our unitholders. Decisions made
by our General Partner will be made by its sole owner. Specifically, our General Partner may decide to exercise its right to make a determination
to receive common units in exchange for resetting the target distribution levels related to the incentive distribution rights, call right,
pre-emptive rights or registration rights, consent or withhold consent to any merger or consolidation of the Partnership, appoint certain
of our directors or vote for the election of any director, vote or refrain from voting on amendments to our Partnership Agreement that
require a vote of the outstanding units, voluntarily withdraw from the Partnership, transfer (to the extent permitted under our Partnership
Agreement) or refrain from transferring its units, the general partner interest or incentive distribution rights or vote upon the dissolution
of the Partnership; |
| · | provides that our directors and officers are entitled to make other decisions in "good faith,"
meaning they reasonably believe that the decision is in our best interests; |
| · | generally provides that affiliated transactions and resolutions of conflicts of interest not approved
by the conflicts committee of our Board of Directors, or our Conflicts Committee, and not involving a vote of unitholders must be on terms
no less favorable to us than those generally being provided to or available from unrelated third-parties or be "fair and reasonable"
to us and that, in determining whether a transaction or resolution is "fair and reasonable," our Board of Directors may consider
the totality of the relationships between the parties involved,
including other transactions that may be particularly advantageous or beneficial to us; and |
| · | provides that neither our General Partner nor our officers or our directors will be liable for monetary
damages to us, our members or assignees for any acts or omissions unless there has been a final and non-appealable judgment entered by
a court of competent jurisdiction determining that our General Partner, our directors or officers or those other persons engaged in actual
fraud or willful misconduct. |
In order to become a member
of our Partnership, a common unitholder is required to agree to be bound by the provisions in the Partnership Agreement, including the
provisions discussed above.
Fees and cost reimbursements, which our
Manager will determine for services provided to us, will be substantial, will be payable regardless of our profitability and will reduce
our cash available for distribution to our unitholders.
Our Manager, which is wholly-owned
by Mr. Georgios Prokopiou, is responsible for the commercial and technical management of the vessels in our Fleet pursuant to a Master
Agreement (as defined in "Item 7. Major Unitholders and Related Party Transactions—B. Related Party Transactions—Vessel
Management"). We currently pay our Manager a fee of $2,833 per day for each vessel for providing our vessel owning subsidiaries with
technical, commercial, insurance, accounting, financing, provisions, crewing and bunkering services. In addition, we pay our Manager a
commercial management fee equal to 1.25% of the gross charter hire and the ballast bonus, which is the amount paid to the shipowner as
compensation for all or part of the cost of positioning the vessel to the port where the vessel will be delivered to the charterer. We
incurred an aggregate expense of approximately $7.7 million in connection with the commercial and technical management of our Fleet for
the year ended December 31, 2021.The management fee increases by 3% annually unless otherwise agreed, between us, with approval of our
Conflicts Committee, and our Manager. The management fees payable for the vessels may be further increased if our Manager has incurred
material unforeseen costs of providing the management services, by an amount to be agreed between us and our Manager, which amount will
be reviewed and approved by our Conflicts Committee.
We have further entered
into an executive services agreement, or the Executive Services Agreement, on March 21, 2014, with retroactive effect to the date of the
closing of our IPO, with our Manager, 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, which expired in November 2018 but was automatically renewed for a successive five year term
(unless terminated earlier), payable in equal monthly installments. After the expiration of the firm period, the Executive Services Agreement
will automatically be renewed for successive five year terms unless terminated earlier. As of December 31, 2021, we incurred approximately
$0.6 million in connection with this agreement.
Pursuant to an administrative
services agreement, or the Administrative Services Agreement, that we entered into on December 30, 2014 and with effect from the date
of the closing of our IPO, our Manager also provides us with certain administrative and support services (including certain financial,
accounting, reporting, secretarial and information technology services) for which we currently pay a monthly fee of $10,000, plus all
related costs and expenses, payable in quarterly installments. As of December 31, 2021, we incurred $0.1 million in connection with this
agreement.
For a description of our
Management Agreements, Executive Services Agreement and Administrative Services Agreement, see "Item 7. Major Unitholders and Related
Party Transactions—B. Related Party Transactions." The fees and expenses payable pursuant to the Management Agreements, Executive
Services Agreement and the Administrative Services Agreement will be payable without regard to our financial condition or results of operations.
The payment of such fees could adversely affect our ability to pay cash distributions to our unitholders.
Our Partnership Agreement contains
provisions that may have the effect of discouraging a person or group from attempting to remove our current management or our
General Partner and even if public unitholders are dissatisfied, they will be unable to remove our General Partner without our
Sponsor's consent, unless our Sponsor's ownership interest in us is decreased; all of which could diminish the trading price of our
common units.
Our Partnership Agreement
contains provisions that may have the effect of discouraging a person or group from attempting to remove our current management or our
General Partner.
| · | The unitholders are unable to remove our General Partner without its consent because our General Partner
and its affiliates, including our Sponsor, own sufficient units to be able to prevent its removal. The vote of the holders of at least
66 2/3% of all outstanding common units (including common units held by the General Partner and its Affiliates) voting together as a single
class is required to remove our General Partner. Our Sponsor currently owns 15,595,000 of our common units, representing approximately
of the outstanding common units. |
| · | Our Partnership Agreement contains provisions that limit the removal of members of our Board of Directors.
Appointed Directors may be removed (i) without Cause (as defined in the Partnership Agreement) only by the General Partner and (ii) with
Cause only by the General Partner, the vote of the holders of a majority of the outstanding units at a properly called meeting of our
Limited Partners, or by vote of the majority of the other members of our Board of Directors. Elected Directors may be removed with Cause
only by vote of the majority of the other members of our Board of Directors or by a vote of the majority of the outstanding common units
at a properly called meeting of our Limited Partners. |
| · | Common unitholders are entitled to elect only three of the five members of our Board of Directors. Our
General Partner in its sole discretion appoints the remaining two directors. |
| · | Election of the three directors elected by unitholders is staggered, meaning that the members of only
one of three classes of our elected directors are selected each year. In addition, the two directors appointed by our General Partner
serve until a successor is duly appointed by the General Partner. |
| · | Our Partnership Agreement contains provisions limiting the ability of unitholders to call meetings of
unitholders, to nominate directors and to acquire information about our operations as well as other provisions limiting the unitholders'
ability to influence the manner or direction of management. |
| · | Unitholders' voting rights are further restricted by the Partnership Agreement providing that if at any
time any person or group, other than our General Partner and its affiliates, or a direct or subsequently approved transferee of our General
Partner or its affiliates or a transferee approved by the Board of Directors, acquires, in the aggregate, beneficial ownership of more
than 4.9% of any class or series of our limited partner interests then outstanding, that person or group will lose voting rights on all
of its limited partner interests of such class or series in excess of 4.9%, except for the Series A Preferred Units and Series B Preferred
Units, and such limited partner interests will not be considered to be outstanding when sending notices of a meeting of limited partners,
calculating required votes (except for nominating a person for election to our Board of Directors), determining the presence of a quorum,
or for other similar purposes. The voting rights of any such limited partner interests in excess of 4.9% will effectively be redistributed
pro rata among the other limited partner interests (as applicable) holding less than 4.9% of the voting power of such class or series.
Our General Partner, its affiliates and persons who acquired limited partner interests with the prior approval of our Board of Directors
will not be subject to this 4.9% limitation except with respect to voting their common units in the election of the elected directors.
Units held in nominee or street name account will be voted by the broker or other nominee in accordance with the instruction of the beneficial
owner unless the arrangement between the beneficial owner and his nominee provides otherwise. |
| · | There are no restrictions in our Partnership Agreement on our ability to issue additional equity securities. |
The effect of these provisions
may be to diminish the price at which the common units will trade.
You may not have limited liability if
a court finds that unitholder action constitutes control of our business.
As a limited partner in
a partnership organized under the laws of the Marshall Islands, you could be held liable for our obligations to the same extent as a General
Partner if you participate in the "control" of our business. Our General Partner generally has unlimited liability for the obligations
of the Partnership, such as its debts and environmental liabilities, except for those contractual obligations of the Partnership that
are expressly made without recourse to our General Partner, including as set forth in the Partnership Agreement. In addition, the limitations
on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established
in some jurisdictions in which we do business.
We can borrow money to pay distributions,
which would reduce the amount of credit available to be used in connection with the operation of our business.
Our Partnership Agreement
allows us to make working capital borrowings to pay distributions. Accordingly, if we have available borrowing capacity and we are permitted
to make distributions under our debt and other agreements, we can make distributions on all our units even though cash generated by our
operations may not be sufficient to pay such distributions. Any working capital borrowings by us to make distributions will reduce the
amount of working capital borrowings we can make for operating our business. For more information, see "Item 5. Operating and Financial
Review and Prospects."
We are dependent on our affiliated Manager
for the management of our Fleet and for the provision of executive management and financial support services.
We subcontract the commercial
and technical management of our Fleet, including crewing, maintenance and repair pursuant to the Management Agreements, with our affiliated
Manager for the commercial and technical management of our Fleet. The loss of our Manager's services or its failure to perform its obligations
to us could materially and adversely affect the results of our operations. In addition, our Manager provides us with significant management,
administrative, executive, financial and other support services.
In addition, our ability
to enter into new charters and expand our customer relationships depends largely on our ability to leverage our relationship with our
Manager and its reputation and relationships in the shipping industry. If our Manager suffers material damage to its reputation or relationships,
it may harm our ability to:
| · | renew existing charters upon their expiration; |
| · | successfully interact with shipyards; |
| · | obtain financing on commercially acceptable terms; |
| · | maintain access to capital under the Sponsor credit facility; or |
| · | maintain satisfactory relationships with suppliers and other third-parties. |
Our business will be harmed
if our Manager fails to perform these services satisfactorily, if they cancel their agreements with us or if they stop providing these
services to us. Our operational success and ability to execute our growth strategy will depend significantly upon the satisfactory performance
of these services by our Manager and the reputation of our Manager.
Our current time charters and our $675
Million Credit Facility prevent us from changing our Manager.
Our ability to change the
Manager of the vessels in our Fleet to another affiliated or third-party manager, is prohibited, without prior written consent, by provisions
in our current time charters, the terms of our $675 Million Credit Facility and the Manager's Undertaking delivered by the Manager
in connection with the $675 Million Credit Facility. In addition, we cannot assure
you that future debt agreements or time charter contracts with our existing or new lenders or charterers, respectively, will not contain
similar provisions.
Since our Manager is a privately held company
and there is little or no publicly available information about it, an investor could have little advance warning of potential financial
and other problems that might affect our Manager that could have a material adverse effect on us.
The ability of our Manager
to continue providing services for our benefit will depend in part on its own financial strength. Circumstances beyond our control could
impair our Manager's financial strength, and because it is privately held, it is unlikely that information about its financial strength
would become public unless our Manager began to default on its obligations. As a result, an investor in our units might have little advance
warning of problems affecting our Manager, even though these problems could have a material adverse effect on us.
Our Manager may be unable to attract,
provide and retain key management personnel, which may negatively impact the effectiveness of our management and our results of operation.
Our success depends to a
significant extent upon the abilities and the efforts of our executive officers, whose services are provided to us by our Manager pursuant
to an Executive Services Agreement. While we believe that we have an experienced management team, the loss or unavailability of one or
more of our senior executives for any extended period of time could have an adverse effect on our business and results of operations.
A shortage of qualified officers and crew
could have an adverse effect on our business and financial condition.
LNG carriers require a technically
skilled officer staff with specialized training. As the world LNG carrier fleet continues to grow, the demand for technically skilled
officers and crew has been increasing. If we or our third-party vessel Manager is unable to employ technically skilled staff and crew,
we will not be able to adequately staff our vessels. A material decrease in the supply of technically skilled officers or an inability
of our Manager to attract and retain such qualified officers could impair our ability to operate, or increase the cost of crewing our
vessels, which would materially adversely affect our business, financial condition and results of operations and significantly reduce
our ability to pay quarterly distributions to our common and preferred unitholders.
We are a holding company, and our ability
to make cash distributions to our unitholders will be limited by the value of investments we currently hold and by the distribution of
funds from our subsidiaries.
We are a holding company
whose assets mainly consist of equity interests in our subsidiaries. As a result, our ability to make cash distributions to our unitholders
will depend on the performance of our operating subsidiaries. If we are not able to receive sufficient funds from our subsidiaries, we
will not be able to pay distributions unless we obtain funds from other sources. We may not be able to obtain the necessary funds from
other sources on terms acceptable to us.
Due to our lack of diversification, adverse
developments in our LNG shipping business could reduce our ability to make distributions to our unitholders.
We rely exclusively on the
cash flow generated from our LNG carriers. Due to our lack of diversification, an adverse development in the LNG shipping industry could
have a significantly greater impact on our financial condition and results of operations than if we maintained more diverse assets or
lines of businesses.
If we are unable to acquire
LNG vessels from our Sponsor or other third parties, we may explore opportunities to expand into other shipping sectors.
As of the date of this annual
report, all of our remaining options under the Omnibus Agreement to acquire interests in our Sponsor’s existing vessels have expired
unexercised.
Pursuant to the Omnibus
Agreement entered into among us, our Sponsor and our General Partner, we continue to have the right, but not the obligation, to purchase
from our Sponsor any LNG carriers acquired or placed under contracts with an initial term of four
or more years, for so long as the Omnibus Agreement is in full force and effect. To the extent we seek and are unable to successfully
negotiate acquisitions of LNG vessels from our Sponsor or other third parties, we may seek to expand into other sectors of the shipping
industry.
Additionally, we continuously
evaluate potential transactions that we believe will be accretive to earnings, enhance unitholder value or are in the best interests
of the Partnership. These transactions may include pursuing business combinations; acquiring vessels or related businesses (or otherwise
expanding our operations), including in sectors outside of the LNG shipping sector (such as, the oil tanker sector); repaying existing
debt; repurchasing of our units; and undertaking short term investments and other transactions.
If we are unable to undertake
such transactions on acceptable terms, or at all, we may be unable to implement our business strategy, which would have a material adverse
effect on our financial condition and results of operations and impair our ability to service our indebtedness.
We may experience operational problems
with vessels that reduce revenue and increase costs.
LNG carriers are complex
and their operation is technically challenging. Marine transportation operations are subject to mechanical risks and problems, including,
among others, business interruptions caused by mechanical failure, human error, war, terrorism, disease (such as the ongoing COVID-19
pandemic) and quarantine, or political action in various countries. Operational problems may lead to loss of revenue or higher than anticipated
operating expenses or require additional capital expenditures. Any of these results could harm our business, financial condition, results
of operations and ability to make cash distributions to our unitholders.
Actions taken by our Board of Directors
may have a material adverse effect on the amount of cash available for distribution to unitholders.
The amount of cash that
is available for distribution to unitholders is affected by decisions of our Board of Directors regarding such matters as:
| · | the amount and timing of asset purchases and sales; |
| · | estimates of maintenance and replacement capital expenditures; |
| · | the issuance of additional units; and |
| · | the creation, reduction or increase of reserves in any quarter. |
In addition, borrowings
by us and our affiliates do not constitute a breach of any duty owed by our General Partner or our directors to our unitholders, including
borrowings that have the purpose or effect of enabling our General Partner or its affiliates to receive distributions or incentive distribution
rights.
Our Partnership Agreement
provides that we and our subsidiaries may borrow funds from our General Partner and its affiliates. However, our General Partner and its
affiliates may not borrow funds from us or our subsidiaries. We are currently unable to pay distributions to our common unit holders
due to restrictions in our $675 Million Credit Facility.
Risks Relating to Our Industry
Our future growth and performance depends
on continued growth in LNG production and demand for LNG and LNG shipping.
A complete LNG project includes
production, liquefaction, storage, regasification and distribution facilities, in addition to the marine transportation of LNG. Increased
infrastructure investment has led to an expansion of LNG production capacity in recent years, but material delays in the construction
of new liquefaction facilities could constrain the amount of LNG available for shipping, reducing vessel utilization. While global LNG
demand has continued to rise, it has risen at a slower pace than previously predicted and the rate of its growth has fluctuated due to
several factors, including the current global economic crisis and continued economic uncertainty, fluctuations in the price of natural
gas and other sources of energy, the continued acceleration in natural gas production from unconventional sources in regions such as North
America and the highly complex and capital intensive nature of new or expanded LNG projects, including liquefaction projects. Continued
growth in LNG production and demand for LNG and LNG shipping could be negatively affected by a number of factors, including, without limitation:
| · | increases in interest rates or other events that may affect the availability of sufficient financing for
LNG projects on commercially reasonable terms; |
| · | increases in the cost of natural gas derived from LNG relative to the cost of natural gas generally; |
| · | increases in the production levels of low-cost natural gas in domestic natural gas consuming markets,
which could further depress prices for natural gas in those markets and make LNG uneconomical; |
| · | increases in the production of natural gas in areas linked by pipelines to consuming areas, the extension
of existing, or the development of new pipeline systems in markets we may serve, or the conversion of existing non-natural gas pipelines
to natural gas pipelines in those markets; |
| · | decreases in the consumption of natural gas due to increases in its price, decreases in the price of alternative
energy sources or other factors making consumption of natural gas less attractive; |
| · | changes in governmental and maritime self-regulatory organizations’ rules and regulations or actions
taken by regulatory authorities; |
| · | environmental concerns and uncertainty around new regulations in relation to, amongst others, new technologies
which may delay the ordering of new vessels; |
| · | any significant explosion, spill or other incident involving an LNG facility or carrier; |
| · | infrastructure constraints, including but not limited to, delays in the construction of liquefaction facilities,
the inability of project owners or operators to obtain governmental approvals to construct or operate LNG facilities, as well as community
or political action group resistance to new LNG infrastructure due to concerns about the environment, safety and terrorism; |
| · | labor or political unrest or military conflicts affecting existing or proposed areas of LNG production
or regasification; |
| · | concerns regarding pandemics, such as the COVID-19 outbreak, other diseases and viruses, safety and terrorism; |
| · | decreases in the price of LNG, which might decrease the expected returns relating to investments in LNG
projects; |
| · | new taxes or regulations affecting LNG production or liquefaction that make LNG production less attractive;
or |
| · | negative global or regional economic or political conditions, including the economic downturn caused by
the spread of the novel COVID-19 virus, particularly in LNG consuming regions, which could reduce energy consumption or its growth. |
Reduced demand for LNG and
LNG shipping or any reduction or limitation in LNG production capacity, could have a material adverse effect on our ability to secure
future multi-year time charters upon expiration or early termination of our current charter arrangements, or for any new ships we acquire,
which could harm our business, financial condition, results of operations and cash flows, including cash available for distribution to
our unitholders.
Fluctuations in overall LNG demand growth
could adversely affect our ability to secure future time charters.
According
to Drewry Shipping Consultants Ltd., or Drewry, LNG trade has increased during 2016 and 2021. While India and China were main drivers
of LNG trade during 2016-18, Europe played a dominant role in 2019. China's LNG import growth rate declined 14.8% year over year to 61.9
million tons in 2019. Previously, China's LNG import grew 46.1% year over year in 2017 and 41.1% in 2018. In 2019, France's LNG imports
more than doubled to 16 million tons, compared to 2018. Spain's LNG imports grew 61.0% year over year in 2019 to 16.1 million tons. In
2019, LNG trade grew by 11.5% year over year to 349 million tons. However, demand from the key Asian importers, Japan and South Korea
declined in 2019 as a change in priorities has marked a shift back to nuclear energy and increased focus on renewables. In 2020, the coronavirus
(COVID-19) outbreak had an adverse impact on LNG trade as many economies imposed lockdown. Global LNG trade grew at only 0.7% year over
year in 2020 compared to 13.3% year over year in 2019 and 7.8% year over year in 2018. Following slump in LNG demand in Asian countries,
many U.S. cargos were cancelled. Global LNG trade grew 6.5% year over year in 2021 mainly driven by recovery in global economy and higher
LNG demand. LNG demand has risen in 2021 due to a prolonged winter season wiping out storage and increased LNG use for power generation
amid emission reduction targets.
Volatile natural gas and oil prices
may adversely affect our growth prospects and results of operations.
Natural gas prices are volatile
in certain geographic areas. Natural gas prices are affected by numerous factors
beyond our control, including but not limited to the following:
| · | price and availability of crude oil and petroleum products; |
| · | worldwide and regional supply of, demand for and price of natural gas; |
| · | the costs of exploration, development, production, transportation and distribution of natural gas; |
| · | expectations regarding future energy prices for both natural gas and other sources of energy, including
renewable energy sources; |
| · | the level of worldwide LNG production and exports; |
| · | government laws and regulations, including but not limited to environmental protection laws and regulations; |
| · | local and international political, economic and weather conditions, including an economic downturn caused
by the spread of the novel COVID-19 virus; |
| · | political and military conflicts including the conflicts between Russia and Ukraine; and |
| · | the availability and cost of alternative energy sources, including alternate sources of natural gas in
gas importing and consuming countries as well as alternate sources of primary energy such as renewables. |
| · | due in part to COVID-19 outbreak as well as actions by OPEC members and other oil producing
countries, energy prices declined significantly during 2020. If the energy price environment remains low for a prolonged period of
time, this could materially and adversely affect our business. In April 2020, oil, natural gas and LNG prices reached their lowest
levels since 2002. Although energy prices recovered in the last quarter of 2020 from such lows, demand for energy remains below
levels before the pandemic. LNG prices rose in 2021 on account of robust LNG demand from Europe. A continuation of current low
natural gas and LNG prices could negatively affect us in a number of ways, including the following a reduction in exploration for or
development of new natural gas reserves or projects, or the delay or cancellation of existing projects as energy companies lower
their capital expenditures budgets, which may reduce our growth opportunities; |
| · | low oil prices negatively affecting the market price of natural gas, to the extent that natural gas prices
are benchmarked to the price of crude oil, in turn negatively affecting the economics of potential new LNG production projects, which
may reduce our growth opportunities; |
| · | high oil prices negatively affecting the competitiveness of natural gas to the extent that natural gas
prices are benchmarked to the price of crude oil; |
| · | low gas prices globally and/or weak differentials between prices in the Atlantic Basin and the Pacific
Basin leading to reduced inter-basin trading of LNG and reduced demand for LNG shipping; |
| · | lower demand for vessels of the types we own and operate, which may reduce available charter rates and
revenue to us upon redeployment of our vessels following expiration or termination of existing contracts or upon the initial chartering
of vessels; |
| · | customers potentially seeking to renegotiate or terminate existing vessel contracts, or failing to extend
or renew contracts upon expiration; |
| · | the inability or refusal of customers to make charter payments to us due to financial constraints or otherwise;
or |
| · | declines in vessel values, which may result in losses to us upon vessel sales or impairment charges against
our earnings and could impact our compliance with the covenants in our loan agreements. |
We may have more difficulty entering into
multi-year time charters in the future if an active spot LNG shipping market continues to develop.
One of our principal strategies
is to enter into additional LNG carrier long-term time charters. Most shipping requirements for new LNG projects continue to be provided
on a multi-year basis, although the level of spot voyages and time charters of less than 24 months in duration has grown in the past few
years. If an active spot market continues to develop, we may have increased difficulty entering into multi-year time charters upon expiration
or early termination of our current charters or for any vessels that we acquire in the future and, as a result, our cash flow may be less
stable. In addition, an active spot LNG market may require us to enter into charters based on changing market prices, as opposed to contracts
based on a fixed rate, which could result in a decrease in our cash flow in periods when the market price for shipping LNG is depressed
which may lead to insufficient funds to cover our financing and other costs for our vessels.
Hire rates for LNG carriers may fluctuate
substantially. If rates are lower when we are seeking a new charter, our revenues and cash flows may decline.
Our ability, from time to
time, to charter or re-charter any vessel at favorable rates will depend on, among other things, the prevailing economic conditions in
the LNG industry. Hire rates for LNG carriers may fluctuate over time as a result of changes in the supply-demand balance relating to
current and future vessel capacity. This supply-demand relationship largely depends on a number
of factors outside our control.
The LNG charter market is connected to world natural gas prices and energy markets, which we cannot predict.
A substantial or extended decline in demand for natural gas or LNG, including due to effects caused by the spread of the novel COVID-19
virus, could adversely affect our ability to charter or re-charter our vessels at acceptable rates or to acquire and profitably operate
new vessels. Hire rates for newbuildings are correlated with the price of newbuildings. Hire rates, at a time when we may be seeking new
charters, may be lower than the hire rates at which our vessels are currently chartered. If hire rates are lower when we are seeking a
new charter, our revenues and cash flows, including cash available for distributions to our unitholders, may substantially decline, as
we may only be able to enter into new charters at reduced or unprofitable rates or we may have to secure a charter in the spot market,
where hire rates are more volatile. Prolonged periods of low charter hire rates or low vessel utilization could also have a material adverse
effect on the value of our assets.
Vessel values may fluctuate substantially
and, if these values are lower at a time when we are attempting to dispose of vessels, we may incur a loss.
Factors that influence vessel
values include:
| · | prevailing economic conditions in the natural gas and energy markets; |
| · | a substantial or extended decline in demand for LNG; |
| · | increases in the supply of vessel capacity; |
| · | the size and age of a vessel; and |
| · | the cost of retrofitting or modifying secondhand vessels, if possible, as a result of technological advances
in vessel design or equipment, changes in applicable environmental or other regulations or standards, customer requirements or otherwise. |
As our vessels age, the
expenses associated with maintaining and operating them are expected to increase, which could have a material adverse effect on our business
and operations if we do not maintain sufficient cash reserves for maintenance and replacement capital expenditures. Moreover, the cost
of a replacement vessel are likely significant. If a charter terminates, we may be unable to re-deploy the affected vessels at favorable
rates and, rather than continue to incur costs to maintain and finance them, we may seek to dispose of them. A sustained decline in charter
rates and employment opportunities could adversely affect the market value of our vessels, on which certain of the ratios and financial
covenants with which we are required to comply are based. A significant decline in the market value of our vessels could impact
our compliance with the covenants in our loan agreements. Our inability to dispose of vessels at a reasonable value could result in a
loss on their sale and adversely affect our ability to purchase a replacement vessel. Our inability to dispose of vessels at a reasonable
value could also adversely affect our results of operations, financial condition and our ability to pay distributions at all to our unitholders.
An oversupply of ships or delays or abandonment
of planned projects may lead to a reduction in the charter hire rates we are able to obtain when seeking charters in the future.
According
to Drewry, during the period from 2011 to February 2022, the global fleet of LNG carriers grew from 360 to 650 vessels due to the construction
and delivery of new LNG carriers and low levels of vessel demolitions. Only 32 LNG carriers, representing 4.9% of the LNG vessels currently
in service, have an Ice Class 1A and Ice-class 1A super designation or equivalent rating, according to Drewry.
Although
the global newbuilding orderbook dropped sharply in 2008, 2009 and 2010, ordering activity increased in 2011 and 2012 in light of Fukushima
nuclear disaster. According to Drewry, a total of 56 LNG carrier newbuilding orders were placed in 2011 and 34 in 2012. In 2013 and 2014
ordering activity remained firm and a total of 100 newbuild orders were placed. New orders declined in 2015 to 32, followed by only 7
new orders placed in 2016. In 2017, 14 new LNG orders were placed, however; in 2018 low newbuilding prices and high charter rates attracted
investment in the LNG market and 76 LNG carriers (which includes LNG bunkering and small scale LNG carriers) were ordered during the year.
Strong new order momentum continued in 2019 with 61 LNG carriers ordered in 2019. In 2020, 55 LNG vessels were ordered.
Qatari LNG newbuild berth reservation and quicker than expected recovery in LNG trade prompted companies to secure new vessels before
newbuilding prices strengthen. As of February 28, 2022, the newbuilding orderbook consisted of vessels with a combined capacity of 31.7
million cbm, equivalent to 32.6% of the current global LNG carrier fleet capacity, according to Drewry. The delivery of these newbuildings
will be spread out between 2022 and 2026.
According
to Drewry, as of February 28, 2022, there were 52 LNG carriers in the size range of 149,000-155,000 cbm in the LNG trading fleet, of
which 45 have membrane cargo containment system. There are no LNG carriers in the same size segment on orderbook, which have moss spherical
containment system.
Increasing scrutiny
and changing expectations from investors, lenders and other market participants with respect to our Environmental, Social and Governance
("ESG") policies may impose additional costs on us or expose us to additional risks.
Companies across all industries
are facing increasing scrutiny relating to their ESG policies. Investor advocacy groups, certain institutional investors, investment funds,
lenders and other market participants are increasingly focused on ESG practices and in recent years have focused on the implications and
social cost of their investments. Unitholder proposals submitted on environmental matters and, in particular, climate-related proposals
have increased for the second consecutive year and those submitted environmental proposals that did go to a vote received greater shareholder
support than previous years. The increased attention and activism related to ESG and similar matters may hinder access to capital,
as investors and lenders may decide to reallocate capital or to not commit capital as a result of their assessment of a company's ESG
practices. Companies which do not adapt to or comply with investor, lender or other industry shareholder expectations and standards, which
are evolving, or which are perceived to have not responded appropriately to the growing concern for ESG issues, regardless of whether
there is a legal requirement to do so, may suffer from reputational damage, cost related to litigation, and the business, financial condition,
and/or stock price of such a company could be materially and adversely affected.
We may face increasing pressures
from investors, lenders and other market participants, who are increasingly focused on climate change, to prioritize sustainable energy
practices, reduce our carbon footprint and promote sustainability. As a result, we may be required to implement more stringent ESG procedures
or standards so that our existing and future investors and lenders remain invested in us and make further investments in us, especially
given the highly focused and specific trade of crude oil transportation in which we are engaged. Such ESG corporate transformation calls
for an increased resource allocation to serve the necessary changes in that sector, increasing costs and capital expenditure. If we do
not meet these standards, our business and/or our ability to access capital could be harmed.
Additionally, certain investors
and lenders may exclude LNG transport companies, such as us, from their investing portfolios altogether due to environmental, social and
governance factors. These limitations in both the debt and equity capital markets may affect our ability to grow as our plans for
growth may include accessing the equity and debt capital markets. If those markets are unavailable, or if we are unable to access
alternative means of financing on acceptable terms, or at all, we may be unable to implement our business strategy, which would have a
material adverse effect on our financial condition and results of operations and impair our ability to service our indebtedness. Further,
it is likely that we will incur additional costs and require additional resources to monitor, report and comply with wide ranging ESG
requirements. The occurrence of any of the foregoing could have a material adverse effect on our business and financial condition.
Further technological advancements and
other innovations affecting LNG carriers could reduce the charter hire rates we are able to obtain when seeking new employment and this
could adversely impact the value of our assets and our future financial performance.
The charter rates,
asset value and operational life of an LNG carrier are determined by a number of factors, including but not limited to, the vessel's
efficiency, operational flexibility and physical life. Efficiency includes speed and fuel economy. Flexibility includes the ability
to enter harbors, utilize related docking facilities and pass through canals and straits. Physical life is related to the original
design and construction, the ongoing maintenance and the impact of operational stresses on the asset. If more advanced ship designs
are developed in the future and new ships are built that are more efficient, more flexible or have longer physical lives than our
Fleet, competition from these more technologically advanced LNG carriers
could adversely affect the charter hire rates we will be able to secure when we seek to re-charter our vessels upon expiration or early
termination of our current charter arrangements. Such an adverse impact could also reduce the resale value of our vessels and adversely
affect our revenues and cash flows, including any cash available for distributions to our unitholders.
If we cannot meet our charterers' quality
and compliance requirements, we may not be able to operate our vessels profitably which could have an adverse effect on our future financial
performance.
Customers, and in particular
those in the LNG industry, have a high and increasing focus on quality and compliance standards with their suppliers across the entire
value chain, including the shipping and transportation segment. Our continuous compliance with these standards and quality requirements
is vital for our operations. Related risks could materialize in multiple ways, including a sudden and unexpected breach in quality and/or
compliance concerning one or more vessels, and/or a continuous decrease in the quality concerning one or more LNG carriers occurring over
time. Moreover, continuous, modified and increasing requirements and standards from LNG industry constituents may further complicate our
ability to meet such requirements and standards. Any noncompliance by the Partnership, either suddenly or over a period of time, on one
or more LNG carriers, or an increase or modification in requirements by our charterers above and beyond what we deliver, may have a material
adverse effect on our future performance, results of operations, cash flows, financial position and our ability to make distributions
to our unitholders.
Exposure to currency exchange rate fluctuations
will result in fluctuations in our cash flows and operating results.
Historically, our revenue
has been generated in U.S. Dollars, but we incur capital, operating and administrative expenses in multiple currencies, including, among
others, the Euro. If the U.S. Dollar weakens significantly, we would be required to convert more U.S. Dollars to other currencies to satisfy
our obligations, which may cause us to have less or no cash available for distribution to our unitholders. Because we report our operating
results in U.S. Dollars, changes in the value of the U.S. Dollar may also result in fluctuations in our reported revenues and earnings.
In addition, under U.S. GAAP, all foreign currency-denominated monetary assets and liabilities, such as cash and accounts payable, are
revalued and reported based on the prevailing exchange rate at the end of the reporting period. This revaluation may cause us to report
significant non-monetary foreign currency exchange gains and losses in certain periods.
An increase in operating expenses, dry-docking
costs, bunker costs and/or other capital expenses could materially and adversely affect our financial performance.
Our operating expenses and
dry-dock capital expenditures depend on a variety of factors including crew costs, provisions, deck and engine stores and spares, lubricating
oil, insurance, maintenance and repairs and shipyard costs, many of which are beyond our control and may affect the entire shipping industry.
Also, while we do not bear the cost of fuel (bunkers) under our time charters, fuel is a significant expense in our operations when our
vessels are, for example, moving to or from dry-dock or when off-hire. The price and supply of fuel are unpredictable and fluctuate based
on events and factors outside our control, including geopolitical developments (such as the ongoing military conflict between Russia and
the Ukraine), supply and demand for oil and gas, actions by the Organization of the Petroleum Exporting Countries, or OPEC, and other
oil and gas producers, war and unrest in oil-producing countries and regions, political instability, regional production patterns and
environmental concerns. These events and factors may increase vessel operating and dry-docking costs further, which could materially and
adversely affect our future performance, results of operations, cash flows, financial position and our ability to make distributions to
our unitholders.
In addition, capital expenditures
and other costs necessary for maintaining a vessel in good operating condition generally increase as the vessel ages. Accordingly, it
is likely that the operating costs of our vessels and capital expenditures required will increase in the future, which will have a direct
impact on our future performance, results of operations, cash flows, financial position and our ability to make distributions to our unitholders.
The operation of LNG carriers is inherently
risky and an incident involving significant loss of or environmental consequences involving any of our vessels could harm our reputation
and business.
Our vessels and their respective
cargoes are at risk of being damaged or lost because of events and factors that include but are not limited to:
| · | environmental accidents and hazards; |
| · | grounding, fire, explosions and collisions; |
| · | political unrest, war, including the recent conflicts between Russia and Ukraine, and terrorism. |
An accident involving any
of our vessels could result in any of the following:
| · | death or injury to persons, loss of property or environmental damage; |
| · | delays or failure in the delivery of cargo; |
| · | loss of revenues from or termination of charter contracts; |
| · | governmental fines, penalties or restrictions on conducting business; |
| · | spills, pollution and the liability associated with the same; |
| · | higher insurance rates; and |
| · | damage to our reputation and customer relationships generally. |
Any of these events could
result in a material adverse effect on our future performance, results of operations, cash flows, financial position and our ability to
make distributions to our unitholders. If our vessels suffer damage, they may need to be repaired. The costs of vessel repairs are unpredictable
and can be substantial. We may have to pay repair costs that our insurance policies do not cover. The loss of earnings while these vessels
are being repaired, as well as the actual cost of these repairs, would decrease or materially and adversely impact our results of operations.
If any of our vessels is involved in an accident with the potential risk of environmental consequences, the resulting media coverage may
also have a material adverse effect on our business, results of operations and cash flows, which in turn could weaken our financial condition
and materially and adversely affect our ability to pay distributions to our unitholders.
Our insurance may be insufficient to cover
losses that may occur to our property or result from our operations.
The operation of LNG carriers
is inherently risky. Although we carry protection and indemnity insurance consistent with industry standards, all of our potential risks
may not be adequately insured against, and any particular claim may not be paid or covered. Any claims covered by insurance would be subject
to deductibles, and since it is possible that a large number of claims may be brought, the aggregate amount of these deductibles could
be material.
Certain of our insurance coverage is maintained
through mutual protection and indemnity associations, and as a member of such associations, we may be required to make additional payments
over and above budgeted premiums if member claims exceed association reserves. We may be unable to procure adequate insurance coverage
at commercially reasonable rates in the future. For example, more stringent and increasing environmental regulations have led to increased
insurance costs, and in the future, may result in the lack of availability of, insurance against risks of marine disasters, environmental
damage or pollution. A marine disaster could exceed our insurance coverage, which could harm our business, financial condition and operating
results. Any uninsured or underinsured loss could harm our business and financial condition. In addition, our insurance may be voidable
by the insurers as a result of certain of our actions, such as our vessels failure to maintain their respective certifications with applicable
maritime self-regulatory organizations.
Changes in the insurance
markets attributable to terrorist attacks may also make certain types of insurance more difficult for us to obtain. In addition, upon
renewal or expiration of our current policies, the insurance that may be available to us may be significantly more expensive or limited
than our existing coverage.
Our vessels may suffer damage and we may
face unexpected costs and off-hire days.
In the event of damage to
our owned vessels, the damaged vessel would be off-hire while it is being repaired, which would decrease our revenues and cash flows,
including cash available for distributions to our unitholders. In addition, the costs of vessel repairs are unpredictable and can be substantial.
In the event of repair costs that are not covered, whether in whole or in part, by our insurance policies, we may have to pay such repair
costs, which would decrease our earnings and cash flows.
Volatile economic conditions may adversely
impact our ability to obtain financing or refinance our future credit facilities on acceptable terms, which may hinder or prevent us from
operating or expanding our business.
Global financial markets
and economic conditions have been, and continue to be, unstable and volatile. Beginning in February 2020, due in part to fears associated
with the spread of COVID-19 (as more fully described below), global financial markets experienced extreme volatility and a steep and abrupt
downturn followed by a recovery, which volatility may continue as the COVID-19 pandemic continues and as certain geopolitical events develop,
such as the ongoing conflict between Russia and Ukraine. Such instability and volatility have negatively affected the general willingness
of banks, other financial institutions and lenders to extend credit, particularly in the shipping industry, due to the historically volatile
asset values of vessels. Credit markets and the debt and equity capital markets have been distressed and the uncertainty surrounding the
future of the global credit markets has resulted in reduced access to credit worldwide. These issues, along with significant write-offs
in the financial services sector, the re-pricing of credit risk and the uncertain economic conditions, have made, and may continue to
make, it difficult to obtain additional financing. The current state of global financial markets and current economic conditions
might adversely impact our ability to issue additional equity at prices that will not be dilutive to our existing unitholders or preclude
us from issuing equity at all. Economic conditions may also adversely affect the market price of our common units.
Beginning in February
of 2022, President Biden and several European leaders announced various economic sanctions against Russia in connection with the
aforementioned conflicts in the Ukraine region, which may adversely impact our business. Our business could also be adversely
impacted by trade tariffs, trade embargoes or other economic sanctions that limit trading activities by the United States or other
countries against countries in the Middle East, Asia or elsewhere as a result of terrorist attacks, hostilities or diplomatic or
political pressures. On March 8, 2022, President Biden issued an executive order prohibiting the import of certain Russian energy
products into the United States, including crude oil, petroleum, petroleum fuels, oils, liquefied natural gas and coal.
Additionally, the executive order prohibits any new investments in the Russian energy sector by U.S. persons, among other
restrictions.
Also, as a result of concerns
about the stability of financial markets generally and the solvency of counterparties specifically, the cost of obtaining money from the
credit markets has increased as a result of increases in interest rates, stricter lending standards, refusals to extend debt financing
at all or on similar terms as existing debt arrangements, reductions, and in some cases, termination of funding to borrowers on the part
of many lenders.
Due to these factors, we cannot be
certain that financing or any alternatives will be available to the extent required, or that we will be able to finance or refinance
our future credit facilities, on acceptable terms or at all. If financing or refinancing is not available when needed, or is
available only on unfavorable terms, we may be unable to meet our obligations as they come due or we may be unable to enhance our
existing business, complete the acquisition of newbuildings (if any) and additional vessels or otherwise take advantage of business
opportunities as they arise.
A cyber-attack could materially disrupt
our business.
We rely on information technology
systems and networks in our operations and the administration of our business. A successful cyber-attack could materially and adversely
disrupt our business and operations, including the safety of our operations and systems, and the availability of our vessels and facilities
or lead to unauthorized release of information or data or alteration of information or data in our systems, which could have a material
adverse effect on our business, financial condition, results of operations and cash flows, including cash available for distributions
to our unitholders. We are subject to laws, directives, and regulations relating to the collection, use, retention, disclosure, security
and transfer of personal data. These laws, directives, and regulations, and their interpretation and enforcement continue to evolve and
may be inconsistent from jurisdiction to jurisdiction. Compliance with emerging and changing privacy and data protection requirements
may cause us to incur substantial costs or require us to change our business practices. Noncompliance with our legal obligations relating
to privacy, security and data protection could result in penalties, fines, legal proceedings by governmental entities or others, loss
of reputation, legal claims by individuals and customers and significant legal and financial exposure and could affect our ability to
retain and attract customers. Changes or increases in the nature of cyber or security-threats and/or changes to industry standards and
regulations might require us to adopt additional or modified procedures for monitoring cybersecurity, which may require us to incur additional
expenses and/or additional capital expenditures. However, the impact of such regulations is difficult to predict at this time.
Moreover, cyber-attacks
against the Ukrainian government and other countries in the region have been reported in connection with the recent conflicts between
Russia and Ukraine. To the extent such attacks have collateral effects on global critical infrastructure or financial institutions or
us, such developments could adversely affect our business, operating results and financial condition. At this time, it is difficult to
assess the likelihood of such threat and any potential impact.
Compliance with safety and other requirements
imposed by classification societies may be very costly and may adversely affect our business.
The hull and machinery of
every commercial LNG carrier must be classed by a classification society. The classification society certifies that the vessel has been
built and maintained in accordance with the applicable rules and regulations of that classification society. Moreover, every vessel must
comply with all applicable international conventions and the regulations of the vessel's flag state as verified by a classification society.
Finally, each vessel must successfully undergo periodic surveys, including annual, intermediate and five-year special surveys performed
under the classification society's rules.
If any vessel does not maintain
its class, it will lose its insurance coverage and be unable to trade, and the vessel's owner will be in breach of relevant covenants
under its financing arrangements. Failure to maintain the class of one or more of our vessels could have a material adverse effect on
our business, financial condition, results of operations and cash flows, including cash available for distributions to our unitholders.
The LNG shipping industry is subject to
substantial environmental and other regulations, which may significantly limit our operations or increase our expenses.
Our operations are materially
affected by extensive and changing international, national, state and local environmental laws, regulations, treaties, conventions and
standards, which are in force in international waters, in the jurisdictional waters of the countries in which our vessels operate and
in the countries in which our vessels are registered. These requirements relate to compliance with applicable legislation and minimizing
our environmental footprint (of our operations both onboard and ashore).
We expect to incur substantial expenses
in complying with these requirements, including, but not limited to, costs relating to air emissions, including greenhouse
gases, sulfur emissions, the management of ballast waters, maintenance and inspection, development and implementation of emergency
procedures and insurance coverage. We could also incur substantial costs, including clean-up costs, civil and criminal
penalties and sanctions, the suspension or termination of operations and third-party claims as a result of violations of, or
liabilities under, such laws and regulations.
In addition, these requirements
can affect the resale value or useful lives of our vessels, require a reduction in cargo capacity, necessitate vessel modifications or
operational changes or restrictions or lead to decreased availability of insurance coverage for environmental matters. These affects could
further result in the denial of access to certain jurisdictional waters or ports or detention in certain ports. We are required to obtain
governmental approvals and permits to operate our vessels and to also to maintain environmental manuals and plans. Any delays in obtaining
such governmental approvals may increase our expenses, and the terms and conditions of such approvals could materially and adversely affect
our future performance, results of operations, cash flows, financial position and our ability to make distributions to our unitholders.
Additional laws and regulations
may be adopted in the future that could limit our ability to do business or increase our operating costs, which could materially and adversely
affect our business. For example, new or amended legislation relating to ship recycling, sewage systems, emission control (including emissions
of greenhouse gases) as well as ballast water treatment and ballast water handling may be adopted. The United States has enacted legislation
and regulations that require more stringent controls of air and water emissions from ocean-going ships. Such legislation or regulations
may require additional capital expenditures or operating expenses (such as increased costs for low-sulfur fuel or costs related to the
installation of scrubbers for cleaning exhaust gas) in order for us to maintain our vessels' compliance with international and/or national
regulations. We also may become subject to additional laws and regulations or any new legislation that may come into effect if and when
we enter new markets or trades.
We also believe that the
heightened environmental, quality and security concerns of insurance underwriters, regulators and charterers will generally lead to additional
regulatory requirements, including enhanced risk assessment and security requirements as well as greater inspection and safety requirements
on all LNG carriers in the marine transportation market. These requirements are likely to add increased costs to our operations, and the
failure to comply with these requirements may affect the ability of our vessels to obtain and, possibly, collect on, insurance or to obtain
the required certificates for entry into the different ports where our vessels operate.
Some environmental laws
and regulations, such as the U.S. Oil Pollution Act of 1990, or OPA, provide for potentially unlimited joint, several, and/or strict liability
for owners, operators and demise or bareboat charterers for oil pollution and related damages. OPA applies to discharges of any oil from
a ship in U.S. waters, including discharges of fuel and lubricants from an LNG carrier, even if the ships do not carry oil as cargo. Vessels
are required to carry onboard a ship-specific non-tank vessel response plan to address contingencies relating to discharges of any oil.
In addition, many states in the United States bordering on a navigable waterway have enacted legislation providing for potentially unlimited
strict liability without regard to fault for the discharge of pollutants within their waters. We also are subject to other laws and conventions
outside the United States that provide for an owner or operator of LNG carriers to bear strict liability for pollution, such as the Convention
on Limitation of Liability for Maritime Claims of 1976, or the "London Convention."
Some of these laws and conventions,
including OPA and the London Convention, may include limitations on liability. However, the limitations may not be applicable in certain
circumstances, such as where a spill is caused by a vessel owner's or operators' intentional or reckless conduct. The 2010 Deepwater Horizon
oil spill has resulted in additional regulatory initiatives, including the raising of liability caps under OPA. On February 24, 2014,
the U.S. Bureau of Ocean Energy Management, or BOEM, proposed a rule increasing the limits of liability for off-shore facilities under
OPA based on inflation, effective in January 2015. In April 2016, the U.S. Bureau of Safety and Environmental Enforcement, or BSEE, announced
a new Well Control Rule. However, pursuant to orders by former U.S. President Trump in early 2017, BSEE announced in August 2017 that
this rule would be revised. The BSEE amended the Well Control Rule, effective July 15, 2019, which rolled back certain reforms regarding
the safety of drilling operations, and former U.S. President Trump had proposed leasing new sections of U.S. waters to oil and gas companies
for offshore drilling. Recently, current U.S. President Biden signed an executive order temporarily blocking new leases for oil and gas
drilling in federal waters.
Compliance with OPA and
other environmental laws and regulations also may result in vessel owners and operators incurring increased costs for additional maintenance
and inspection requirements, the development of contingency arrangements for potential spills, obtaining mandated insurance coverage and
meeting financial responsibility requirements.
Please see "Item 4.
Information on the Partnership—B. Business Overview—Environmental and Other Regulations."
Developments in safety and environmental
requirements relating to the recycling of vessels may result in escalated and unexpected costs.
The 2009 Hong Kong International
Convention for the Safe and Environmentally Sound Recycling of Ships, or the Hong Kong Convention, aims to ensure ships, being recycled
once they reach the end of their operational lives, do not pose any unnecessary risks to the environment, human health and safety. The
Hong Kong Convention has yet to be ratified by the required number of countries to enter into force. Upon the Hong Kong Convention's entry
into force, each ship sent for recycling will have to carry an inventory of its hazardous materials. The hazardous materials, whose use
or installation are prohibited in certain circumstances, are listed in an appendix to the Hong Kong Convention. Ships will be required
to have surveys to verify their inventory of hazardous materials initially, throughout their lives and prior to the ship being recycled.
The Hong Kong Convention,
which is currently open for accession by IMO Member States, will enter into force 24 months after the date on which 15 IMO Member States,
representing at least 40% of world merchant shipping by gross tonnage, have ratified or approve accession. As of the date of this annual
report, fifteen countries have ratified or approved accession of the Hong Kong Convention but the requirement of 40% of world merchant
shipping by gross tonnage has not yet been satisfied.
On November 20, 2013, the
European Parliament and the Council of the EU adopted the Ship Recycling Regulation, which retains the requirements of the Hong Kong Convention
and requires that certain commercial seagoing vessels flying the flag of an EU Member State may be recycled only in facilities included
on the European list of permitted ship recycling facilities. We were required to comply with EU Ship Recycling Regulation by December
31, 2020, since our ships trade in EU region. One of our vessels, the Artic Aurora, is a Maltese flagged vessel. Malta is
a EU Member State.
These regulatory developments,
when implemented, may lead to cost escalation by shipyards, repair yards and recycling yards. This may then result in a decrease in the
residual scrap value of a vessel, and a vessel could potentially not cover the cost to comply with latest requirements, which may have
an adverse effect on our future performance, results of operations, cash flows and financial position.
Climate change and greenhouse gas restrictions
may adversely impact our operations and markets, and may cause us to incur substantial costs and to procure low-sulfur fuel oil directly
on the wholesale market for storage at sea and onward consumption on our vessels.
Due to concern over the
risk of climate change, a number of countries and the International Maritime Organization, or the IMO, have adopted, or are considering
the adoption of, regulatory frameworks to reduce greenhouse gas emissions. These regulatory measures may include, among others, adoption
of cap and trade regimes, carbon taxes, increased efficiency standards and incentives or mandates for renewable energy. More specifically,
on October 27, 2016, the IMO's Marine Environment Protection Committee (the “MEPC”) announced its decision concerning the
implementation of regulations mandating a reduction in sulfur emissions from 3.5% currently to 0.5% as of the beginning of January 1,
2020. Since January 1, 2020, ships must either remove sulfur from emissions or buy fuel with low sulfur content, which may lead to increased
costs and supplementary investments for ship owners. The interpretation of "fuel oil used on board" includes use in main engine,
auxiliary engines and boilers. Shipowners may comply with this regulation by (i) using 0.5% sulfur fuels on board, which are available
around the world but at a higher cost; (ii) installing scrubbers for cleaning of the exhaust gas; or (iii) by retrofitting vessels to
be powered by liquefied natural gas, which may not be a viable option due to the lack of supply network and high costs involved in this
process. Costs of compliance with these regulatory changes may be significant and may have a material adverse effect on our future performance,
results of operations, cash flows and financial position. Additional or new conventions, laws and regulations may be adopted
that could require, among others, the installation of expensive emission control systems and could adversely affect our business, results
of operations, cash flows and financial condition.
We continue to evaluate different options
in complying with IMO and other rules and regulations. We expect that our fuel costs and fuel inventories will increase in 2022 as a
result of these sulfur emission regulations. Low sulfur fuel is more expensive than standard marine fuel containing 3.5% sulfur content
and may become more expensive or difficult to obtain as a result of increased demand. If the cost differential between low sulfur fuel
and high sulfur fuel is significantly higher than anticipated, or if low sulfur fuel is not available at ports on certain trading routes,
it may not be feasible or competitive to operate our vessels on certain trading routes without installing scrubbers or without incurring
deviation time to obtain compliant fuel. Scrubbers may not be available to be installed on such vessels at a favorable cost or at all
if we seek them at a later date. Further there is a risk that if the fuel spread between high sulfur fuel oil ("HSFO") and
very low sulfur fuel oil ("VLSFO") continues to shrink, and therefore the alternative cost related to scrubber investments
may increase.
Fuel is a significant, if
not the largest, expense in our shipping operations when vessels are under voyage charter and is an important factor in negotiating charter
rates. Our operations and the performance of our vessels, and as a result our results of operations, cash flows and financial position,
may be negatively affected to the extent that compliant sulfur fuel oils are unavailable, of low or inconsistent quality, if de-bunkering
facilities are unavailable to permit our vessels to accept compliant fuels when required, or upon occurrence of any of the other foregoing
events. Costs of compliance with these and other related regulatory changes may be significant and may have a material adverse effect
on our future performance, results of operations, cash flows and financial position. As a result, an increase in the price of fuel beyond
our expectations may adversely affect our profitability at the time of charter negotiation. Further, fuel may become much more expensive
in the future, which may reduce the profitability and competitiveness of our business versus other forms of transportation, such as truck
or rail.
While we carry cargo insurance
to protect us against certain risks of loss of or damage to the procured commodities, we may not be adequately insured to cover any losses
from such operational risks, which could have a material adverse effect on us. Any significant uninsured or under-insured loss or liability
could have a material adverse effect on our business, results of operations, cash flows and financial condition and our available cash.
Maritime shipping will also
be included in the Emission Trading Scheme (ETS) as of 2023 with a phase-in period. It is expected that shipowners will need to purchase
and surrender a number of emission allowances that represent their MRV-recorded carbon emission exposure for a specific reporting period.
The person or organization responsible for the compliance with the EU ETS should be the shipping company, defined as the shipowner or
any other organization or person, such as the manager or the bareboat charterer, that has assumed the responsibility for the operation
of the ship from the shipowner. Compliance with the Maritime EU ETS will result in additional compliance and administration costs to properly
incorporate the provisions of the Directive into our business routines. Additional EU regulations which are part of the EU’s Fit-for-55,
could also affect our financial position in terms of compliance and administration costs when they take effect.
Territorial taxonomy regulations
in geographies where we are operating and are regulatorily liable, such as EU Taxonomy, might jeopardize the level of access to capital.
For example, EU has already introduced a set of criteria for economic activities which should be framed as ‘green’, called
EU Taxonomy. As long as we are an EU-based company meeting the NFRD prerequisites, we will be eligible for reporting our Taxonomy eligibility
and alignment. Based on the current version of the Regulation, companies that own assets shipping fossil fuels are considered as not aligned
with EU Taxonomy. The outcome of such provision might be either an increase in the cost of capital and/or gradually reduced access to
financing as a result of financial institutions’ compliance with EU Taxonomy.
In addition, although the
emissions of greenhouse gases from international shipping currently are not subject to the Kyoto Protocol to the United Nations Framework
Convention on Climate Change, which required adopting countries to implement national programs to reduce emissions of certain gases, or
the Paris Agreement (discussed further below), a new treaty may be adopted in the future that includes restrictions on shipping emissions.
Compliance with changes in laws, regulations and obligations relating to climate change affects the propulsion options in subsequent vessel
designs and could increase our costs related to acquiring new vessels, operating and maintaining our existing vessels and require us to
install new emission controls, acquire allowances or pay taxes related to our greenhouse gas emissions or administer and
manage a greenhouse gas emissions program. Revenue generation and strategic growth opportunities may also be adversely affected.
Adverse effects upon the oil and gas production
industry relating to climate change, including growing public concern about the environmental impact of climate change, may also have
an effect on demand for our services. For example, increased regulation of greenhouse gases or other concerns relating to climate change
may reduce the demand for oil and gas in the future or create greater incentives for use of alternative energy sources. Any long-term
material adverse effect on the oil and gas production industry could have significant financial and operational adverse impacts on our
business that we cannot predict with certainty at this time.
We operate globally, including
in countries, states and regions where our businesses, and the activities our consumer customers, could be negatively impacted by climate
change. Climate change presents both immediate and long-term risks to us and our customers, with the risks expected to increase over time.
Climate risks can arise from physical risks (acute or chronic risks related to the physical effects of climate change) and transition
risks (risks related to regulatory and legal, technological, market and reputational changes from a transition to a low-carbon economy).
Physical risks could damage or destroy our or our customers' and clients' properties and other assets and disrupt our or their operations.
For example, climate change may lead to more extreme weather events occurring more often which may result in physical damage and additional
volatility within our business operations and potential counterparty exposures and other financial risks. Transition risks may result
in changes in regulations or market preferences, which in turn could have negative impacts on our results of operation or the reputation
of us and our customers. For example, carbon-intensive industries like LNG are exposed to climate risks, such as those risks related to
the transition to a low-carbon economy, as well as low-carbon industries that may be subject to risks associated with new technologies.
Ongoing legislative or regulatory uncertainties and changes regarding climate risk management and practices may result in higher regulatory,
compliance, credit and reputational risks and costs.
If we fail to comply with
international safety regulations, we may be subject to increased liability, which may adversely affect our insurance coverage and may
result in a denial of access to, or detention in, certain ports.
The operation of our vessels
is affected by the requirements set forth in the IMO’s International Safety Management Code (the “ISM Code”). The ISM
Code requires shipowners, ship managers and bareboat charterers to develop and maintain an extensive "Safety Management System"
that includes the adoption of a safety and environmental protection policy setting forth instructions and procedures for safe operation
and describing procedures for dealing with emergencies. If we fail to comply with the ISM Code, we may be subject to increased liability,
or may invalidate existing insurance or decrease available insurance coverage for our affected vessels, and such failure may result in
a denial of access to, or detention in, certain ports. The USCG and European Union authorities enforce compliance with the ISM and International
Ship and Port Facility Security Code (the “ISPS Code”) and prohibit non-compliant vessels from trading in U.S. and European
Union ports. This could have a material adverse effect on our future performance, results of operations, cash flows and financial position.
Given that the IMO continues to review and introduce new regulations, it is impossible to predict what additional regulations, if any,
may be passed by the IMO and what effect, if any, such regulations might have on our operations.
Because such conventions,
laws, and regulations are often revised, we cannot predict the ultimate cost of complying with such conventions, laws and regulations
or the impact thereof on the resale prices or useful lives of our vessels. Additional conventions, laws and regulations may be adopted
which could limit our ability to do business or increase the cost of our doing business and which may materially adversely affect our
operations. We are required by various governmental and quasigovernmental agencies to obtain certain permits, licenses, certificates,
and financial assurances with respect to our operations.
Please see “Item 4.
Information on the Partnership—B. Business Overview - Environmental and Other Regulations in the Shipping Industry” for a
discussion of the environmental and other regulations applicable to us.
Safety, environmental
and other governmental and other requirements expose us to liability, and compliance with current and future regulations could require
significant additional expenditures, which could have a material adverse effect on our business and financial results.
Our operations are affected
by extensive and changing international, national, state and local laws, regulations, treaties, conventions and standards in force in
international waters, the jurisdictions in which our LNG vessels operate, and the country or countries in which such vessels are registered,
including those governing the management and disposal of hazardous substances and wastes, the cleanup of oil spills and other contamination,
air emissions, and water discharges and ballast and bilge water management. These regulations include, but are not limited to, the U.S.
Oil Pollution Act of 1990, or OPA, requirements of the U.S. Coast Guard, or the USCG, and the U.S. Environmental Protection Agency, or
EPA, the U.S. Comprehensive Environmental Response, Compensation and Liability Act of 1980, or CERCLA, the U.S. Clean Water Act, the U.S.
Maritime Transportation Security Act of 2002, and regulations of the International Maritime Organization, or IMO, including the International
Convention for the Safety of Life at Sea of 1974, or SOLAS, the International Convention for the Prevention of Pollution from Ships of
1973, or MARPOL, including the designation thereunder of Emission Control Areas, or ECAs, the International Convention on Civil Liability
for Oil Pollution Damage of 1969, or CLC, and the International Convention on Load Lines of 1966. In particular, IMO’s Marine Environmental
Protection Committee ("MEPC") 73, amendments to Annex VI prohibiting the carriage of bunkers above 0.5% sulfur on ships took
effect March 1, 2020 and may cause us to incur substantial costs. Compliance with these regulations could have a material adverse effect
our business and financial results.
In addition, vessel classification
societies and the requirements set forth in the IMO’s International Management Code for the Safe Operation of Ships and for Pollution
Prevention, or the ISM Code, also impose significant safety and other requirements on our vessels. In complying with current and future
environmental requirements, vessel owners and operators may also incur significant additional costs in meeting new maintenance and inspection
requirements, in developing contingency arrangements for potential spills and in obtaining insurance coverage. Government regulation of
vessels, particularly in the areas of safety and environmental requirements, can be expected to become stricter in the future and require
us to incur significant capital expenditures on our vessels to keep them in compliance, or even to recycle or sell certain vessels altogether.
Many of these requirements
are designed to reduce the risk of oil spills and other pollution, and our compliance with these requirements can be costly. These requirements
can also affect the resale value or useful lives of our vessels, require reductions in cargo capacity, ship modifications or operational
changes or restrictions, lead to decreased availability of insurance coverage for environmental matters or result in the denial of access
to certain jurisdictional waters or ports, or detention in certain ports.
Under local, national and
foreign laws, as well as international treaties and conventions, we could incur material liabilities, including cleanup obligations, natural
resource damages and third-party claims for personal injury or property damages, in the event that there is a release of petroleum or
other hazardous substances from our vessels or otherwise in connection with our current or historic operations. We could also incur substantial
penalties, fines and other civil or criminal sanctions, including in certain instances seizure or detention of our vessels, as a result
of violations of or liabilities under environmental laws, regulations and other requirements. Environmental laws often impose strict liability
for remediation of spills and releases of oil and hazardous substances, which could subject us to liability without regard to whether
we were negligent or at fault. For example, OPA affects all vessel owners shipping oil to, from or within the United States. Under OPA,
owners, operators and bareboat charterers are jointly and severally strictly liable for the discharge of oil in U.S. waters, including
the 200 nautical mile exclusive economic zone around the United States. Similarly, the CLC, which has been adopted by most countries outside
of the United States, imposes liability for oil pollution in international waters. OPA expressly permits individual states to impose their
own liability regimes with regard to hazardous materials and oil pollution incidents occurring within their boundaries, provided they
accept, at a minimum, the levels of liability established under OPA. Coastal states in the United States have enacted pollution prevention
liability and response laws, many providing for unlimited liability. Furthermore, the 2010 explosion of the drilling rig Deepwater
Horizon, which is unrelated to SFL, and the subsequent release of oil into the Gulf of Mexico, or other events, has resulted in increased,
and may result in further, regulation of the shipping and offshore industries and modifications to statutory liability schemes, which
could have a material adverse effect on our business, financial condition, results of operations and cash flows. An oil spill could also
result in significant liability, including fines, penalties, criminal liability and remediation costs for natural resource damages under
other international and U.S. federal, state and local laws, as well as third-party damages, and could harm our reputation with current
or potential charterers of our vessels. We are required to satisfy insurance and financial responsibility requirements for potential oil
(including marine fuel) spills and other pollution incidents. Although we have arranged insurance to cover certain environmental risks,
there can be no assurance that such insurance will be sufficient to cover all such risks or that
any claims will not have a material adverse effect on our business, results of operations, cash flows and financial condition and available
cash.
Regulations relating to ballast water
discharge which came into effect during September 2019 may adversely affect our revenues and profitability.
The IMO has imposed updated
guidelines for ballast water management systems specifying the maximum amount of viable organisms allowed to be discharged from a vessel's
ballast water. Depending on the date of the International Oil Pollution Prevention, or IOPP renewal survey, existing vessels constructed
before September 8, 2017 must comply with the updated D-2 standard on or after September 8, 2019. For most vessels, compliance with the
D-2 standard will involve installing on-board systems to treat ballast water and eliminate unwanted organisms. Ships constructed on or
after September 8, 2017 are to comply with the D-2 standards upon delivery. One of our vessels had on- board ballast water management
system installed in April 2022, during the completion of its’ scheduled special survey, while all our vessels intend to have on-board
ballast water management systems installed within their special surveys due in 2022 and 2023.
Furthermore, United States regulations
are currently changing. Although the 2013 Vessel General Permit, or VGP, program and U.S. National Invasive Species Act, or NISA, are
currently in effect to regulate ballast discharge, exchange and installation, the Vessel Incidental Discharge Act, or VIDA, which was
signed into law on December 4, 2018, requires that the, U.S. Environmental Protection Agency, or EPA develop national standards of performance
for approximately 30 discharges, similar to those found in the VGP within two years. On October 26, 2020, the EPA published a Notice of
Proposed Rulemaking for Vessel Incidental Discharge National Standards of Performance under VIDA. By approximately 2022, the U.S. Coast
Guard, or USCG, must develop corresponding implementation, compliance and enforcement regulations regarding ballast water. The new regulations
could require the installation of new equipment, which may cause us to incur substantial costs. Please see "Item 4. Information on
the Partnership—B. Business Overview—Environmental and Other Regulations."
Political instability, terrorist or
other attacks, war, international hostilities and global public health threats can affect the seaborne transportation industry, which
could adversely affect our business.
We conduct most of our operations
outside of the United States, and our business, results of operations, cash flows, financial condition and ability to pay distributions,
if any, in the future may be adversely affected by changing economic, political and government conditions in the countries and regions
where our vessels are employed or registered. Moreover, we operate in a sector of the economy that is likely to be adversely impacted
by the effects of political conflicts.
Currently, the world economy
faces a number of ongoing challenges, including trade tensions between the United States and China, Brexit, continuing threat of terrorist
attacks around the world, continuing instability and conflicts and other recent occurrences in the Middle East, Ukraine and in other geographic
areas and countries, and stabilizing growth in China, as well as the public health concerns stemming from the COVID-19 pandemic.
Further, governments may
turn, and have turned, to trade barriers to protect their domestic industries against foreign imports, thereby depressing shipping demand.
For example, there have been continuing trade tensions between the United States and China, including the imposition of tariffs by each
country on certain of the other’s goods and products. On January 15, 2020, the United States and China signed a “Phase One”
agreement, pursuant to which China agreed to increase purchases and imports of U.S. goods by $200 billion over 2017 levels during between
January 1, 2020 to December 31, 2021. In connection with this agreement, the United States agreed to reduce certain tariffs and indefinitely
suspend the imposition of certain additional tariffs. While the Phase One agreement may reduce the risk of adverse effects on United States
and Chinese trade policy, the future success of the agreement is uncertain as the Biden Administration has signaled the need to maintain
political pressure on China, including with respect to perceived national security and human rights concerns, and has also indicated that
it would review the Phase One agreement. Separate from the Phase One agreement, the United States has implemented or is considering implementing
a number of policies, which may ultimately reduce trade between the United States and China, including as in response to what have been
characterized as human rights abuses in the Xinjian Uyghur Autonomous Region. While it is not yet certain how the Biden Administration
will handle each of these policies, the expectation is that most of these measures will remain in place.
In addition, we may be
affected, either directly or indirectly, by continuing political tension in Europe between Russia and the Ukraine following Russia's
annexation of Crimea through our customers Gazprom and Yamal, which are both trading from Russia. The recent escalation of the
conflict between Russia and Ukraine may lead to further regional and international conflicts or armed action. This conflict has
disrupted supply chains and cause instability in the energy markets and the global economy, with effects on the LNG market, which
has experienced volatility.
Beginning in February of 2022,
President Biden and several European leaders announced various economic sanctions against Russia in connection with the aforementioned
conflicts in the Ukraine region, which may adversely impact our business, given Russia’s role as a major global exporter of crude
oil and natural gas. Our business could also be adversely impacted by trade tariffs, trade embargoes or other economic sanctions that
limit trading activities by the United States or other countries against countries in the Middle East, Asia or elsewhere as a result of
terrorist attacks, hostilities or diplomatic or political pressures.
On March 8, 2022, President
Biden issued an executive order prohibiting the import of certain Russian energy products into the United States, including crude
oil, petroleum, petroleum fuels, oils, liquefied natural gas and coal. Additionally, the executive order prohibits any investments
in the Russian energy sector by U.S. persons, among other restrictions. While much uncertainty remains regarding the global impact
of the conflict in Ukraine, it is possible that such tensions could adversely affect our business, financial condition, results of
operation and cash flows. Please also see “Item 4.B. Business Overview--Geopolitical risk and impact on LNG
shipping.”
In Europe, large sovereign
debts and fiscal deficits, low growth prospects and high unemployment rates in a number of countries have contributed to the rise of Eurosceptic
parties, which would like their countries to leave the Euro. The exit of the United Kingdom from the European Union, or Brexit, and potential
new trade policies in the United States further increase the risk of additional trade protectionism.
In addition, public health
threats, such as influenza and other highly communicable diseases or viruses, outbreaks of which have from time to time occurred in various
parts of the world in which we operate, including China, Japan and South Korea, which may even become pandemics, such as the COVID-19
virus, could lead to a significant decrease of demand for the transportation of crude oil. Such events may also adversely impact our operations,
including timely rotation of our crews, the timing of completion of any outstanding or future newbuilding projects or repair works in
drydock as well as the operations of our customers. Delayed rotation of crew may adversely affect the mental and physical health of our
crew and the safe operation of our vessels as a consequence.
Further economic downturn
in any of these countries could have a material and adverse effect on our future performance, results of operations, cash flows, financial
position and our ability to make distributions to our unitholders.
Failure to comply with the U.S. Foreign
Corrupt Practices Act and other applicable anti-bribery legislation in other jurisdictions could result in fines, criminal penalties,
contract terminations and an adverse effect on our business.
We may operate in a number
of countries throughout the world, including countries known to have a reputation for corruption. We are committed to doing business in
accordance with applicable anti-corruption laws and have adopted a code of business conduct and ethics which is consistent and designed
to ensure compliance with the U.S. Foreign Corrupt Practices Act of 1977, as amended. We are subject, however, to the risk that we, our
affiliated entities or our or their respective officers, directors, employees and agents may take actions determined to be in violation
of such anti-corruption laws, including the U.S. Foreign Corrupt Practices Act. Any such violation could result in substantial fines,
sanctions, civil and/or criminal penalties, curtailment of operations in certain jurisdictions, and might materially and adversely affect
our business, results of operations or financial condition and our ability to make distributions to our unitholders. In addition, actual
or alleged violations could damage our reputation and ability to do business. Furthermore, detecting, investigating, and resolving actual
or alleged violations are expensive and can consume significant time and attention of our senior management.
If the vessels we own call on ports located
in countries or territories that are the subject of sanctions or embargoes imposed by the United States government or other governmental
authorities, it could result in the imposition of monetary fines or penalties and adversely affect our reputation and the market for
our securities.
Although no vessels operated
by us called on ports located in countries or territories that are the subject of country-wide or territory-wide comprehensive sanctions
and/or embargoes imposed by the U.S. government or other applicable governmental authorities ("Sanctioned Jurisdictions") in
violation of applicable sanctions or embargo laws during 2021, and we endeavor to take precautions reasonably designed to mitigate such
risks, it is possible that, in the future our vessels may call on ports in Sanctioned Jurisdictions on charterers' instructions
and/or without our consent. If such activities result in a violation of applicable sanctions or embargo laws, we could be subject to monetary
fines, penalties, or other sanctions, and our reputation and the market for our common units could be adversely affected.
The sanctions and embargo
laws and regulations vary in their application, as they do not all apply to the same covered persons or proscribe the same activities,
and such sanctions and embargo laws and regulations may be amended or expanded over time. Current or future counterparties of ours
may be affiliated with persons or entities that are or may be in the future the subject of sanctions or embargoes imposed by the U.S.,
the EU, and/or other international bodies. If we determine that such sanctions or embargoes require us to terminate existing or future
contracts to which we, or our subsidiaries are party or if we are found to be in violation of such applicable sanctions or embargoes,
our results of operations may be adversely affected, we could face monetary fines or penalties, or we may suffer reputational harm.
Additionally, although we
believe that we have been in compliance with all applicable sanctions and embargo laws and regulations in 2021, and intend to maintain
such compliance, there can be no assurance that we will be in compliance in the future, particularly as the scope of certain laws may
be unclear and may be subject to changing interpretations. Any such violation could result in fines, penalties or other sanctions that
could severely impact our ability to access U.S. capital markets and conduct our business, and could result in some investors deciding,
or being required, to divest their interest, or not to invest, in us. In addition, certain institutional investors may have investment
policies or restrictions that prevent them from holding securities of companies that have contracts with countries identified by the U.S.
government as state sponsors of terrorism. The determination by these investors not to invest in, or to divest from, our common units
may adversely affect the price at which our common units trade. Moreover, our charterers may violate applicable sanctions and embargo
laws and regulations as a result of actions that do not involve us or our vessels, and those violations could in turn negatively affect
our reputation. Investor perception of the value of our common units may be adversely affected by the consequences of war, the effects
of terrorism, civil unrest and governmental actions in the countries or territories that we operate in. In addition, charterers and other
parties that we have previously entered into contracts with regarding our vessels may be affiliated with persons or entities that are
now or may in the future be the subject of sanctions or embargo laws imposed by the U.S. or other applicable governmental bodies, including
in response to events relating to Russia, Crimea and the Ukraine. If we determine that such sanctions require us to terminate existing
contracts or if we are found to be in violation of such sanctions or embargo laws, we may suffer reputational harm and our results of
operations may be adversely affected.
With respect to U.S. sanctions
against Russia, the United States' Office of Foreign Assets Control (OFAC) administers a sectoral sanctions program, which targets specific
industries or sectors of the Russian economy. Transactions with companies designated under the Sectoral Sanctions Identifications List
("SSI List") are not completely prohibited. Under OFAC's 50 percent rule, a company owned 50 percent or more, in the aggregate
by an SSI-Listed entity will also be the subject of the same restrictions as the SSI-Listed entity. We have a chartering relationship
with Yamal Trade Pte ("Yamal"), which may be indirectly owned 50 percent or more by an SSI-Listed entity under Directive 2
of Executive Order 13662. In addition, we have a chartering relationship with an entity that may be indirectly owned by Gazprom OAO ("Gazprom"),
which is identified as an SSI-Listed entity under Directive 4 of Executive Order 13662, as well as restrictions imposed pursuant to Directive
3 of Executive Order 14024, and entities that are owned 50% or more by Gazprom may be subject to Directive 4 of Executive Order 13662
and/or Directive 3 of Executive Order 14024, as well. In addition, pursuant to Executive Order 14066, the U.S. has imposed restrictions
on the import into the U.S. of certain energy products from the Russian Federation, as well as new investments in the energy sector of
the Russian Federation. In the future, the U.S. may impose greater sanctions, including, but not limited to, by designating Yamal, Gazprom,
or other counterparties to OFAC's Specially Designated Nationals and Blocked Persons List (the "SDN List").
In addition, our reputation and the market for our securities may be adversely
affected by our engagement in certain other activities, such as our dealings with Yamal, Gazprom or other SSI-Listed entities or their
subsidiaries, or if we enter into charters with other individuals or entities in countries that are the subject of U.S. sanctions and
embargo laws that are not controlled by the governments of those countries, engage in operations associated with those countries pursuant
to contracts with third-parties that are unrelated to those countries or entities controlled by their governments, or otherwise engage
in activities that are prohibited by U.S., the European Union or other sanctions to the extent that such sanctions may be applicable.
Furthermore, because we derive, and expect to continue to derive, all of our revenues from a limited number of charterers, our business
would be materially adversely affected if we were to determine that we are required because of applicable sanctions, to terminate our
relationships with Yamal, Gazprom, or any of our other charterers, or if the negative impact of these or any additional sanctions imposed
in the future threaten the viability of the Yamal LNG Project or otherwise cause Yamal, Gazprom or any of our other charterers to end
their relationships with us. Any of these events could have a material adverse effect on our business, financial condition, and results
of operations.
Governments could requisition our vessels
during a period of war or emergency, resulting in loss of earnings.
The government of a jurisdiction
where one or more of our vessels are registered could requisition for title or seize our vessels. Requisition for title occurs when a
government takes control of a vessel and becomes its owner. Also, a government could requisition our vessels for hire. Requisition for
hire occurs when a government takes control of a vessel and effectively becomes the charterer at dictated charter rates. Generally, requisitions
occur during a period of war or emergency, although governments may elect to requisition ships in other circumstances. Although we would
expect to be entitled to government compensation in the event of a requisition of one or more of our vessels, the amount and timing of
payments, if any, would be uncertain. A government requisition of one or more of our vessels would result in off-hire days under our time
charters and may cause us to breach covenants in debt agreements, and could have a material adverse effect on our business, financial
condition, results of operations and cash flows, including cash available for distribution to our unitholders.
Maritime claimants could arrest our vessels,
which could interrupt our cash flows.
Crew members, suppliers
of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against a vessel for unsatisfied
debts, claims or damages. In many jurisdictions, a claimant may seek to obtain security for its claim by arresting a vessel through foreclosure
proceedings. The arrest or attachment of one or more of our vessels could interrupt our cash flow and require us to pay large sums of
money to have the arrest or attachment lifted. In addition, in some jurisdictions, such as South Africa, under the "sister ship"
theory of liability, a claimant may arrest both the vessel which is subject to the claimant's maritime lien and any "associated"
vessel, which is any vessel owned or controlled by the same owner. Claimants could attempt to assert "sister ship" liability
against a vessel in our Fleet for claims relating to another of our vessels.
We may be subject to litigation that could
have an adverse effect on us
We may in the future be involved from time to time in litigation matters. These matters may include, among other things, contract disputes,
personal injury claims, environmental claims or proceedings, toxic tort claims, employment matters, securities class actions claims and
governmental claims for taxes or duties as well as other litigation that arises in the ordinary course of our business. We cannot predict
with certainty the outcome of any claim or other litigation matter. The ultimate outcome of any litigation matter and the potential costs
associated with prosecuting or defending such lawsuits, including the diversion of management's attention to these matters, could have
an adverse effect on us and, in the event of litigation that could reasonably be expected to have a material adverse effect on us, could
lead to an event of default under our credit facilities. For information regarding pending litigation claims, see "Item 8.
Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings."
Risks Relating to our Common Units
The price of our common units may be volatile.
The price of our common
units may be volatile and may fluctuate due to factors including:
| · | our payment of cash distributions to our unitholders; |
| · | actual or anticipated fluctuations in quarterly and annual results; |
| · | fluctuations in the seaborne transportation industry, including fluctuations in the LNG carrier market; |
| · | mergers and strategic alliances in the shipping industry; |
| · | changes in governmental regulations or maritime self-regulatory organization standards; |
| · | shortfalls in our operating results from levels forecasted by securities analysts; announcements concerning
us or our competitors; |
| · | the failure of securities analysts to publish research about us, or analysts making changes in their financial
estimates; |
| · | general economic conditions; |
| · | business interruptions caused by the ongoing COVID-19 pandemic; |
| · | future sales of our units or other securities; |
| · | investors' perception of us and the LNG shipping industry; |
| · | the general state of the securities market; and |
| · | other developments affecting us, our industry or our competitors. |
Securities markets worldwide
are experiencing significant price and volume fluctuations. The market price for our common units may also be volatile. This market volatility,
as well as general economic, market or political conditions, could reduce the market price of our common units in spite of our operating
performance.
The
price of our common units has fluctuated in the past, has recently been volatile and may be volatile in the future, and as a result, investors
in our common units could incur substantial losses.
The price of our common
units has fluctuated in the past, has recently been volatile and may be volatile in the future. The price of our common units has
ranged from a price of between $2.63 and $4.10 over the last six months without any discernible announcements or developments by the Partnership
or third parties to substantiate the movement of the price of our common units. The price of our common units may experience rapid
and substantial decreases or increases in the foreseeable future that are unrelated to our operating performance or prospects. In addition,
the ongoing outbreak of the novel COVID-19 virus has caused broad stock market and industry fluctuations. The stock market in general
and the market for shipping companies in particular have experienced extreme volatility that has often been unrelated to the operating
performance of particular companies. As a result of this volatility, investors may experience substantial losses on their investment in
our common units. The market price for our common units may be influenced by many factors, including the following:
| · | investor reaction to our business strategy; |
| · | our continued compliance with the listing standards of NYSE; |
| · | regulatory or legal developments in the United States and other countries, especially changes in laws
or regulations applicable to our industry; |
| · | variations in our financial results or those of companies that are perceived to be similar to us; |
| · | our ability or inability to raise additional capital and the terms on which we raise it; |
| · | declines in the market prices of stocks generally; |
| · | trading volume of our common units; |
| · | sales of our common units by us or our unitholders; |
| · | general economic, industry and market conditions; |
| · | an increase in interest rates or reduction in demand for our common units resulting from other relatively
more attractive investment opportunities; and |
| · | other events or factors, including those resulting from such events, or the prospect of such events, including
war, terrorism and other international conflicts, including the recent conflict between Russia and Ukraine, public health issues including
health epidemics or pandemics, such as the ongoing COVID-19 pandemic, adverse weather and climate conditions could disrupt our operations
or result in political or economic instability. |
These broad market and industry
factors may seriously harm the market price of our common units, regardless of our operating performance, and may be inconsistent with
any improvements in actual or expected operating performance, financial condition or other indicators of value. Since the price
of our common units has fluctuated in the past, has been recently volatile and may be volatile in the future, investors in our common
units could incur substantial losses. In the past, following periods of volatility in the market, securities class-action litigation has
often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of
management's attention and resources, which could materially and adversely affect our business, financial condition, results of operations
and growth prospects. There can be no guarantee that the price of our common units will remain at current prices.
Additionally, recently,
securities of certain companies have experienced significant and extreme volatility in stock price due to short sellers of securities,
known as a "short squeeze". These short squeezes have caused extreme volatility in those companies and in the market and have
led to the price per share of those companies to trade at a significantly inflated rate that is disconnected from the underlying value
of the Partnership. Many investors who have purchased shares in those companies at an inflated rate face the risk of losing a significant
portion of their original investment as the price per share has declined steadily as interest in those stocks have abated. While we have
no reason to believe our shares would be the target of a short squeeze, there can be no assurance that we will not be in the future, and
you may lose a significant portion or all of your investment if you purchase our shares at a rate that is significantly disconnected from
our underlying value.
Unitholders may have liability to repay
distributions.
Under some circumstances,
unitholders may have to repay amounts wrongfully returned or distributed to them. Under the Partnership Act, we may not make a distribution
to our unitholders if the distribution would cause our liabilities to exceed the fair value of our assets. Marshall Islands law provides
that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who
knew at the time of the distribution that it violated Marshall Islands law will be liable to the limited partnership for the distribution
amount.
Assignees who become substituted limited partners
are liable for the obligations of the assignor to make contributions to the Partnership that are known to the assignee at the time it
became a limited partner and for unknown obligations if the liabilities could be determined from the Partnership Agreement. Liabilities
to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes
of determining whether a distribution is permitted.
We may issue additional equity securities,
including securities senior to the common units, without the approval of our common unitholders, which would dilute the ownership interests
of the common unitholders.
We may, without the approval
of our common unitholders, issue an unlimited number of additional units or other equity securities, subject to the restriction in our
$675 Million Credit Facility that the Sponsor must own at least 30% of our total common units outstanding. In addition, we may issue an
unlimited number of units that are senior to the common units in right of distribution, liquidation and voting. These sales could also
impair our ability to raise additional capital through the sale of our equity securities in the future. The issuance by us of additional
common units or other equity securities of equal or senior rank may have the following effects:
| · | our existing unitholders' proportionate ownership interest in us will decrease; |
| · | the amount of cash available for distribution per unit may decrease; |
| · | the relative voting strength of each previously outstanding unit may be diminished; and |
| · | the market price of our common units may decline. |
We have been organized as a limited partnership
under the laws of the Marshall Islands, which does not have a well-developed body of partnership law.
We are organized in the
Republic of the Marshall Islands, which does not have a well-developed body of case law or bankruptcy law and, as a result, unitholders
may have fewer rights and protections under Marshall Islands law than under a typical jurisdiction in the United States. Our partnership
affairs are governed by our Partnership Agreement and by the Partnership Act. The provisions of the Partnership Act resemble the limited
partnership laws of a number of states in the United States, most notably Delaware. The Partnership Act also provides that it is to be
applied and construed to make it uniform with the Delaware Revised Uniform Partnership Act and, so long as it does not conflict with the
Partnership Act or decisions of the Marshall Islands courts, interpreted according to the non-statutory law (or case law) of the State
of Delaware. There have been, however, few, if any, court cases in the Marshall Islands interpreting the Partnership Act, in contrast
to Delaware, which has a fairly well-developed body of case law interpreting its limited partnership statute. Accordingly, we cannot predict
whether Marshall Islands courts would reach the same conclusions as the courts in Delaware. For example, the rights of our unitholders
and the fiduciary responsibilities of our General Partner under Marshall Islands law are not as clearly established as under judicial
precedent in existence in Delaware. As a result, unitholders may have more difficulty in protecting their interests in the face of actions
by our General Partner and its officers and directors than would unitholders of a similarly organized limited partnership in the United
States. Further, the Republic of the Marshall Islands does not have a well-developed body of bankruptcy law. As such, in the case of a
bankruptcy of our Partnership, there may be a delay of bankruptcy proceedings and the ability of unitholders and creditors to receive
recovery after a bankruptcy proceeding.
We are a "foreign private issuer"
under New York Stock Exchange, or the NYSE, rules, and as such we are entitled to exemption from certain corporate governance standards
of the NYSE applicable to domestic companies, and holders of our common units may not have the same protections afforded to unitholders
of companies that are subject to all of the NYSE corporate governance requirements.
As a "foreign private
issuer" under the securities laws of the United States and the rules of the NYSE. We are subject to different disclosure requirements
than U.S. domiciled registrants, as well as different financial reporting requirements. As a foreign private issuer, we are exempt under
the Exchange Act from, among other things, certain rules prescribing the furnishing and content of proxy statements, and our executive
officers, directors and principal unitholders are exempt from the reporting and short-swing profit recovery provisions contained in Section
16 of the Exchange Act.
In addition, we are not required
under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose
securities are registered under the Exchange Act, including the filing of quarterly reports or current reports on Form 8-K. Under the
NYSE rules, a "foreign private issuer" is subject to less stringent corporate governance requirements. Subject to certain exceptions,
the rules of the NYSE permit a "foreign private issuer" to follow its home country practice in lieu of the listing requirements
of the NYSE.
A majority of our directors
qualify as independent under the NYSE director independence requirements. However, we cannot assure you that we will continue to maintain
an independent board in the future. In addition, we may have one or more non-independent directors serving as committee members on our
compensation committee. As a result, non-independent directors may among other things, participate in fixing the compensation of our management,
making share and option awards and resolving governance issues regarding our Partnership.
Accordingly, in the future
holders of our common units may not have the same protections afforded to shareholders of companies that are subject to all of the NYSE
corporate governance requirements.
For a description of our
corporate governance practices, please see "Item 6. Directors, Senior Management and Employees."
Because we are organized under the laws
of the Marshall Islands, it may be difficult to serve us with legal process or enforce judgments against us, our directors or our management.
We are organized under the
laws of the Marshall Islands, and substantially all of our assets are located outside of the United States. In addition, our directors
and officers generally are or will be non-residents of the United States, and all or a substantial portion of the assets of these non-residents
are located outside the United States. As a result, it may be difficult or impossible for holders of our common units to bring an action
against us or against these individuals in the United States if they believe that their rights have been infringed under securities laws
or otherwise. Even if holders of our common units are successful in bringing an action of this kind, the laws of the Marshall Islands
and of other jurisdictions may prevent or restrict them from enforcing a judgment against our assets or the assets of our directors or
officers.
Our Partnership Agreement designates the
Court of Chancery of the State of Delaware as the sole and exclusive forum for any claims, suits, actions or proceedings, unless otherwise
provided for by Marshall Islands law, for certain litigation that may be initiated by our unitholders, which could limit our unitholders'
ability to obtain a favorable judicial forum for disputes with the Partnership.
Our Partnership Agreement
provides that, unless otherwise provided for by Marshall Islands law, the Court of Chancery of the State of Delaware will be the sole
and exclusive forum for any claims that:
| · | arise out of or relate in any way to the Partnership Agreement (including any claims, suits or actions
to interpret, apply or enforce the provisions of the Partnership Agreement or the duties, obligations or liabilities among limited partners
or of limited partners to us, or the rights or powers of, or restrictions on, the limited partners or us); |
| · | are brought in a derivative manner on our behalf; |
| · | assert a claim of breach of a fiduciary duty owed by any director, officer or other employee of us or
our General Partner, or owed by our General Partner, to us or the limited partners; |
| · | assert a claim arising pursuant to any provision of the Partnership Act; or |
| · | assert a claim governed by the internal affairs doctrine, |
regardless of whether such claims, suits, actions
or proceedings sound in contract, tort, fraud or otherwise, are based on common law, statutory, equitable, legal or other grounds, or
are derivative or direct claims. Any person or entity purchasing or otherwise acquiring any interest
in our common units shall be deemed to have notice of and to have consented to the provisions described above. This forum selection provision
may limit our unitholders' ability to obtain a judicial forum that they find favorable for disputes with us or our directors, officers
or other employees or unitholders.
Provisions in our organizational documents
may have anti-takeover effects.
Our Partnership Agreement
contains provisions that could make it more difficult for a third-party to acquire us without the consent of our Board of Directors. These
provisions require approval of our Board of Directors and prior consent of our General Partner.
These provisions could also
make it difficult for our unitholders to replace or remove our current Board of Directors or could have the effect of discouraging, delaying
or preventing an offer by a third-party to acquire us, even if the third-party's offer may be considered beneficial by many unitholders.
As a result, unitholders may be limited in their ability to obtain a premium for their common units.
Risks Relating to our Indebtedness
Our debt levels could limit our liquidity
and flexibility in obtaining additional financing and in pursuing other business opportunities.
As of December 31,
2021, we had total outstanding long-term debt of $567 million, consisting of amounts outstanding under our fully drawn $675
Million Credit Facility (as defined below). In addition, we have the ability to borrow an additional $30 million under our
interest free $30 million revolving credit facility with our Sponsor, or the $30 Million Revolving Credit Facility. On November 14,
2018, we extended our $30 Million Revolving Credit Facility with our Sponsor for an additional five-year term on terms and
conditions substantially similar to the existing credit facility. We expect that a large portion of our cash flow from
operations will be used to repay the principal and interest on our outstanding indebtedness.
Our current indebtedness
and future indebtedness that we may incur could affect our future operations, as a significant portion of our cash flow from operations
will be dedicated to the payment of interest and principal on such debt and will not be available for other purposes. Our debt levels
may limit our flexibility in obtaining additional financing, pursuing other business opportunities and paying distributions to unitholders.
Covenants contained in our debt agreements may affect our flexibility in planning for, and reacting to, changes in our business or economic
conditions, limit our ability to dispose of assets or place restrictions on the use of proceeds from such dispositions, withstand current
or future economic or industry downturns and compete with others in our industry for strategic opportunities, and limit our ability to
obtain additional financing for working capital, capital expenditures, acquisitions, general corporate and other purposes and our ability
to make distributions to our unitholders. Under the terms of the $675 Million Credit Facility, the Partnership restricted from paying
distributions to its common unitholders while borrowings are outstanding under the $675 Million Credit Facility.
Our ability to service our
debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic
conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not
sufficient to service our current or future indebtedness, we will be forced to take actions such as reducing or eliminating distributions
to our unitholders, reducing or delaying our business activities, acquisitions, investments or capital expenditures, selling assets, restructuring
or refinancing our debt, or seeking additional equity capital or bankruptcy protection. We may not be able to effect any of these remedies
on satisfactory terms, or at all. Additionally, the ability of our Sponsor to perform its obligations under the $30 Million Revolving
Credit Facility will depend on a number of factors that may be beyond our control and may include, among other things, general economic
conditions and the overall financial condition of our Sponsor.
We may be unable to comply with covenants
in our debt agreements or any future financial obligations that impose operating and financial restrictions on us.
Certain of our existing
and future debt agreements, which may be secured by mortgages on our vessels, impose and will impose certain operating and financial restrictions
on us, including ensuring that the outstanding amount of the debt agreement does not exceed a certain percentage of the aggregate fair
market value of the mortgaged vessel(s) under the applicable credit facility, restricting our operations or ability to incur additional
debt, pay distributions consistent with our past practices or issue equity that would result in our Sponsor ceasing to directly own at
least 30% of our total common partnership interest. The operating and financial restrictions and covenants in our $675 Million Credit
Facility (as defined below) and any new or amended credit facility we enter into in the future, could adversely affect our ability to
finance future operations or capital needs or to engage, expand or pursue our business activities.
For example, our $675 Million
Credit Facility requires the consent of our lenders to, among other things:
| · | incur or guarantee indebtedness outside of our ordinary course of business; |
| · | sell, lease, transfer or otherwise dispose of our assets; |
| · | redeem, repurchase or otherwise reduce any of our equity or share capital; |
| · | declare or pay any distribution, charge, fee or distribution to our common unitholders (as described below); |
| · | change the approved Manager; and |
| · | vary the vessels’ time charters. |
Pursuant to the terms of
the $675 million Credit Facility, it is considered a change of control, which could allow the lenders to declare the facility payable
within ten days, if, among other things, (i) Dynagas Holdings Ltd. ceases to own 30% of our total common units outstanding,
(ii) any person or persons acting in consent (other than certain permitted holders as defined therein) own a higher percentage of our
total common units than in Dynagas LNG Partners LP ("Parent") than our Sponsor and/or have the ability to control, either directly
or indirectly, the affairs or composition of the majority of the board of directors or the board of managers of the Parent, (iii) Mr.
George Prokopiou ceases to be our Chairman and/or member of our board, or (iv) Dynagas GP LLC ceases to be our general partner.
The $675 Million Credit
Facility also requires us to comply with the International Safety Management Code and to maintain valid safety management certificates
and documents of compliance at all times and also comply with the following financial covenants:
| · | maintain cash and cash equivalents of not less than 8% of our total liabilities; and |
| · | maintain a consolidated leverage ratio of total liabilities to the aggregate market value of our total
assets of no more than 0.7:1.0. |
Should our charter
rates or vessel values materially decline in the future, we may seek to obtain waivers or amendments from our lenders with respect to
such financial ratios and covenants, or we may be required to take action to reduce our debt or to act in a manner contrary to our business
objectives to meet any such financial ratios and satisfy any such financial covenants. Events beyond our control, including changes in
the economic and business conditions in the shipping markets in which we operate, interest rate developments, changes in the funding
costs of our banks, changes in vessel earnings and asset valuations, sanctions imposed against Russia, outbreaks of epidemic and pandemic
of diseases, such as the ongoing COVID-19 pandemic, may affect our ability to comply with these covenants. We cannot assure you that
we will meet these ratios or satisfy these covenants or that our lenders will waive any failure to do so or amend these requirements.
The operating restrictions
contained in our existing and future debt agreements may prohibit or otherwise limit our ability to, among other things:
| · | obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or
other purposes on favorable terms, or at all; |
| · | make distributions to unitholders; |
| · | incur additional indebtedness, create liens or issue guarantees; |
| · | charter our vessels or change the terms of our existing charter agreements; |
| · | sell, transfer or lease our assets or vessels or the shares of our vessel-owning subsidiaries; |
| · | make investments and capital expenditures; |
| · | reduce our partners' capital; and |
| · | undergo a change in ownership or Manager. |
A breach of any of the covenants
in, or our inability to maintain the required financial ratios under, our current or future debt agreements would prevent us from borrowing
additional money under such debt agreements and could result in a default thereunder. Therefore, we may need to seek permission from our
lenders in order to engage in some actions. Our lenders' interests may be different from ours and we may not be able to obtain our lenders'
permission when needed. This may limit our ability to pay distributions on our Series A Preferred Units and Series B Preferred Units,
finance our future operations or capital requirements, make acquisitions or pursue business opportunities.
In addition, our credit
facilities may prohibit the payment of distributions to our Series A and Series B preferred unitholders upon the occurrence of events
of default under our debt agreement, which may include, among other things, the following:
| · | failure to pay any principal, interest, fees, expenses or other amounts when due; |
| · | failure to observe any other agreement, security instrument, obligation or covenant beyond specified cure
periods in certain cases; |
| · | default under other indebtedness; |
| · | an event of insolvency or bankruptcy; |
| · | failure of any representation or warranty to be materially correct; and |
| · | a change of control whereby the Partnership or its affiliates no longer hold, indirectly or directly,
100% of the interests in Arctic LNG Carriers. |
A violation of any of the
provisions contained in our existing or future debt agreements may constitute an event of default under such debt agreement, which, unless
cured or waived or modified by our lenders, provides our lenders with the right to, among other things, declare the outstanding debt,
together with accrued interest and other fees, to be immediately due and payable, or to require us to post additional collateral, enhance
our equity and liquidity, increase our interest payments, pay down our indebtedness to a level where we are in compliance with our loan
covenants, sell vessels in our Fleet, reclassify our indebtedness as current liabilities and accelerate our indebtedness and foreclose
their liens on our vessels and the other assets securing the credit facilities, which would impair our ability to continue to conduct
our business.
See "Item 5. Operating
and Financial Review and Prospects—B. Liquidity and Capital Resources."
Risks Relating to our Series A and Series
B Preferred Units
Our Series A Preferred Units and our Series
B Preferred Units are subordinate to our indebtedness, and the interests of holders of Series A Preferred Units and Series B Preferred
Units could be diluted by the issuance of additional preferred units, including additional Series A Preferred Units or Series B Preferred
Units, and by other transactions.
Our Series A Preferred Units
and our Series B Preferred Units are subordinated to all of our existing and future indebtedness. The payment of principal and interest
on our debt reduces cash available for distributions and therefore, our ability to pay distributions on, redeem at our option or pay the
liquidation preference on our Series A Preferred Units and our Series B Preferred Units in liquidation or otherwise may be subject to
prior payments due to the holders of our indebtedness.
The issuance of additional
limited partner interests on a parity with or senior to our Series A Preferred Units and Series B Preferred Units would dilute the interests
of the holders of our Series A Preferred Units and Series B Preferred Units, as applicable, and any issuance of senior securities or parity
securities or additional indebtedness could affect our ability to pay distributions on, redeem or pay the liquidation preference on our
Series A Preferred Units and our Series B Preferred Units. No provisions relating to our Series A Preferred Units and our Series B Preferred
Units protect the holders of our Series A Preferred Units and our Series B Preferred Units, as applicable, in the event of a highly leveraged
or other transaction, including a merger or the sale, lease or conveyance of all or substantially all of our assets or business, which
might adversely affect the holders of our Series A Preferred Units and our Series B Preferred Units.
In the event of any liquidation event,
the amount of your liquidation preference is fixed and you will have no right to receive any greater payment regardless of the circumstances.
In the event of any liquidation,
dissolution or winding up of our affairs, whether voluntary or involuntary, the payment due upon a liquidation event is fixed at
a redemption price of $25.00 per unit plus an amount equal to all accumulated and unpaid distributions up to, and including, the date
of liquidation. If, in the case of a liquidation event, there are remaining assets to be distributed after payment of this amount, you
will have no right to receive or to participate in these amounts. Furthermore, if the market price of your Series A Preferred Units or
your Series B Preferred Units is greater than the applicable liquidation preference, you will have no right to receive the market price
from us upon our liquidation.
As a holder of Series A Preferred Units
or Series B Preferred Units, you have extremely limited voting rights.
Your voting rights as a
holder of Series A Preferred Units or Series B Preferred Units are extremely limited. Our common units are the only class of limited partner
interests carrying full voting rights. Holders of the Series A Preferred Units and Series B Preferred Units generally have no voting rights.
However, in the event that six quarterly distributions, whether consecutive or not, payable on our Series A Preferred Units or our
Series B Preferred Units or any other parity securities (if applicable), are in arrears, the holders of such Series A Preferred Units
or Series B Preferred Units will have the right, voting together as a class with all other classes or series of parity securities (if
applicable) upon which like voting rights have been conferred and are exercisable, to elect one additional director to serve on our Board
of Directors, and the size of our Board of Directors will be increased as needed to accommodate such change (unless the holders of Series
A Preferred Units, Series B Preferred Units, and parity securities (if applicable) upon which like voting rights have been conferred,
voting as a class, have previously elected a member of our Board of Directors, and such director continues then to serve on the Board
of Directors). The right of such holders of Series A Preferred Units and Series B Preferred Units to elect a member of our Board of Directors
will continue until such time as all accumulated and unpaid distributions on the Series A Preferred Units and Series B Preferred Units
have been paid in full.
Market interest rates may adversely affect
the value of our Series A Preferred Units and our Series B Preferred Units.
One of the factors that
will influence the price of our Series A Preferred Units and our Series B Preferred Units will be the distribution yield on such Series
A Preferred Units and the Series B Preferred Units (as a percentage of the price of our Series A Preferred Units or our Series B Preferred
Units, as applicable) relative to market interest rates. An increase in market interest rates may lead prospective purchasers of our Series
A Preferred Units or our Series B Preferred Units to expect a distribution yield higher than what is paid on the applicable Series A Preferred
Units or Series B Preferred Units, and higher interest rates would likely increase our borrowing costs which could potentially decrease
funds available for distributions to our unitholders. Accordingly, higher market interest rates could cause the market price of our Series
A Preferred Units or our Series B Preferred Units to decrease.
The Series A Preferred Units and the Series
B Preferred Units are redeemable at our option.
We may redeem, at our option,
all or, from time to time, part of the Series A Preferred Units on or after August 12, 2020. If we redeem your Series A Preferred Units,
you will be entitled to receive a redemption price equal to $25.00 per unit plus an amount equal to all accumulated and unpaid distributions
thereon to the date of redemption. We may redeem, at our option, all or, from time to time, part of our Series B Preferred Units on or
after November 22, 2023. If we redeem your Series B Preferred Units, you will be entitled to receive a redemption price equal to $25.00
per unit plus an amount equal to all accumulated and unpaid distributions thereon to the date of redemption. It is likely that we would
choose to exercise our optional redemption right only when prevailing interest rates have declined, which would adversely affect your
ability to reinvest your proceeds from the redemption in a comparable investment with an equal or greater yield to the yield on the applicable
series of the preferred units had such series of preferred units not been redeemed. We may elect to exercise our partial redemption right
on multiple occasions.
We continuously evaluate potential transactions
which we believe enhance unitholder value or are in the best interests of the Partnership, the announcement of which may have an adverse
effect on unitholders and other stakeholders.
We continuously evaluate
potential transactions that we believe will be accretive to earnings, enhance unitholder value or are in the best interests of the Partnership,
which may include pursuit of other business combinations, the acquisition of vessels or related businesses, the expansion of our operations,
repayment of existing debt, unit repurchases, short term investments, going private transactions or other transactions. The announcement
and pendency of any such transaction could have an adverse effect on our unitholders, relationships with customers and third-party service
providers.
Risks Relating to Conflicts of Interest
Our Sponsor, our General Partner and their
respective affiliates own a significant interest in us and have conflicts of interest and limited duties to us and our common unitholders,
which may permit them to favor their own interests to your detriment.
Members of the Prokopiou
Family control our Sponsor, our Manager and our General Partner. Our Sponsor currently owns 15,595,000 of our common units, representing
approximately 42.4% of the outstanding common units and our General Partner owns a 0.1% General Partner interest in us and 100%
of our incentive distribution rights and therefore may have considerable influence over our actions. Our $675 Million Credit Facility
requires that our Sponsor owns at least 30% of our total common units outstanding. The interests of our Sponsor and the members of the
Prokopiou Family may be different from your interests and the relationships described above could create conflicts of interest. We cannot
assure you that any conflicts of interest will be resolved in your favor.
Conflicts of interest exist
and may arise in the future as a result of the relationships between our General Partner and its affiliates, including Dynagas Holding
Ltd., on the one hand, and us and our unaffiliated limited partners, on the other hand. Our General Partner has a fiduciary duty to make
any decisions relating to our management in a manner beneficial to us and our unitholders. Similarly, our Board of Directors has fiduciary
duties to manage us in a manner beneficial to us, our General Partner and our limited partners. Certain of our officers and directors
will also be officers of our Sponsor or its affiliates
and will have fiduciary duties to our Sponsor or its affiliates that may cause them to pursue business strategies that disproportionately
benefit our Sponsor or its affiliates or which otherwise are not in the best interests of us or our unitholders.
As a result of these
relationships, conflicts of interest may arise between us and our unaffiliated limited partners on the one hand, and our Sponsor and its
affiliates, including our General Partner, on the other hand. Although a majority of our directors are elected by our common unitholders,
our General Partner, through its appointed directors, has certain influence on decisions made by our Board of Directors. Our Board of
Directors has a Conflicts Committee comprised of independent directors. Our Board of Directors may, but is not obligated to, seek approval
of the Conflicts Committee for resolutions of conflicts of interest that may arise as a result of the relationships between our Sponsor
and its affiliates, on the one hand, and us and our unaffiliated limited partners, on the other hand. The resolution of these conflicts
may not be in the best interest of us or our unitholders. We, our officers and directors and our General Partner will not owe any fiduciary
duties to holders of the Series A Preferred Units and Series B Preferred Units other than a contractual duty of good faith and fair dealing
pursuant to the Partnership Agreement. There can be no assurance that a conflict of interest will be resolved in favor of us.
These conflicts include,
among others, the following situations:
| · | neither our Partnership Agreement nor any other agreement requires our Sponsor or our General Partner
or their respective affiliates to pursue a business strategy that favors us or utilizes our assets, and their officers and directors have
a fiduciary duty to make decisions in the best interests of their respective unitholders, which may be contrary to our interests; |
| · | our Partnership Agreement provides that our General Partner may make determinations or take or decline
to take actions without regard to our or our unitholders' interests. Specifically, our General Partner may exercise its call right, pre-emptive
rights, registration rights or right to make a determination to receive common units in exchange for resetting the target distribution
levels related to the incentive distribution rights, consent or withhold consent to any merger or consolidation of the Partnership, appoint
certain directors or vote for the election of any director, vote or refrain from voting on amendments to our Partnership Agreement that
require a vote of the outstanding units, voluntarily withdraw from the Partnership, transfer (to the extent permitted under our Partnership
Agreement) or refrain from transferring its units, the General Partner interest or incentive distribution rights or vote upon the dissolution
of the Partnership; |
| · | our General Partner and our directors and officers have limited their liabilities and any fiduciary duties
they may have under the laws of the Marshall Islands, while also restricting the remedies available to our unitholders, and, as a result
of purchasing common units, unitholders are treated as having agreed to the modified standard of fiduciary duties and to certain actions
that may be taken by the General Partner and our directors and officers, all as set forth in the Partnership Agreement; |
| · | our General Partner and our Manager are entitled to reimbursement of all reasonable costs incurred by
them and their respective affiliates for our benefit; our Partnership Agreement does not restrict us from paying our General Partner and
our Manager or their respective affiliates for any services rendered to us on terms that are fair and reasonable or entering into additional
contractual arrangements with any of these entities on our behalf; |
| · | our General Partner may exercise its right to call and purchase our common units if it and its affiliates
own more than 80% of our common units; and is not obligated to obtain a fairness opinion regarding the value of the common units to be
repurchased by it upon the exercise of its limited call right; and |
| · | although a majority of our directors are elected by common unitholders, our General Partner will likely
have substantial influence on decisions made by our Board of Directors. |
Our General Partner has limited its liability
regarding our obligations.
Our General Partner has
limited its liability under contractual arrangements so that the other party has recourse only to our assets and not against our General
Partner or any affiliate of our General Partner, or any of their respective assets. The Partnership Agreement provides that any action
taken by our General Partner to limit its or our liability is not a breach of our General Partner's fiduciary duties owed to common unitholders
or a breach of our General Partner's contractual duty of good faith and fair dealing to holders of the Series A and Series B Preferred
Units even if we could have obtained terms that are more favorable without the limitation on liability.
Neither our Partnership Agreement nor
any other agreement requires our Sponsor to pursue a business strategy that favors us or utilizes our assets or dictates what markets
to pursue or grow. Our Sponsor's directors and executive officers have a fiduciary duty to make these decisions in the best interests
of the shareholders of our Sponsor, which may be contrary to our interests.
Because certain of our officers
and directors are also officers of our Sponsor and its affiliates, such directors have fiduciary duties to our Sponsor and its affiliates
that may cause them to pursue business strategies that disproportionately benefit our Sponsor, or which are otherwise not in the best
interests of us or our unitholders.
Our General Partner is allowed to take
into account the interests of parties other than us, such as our Sponsor.
Our Partnership Agreement
contains provisions that reduce the standards to which our General Partner would otherwise be held by Marshall Islands fiduciary duty
law. For example, our Partnership Agreement permits our General Partner to make a number of decisions in its individual capacity, as opposed
to in its capacity as our General Partner. This entitles our General Partner to consider only the interests and factors that it desires,
and it has no duty or obligations to give any consideration to any interest of or factors affecting us, our affiliates or any unitholder.
Decisions made by our General Partner in its individual capacity will be made by its sole owner, Dynagas Holding Ltd. Specifically, our
General Partner will be considered to be acting in its individual capacity if it exercises its call right, pre-emptive rights, registration
rights or right to make a determination to receive common units in a resetting of the target distribution levels related to its incentive
distribution rights, consents or withholds consent to any merger or consolidation of the Partnership, appoints any directors or votes
for the election of any director, votes or refrains from voting on amendments to our Partnership Agreement that require a vote of the
outstanding units, voluntarily withdraws from the Partnership, transfers (to the extent permitted under our Partnership Agreement) or
refrains from transferring its units, General Partner interest or incentive distribution rights it owns or votes upon the dissolution
of the Partnership.
Substantial future sales of our common
units in the public market could cause the price of our common units to fall.
We have granted registration
rights to our Sponsor and certain its affiliates pursuant to our Partnership Agreement. These unitholders have the right, subject to some
conditions, to require us to file registration statements covering any of our common or other equity securities owned by them or to include
those securities in registration statements that we have or may file for ourselves or other unitholders. As of the date of this annual
report, our Sponsor owns 15,595,000 common units. Following their registration and sale under the applicable registration statement, those
securities will become freely tradable. Any sale by our Sponsor of a number of our common units or other securities could cause the price
of our common units to decline.
Common unitholders, holders of our Series
A Preferred Units, and holders of our Series B Preferred Units have no right to enforce obligations of our General Partner and its affiliates
under agreements with us.
Any agreements between us,
on the one hand, and our General Partner and its affiliates, on the other, do not and will not grant to the holders of our common units,
Series A Preferred Units and Series B Preferred Units separate and apart from us, the right to enforce the obligations of our General
Partner and its affiliates in our favor.
Contracts between us, on the one hand,
and our General Partner and its affiliates, on the other, will not be the result of arm's-length negotiations.
Neither our Partnership
Agreement nor any of the other agreements, contracts and arrangements between us and our General Partner and its affiliates are or will
be the result of arm's-length negotiations. Our Partnership Agreement generally provides that any affiliated transaction, such as an agreement,
contract or arrangement between us and our General Partner and its affiliates, must be:
| · | on terms no less favorable to us than those generally being provided to or available from unrelated third-parties;
or |
| · | "fair and reasonable" to us, taking into account the totality of the relationships between the
parties involved (including other transactions that may be particularly favorable or advantageous to us). |
Our Manager, which provides
our executive officers and certain management and administrative services to us, may also enter into additional contractual arrangements
with any of its affiliates on our behalf; however, there is no obligation of any affiliate of our Manager to enter into any contracts
of this kind.
Common units are subject to our General
Partner's limited call right.
Our General Partner may
exercise its right to call and purchase common units as provided in the Partnership Agreement or assign this right to one of its affiliates
or to us. Our General Partner may use its own discretion, free of fiduciary duty restrictions, in determining whether to exercise this
right. Our General Partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by
it upon the exercise of this limited call right. As a result, a common unitholder may have common units purchased from the unitholder
at an undesirable time or price.
We may choose not to retain separate counsel
for ourselves or for the holders of common units.
The attorneys, independent
accountants and others who perform services for us have been retained by our Board of Directors. Attorneys, independent accountants and
others who perform services for us are selected by our Board of Directors or the Conflicts Committee and may perform services for our
General Partner and its affiliates. We may retain separate counsel for ourselves or the holders of common units in the event of a conflict
of interest between our General Partner and its affiliates, on the one hand, and us or the holders of common units, on the other, depending
on the nature of the conflict. We do not intend to do so in most cases.
Tax Risks
In addition to the following
risk factors, please see "Item 10. Additional Information—E. Taxation" for a more complete discussion of the material
Marshall Islands and United States federal income tax consequences of owning and disposing of our common units.
We may be subject to taxes, which will
reduce our cash available for distribution to our unitholders.
We and our subsidiaries
may be subject to tax in the jurisdictions in which we are organized or operate, reducing the amount of cash available for distribution.
In computing our tax obligation in these jurisdictions, we are required to take various tax accounting and reporting positions on matters
that are not entirely free from doubt and for which we have not received rulings from the governing authorities. We cannot assure you
that upon review of these positions the applicable authorities will agree with our positions. A successful challenge by a tax authority
could result in additional tax imposed on us or our subsidiaries, further reducing the cash available for distribution. In addition, changes
in our operations or ownership could result in additional tax being imposed on us or our subsidiaries in jurisdictions in which operations
are conducted. Please see "Item 10. Additional Information—E. Taxation"
We may have to pay tax on United States-source
income, which would reduce our earnings and cash flow.
Under the U.S. Internal
Revenue Code of 1986, as amended, or the Code, the United States source gross transportation income of a ship-owning or chartering corporation,
such as ourselves, generally is subject to a 4% United States federal income tax, unless such corporation qualifies for exemption from
tax under a tax treaty or Section 883 of the Code and the Treasury Regulations promulgated thereunder. U.S. source gross transportation
income consists of 50% of the gross shipping income that is attributable to transportation that begins or ends, but that does not both
begin and end, in the United States.
We believe we qualified
for this statutory tax exemption for our taxable year ended December 31, 2021, and we intend to take this position for United States federal
income tax reporting purposes. However, there are factual circumstances beyond our control that could cause us to lose the benefit of
this tax exemption in future taxable years and thereby become subject to the 4% United States federal income tax described above.
It is noted that holders of our common units are limited to owning 4.9% of the voting power of such common units. Assuming that
such limitation is treated as effective for purposes of determining voting power under Section 883, then our 5% Unitholders could not
own 50% of more of our common units. If contrary to these expectations, our 5% Unitholders were to own 50% or more of the common
units, we would not qualify for exemption under Section 883 unless we could establish that among the closely-held group of 5% Unitholders,
there are sufficient 5% Unitholders that are qualified stockholders for purposes of Section 883 to preclude non-qualified 5% Unitholders
in the closely-held group from owning 50% or more of our common units for more than half the number of days during the taxable year. In
order to establish this, sufficient 5% Unitholders that are qualified stockholders would have to comply with certain documentation and
certification requirements designed to substantiate their identity as qualified stockholders. These requirements are onerous and there
can be no assurance that we would be able to satisfy them. The imposition of this taxation could have a negative effect on our business
and would result in decreased earnings and cash available for distribution payments to our unitholders. For a more detailed discussion,
see "Item 10. Additional Information—E. Taxation."
United States tax authorities could treat
us as a "passive foreign investment company," which would have adverse United States federal income tax consequences to United
States unitholders.
A non-U.S. entity treated
as a corporation for United States federal income tax purposes will be treated as a "passive foreign investment company" (or
PFIC) for U.S. federal income tax purposes if at least 75% of its gross income for any taxable year consists of "passive income"
or at least 50% of the average value of its assets produce, or are held for the production of, "passive income." For purposes
of these tests, "passive income" includes dividends, interest, gains from the sale or exchange of investment property, and rents
and royalties other than rents and royalties that are received from unrelated parties in connection with the active conduct of a trade
or business. For purposes of these tests, income derived from the performance of services does not constitute "passive income."
U.S. shareholders of a PFIC are subject to a disadvantageous United States federal income tax regime with respect to the income derived
by the PFIC, the distributions they receive from the PFIC, and the gain, if any, they derive from the sale or other disposition of their
interests in the PFIC. Based on our current and projected method of operation, we believe that we were not a PFIC in the year ended December
31, 2021 and do not expect to be a PFIC for any future taxable year. We have received an opinion of our United States counsel in support
of this position that concludes that the income our subsidiaries earned from certain of our time-chartering activities should not constitute
passive income for purposes of determining whether we are a PFIC. In addition, we have represented to our United States counsel that we
expect that more than 25% of our gross income for the year ended December 31, 2021 and each future year will arise from such time-chartering
activities or other income which does not constitute passive income, and more than 50% of the average value of our assets for each such
year will be held for the production of such non passive income. Assuming the composition of our income and assets is consistent with
these expectations, and assuming the accuracy of other representations we have made to our United States counsel for purposes of their
opinion, our United States counsel is of the opinion that we should not be a PFIC for the year ended December 31, 2021 year or any future
year. This opinion is based and its accuracy is conditioned on representations, valuations and projections provided by us regarding our
assets, income and charters to our United States counsel. While we believe these representations, valuations and projections to be accurate,
the shipping market is volatile and no assurance can be given that they will continue to be accurate at any time in the future.
The conclusions reached
are not free from doubt, and it is possible that the United States Internal Revenue Service, or the IRS, or a court could disagree with
this position. In addition, although we intend to conduct our affairs in a manner to avoid being classified as a PFIC with respect to
each taxable year, we cannot assure you that the nature of our operations will not change in the future and that we will not become a
PFIC in any taxable year. If the IRS were to find that we are or have been a PFIC for any taxable year (and regardless of whether we remain
a PFIC for subsequent taxable years), our U.S. unitholders would face adverse United States federal income tax consequences. See
"Item 10. Additional Information—E. Taxation" for a more detailed discussion of the United States federal income tax consequences
to United States unitholders if we are treated as a PFIC.
| ITEM 4. | INFORMATION ON THE PARTNERSHIP |
| A. | HISTORY AND DEVELOPMENT OF THE PARTNERSHIP |
Dynagas LNG Partners LP
was organized as a limited partnership in the Republic of the Marshall Islands on May 30, 2013 for the purpose of owning, operating, and
acquiring LNG carriers and other business activities incidental thereto. In October 2013, we acquired from our Sponsor three LNG
carriers, the Clean Energy, the Ob River and the Amur River (formerly named the Clean
Force), which we refer to as our Initial Fleet. In November 2013, we completed our underwritten IPO pursuant to which, the Partnership
offered and sold 8,250,000 common units to the public at $18.00 per common unit, and in connection with the closing of the IPO, the Partnership's
Sponsor, Dynagas Holding Ltd., a company beneficially wholly owned by Mr. Georgios Prokopiou, the Partnership's Chairman and major unitholder
and certain of his close family members, offered and sold 4,250,000 common units to the public at $18.00 per common unit. In connection
with the IPO, the Partnership entered into certain agreements including: (a) an omnibus agreement with the Sponsor, which provided the
Partnership the right to purchase certain identified liquefied natural gas ("LNG") carrier vessels at a purchase price to be
determined pursuant to the terms and conditions contained therein and, (b) a $30 million Revolving Credit Facility with the Sponsor to
be used for general Partnership purposes. Following our IPO we expanded our Initial Fleet and in 2014 and 2015 we acquired the Arctic
Aurora, the Yenisei River and the Lena River, each a 2013-built ice class liquefied natural gas carrier,
and the related time charter contracts, from our Sponsor, pursuant to our right to acquire such vessels under the Omnibus Agreement in
effect at that time.
On July 2, 2020, we entered
into a sales agreement, or the Original Agreement, with Virtu Americas LLC, as sales agent, for the offer and sale, from time to time,
of up to an aggregate of $30.0 million of our common units representing limited partnership interests under an "at-the-market"
offering program. In August 2020, we entered into an amended and restated ATM Sales Agreement with Virtu Americas LLC and DNB Markets,
Inc., or the A&R Sales Agreement, for the offer and sale of common units representing limited partnership interests, having an aggregate
offering price of up to $30.0 million, or the Current ATM Program. Upon entry into the A&R Sales Agreement, we terminated the prior
at-the-market program established in July of 2020 pursuant to the Original Agreement, or the Prior ATM Program. At the time of such termination,
we had issued and sold 122,580 common units resulting in net proceeds of $0.3 million, under the Original Agreement. As of the date of
this annual report, we have issued and sold 1,189,667 common units resulting in net proceeds of $3.3 million under the A&R Sales
Agreement.
As of the date of this
annual report, we have outstanding 36,802,247 common units, 35,526 general partner units, 3,000,000 9.00% Series A Cumulative Redeemable
Preferred Units, or the Series A Preferred Units and 2,200,000 Series B Fixed to Floating Cumulative Redeemable Perpetual Preferred Units
or the Series B Preferred Units. Our Sponsor currently beneficially owns approximately 42.4% of the equity interests in the
Partnership (excluding the Series A Preferred Units and the Series B 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 or Series B Preferred Units. Our common units, our Series A Preferred Units and our Series B Preferred Units trade on the New York
Stock Exchange, or NYSE, under the symbols "DLNG", "DLNG PR A" and "DLNG PR B", respectively.
Our principal executive
offices are located at Poseidonos Avenue and Foivis 2 Street 166 74 Glyfada, Athens, Greece. Our website is www.dynagaspartners.com. The
SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file
electronically with the SEC. The address of the SEC's internet site is www.sec.gov. None of the information contained on these websites
is incorporated into or forms a part of this annual report. For
more information, please see "Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Our
Borrowing Activities."
Since our IPO in November
2013, we have been a growth-oriented limited partnership focused on owning and operating LNG carriers growing our fleet from three vessels
at the time of our IPO to six vessels at the end of 2015. However, as a result of the significant challenges facing the listed midstream
energy MLP industry, our cost of equity capital remained elevated for a prolonged period, making the funding of new acquisitions challenging.
All of the vessels in our Fleet are currently contracted on time charters with international energy companies, including Gazprom, Equinor
and Yamal, which we expect to provide us with the benefits of fixed-fee contracts, predictable cash flows and high utilization rates.
We are currently focusing
our capital allocation on debt repayment, prioritizing balance sheet strength, in order to reposition the Partnership for potential future
growth if our cost of capital allows us to access debt and equity capital on acceptable terms. As a result, if we are able to raise
new debt or equity capital on terms acceptable to the Partnership in the future, we intend to leverage the reputation, expertise and relationships
with our charterers, our Sponsor and our Manager in growing our core business and potentially pursuing further business and growth opportunities
in transportation of energy or other energy-related projects including floating storage regassification units, 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. In connection with such plans for growth, we 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 and businesses that we may acquire, and, subject to favorable market conditions, we may raise capital in the public
or private markets, including through incurring additional debt, debt or equity offerings of our securities or in other transactions.
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. For further information
on the risks associated with our business, please see "Item 3. Key Information—D. Risk Factors".
Our Fleet
As of April 29, 2022, we
owned and operated a fleet of six LNG carriers, consisting of the three modern steam turbine LNG carriers in our Initial Fleet, the Clean
Energy, the Ob River and the Amur River (formerly named the Clean Force), and three
modern tri-fuel diesel electric (TFDE) propulsion technology Ice Class LNG carriers that we additionally acquired from our Sponsor the Arctic
Aurora, the Yenisei River, and the Lena River, which we collectively refer to as our "Fleet."
As of April 29, 2022, the vessels in our Fleet had an average age of 11.7 years and are contracted under multi-year charters with an average
remaining charter term of approximately 6.8 years. All of the vessels in our Fleet vessels are currently employed on multi-year time charters
with international energy companies such as Gazprom, Equinor and Yamal.
Since the end of the first
fiscal year following our IPO, which occurred in November 2013 and as of the date of this annual report, we have increased the total capacity
of the vessels in our Fleet by approximately 104% and as of the date of this annual report, the estimated contracted revenue backlog of
our Fleet was approximately $1.0 billion, $0.14 billion of which is a variable hire element contained in certain time charter contracts
with Yamal. The variable hire rate on these time charter contracts with Yamal is calculated based on two components—a capital cost
component and an operating cost component. The capital cost component is a fixed daily amount. The daily amount of the operating cost
component, which is intended to pass the operating costs of the vessel to the charterer in their entirety including dry-docking costs,
is set annually and adjusted at the end of each year to compensate us for the actual costs we incur in operating the vessel. Dry-docking
expenses are budgeted in advance within the year of the dry-dock and are reimbursed by Yamal immediately following the dry-dock. The actual
amount of revenues earned in respect of such operating cost component of such variable hire rate may therefore differ from the amounts
included in the revenue backlog estimate due to the annual variations in the respective vessels' operating costs.
The average remaining contract duration
is approximately 6.8 years. The estimated 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. Our Fleet is managed by our Manager, Dynagas Ltd., a
company controlled by Mr. Georgios Prokopiou. See "Item 7. Major Unitholders and Related Party Transactions—B. Related
Party Transactions."
All of the vessels in our
Fleet other than the Clean Energy have been assigned with Lloyds Register Ice Class notation 1A FS, or Ice Class, equivalent to ARC4 of
the Russian Maritime Register of Shipping Rules, designation for hull and machinery and are fully winterized, which means that they are
designed to call at ice-bound and harsh environment terminals and to withstand temperatures up to minus 30 degrees Celsius. According
to Drewry, as of February 28, 2022, only 32 LNG carriers, representing 4.9% of the LNG vessels in the global LNG fleet, have an Ice Class
1A and Ice-class 1A super designation or equivalent rating. Moreover, in 2012, we were the first company in the world to operate LNG carriers
on the Northern Sea Route, which is a shipping lane from the Atlantic Ocean to the Pacific Ocean entirely in Arctic waters, and continue
to be one of a limited number of vessel operators to currently do so. In addition, we believe that each of the vessels in our Fleet is
optimally sized with a carrying capacity of between approximately 150,000 and 155,000 cbm, which allows us to maximize operational flexibility
as such medium-to-large size LNG vessels are compatible with most existing LNG terminals around the world. We believe that these specifications
enhance our trading capabilities and future employment opportunities because they provide greater diversity in the trading routes available
to our charterers.
We believe that the key
characteristics of each of the vessels in our Fleet include the following:
| · | optimal sizing with a carrying capacity of between approximately 150,000 and 155,000 cbm (which is a medium-
to large-size class of LNG carrier) that maximizes operational flexibility as such vessel is compatible with most existing LNG terminals
around the world; |
| · | the vessels in our Fleet consist of two series of sister vessels, which are vessels built at the same
shipyard, Hyundai Heavy Industries Co. Ltd., that share (i) a near-identical hull and superstructure layout, (ii) similar displacement,
and (iii) roughly comparable features and equipment; |
| · | utilization of a membrane containment system that uses insulation built directly into the hull of the
vessel with a membrane covering inside the tanks designed to maintain integrity and that uses the vessel's hull to directly support the
pressure of the LNG cargo, which we refer to as a "membrane containment system" (see "—The International Liquefied
Natural Gas (LNG) Shipping Industry—The LNG Fleet" for a description of the types of LNG containment systems); and |
| · | double-hull construction, based on the current LNG shipping industry standard. |
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According to Drewry, as
of February 28, 2022, there were only 52 LNG carriers in the worldwide LNG trading fleet, including the six vessels in our Fleet, in
the size range of 149,000-155,000 cbm, of which 45 have membrane cargo containment system. There are no LNG carriers in the same size
segment in the order book, which have a moss spherical containment system, a well-established spherical containment system designed in
Norway and that have been in use for over 49 years. The following table sets forth additional information about our Fleet as of the date
of this annual report:
Vessel Name |
|
Year
Built |
|
Cargo Capacity
(cbm) |
|
Ice
Class |
|
Propulsion |
|
Charterer |
|
Estimated Earliest Charter
Expiration |
|
Latest Charter
Expiration |
|
Estimated Latest Charter
Expiration including options to extend |
Clean Energy |
|
2007 |
|
149,700 |
|
No |
|
Steam |
|
Gazprom |
|
March 2026 |
|
April 2026 |
|
n/a |
Ob River |
|
2007 |
|
149,700 |
|
Yes |
|
Steam |
|
Gazprom |
|
March 2028 |
|
May 2028 |
|
n/a |
Amur River |
|
2008 |
|
149,700 |
|
Yes |
|
Steam |
|
Gazprom |
|
June 2028 |
|
July 2028 |
|
n/a |
Arctic Aurora |
|
2013 |
|
155,000 |
|
Yes |
|
TFDE * |
|
Equinor |
|
September 2023 |
|
October 2023(1) |
|
n/a |
Yenisei River |
|
2013 |
|
155,000 |
|
Yes |
|
TFDE * |
|
Yamal |
|
Q4 2033 |
|
Q2 2034 |
|
Q2 2049(2) |
Lena River |
|
2013 |
|
155,000 |
|
Yes |
|
TFDE * |
|
Yamal |
|
Q2 2034 |
|
Q3 2034 |
|
Q4 2049(3) |
* As
used in this annual report, "TFDE" refers to tri-fuel diesel electric propulsion system.
| (1) | In April 2021, we entered into a new time charter party agreement with Equinor for the employment
of Arctic Aurora, with an initial contract term of two years + 45 days. Under the new time charter agreement, the Arctic Aurora was delivered
to Equinor on September 15, 2021. This charter is in direct continuation of the vessel's previous charter with Equinor, which means that
this new charter commenced immediately following the prior charter. |
| (2) | On August 14, 2018, the Yenisei River was delivered early to Yamal immediately upon completion
of its mandatory statutory class five-year special survey and dry-docking, pursuant to an addendum to the charter party with Yamal under
which we agreed to extend the firm charter period from 15 years to 15 years plus 180 days. The charter contract for the Yenisei
River with Yamal in the Yamal LNG Project has an initial term of 15.5 years, which may be extended at Charterers' option by three
consecutive periods of five years. |
| (3) | On July 1, 2019, the Lena River commenced employment under its long term charter with
Yamal. The charter contract for the Lena River with Yamal in the Yamal LNG Project has an initial term of 15 years, which
may be extended at Charterers' option by three consecutive periods of five years. |
Our Chartering Strategy and Charterers
We seek to employ our vessels
on multi-year time charters with international energy companies that provide us with the benefits of stable cash flows and high utilization
rates. We charter our vessels for a fixed period of time at daily rates that are generally fixed, but which could contain a variable component
to adjust for, among other things, inflation and/or to offset the effects of increases in operating expenses.
In April 2021, we entered
into a new time charter party agreement with Equinor for the employment of Arctic Aurora, with an initial contract term of two years
+ 45 days. Under the new time charter agreement, the Arctic Aurora was delivered to Equinor on September 15, 2021. This charter is in
direct continuation of the vessel's previous charter with Equinor, which means that this new charter commenced immediately following
the prior charter.
The Amur
River is employed under a 13-year charter party with Gazprom that expires in 2028.
The Ob River is
employed under a ten-year charter party with Gazprom that expires in 2028.
The Clean Energy is
employed under an eight-year charter party with Gazprom that expires in 2026.
On August 14, 2018, immediately
upon completion of its mandatory statutory class five-year special survey and dry-docking, the Yenisei River was delivered
earlier than anticipated under its multi-year charter contract with Yamal for the Yamal LNG project. As a result, we agreed with Yamal
to extend the firm charter period from 15 years to 15 years plus 180 days. The initial term of the charter may be extended at Charterers'
option by three consecutive periods of five years.
On July 1, 2019, the Lena
River commenced employment under its multi-year time charter contract with Yamal in the Yamal LNG Project, with an initial term
of 15 years, which may each be extended at Charterers' option by three consecutive periods of five years.
Based on the charter contracts
described in the preceding paragraphs and the minimum expected number of days committed under those contracts (excluding options to extend),
as of April 29, 2022 we had estimated contracted revenue backlog of approximately $1.0 billion, $0.14 billion of which relates to the
operating expenses and estimated portion of the hire contained in certain time charter contracts with Yamal, subject to yearly adjustments
on the basis of the actual operating costs incurred within each year. The actual amount of revenues earned in respect of such variable
hire rate may therefore differ from the amounts included in the revenue backlog estimate due to the yearly variations in the respective
vessels' operating costs, notwithstanding our current estimated contracted backlog. The average remaining contract duration is approximately
6.8 years.
We may not be able to perform
under these contracts due to events within or beyond our control, and our counterparty may seek to cancel or renegotiate our contracts
for various reasons. Our inability or the inability of our counterparty, to perform under the respective contractual obligations
may affect our ability to realize the estimated contractual backlog listed 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 for which certain of our vessels are contracted to be employed is
abandoned or underutilized due to changes in the demand for LNG.
In both 2021 and 2020
we earned 84% of our revenues from Gazprom and Yamal, both of which primarily trade from Russian LNG ports. Due to the recent
conflicts between Russia and the Ukraine, the United States (“U.S.”), European Union (“E.U.”), Canada and
other Western countries and organizations announced and enacted from February 2022 until the date of this report, numerous sanctions
against Russia. However, to date, such sanctions have not expressly prohibited LNG shipping and have not had any adverse effects to
the Partnership’s time charter contracts. The recent conflict between Russia and Ukraine is, however, still ongoing, which may
result in the imposition of further economic sanctions in addition to the ones already announced by the United States, Europe,
amongst other countries which could adversely affect our charterers and our future revenues from our time charter contracts with
Gazprom and Yamal.
For information on our customer
concentration, please see "Item 11. Quantitative and Qualitative Disclosure About Market Risk—Concentration of Credit Risk."
The International Liquefied Natural Gas
(LNG) Shipping Industry
All the information and
data presented in this section, including the analysis of the various sectors of the international liquefied natural gas (LNG) shipping
industry has been provided by Drewry Shipping Consultants, Ltd., or Drewry, an independent consulting and research company. Drewry has
advised that the statistical and graphical information contained herein is drawn from its database and other sources. In connection therewith,
Drewry has advised that: (a) certain information in Drewry's database is derived from estimates or subjective judgments; (b) the information
in the databases of other maritime data collection agencies may differ from the information in Drewry's database; and (c) while Drewry
has taken reasonable care in the compilation of the statistical and graphical information herein and believes it to be accurate and correct,
data compilation is subject to limited audit and validation procedures.
Overview of Natural Gas Market
Natural gas is one of the
key sources of global energy, including oil, coal, hydroelectricity, solar, wind, and nuclear power. In the last three decades, demand
for natural gas has grown faster than the demand for any other fossil fuel. Since the early 1970s, natural gas' share of the total global
primary energy consumption has risen from 18.1% in 1970 to 24.9% in 2021.
Natural Gas Share of Primary Energy Consumption:
1970-20211
(% – Based On Million Tons Oil Equivalent)
(1) Provisional estimate
Source: BP Statistical Review, Shell LNG
outlook, Drewry
Natural gas has a number
of advantages that make it a competitive source of energy in the future. Apart from being abundant in supply, natural gas is the lowest
carbon-intensive fossil fuel and least affected by the various regulatory policies aimed to curb greenhouse gas emissions. In recent
years, consumption of natural gas has risen steadily due to global economic growth, increasing energy demand, consumers' desires to diversify
energy sources, market deregulation, competitive pricing, and recognition that natural gas is a cleaner energy source compared to coal
and oil. The level of carbon dioxide emissions and pollutants from natural gas in power generation are 50 to 60 percent lower than the
level of carbon dioxide emissions and pollutants from coal-fired power plants. Natural gas emits 15 to 20 percent less heat-trapping
gases than gasoline/gas oil when burned in typical automobile engines.
Natural gas is primarily
used for power generation and heating. According to BP Statistical Review of World Energy - June 2021, worldwide natural gas reserves
are estimated at 188.1 trillion cubic meters (cbm), which is enough for nearly 49 years of supply at current rates of consumption. During
2011-2021, natural gas consumption rose 2.0% per annum, with growth of 3.6% per annum in each of the Middle East, Africa and Asia-Pacific,
followed by 2.6% per annum in North-America. After declining 2.1% in 2020, global natural gas consumption surged 3.7% in 2021 mainly driven
by the sharp recovery in global economy.
In the last decade, a large
part of the growth in natural gas consumption has been accounted for by Asia-Pacific, the Middle East and Africa regions, where gas consumption
has increased nearly 1.4 times between 2011 and 2021.
World Natural Gas Consumption: 1970-20211
(Million Tons Oil Equivalent)
(1) Provisional estimate
Source: BP Statistical Review, Drewry
The International Energy
Agency (IEA) has stated that global natural gas reserves are large enough to accommodate rapid expansion of natural gas demand for several
decades to come. Although natural gas reserves and production are widespread, the geographical disparity between areas of production and
areas of consumption has been the principal stimulus of international trade in natural gas.
World Natural Gas Production: 1970-20211
(Million Tons Oil Equivalent)
(1) Provisional estimate
Source: BP Statistical Review, Drewry
Natural gas production in
North America has increased due to the emergence of new techniques, such as horizontal drilling and hydraulic fracturing, to access and
extract the shale gas reserves. United States (U.S.) domestic gas production has exceeded domestic gas consumption for a large part of
the year, which may reduce future gas import rates. Additionally, rising U.S. domestic production may drive down domestic gas prices and
raise the likelihood of U.S. gas exports.
As a result of these developments,
the North American gas market is moving in a different cycle from that of the rest of the world, and there is a price differential with
other markets as indicated in the chart below. Regional price differentials create the opportunity for arbitrage and also act as a catalyst
for the construction of new productive capacity. Given these conditions, the interest in exporting LNG from the U.S. has grown and a number
of new liquefaction plants have come up in the last few years. LNG prices surged in both Asia and Europe in the latter part of 2021 on
account of high LNG demand from Europe. However, this price differential has reduced substantially since 2014 due to a sharp drop in LNG
prices in the international market which has led to delay in some new planned facilities. In the latter part of 2018, the price of natural
gas in key Asian market such as Japan, South Korea and Taiwan increased due to firm winter demand, whereas LNG prices in China softened
in December 2018 due to high cargo availability and low demand. While high restocking activity in the third quarter of 2018 kept China's
winter LNG imports stable, LNG prices failed to improve despite increased seasonal consumption. In 2019, LNG prices declined on account
of high inventory in Europe and Asia, mild winter across the northern hemisphere, and slowing momentum of China's LNG demand. China's
LNG demand faltered in 2019 due to lower economic growth and slower pace of the switch from coal to LNG. However, LNG prices surged in
December 2020 and January 2021 in Asian countries on account of harsher-than-expected winter, but have since softened as the winter-led
heating demand receded. Low wind energy production, reduced Russian pipeline supply along with weak LNG imports drove European LNG prices
higher in 2021, while robust demand and competition with Europe led Asian spot prices to increase.
Natural Gas Prices: 2010-January 2022
(U.S. $ per MMBtu)
Source: GTIS, Drewry
The LNG Market
To turn natural gas into
the liquefied form, natural gas must be super cooled to a temperature of approximately minus 260 degrees Fahrenheit. This process reduces
the gas to approximately 1/600th of its original volume in the gaseous state. Reducing the volume enables economical storage and transportation
by ship over long distances. LNG is transported through sea in specially built tanks on double-hulled ships to a receiving terminal, where
it is unloaded and stored in heavily insulated tanks. The LNG is then returned to its gaseous state, or regasified, in regasification
facilities at the receiving terminal. Finally, the regasified LNG is moved through pipeline for distribution to natural gas customers.
Source: Drewry
LNG Supply
Globally, 115.7 million
tons of new LNG production capacity is under construction, 203.5 million tons of new LNG production capacity is planned, and 625.4 million
tons of speculative LNG production capacity is under consideration, for which no confirmed plans exist.
World LNG Production Capacity – February 2022
(Million Tons per Annum)
Source: Drewry
As such, LNG production
capacity will expand significantly as several new production facilities are now under construction and due on stream in the next few years.
Generally, every additional one million ton of LNG productive capacity creates demand for up to two standard modern LNG carriers.
In the last decade, more
countries entered the LNG export market. In December 2021, there were 20 producers and exporters of LNG compared with 19 in 2010. World
trade in LNG has risen from 217.3 million tons in 2010 to an estimated 379.9 million tons in 2021.
LNG Exports: 2010-20211
(Million Tons)
Exporters |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2021e |
%
Change
20-21 |
ALG |
14.1 |
12.5 |
10.5 |
10.9 |
12.6 |
11.8 |
11.6 |
12.3 |
12.0 |
12.2 |
10.9 |
10.5 |
-3.7% |
USA# |
1.2 |
1.5 |
0.5 |
0.1 |
0.3 |
0.6 |
3.2 |
12.2 |
18.5 |
33.8 |
50.8 |
74.0 |
45.8% |
LIB |
0.0 |
0.1 |
- |
- |
- |
- |
- |
- |
|
0.0 |
0.0 |
0.0 |
n.a. |
BRU |
6.4 |
6.9 |
6.6 |
6.9 |
6.0 |
6.4 |
6.0 |
6.9 |
6.8 |
6.4 |
6.3 |
5.3 |
-16.2% |
UAE |
5.8 |
5.8 |
5.5 |
5.4 |
5.8 |
5.6 |
5.4 |
5.6 |
5.8 |
5.8 |
5.0 |
5.7 |
14.3% |
INO |
22.9 |
21.3 |
17.5 |
16.4 |
15.8 |
16.0 |
15.5 |
18.7 |
18.0 |
15.5 |
13.7 |
11.8 |
-13.9% |
MAL |
22.3 |
24.3 |
23.2 |
24.7 |
24.8 |
24.9 |
23.4 |
26.9 |
24.3 |
26.2 |
23.0 |
22.9 |
-0.6% |
AUS |
18.5 |
18.9 |
20.5 |
22.1 |
23.1 |
29.0 |
41.5 |
55.6 |
67.8 |
75.4 |
77.9 |
82.9 |
6.5% |
QAT |
55.3 |
74.9 |
76.7 |
77.0 |
75.5 |
77.6 |
76.2 |
77.5 |
78.0 |
77.8 |
76.9 |
79.7 |
3.6% |
TNT |
15.1 |
13.8 |
13.7 |
14.4 |
14.1 |
12.4 |
10.4 |
10.2 |
10.1 |
12.5 |
11.9 |
6.7 |
-43.7% |
NIG |
17.4 |
18.9 |
19.9 |
16.3 |
18.5 |
20.1 |
17.3 |
20.3 |
20.0 |
20.8 |
18.9 |
18.0 |
-4.6% |
OMA |
8.4 |
8.0 |
8.2 |
8.4 |
7.8 |
7.4 |
7.8 |
8.2 |
8.0 |
10.3 |
8.5 |
9.8 |
15.2% |
EGY |
7.1 |
6.3 |
4.9 |
2.7 |
0.3 |
- |
0.5 |
0.8 |
0.8 |
3.5 |
3.4 |
4.2 |
23.5% |
EQG |
3.8 |
3.8 |
3.5 |
3.7 |
3.7 |
3.6 |
3.2 |
3.9 |
3.8 |
2.8 |
2.6 |
2.7 |
3.8% |
NOR |
3.4 |
2.9 |
3.3 |
2.8 |
3.9 |
4.4 |
4.6 |
3.9 |
3.9 |
4.7 |
3.3 |
0.1 |
-97.0% |
RUS |
9.8 |
10.5 |
10.8 |
10.4 |
10.6 |
10.6 |
10.2 |
11.5 |
16.2 |
29.3 |
30.8 |
30.6 |
-0.7% |
YMN |
4.0 |
6.5 |
5.2 |
7.0 |
6.5 |
1.4 |
- |
- |
|
0.0 |
0.0 |
0.0 |
n.a. |
PER |
1.3 |
3.7 |
3.9 |
4.1 |
4.2 |
3.6 |
4.0 |
3.7 |
3.8 |
3.8 |
3.6 |
2.9 |
-19.4% |
FRA |
|
|
|
|
|
|
1.1 |
1.1 |
1.0 |
0.0 |
0.0 |
0.0 |
n.a. |
BEL# |
0.4 |
0.4 |
0.3 |
1.1 |
1.1 |
0.9 |
- |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
n.a. |
ESP# |
- |
0.5 |
1.2 |
2.1 |
3.8 |
2.3 |
0.1 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
n.a. |
Papua |
- |
- |
- |
- |
3.4 |
7.1 |
7.6 |
8.1 |
8.0 |
8.2 |
8.2 |
8.1 |
-0.6% |
Others## |
- |
- |
0.7 |
0.9 |
1.5 |
1.4 |
3.2 |
3.2 |
6.2 |
5.7 |
1.7 |
4.0 |
135.3% |
Total |
217.3 |
241.5 |
236.9 |
237.5 |
243.3 |
247.4 |
253.0 |
290.7 |
313.0 |
354.7 |
357.3 |
379.9 |
6.3% |
# Include re-exports
## Includes re-exports from Brazil, France,
Portugal, South Korea, Japan and Greece
(1) Provisional estimate
Source: BP statistical review, Drewry
Major LNG exporting regions
have undergone significant transition in the last ten years, with the market share of Indonesia and Malaysia having sharply declined.
Australia surpassed Qatar as the largest LNG producer and exporter in 2020. Australia's LNG exports constituted 21.8% of the global LNG
exports in 2021. Qatar is now the world's second largest producer and exporter of LNG, accounting for close to 21.0% of the global LNG
export in 2021. Qatar took FID on its mega North Field Expansion (NFE) Phase 1 (32 mtpa) project, which is expected to start operations
by the fourth quarter of 2025. The FID on Phase 2 of the project, adding 16 mtpa is also anticipated to be accelerated to 2022-23. With
these two projects, the country aims to add 49 mtpa of liquefaction capacity, taking its total to 126 mtpa from 77 mtpa at the end of
2021. It also plans to boost its carbon capture capacity from the current 2mtpa, making headways into the carbon-neutral LNG market.
U.S. LNG exports have ramped
up significantly in the last five years, increasing from 3.2 million tons in 2016 to 74.0 million tons in 2021. The country's LNG exports
have mainly benefited from the new liquefaction terminals coming on stream. Major LNG terminals coming on stream in the last few years
include Sabine Pass, Dominion Energy Cove Point, Cameron LNG, Freeport LNG, Cheniere's Corpus Christi terminal second train, and five
of 10 small trains of Kinder Morgan Inc.'s Elba Island facility. In 2020, a total of 32.5 million tons of LNG liquefaction capacity were
added in the U.S. (Cameroon LNG, Elba Island, and Freeport LNG), leading to a surge in U.S. LNG exports in 2021 compared to 2020. As of
December 2021, LNG export terminals with an aggregate capacity of 31.2 million tons per annum are under construction in the US.
Sakhalin 2, the first LNG
project in Russia which started in 2009 (11 mtpa), is the main export contributor apart from the recent Yamal project. In the fourth quarter
of 2017, Russia started the first phase of the Yamal LNG project and commenced its first phase of production with a nameplate capacity
of 5.5 million tons. The second and third train of the project came online in July 2018 and November 2018 respectively. The third train
of the project commenced operations a year ahead of schedule and the project has added an aggregate capacity of 16.5 million tons to the
global LNG production. In 2019, Russia added 0.7 mtpa of capacity and the country's LNG exports surged 32.1 percent to 21.4 million tons
with Yamal LNG project ramping up to full capacity.
LNG Demand
In tandem with the growth
in the number of LNG suppliers, there has been a corresponding increase in the number of importers. In 2010, there were 34 countries importing
LNG and by December 2022, the number increased to 43.
LNG imports by country between
2010 and 2021 are shown in the table below. Despite an increase in the number of importers, Japan, South Korea, and China provide the
backbone of LNG trade, collectively accounting for 53% of the total LNG imports as of the end of 2021. China's LNG imports surged in 2017
and surpassed South Korea's to become the second biggest LNG importing nation. There has also been strong growth of LNG imports by India,
Taiwan and Spain due to increasing demand from the power sector in those countries and their respective government's focus on the use
of natural gas as a source of energy to reduce air pollution caused by conventional sources of energy.
China's LNG imports commenced
in 2006 and have since grown exponentially from 0.7 million tons in 2006 to 79.8 million tons in 2021. The country's LNG imports expanded
by a whopping 41% year on year in 2018 as it took steps to shift from coal to natural gas for heating households during the winter because
of the government's policy to increase the share of natural gas in the overall energy demand. After showing strong growth momentum in
2017 and 2018, China's LNG imports growth rate has slowed down in the last two years. The country’s LNG imports grew 14.8% year-over-year
to 61.9 million tons in 2019 and 10.1% year-over-year in 2020. The pandemic-induced demand slump adversely affected Chinese LNG demand
in 1H20 with major Chinese LNG importers declaring force majeure. Chinese LNG demand surged in 2021 buoyed by a recovering economy, low
inventories and the start of additional regasification capacities.
China's coal to natural
gas switch is driven by the country's intent to reduce pollution. China's use of natural gas as a share of the country’s overall
energy demand increased from 5.5% to 8.2% during the country’s 13th Five Year Plan and the share of coal declined from 64% in 2015
to 56.6% in 2020. Under the 14th Five-Year Plan, China plans to formulate an action plan for peaking carbon emission before 2030 and anchor
efforts to achieve carbon neutrality by 2060. China's increased emphasis on LNG as a source of energy is the result of its capital, Beijing's,
aim to cut the country's greenhouse gas emissions, per unit of GDP, by 60-65 percent between 2005 and 2030. China’s plans to achieve
carbon neutrality is expected to accelerate its switch from coal to gas and aid LNG demand.
LNG Imports by Country 2010-20211
(Million Tons)
Importer |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2021e |
Argentina |
1.3 |
3.2 |
3.4 |
4.7 |
4.8 |
4.3 |
3.8 |
3.4 |
3.0 |
1.2 |
1.4 |
2.6 |
Belgium |
4.7 |
4.8 |
3.1 |
1.6 |
2.1 |
2.8 |
2.1 |
0.9 |
1.6 |
5.1 |
5.9 |
4.0 |
Brazil |
2.0 |
0.8 |
2.5 |
4.1 |
5.8 |
5.2 |
2.2 |
1.6 |
2.0 |
2.3 |
2.4 |
7.4 |
Canada |
1.5 |
2.4 |
1.3 |
0.8 |
0.6 |
0.5 |
0.2 |
0.3 |
0.4 |
0.4 |
0.6 |
0.5 |
Chile |
2.2 |
2.8 |
3.0 |
3.0 |
2.8 |
3.1 |
3.1 |
3.3 |
3.6 |
2.5 |
2.7 |
3.4 |
China |
9.3 |
12.1 |
14.6 |
18.3 |
19.8 |
19.1 |
26.2 |
38.2 |
53.9 |
61.7 |
68.9 |
79.8 |
Dom. Rep. |
0.6 |
0.7 |
0.9 |
1.2 |
0.9 |
1.3 |
1.3 |
0.9 |
1.2 |
1.2 |
1.2 |
1.5 |
Egypt |
- |
- |
- |
- |
- |
2.8 |
0.6 |
6.2 |
2.5 |
0.1 |
0.0 |
0.0 |
France |
10.2 |
10.6 |
7.5 |
6.4 |
5.4 |
4.8 |
7.0 |
7.4 |
7.8 |
15.6 |
13.1 |
13.3 |
Greece |
0.9 |
0.9 |
0.7 |
0.5 |
0.4 |
0.3 |
0.0 |
1.3 |
1.5 |
2.1 |
2.2 |
1.6 |
India |
8.9 |
12.5 |
15.0 |
12.8 |
13.8 |
15.9 |
16.5 |
18.7 |
22.3 |
23.4 |
26.6 |
23.9 |
Indonesia |
- |
- |
0.7 |
1.0 |
1.6 |
2.0 |
2.0 |
2.6 |
2.0 |
3.7 |
2.8 |
2.6 |
Israel |
- |
- |
- |
0.4 |
0.3 |
0.4 |
0.0 |
0.5 |
0.0 |
0.6 |
0.6 |
0.2 |
Italy |
6.6 |
6.4 |
5.2 |
3.7 |
3.5 |
4.3 |
4.1 |
6.0 |
5.6 |
9.8 |
9.1 |
7.1 |
Japan |
68.2 |
78.1 |
86.7 |
87.0 |
88.0 |
86.2 |
83.3 |
83.6 |
82.9 |
76.9 |
74.4 |
74.3 |
Jordan |
- |
- |
- |
- |
- |
2.9 |
3.3 |
3.3 |
3.0 |
1.4 |
0.8 |
1.0 |
Kuwait |
2.0 |
2.3 |
2.0 |
1.6 |
2.7 |
2.7 |
2.7 |
3.5 |
3.0 |
3.6 |
4.1 |
1.3 |
Lithuania |
- |
- |
- |
- |
0.1 |
0.4 |
0.0 |
0.9 |
0.0 |
1.4 |
1.4 |
0.8 |
Malaysia |
- |
- |
0.1 |
1.5 |
1.7 |
1.6 |
1.2 |
1.8 |
1.1 |
2.7 |
2.6 |
2.2 |
Mexico |
4.2 |
3.0 |
3.5 |
5.7 |
6.8 |
5.2 |
4.3 |
4.8 |
4.2 |
4.9 |
1.9 |
0.7 |
Netherlands |
- |
0.6 |
0.6 |
0.6 |
0.4 |
0.4 |
1.1 |
0.8 |
1.0 |
5.8 |
5.3 |
5.2 |
Pakistan |
- |
- |
- |
- |
- |
1.1 |
2.9 |
4.6 |
6.0 |
8.1 |
7.4 |
8.3 |
Portugal |
2.2 |
2.2 |
1.5 |
1.8 |
1.2 |
0.7 |
0.7 |
2.7 |
1.2 |
4.1 |
2.7 |
4.0 |
Puerto Rico |
0.6 |
0.5 |
1.0 |
1.3 |
1.3 |
1.2 |
0.9 |
0.9 |
1.0 |
1.4 |
0.9 |
0.7 |
South Korea |
32.4 |
36.0 |
35.9 |
39.6 |
37.3 |
31.9 |
32.1 |
37.8 |
44.0 |
40.1 |
40.8 |
46.1 |
Spain |
20.1 |
17.6 |
14.7 |
10.9 |
11.5 |
9.5 |
9.6 |
12.1 |
10.0 |
15.7 |
15.1 |
16.3 |
Singapore |
- |
- |
- |
0.9 |
1.9 |
2.2 |
2.2 |
3.0 |
3.2 |
3.3 |
3.2 |
4.6 |
Taiwan |
10.9 |
11.9 |
11.7 |
12.6 |
13.2 |
13.7 |
14.2 |
16.6 |
16.7 |
16.7 |
17.8 |
19.5 |
Thailand |
- |
0.7 |
1.0 |
1.5 |
1.4 |
2.6 |
3.1 |
3.8 |
4.4 |
5.0 |
5.6 |
6.7 |
Turkey |
5.8 |
4.5 |
5.7 |
4.0 |
5.3 |
5.5 |
5.6 |
7.3 |
7.1 |
9.4 |
10.7 |
10.4 |
UAE |
0.1 |
1.0 |
1.0 |
1.1 |
1.3 |
1.6 |
1.5 |
2.5 |
2.8 |
1.4 |
1.5 |
4.7 |
UK |
13.6 |
18.5 |
10.0 |
6.8 |
6.1 |
9.4 |
7.7 |
4.9 |
6.6 |
13.6 |
13.5 |
11.3 |
USA |
8.9 |
7.3 |
3.7 |
2.0 |
1.2 |
1.9 |
1.8 |
1.5 |
1.8 |
1.0 |
0.9 |
0.8 |
Africa |
|
|
|
|
|
|
7.4 |
|
|
|
|
|
Others |
- |
- |
- |
- |
- |
- |
3.4 |
2.8 |
5.6 |
9.0 |
8.1 |
12.8 |
World Total |
217.3 |
241.5 |
236.9 |
237.4 |
243.3 |
247.3 |
258.3 |
290.3 |
313.0 |
354.7 |
356.1 |
379.3 |
* Includes Colombia, Jamaica and Poland
(1) Provisional estimate
Further expansion of regasification and terminal
import infrastructure will support the continued growth in Chinese LNG imports. China is not different from the U.S. in that China also
has large deposits of shale gas, but geological structures in China are far more complicated. Additionally, China lacks the infrastructure
to support the rapid development of domestic gas supplies, creating demand for imported LNG. Monthly trends in LNG imports among Asian
importers between January 2010 and February 2021 are shown in the chart below.
Asian LNG Imports: 2010-December 2021
(Million Tons)
Source: Drewry
International Trade in Natural Gas
Generally, a pipeline is
the most economical way of transporting natural gas from a producer to a consumer, provided that the end users are not too distant from
the natural gas reserves. However, for some areas, such as the Far East, the lack of an adequate pipeline infrastructure means that natural
gas must be turned into a liquefied form (LNG), as this is the only economical and feasible way it can be transported over long distances.
Additionally, sea transportation of LNG is more flexible than through a pipeline as it can accommodate required changes in trade patterns
that are economically or politically driven.
International trade in natural
gas has grown more than 26.7% between 2011 and 2021, with the volume of LNG trade currently being 1.6 times greater than 2011 levels and
accounting for about 40% total natural gas trade. As a result, LNG has captured a growing share of international gas trade, primarily
due to the diversification of consumers, flexibility among producers, cost-efficient transport and competitive gas prices.
World Natural Gas Trade 2010-20211
(Billion Cubic Meters)
(1) Provisional estimate
Source: Drewry
LNG Shipping Routes
Although the number of LNG
shipping routes has increased in recent years due to growth in the number of LNG suppliers and consumers, demand for shipping services
remains heavily focused on a number of key trade routes. In 2021, the principal trade routes for LNG shipping included Qatar to Europe
(the United Kingdom, Italy and Spain), Qatar to Asia (India, Japan and South Korea), Australia to Asia (China, Japan and South Korea),
Malaysia to Japan, U.S. to Europe, U.S. to Asia (South Korea and Japan), Russia to Asia (Japan, South Korea, Taiwan and China) and Russia
to Europe (France, Netherland, United Kingdom and Spain). Additionally, with the increase in liquefaction projects in the U.S., more cargo
is being exported from the U.S. to Europe and Asia.
One important result of
the geographical shifts in LNG production and consumption is that demand for shipping services (expressed in terms of ton miles) has grown
at a much faster rate than the underlying increases in LNG trade. Ton miles are derived by multiplying the volume of cargo by the distance
between the load and the discharge ports on each voyage. During 2011-2021, demand for LNG shipping services, expressed in terms of ton
miles, has increased at a compound average growth rate (CAGR) of 7.6%, compared with a 5.1% increase in the volume of cargo carried.
LNG Seaborne Trade 2010-20211
(1) Provisional estimate
Source: Drewry
LNG Trades Requiring Ice Class Tonnage
Ice Class Vessel Classifications
Ice class designations are
assigned to ships that are strengthened to navigate in specific ice conditions. Ice class vessels are governed by different ice class
rules and regulations depending on their respective area of operations.
Baltic Sea
| · | Bay and Gulf of Bothnia, Gulf of Finland - Finnish-Swedish Ice Class Rules (FSICR) |
| · | Gulf of Finland (Russian territorial waters) - Russian Maritime
Register (RMR) Ice Class Rules
|
Arctic Ocean
| · | Barents, Kara, Laptev, East Siberian and Chukchi Seas - Russian Maritime Register (RMR) Ice Class Rules |
| · | Beaufort Sea, Baffin Bay, etc. - Canadian Arctic Shipping Pollution Prevention Rules (CASPPR) |
There are also ice class rules and regulations
for commercial ship operations on inland lakes, mainly the Great Lakes/St. Lawrence Seaway.
In the context of current
commercial newbuilding orders, the FSICR have become the de facto standard for new tonnage. Four ice classes are defined
in the FSICR. The FSICR fairway due ice classes along with the design notional level thicknesses, in order of strength from high to low,
are:
Class |
Standard |
1A Super (1AS) |
Design notional level ice thickness of 1.0m. For extreme harsh ice conditions. |
1A |
Design notional level ice thickness of 0.8m. For harsh ice conditions. |
1B |
Design notional level ice thickness of 0.6m. For medium ice conditions. |
1C |
Design notional level ice thickness of 0.4m. For mild ice conditions. |
The FSICR and the system
of ice navigation operated during the winter months in the Northern Baltic are the most well-developed criteria and standards for ice
navigation. The system of ice navigation comprises three fundamental elements:
| · | Ice class merchant vessels (compliant with the FSICR for navigation in the northern Baltic); |
| · | Fairway navigation channels; and |
Year-round navigation
and continuity of trade using the above three fundamental elements were first introduced in the northern Baltic Sea areas during the
1960s. The current FSICR, as well as the system of ice navigation, has evolved over the years to its current state.
Requirement for Ice Class Tonnage
The FSICR include technical
requirements for hull and machinery scantlings as well as for the minimum propulsion power of ships. The hull of ice class vessels and
the main propulsion machinery must be safe. The vessel must have sufficient power for safe operations in ice-covered waters. During the
vessels' normal operations, they encounter various ice interaction loadings, which calls for strengthened hull structures.
In addition to the ice class
rules, ships are required to comply with requirements set by the maritime authorities in various jurisdictions. For example, the Russian
marine operations headquarters accepts ships with ice-strength functionalities according to or at least the equivalent of FSICR 1B and
compliance with crewing and icebreaker assistance requirements in order to operate in the Northern Sea Route (NSR).
Ice Class LNG Fleet
The number of ships in the
international LNG fleet with an ice class standard is very low. As of February 2022, there were only 32 LNG carriers with Ice Class 1A
and Ice-Class 1A Super Standard in operation and 22 vessels on order.
Northern Sea Route (NSR)
Currently, cargo flows through
the NSR are dominated by oil, gas and mineral exports, particularly coal and iron ore. Demand for shipping for these commodities in the
region has been increasing in recent years, driven by several key factors, including:
| · | reduced level of sea ice has extended the summer shipping season in the Arctic and is making some areas
easy to navigate; |
| · | increase in mineral resource development activities in the Arctic; |
| · | commodity demand growth in Asian economies; |
| · | technological developments which have made NSR a more feasible shipping route than in the past; and |
| · | chronic political problems in the Middle East, piracy in North Africa,
and non-transparent commercial disputes over the Suez in Egypt. |
These factors have made
NSR a promising alternative.
Northern Sea Route
Source: Drewry
As a result, the NSR experienced
strong growth in trade volumes between 2010 and 2020, illustrated in the table below. However, transit traffic on the NSR fell substantially
in 2014 and 2015, with only 23 and 18 vessels passing through in the respective years. In 2016, cargo volumes rebounded, partly because
construction materials for the Yamal LNG plant were handled at Port of Sabetta on the Yamal Peninsula. With Yamal LNG project coming on
stream, transit cargo volume through Northern Sea Route (NSR) has increased more than three times between 2016 and 2019. In 2020, cargo
transit volume through NSR doubled compared to 2019 on account of the sharp increase in the transport of iron ore concentrate. Cargo transit
volumes increased 58.2% year over year in 2021 with iron ore and iron ore concentrate constituting the dominant cargo type.
Northern Sea Route — Transit traffic
|
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
Number of Vessels |
4 |
34 |
46 |
71 |
23 |
18 |
19 |
NA |
NA |
37 |
64 |
85 |
Total Cargo Volume (thousand tons) |
111,000 |
820,789 |
1,261,545 |
1,355,897 |
274,000 |
39,586 |
214,513 |
194,000
|
491,000 |
697,277 |
1,281,010 |
2,021,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Source: Drewry, Centre for High North Logistics
In early 2017, the most suitable
LNG terminal on the NSR for loading LNG for transport to the Far East was located in Northern Norway. The distance from Norway to Japan
through the NSR is approximately 45% shorter than traditional shipping routes through the Suez Canal. The Arctic route allows ships to
save time, fuel, and cut back on environmental emissions.
Russia began
production at the first train of the Yamal LNG project in December 2017, while the second and third train of the project began
production in July 2018 and November 2018, respectively. The Yamal project (located in remote northern Russia, above the Arctic
Circle) has capacity to produce 17.4 million tons of LNG (as of February 28, 2022). In December 2018, Yamal LNG offloaded its
one hundredth LNG cargo since the beginning of the first train of the project in December 2017. Yamal LNG project attained full
capacity in 2019 and Russia's LNG exports increased 32.1% in 2019 over the previous year. Drewry expects that increased Russian LNG
exports will increase the demand for ice class vessels as the transportation from Yamal and under construction Arctic LNG1 project
to Asian and European countries will require a specialized category of ice-breaker LNG carriers capable of taking the shorter Arctic
route. However, the exit of some of the foreign energy and manufacturing partners from Russian projects following the Russia-Ukraine
crisis may impact the progress on Arctic LNG2 and Arctic LNG3 project and consequently LNG ship demand related to these
projects.
Russia will be able to deliver
LNG at a lower price than most of its competitors due to the low feedstock cost of the world's most complex LNG project and the introduction
of a shorter shipping route. Furthermore, the project has benefitted from the Russian government's support, including a 12-year exemption
from mineral extraction tax, no export taxes on LNG, and government-subsidized construction of the port of Sabetta.
Arc 7 LNG vessels will be
required to pass the NSR via the Bering Strait, which will enable vessels to reach Asia in 15 days, while the conventional route via the
Suez Canal takes 30 days. This, in turn, will benefit importers by reducing voyage time and transportation expenses.
In general, ships below
1A Ice-Class will not be allowed to trade on NSR, which provides an advantage to vessel owners with ice class tonnage. Furthermore, vessel
owners/operators with experience of operating in ice conditions will have a competitive advantage over the traditional operators that
make occasional voyages into the region during the winter months.
IMO2020 regulation and its impact on LNG
demand
The IMO, the governing body
of international shipping, has made a decisive effort to diversify the industry away from HFO into cleaner fuels with less harmful effects
on the environment and human health. Effective in 2015, ships operating within the Emission Control Areas (ECAs) covering the Economic
Exclusive Zone of North America, the Baltic Sea, the North Sea, and the English Channel are required to use marine gas oil with allowable
sulfur content up to 0.1%.
In order to reduce the emission
of air pollutants from ships in key areas of China, the Ministry of Transport issued stricter emission control area regulations in their
territorial waters. Beginning on January 1, 2020, ships entering inland waterways, including the Yangtze River and Xijiang River have
to adhere to a strict requirement of 0.1% sulfur content. From January 1, 2022, ships will be required to comply with the 0.1% sulfur
content requirement when entering the Hainan coastal ECA. In the meantime, China is considering adopting more stringent emission control
requirements, such as to implement the 0.1% sulfur content limit requirement in all coastal waters beginning January 1, 2025.
The IMO implemented emission
control regulations globally with effect from January 1, 2020. These regulations stipulate that ships sailing outside ECAs will switch
to an alternative fuel with permitted sulfur content up to 0.5% or will retrofit scrubbers in order to reduce emissions. LNG qualifies
as an alternate fuel for complying with IMO regulations as it has sulfur content below 0.1%. This has resulted in some ship owners getting
their vessels retrofitted so that they can use LNG as a fuel. Some ship owners also prefer to have their newbuilding vessels LNG ready.
As of February 2022, the
global shipping fleet comprises 287 LNG-capable vessels (i.e., non-LNG carriers) with another 423 vessels on the orderbook. The number
of LNG-fueled vessels on the water is set to increase in coming years. 59 LNG-capable vessels aggregating 2.6 mdwt were delivered in 2021
and 121 vessels aggregating 8.7 mdwt will be delivered in 2022 (of which 21 vessels aggregating 2.2 mdwt have already been delivered).
These promising numbers highlight the industry's rising inclination towards accepting LNG as a bunker fuel.
IMO GHG strategy
The IMO has been devising
strategies to reduce greenhouse gases (“GHG”) and carbon emissions from ships. According to the announcement in 2018, the
IMO plans to initiate measures to reduce CO2 emission intensity by at least 40% by 2030 and 70% by 2050 from the levels in 2008. It also
plans to introduce measures to reduce GHG emissions by 50% by 2050 from the 2008 levels. These are likely to be achieved by setting energy
efficiency requirements, energy-saving technology and encouraging shipowners to use alternative fuels such as biofuels, and electro-/synthetic
fuels such as hydrogen or ammonia. It may also include limiting the speed of the ships. Currently, there is uncertainty regarding the
exact measures that the IMO will undertake to achieve these targets. Although the current macroeconomic environment is the main deterrent,
IMO-related uncertainty is also a key factor preventing ship owners from placing new orders, as the vessels with conventional propulsion
systems may have a high environmental compliance cost and possibly result in faster depreciation in asset values in the future. Some shipowners
have decided to manage this risk by ordering LNG-fueled/methanol ships in order to comply with stricter regulations that may be announced
in future.
In June 2021, the IMO adopted amendments
to the International Convention for the Prevention of Pollution from ships that will require vessels to reduce their greenhouse gas emissions.
These amendments are a combination of technical and operational measures and are expected to come into force on November 1, 2022, with
the requirements for Energy Efficiency Existing Ship Index (“EEXI”) and Carbon Intensity Indicator (“CII”) certification,
effective January 1, 2023. These will be monitored by the flag administration and corrective actions will be required in the event of
constant non-compliance. A review clause requires the IMO to review the effectiveness of the implementation of the CII and EEXI requirements,
by January 1, 2026, at the latest. EEXI is a technical measure and would apply to ships above 400 GT. It indicates the energy efficiency
of the ship compared to a baseline and is based on a required reduction factor (expressed as a percentage relative to the Energy Efficiency
Design Index baseline).
On the other hand, CII
is an operational measure which specifies carbon intensity reduction requirements for vessels with 5,000 GT and above. The CII determines
the annual reduction factor needed to ensure continuous improvement of the ship’s operational carbon intensity within a specific
rating level. The operational carbon intensity rating would be given on a scale of A, B, C, D or E indicating a major superior, minor
superior, moderate, minor inferior, or inferior performance level, respectively. The performance level would be recorded in the ship’s
Ship Energy Efficiency Management Plan (“SEEMP”). A ship rated D for three consecutive years, or E, would have to submit
a corrective action plan, to show how the required index (C or above) would be achieved. To reduce carbon intensity, shipowners can switch
from fuel oil to alternative fuels such as LNG, methanol or LPG. There are some potential marine fuels such as ammonia and hydrogen,
which have zero-carbon content. In the long term, ammonia may emerge as a cost-effective alternative fuel but in the short term, it seems
unviable. Globally, there are several initiatives underway to facilitate adoption of ammonia as a marine fuel. Some of them have been
listed below:
1. MAN
Energy Solutions aims to have two-stroke ammonia engines for large ships by 2024 and retrofit package for existing ships by 2025. Wärtsilä
and the Korean shipbuilding company Samsung Heavy Industries have signed an agreement aimed at developing ammonia-fuelled vessels with
4-stroke auxiliary engines available for future newbuild projects. Wartsila anticipates having an engine concept capable of operating
with 100 percent ammonia in 2023.
2. The
Global Centre for Maritime Decarbonisation, Singapore has been studying various aspects of ammonia bunkering and has aims of commercialising
the developments by 2024.
3. Castor
Initiative is a group of engine maker, class society, shipyard, ammonia producer, shipowner, regulatory body, and port operator. It was
formed in 2021. Recently, the members inked an MoU to build ammonia-powered VLCC by 2025 or 2026.
4. There
has been a growing consensus for implementing market-based measures to reduce the price gap between fuel oil and zero-carbon fuel. IMO
has plans to discuss it further in future negotiations.
5. The
Class Society such as Korean Register, DNV, Lloyd’s Register, have been giving approval in principle for dual-fuel ammonia ships
as well.
Other options for reducing carbon
intensity include propeller upgrading/polishing, hull cleaning/coating and retrofitting vessels with the wind-assisted propulsion system.
Reducing ship speeds also helps in complying with the regulations as it lowers fuel consumption, and it is easy to implement.
In addition to the IMO regulation,
the EU has proposed a set of proposals including the EU Emissions Trading System and FuelEU Maritime Initiative. It lays down rules regarding
GHG intensity of energy used on-board all ships arriving in the EU. It aims to reduce GHG emission by 26% by 2040 and 75% by 2050 compared
to 2020 level. It also makes it obligatory for ships to use
on-shore power supply or zero-emission technology in ports in the EU. These initiatives are applicable to 50% of the emission from
voyages arriving at or departing from an EU port. All shipowners trading in the European waters will need to comply with these
regulations.
The emission control regulations
are likely to slow the speed of the vessels in next few years. Consequently, it will lead to a reduction in the supply of ships and therefore,
in the short to medium-term, it will benefit shipowners with younger fleets as charter rates should potentially increase with lower supply
of ships. In the long-term, the ships may switch to alternative low/zero carbon fuels to comply with emission regulations.
Besides the IMO regulations, the
decarbonization of shipping is being propelled by various state and non-state stakeholders of the shipping industry. In recent years,
there has been several developments towards it such as Sea Cargo Charter, Poseidon Principles (for ship finance banks) and Poseidon Principles
for Marine Insurance. In addition, there has been several industry led initiatives to facilitate movement towards low/zero-carbon shipping
such as Getting to Zero Coalition, The Castor Initiative for Ammonia, Global Centre for Maritime Decarbonization and the Mærsk Mc-Kinney
Møller Center for Zero Carbon Shipping.
Alternative fuels for shipping
The IMO has a target to reduce
GHG emissions by 50% in 2050. This can’t be achieved with the low sulfur fuel and so has encouraged innovation in alternative fuels.
IMO has also been planning other technical and operational measures in order to meet emission targets. Alternative fuels like LPG and
methanol are mainly used on vessels carrying these as cargo. However, LNG is used as a fuel in LNG vessels and also in other vessels.
Hydrogen and ammonia are in the initial stages of development as a marine fuel. LNG is expected to remain as a preferred alternative fuel
in the near to medium term due to its availability. However, LNG is still a fossil fuel and is unable to meet IMO 2050 decarbonization
target and methane slips continue to be a heavily debated issue. Another drawback is that LNG propulsion requires an LNG capable engine
which, would require additional capex and increased fuel storage space. Biofuel could emerge as a preferred alternative fuel because of
its successful trials, especially considering that no major modification of engine is needed, and therefore, no significant additional
capex is required.
The LNG Fleet
LNG carriers are specialist
vessels designed to transport LNG between liquefaction facilities and import terminals. They are double-hulled vessels with sophisticated
containment systems that hold and insulate LNG to maintain it in liquid form. Any LNG that evaporates during the voyage and converts
to a natural gas (normally referred to as boil-off) can be used as fuel to help propel the ship.
Among the existing fleet,
there are several different types of containment systems used on LNG carriers, but the two most popular systems are:
| · | The Moss Rosenberg spherical system, which was designed in the 1970s and is used by a large portion of
the existing LNG fleet. In this system, multiple self-supporting, spherical tanks are built independent of the carrier and arranged inside
its hull. |
| · | The Gaz Transport membrane system, which is built inside the carrier and
consists of insulation between the thin primary and secondary barriers. The membrane is designed to accommodate thermal expansion and
contraction without overstressing the membrane |
However, most new
vessels are being built with membrane systems such as the Gaz Transport system. This trend is primarily a result of lower Suez Canal
fees and related costs associated with passage through the Suez Canal, often required for many long-haul trade routes. In addition, ships
with membrane systems, such as the Gaz Transport membrane system, tend to operate more efficiently with less wind resistance as compared
to the ships with Moss Rosenberg systems. Generally, ships with membrane systems achieve better speed due to improved hull utilization,
reduced cool down time, and better terminal capacity.
LNG Fleet
The cargo capacity of an
LNG carrier is measured in cbm. As of February 28, 2022, the worldwide fleet totaled 650 ships with a combined capacity of 97.3 million
cbm. The breakdown of the fleet by vessel size is shown below.
The LNG Fleet by Vessel Size: February 28,
2022
Size |
No. |
000 Cbm |
0-17,999 cbm |
37 |
235 |
18-49,999 cbm |
23 |
579 |
50-74,999 cbm |
4 |
278 |
75-124,999 cbm |
3 |
255 |
125-149,999 cbm |
186 |
26,159 |
150-199,999 cbm |
352 |
59,422 |
200-219,999 cbm |
31 |
6,608 |
220,000+ cbm |
14 |
3,727 |
Total |
650 |
97,265 |
Source: Drewry
The changes in LNG fleet
supply are a function of deliveries of new ships from the orderbook and the removal of existing vessels through scrapping. The increases
in seaborne LNG trade and ship demand over the last three years have resulted in rapid growth in the overall fleet size. LNG fleet capacity
has expanded at a CAGR of 7.8% per annum between 2014 and 2021. High deliveries in the last three years have led to a sharp increase
in LNG fleet in these years.
LNG Fleet: 2014-February 2022
Source: Drewry
Within the current worldwide
fleet, there are only 69 vessels with ice class certification and these vessels account for close to 11.4% of the global LNG fleet. These
ships are a niche part of the market and command a premium over the freight rates of non-ice class vessels.
The age profile of the existing
fleet as of February 28, 2022, is shown below. The average age of all LNG carriers in service is 10.3 years, with lower fleet ages for
comparatively bigger vessels and smaller vessels. Whereas, mid-sized vessels are relatively older.
LNG Fleet Age Profile: February 28, 2022
Size Range in CBM |
|
Average Age (Years) |
0-18,000 |
|
9.0 |
18-50,000 |
|
8.9 |
50-75,000 |
|
19.6 |
75-125,000 |
|
23.4 |
125-150,000 |
|
19.3 |
150-200,000 |
|
5.2 |
200-220,000 |
|
13.3 |
220,000+ |
|
12.6 |
Average Age -Total Fleet |
|
10.3 |
Due to high-quality construction
and in most cases, high-quality maintenance, LNG carriers tend to have longer trading lives than oil tankers. However, older ships may
find it harder to find employment. Upcoming EEXI and CII regulations are expected to impact older steam turbine LNG vessels more than
newer vessels of this type. The older vessels will need to reduce the speed. Ships built before 1990 will likely be replaced in the near
future. Some of older tonnage may also get converted into FSRU. LNG fleet deliveries over last seven years are shown below.
LNG Fleet Delivery: 2014-February 2022
Source: Drewry, Note – YTD 2022 deliveries
include deliveries between January and February 2022
LNG Shipping Arrangements
LNG carriers are usually
chartered for a fixed period of time. Shipping arrangements are normally based on charters of five years or more because:
| · | LNG projects are expensive and typically involve an integrated chain of dedicated facilities. Accordingly,
the overall success of an LNG project depends heavily on long-term planning and coordination of project activities, including marine transportation;
and |
| · | LNG carriers are expensive to build, and vessel financing is supported by the corresponding
cash-flow from long-term fixed-rate charters. |
Most end users of LNG are
utility companies, power stations or petrochemical producers with operations that depend on reliable and uninterrupted deliveries of
LNG. Although most shipping requirements for new LNG projects continue to be provided on a long-term basis, spot voyages and time charters
of four years or less have become a feature of the market in recent years. However, it should be noted that the LNG spot market is different
from the tanker spot market. In the tanker market, the term "spot trade" refers to a single voyage, which is arranged at a
short notice. In the LNG market, the term "spot trade" refers to the transport of one or more cargoes, sometimes within a specified
time period between one and six months, with a set-up time of possibly several months. With changing global LNG market, the vessel owners
are gradually increasing their exposure to spot trade. Earlier shipowners used to employ more than 85% of their fleet on long-term charters
and 10 to 15% of the fleet used to operate in spot trade. However, short term LNG trade data for last ten years indicates that with increasing
imports of China from the spot market and taking advantage of the rate spike in winters and other market imbalances, shipowners have
increased the sport market exposure in the range of 30 to 40%.
Short-term LNG trade 2010-2021
Source: Drewry
Spot earnings for LNG ships
Spot rates for LNG vessels
were at its peak in 2012 following the Fukushima nuclear disaster of March 2011 in Japan. The disaster compelled Japan to adopt LNG more
actively in lieu of nuclear power. The spot rates reached their lowest in 2016 as the demand slowed down. In 2018, the spot rates increased
steadily despite strong newbuild deliveries. The strengthening in spot earnings of LNG ships was facilitated by a demand driven market
in which demand for LNG vessels has outpaced the supply growth in world LNG fleet. Spot rates softened in 2019 on account of lower LNG
imports in China, higher LNG inventory levels in Europe and Asia, and mild winter.
Spot LNG shipping rates
plummeted in the first quarter of 2020 as the coronavirus (COVID-19) outbreak had an adverse impact on LNG trade and LNG spot prices.
The outbreak forced several countries to go into lockdown, leading to decline in the world GDP and consequently weak LNG demand. Many
LNG cargos were cancelled due to weak Asian LNG demand and high European gas inventories. However, LNG demand recovered in the latter
half of 2020 as countries started easing the lockdown. LNG spot shipping freight rates started increasing from November 2020 on account
of the cold snap in Asia, congestion in the Panama Canal, and availability of fewer LNG ships in the spot market. Higher Asian LNG demand
supported spot LNG shipping rates in 2021. LNG shipping spot rates have declined since December 2021 as most LNG cargos are moving from
the U.S. to Europe rather than to Asia. Asian LNG demand has been lacklustre on account of the relatively warm winter in 2021 and higher
LNG inventory levels.
Spot rate for LNG ships January 2012 – February
2022
(U.S. $ per day)
Source: Baltic exchange, Drewry
Geopolitical risk and impact on LNG shipping
European LNG imports are
expected to rise in the short term as European countries are expected to reduce Russian gas imports. Even though there are no sanctions
on Russian gas as of the date of this annual report, European countries are expected to avoid Russian flows of gas and LNG. A prolonged
conflict is expected to result in European countries moving away from Russian energy commodities. The EU sanctions on investments in Russian
oil and gas sector is likely to impact the development of LNG liquefaction projects in the country while boosting potential for projects
in the U.S. and Africa.
Newbuilding Prices
Similar to other types of
vessels, newbuilding prices for LNG carriers rose steeply in the late 1980s and early 1990s, and then began to drift downwards in the
mid-1990s and fall sharply in the late 1990s. At the beginning of 1992, the price of a 125,000 cbm ship from a Far East yard was reported
to be approximately $270 million to $290 million, compared with a low of $120 million at the end of 1986. However, by early 2000 new orders
were being struck at a new low of around $150 million.
After the lows of early
2000, prices crept to $165 million in 2001. Pressure on newbuilding prices pushed prices closer to $160 million in 2002, and by 2003 prices
fell to just above $150 million. However, constrained shipbuilding capacity, currency movements and high steel prices led to an increase
in prices in 2004 to around $175 million. Prices rose above $200 million in 2005 and renewed pressure on shipbuilding prices pushed prices
close to $220 million in 2006.
LNG Carrier Newbuilding Prices: 2010-February 2022
(End Period – U.S. $ Million)
Source: Drewry
Prices for larger sized
LNG carriers of 210,000-220,000 cbm were around $215 million when they were first ordered in late 2004 and increased to $235 million in
the summer of 2005.
Newbuilding prices reached
an all-time high of $250 million around mid-2008, influenced by a number of factors including the declining dollar exchange rate, easy
availability of finance, high steel prices, and tight shipbuilding capacity. However, newbuilding prices fell in the period between 2008
and 2011 due to a reduction in new orders. The newbuilding price for an LNG carrier increased marginally by 2% from $202 million in 2011
to $206 million in 2015, but dropped by 7.7% in 2016 due to weak freight rates and the resulting oversupply in the market. These prices
continued to drop in 2017 before inching up by a marginal 1.4% on account of increased ordering activity in 2018 and thereafter 2.9% year
over year to $189.3 million in 2019 with a demand for better technology LNG vessels and higher competition for slots at shipyard. Newbuilding
orders surged in 2018 and 2019 due to positive outlook of high liquefaction capacity to be added in in coming years, which would have
created demand for additional LNG vessels. Newbuilding prices declined in 2020 due to weak LNG prospects and lower new orders. Increase
in Newbuilding prices increased in 2021 as a result of lower availability of LNG shipbuilding slots and inclusion of energy efficiency
equipments.
Secondhand Prices
Sale and purchase transactions
of LNG vessels are limited in number. The secondhand price of a five-year old 150,000cbm LNG vessel declined by 7.9% in 2016, 5.4% in
2017, and 5.1% in 2018. After falling between 2016 and 2018, secondhand vessel prices rose 1.5% year over year in 2019 on account of increase
in newbuilding prices, rise in demand for MEGI and DFDE vessels with increase in spot trading and expectation of significant liquefaction
capacity to be added in 2019. Secondhand LNG prices declined in 2020 in line with softer LNG spot rates for majority of the year. The
increase in secondhand vessel prices in 2021 was mainly driven by strong prospects of LNG vessels and the increase in newbuilding prices.
LNG Carrier Secondhand Prices: January 2016 –
February 2022
(Monthly – U.S. $ Million)
Source: Drewry
LNG Safety
LNG shipping is generally
safe relative to other forms of commercial marine transportation. In the past forty years, there have been no significant accidents or
cargo spillages involving an LNG carrier, even though over 40,000 LNG voyages have been made during that time.
LNG is non-toxic and non-explosive
in its liquid state. It only becomes explosive or inflammable when it is heated, vaporized, and in a confined space within a narrow range
of concentrations in the air (5% to 15%). The risks and hazards from an LNG spillage vary depending on the size of the spillage, the environmental
conditions, and the site at which the spillage occurs.
Competition
We operate in markets that
are highly competitive and based primarily on supply and demand. The process of obtaining new time charters generally involves intensive
screening and competitive bidding, and often extends for several months. LNG carrier time charters are generally awarded based upon a
variety of factors relating to the vessel operator, including but not limited to price, customer relationships, operating expertise,
professional reputation and size, age and condition of the vessel. We believe that the LNG shipping industry is characterized by the significant
time required to develop the operating expertise and professional reputation necessary to obtain and retain charterers.
We expect substantial competition
for providing marine transportation services for potential LNG projects from a number of experienced companies, including state-sponsored
entities and major energy companies. Many of these competitors have significantly greater financial resources and larger and more versatile
fleets than we do. We anticipate that an increasing number of marine transportation companies, including many with strong reputations
and extensive resources and experience, will enter the LNG transportation market. This increased competition may cause greater price competition
for time charters.
Seasonality
Historically, LNG trade,
and therefore charter rates, increased in the winter months and eased in the summer months as demand for LNG in the Northern Hemisphere
rose in colder weather and fell in warmer weather. The LNG industry in general has become less dependent on the seasonal transport
of LNG than a decade ago as new uses for LNG have developed, spreading consumption more evenly over the year. There is a higher
seasonal demand during the summer months due to energy requirements for air conditioning in some markets and a pronounced higher seasonal
demand during the winter months for heating in other markets. However, our vessels primarily operate under multi-year charters and are
not subject to the effect of seasonal variations in demand.
Environmental
and Other Regulations in the Shipping Industry
Government regulation and
laws significantly affect the ownership and operation of our fleet. We are subject to international conventions and treaties, national,
state and local laws and regulations in force in the countries in which our vessels may operate or are registered relating to safety and
health and environmental protection including the storage, handling, emission, transportation and discharge of hazardous and non-hazardous
materials, and the remediation of contamination and liability for damage to natural resources. Compliance with such laws, regulations
and other requirements entails significant expense, including vessel modifications and implementation of certain operating procedures.
A variety of government
and private entities subject our vessels to both scheduled and unscheduled inspections. These entities include the local port authorities
(applicable national authorities such as the United States Coast Guard ("USCG"), harbor master or equivalent), classification
societies, flag state administrations (countries of registry) and charterers, particularly terminal operators. Certain of these entities
require us to obtain permits, licenses, certificates and other authorizations for the operation of our vessels. Failure to maintain necessary
permits or approvals could require us to incur substantial costs or result in the temporary suspension of the operation of one or more
of our vessels.
Increasing environmental
concerns have created a demand for vessels that conform to stricter environmental standards. We are required to maintain operating standards
for all of our vessels that emphasize operational safety, quality maintenance, continuous training of our officers and crews and compliance
with United States and international regulations. We believe that the operation of our vessels is in substantial compliance with applicable
environmental laws and regulations and that our vessels have all material permits, licenses, certificates or other authorizations necessary
for the conduct of our operations. However, because such laws and regulations frequently change and may impose increasingly stricter requirements,
we cannot predict the ultimate cost of complying with these requirements, or the impact of these requirements on the resale value or useful
lives of our vessels. In addition, a future serious marine incident that causes significant adverse environmental impact could result
in additional legislation or regulation that could negatively affect our profitability.
International Maritime Organization
The International Maritime
Organization, the United Nations agency for maritime safety and the prevention of pollution by vessels (the "IMO"), has adopted
the International Convention for the Prevention of Pollution from Ships, 1973, as modified by the Protocol of 1978 relating thereto,
collectively referred to as MARPOL 73/78 and herein as "MARPOL," the International Convention for the Safety of Life at Sea
of 1974 ("SOLAS Convention"), and the International Convention on Load Lines of 1966 (the "LL Convention"). MARPOL
establishes environmental standards relating to oil leakage or spilling, garbage management, sewage, air emissions, handling and disposal
of noxious liquids and the handling of harmful substances in packaged forms. MARPOL is applicable to drybulk, tanker and LNG carriers,
among other vessels, and is broken into six Annexes, each of which regulates a different source of pollution. Annex I relates to oil
leakage or spilling; Annexes II and III relate to harmful substances carried in bulk in liquid or in packaged form, respectively; Annexes
IV and V relate to sewage and garbage management, respectively; and Annex VI, lastly, relates to air emissions. Annex VI was separately
adopted by the IMO in September of 1997, new emissions standards, titled IMO-2020, took effect on January 1, 2020.
Vessels that transport gas,
including LNG carriers and FSRUs, are also subject to regulation under the International Code for the Construction and Equipment of Ships
Carrying Liquefied Gases in Bulk, or the IGC Code, published by the IMO. The IGC Code provides
a standard for the safe carriage of LNG and certain other liquid gases by prescribing the design and construction standards of vessels
involved in such carriage. The completely revised and updated IGC Code entered into force in 2016, and the amendments were developed following
a comprehensive five-year review and are intended to take into account the latest advances in science and technology. Compliance with
the IGC Code must be evidenced by a Certificate of Fitness for the Carriage of Liquefied Gases in Bulk. Non-compliance with the IGC Code
or other applicable IMO regulations may subject a shipowner or a bareboat charterer to increased liability, may lead to decreases in available
insurance coverage for affected vessels and may result in the denial of access to, or detention in, some ports. We believe that
each of our vessels is in compliance with the IGC Code and each of our new buildings/conversion contracts requires that the vessel receive
a certification that it is in compliance with applicable regulations before it is delivered.
Our LNG vessels may also
become subject to the 2010 HNS Convention, if it is entered into force. The 2010 HNS Convention creates a regime of liability and
compensation for damage from hazardous and noxious substances ("HNS"), including liquefied gases. The 2010 HNS Convention
sets up a two-tier system of compensation composed of compulsory insurance taken out by shipowners and an HNS Fund which comes into play
when the insurance is insufficient to satisfy a claim or does not cover the incident. Under the 2010 HNS Convention, if damage is
caused by bulk HNS, claims for compensation will first be sought from the shipowner up to a maximum of 100 million Special Drawing Rights
("SDR"). If the damage is caused by packaged HNS or by both bulk and packaged HNS, the maximum liability is 115 million
SDR. Once the limit is reached, compensation will be paid from the HNS Fund up to a maximum of 250 million SDR. The 2010 HNS
Convention has not been ratified by a sufficient number of countries to enter into force, and we cannot estimate the costs that may be
needed to comply with any such requirements that may be adopted with any certainty at this time.
In June 2015 the IMO formally
adopted the International Code of Safety for Ships using Gases or Low flashpoint Fuels, or the "IGF Code," which is designed
to minimize the risks involved with ships using low flashpoint fuels- including LNG. The IGF Code will be mandatory under SOLAS through
the adopted amendments. The IGF Code and the amendments to SOLAS became effective January 1, 2017.
Air Emissions
In September of 1997, the
IMO adopted Annex VI to MARPOL to address air pollution from vessels. Effective May 2005, Annex VI sets limits on sulfur oxide and nitrogen
oxide emissions from all commercial vessel exhausts and prohibits "deliberate emissions" of ozone depleting substances (such
as halons and chlorofluorocarbons), emissions of volatile compounds from cargo tanks and the shipboard incineration of specific substances.
Annex VI also includes a global cap on the sulfur content of fuel oil and allows for special areas to be established with more stringent
controls on sulfur emissions, as explained below. Emissions of "volatile organic compounds" from certain vessels, and the shipboard
incineration (from incinerators installed after January 1, 2000) of certain substances (such as polychlorinated biphenyls, or "PCBs")
are also prohibited. We believe that all our vessels are currently compliant in all material respects with these regulations.
The Marine Environment
Protection Committee, or "MEPC," adopted amendments to Annex VI regarding emissions of sulfur oxide, nitrogen oxide, particulate
matter and ozone depleting substances, which entered into force on July 1, 2010. The amended Annex VI seeks to further reduce air
pollution by, among other things, implementing a progressive reduction of the amount of sulfur contained in any fuel oil used on board
ships. On October 27, 2016, at its 70th session, the MEPC agreed to implement a global 0.5% m/m sulfur oxide emissions limit (reduced
from 3.50%) starting from January 1, 2020. This limitation can be met by using low-sulfur compliant fuel oil, alternative fuels
or certain exhaust gas cleaning systems. Ships are now required to obtain bunker delivery notes and International Air Pollution
Prevention ("IAPP") Certificates from their flag states that specify sulfur content. Additionally, at MEPC 73, amendments
to Annex VI to prohibit the carriage of bunkers above 0.5% sulfur on ships, with the exception of vessels fitted with exhaust gas cleaning
equipment (“scrubbers”) which can carry fuel of higher sulfur content, were adopted and took effect March 1, 2020.
These regulations subject ocean-going vessels to stringent emissions controls, and may cause us to incur substantial costs.
Sulfur content standards
are even stricter within certain "Emission Control Areas," or ("ECAs"). As of January 1, 2015, ships operating within
an ECA were not permitted to use fuel with sulfur content in excess of 0.1% m/m. Amended Annex VI establishes procedures for designating
new ECAs. Currently, the IMO has designated four ECAs, including specified portions of the Baltic
Sea area, North Sea area, North American area and United States Caribbean area. Ocean-going vessels in these areas will be subject to
stringent emission controls and may cause us to incur additional costs. Other areas in China are subject to local regulations that impose
stricter emission controls. In December 2021, the member states of the Convention for the Protection of the Mediterranean Sea Against
Pollution (“Barcelona Convention”) agreed to support the designation of a new ECA in the Mediterranean. The group plans to
submit a formal proposal to the IMO by the end of 2022 with the goal of having the ECA implemented by 2025. If other ECAs are approved
by the IMO, or other new or more stringent requirements relating to emissions from marine diesel engines or port operations by vessels
are adopted by the U.S. Environmental Protection Agency ("EPA") or the states where we operate, compliance with these regulations
could entail significant capital expenditures or otherwise increase the costs of our operations.
Amended Annex VI also establishes
new tiers of stringent nitrogen oxide emissions standards for marine diesel engines, depending on their date of installation. At
the MEPC meeting held from March to April 2014, amendments to Annex VI were adopted which address the date on which Tier III Nitrogen
Oxide (NOx) standards in ECAs will go into effect. Under the amendments, Tier III NOx standards apply to ships that operate in the
North American and U.S. Caribbean Sea ECAs designed for the control of NOx produced by vessels with a marine diesel engine installed and
constructed on or after January 1, 2016. Tier III requirements could apply to areas that will be designated for Tier III NOx in
the future. At MEPC 70 and MEPC 71, the MEPC approved the North Sea and Baltic Sea as ECAs for nitrogen oxide for ships built on or after
January 1, 2021. The EPA promulgated equivalent (and in some senses stricter) emissions standards in 2010. As a result of these
designations or similar future designations, we may be required to incur additional operating or other costs.
As determined at the MEPC
70, the new Regulation 22A of MARPOL Annex VI became effective as of March 1, 2018 and requires ships above 5,000 gross tonnage to collect
and report annual data on fuel oil consumption to an IMO database, with the first year of data collection having commenced on January
1, 2019. The IMO intends to use such data as the first step in its roadmap (through 2023) for developing its strategy to reduce greenhouse
gas emissions from ships, as discussed further below.
As of January 1, 2013, MARPOL
made mandatory certain measures relating to energy efficiency for ships. All ships are now required to develop and implement Ship Energy
Efficiency Management Plans ("SEEMP"), and new ships must be designed in compliance with minimum energy efficiency levels per
capacity mile as defined by the Energy Efficiency Design Index ("EEDI"). Under these measures, by 2025, all new ships
built will be 30% more energy efficient than those built in 2014. MEPC 75 adopted amendments to MARPOL Annex VI which brings forward
the effective date of the EEDI's "phase 3" requirements from January 1, 2025 to April 1, 2022 for several ship types, including
gas carriers, general cargo ships, and LNG carriers.
Additionally, MEPC 75 introduced
draft amendments to Annex VI which impose new regulations to reduce greenhouse gas emissions from ships. These amendments introduce
requirements to assess and measure the energy efficiency of all ships and set the required attainment values, with the goal of reducing
the carbon intensity of international shipping. The requirements include (1) a technical requirement to reduce carbon intensity
based on a new Energy Efficiency Existing Ship Index ("EEXI"), and (2) operational carbon intensity reduction requirements,
based on a new operational carbon intensity indicator ("CII"). The attained EEXI is required to be calculated for ships
of 400 gross tonnage and above, in accordance with different values set for ship types and categories. With respect to the CII,
the draft amendments would require ships of 5,000 gross tonnage to document and verify their actual annual operational CII achieved against
a determined required annual operational CII. Additionally, MEPC 75 proposed draft amendments requiring that, on or before January
1, 2023, all ships above 400 gross tonnage must have an approved SEEMP on board. For ships above 5,000 gross tonnage, the SEEMP
would need to include certain mandatory content. MEPC 75 also approved draft amendments to MARPOL Annex I to prohibit the use and carriage
for use as fuel of heavy fuel oil ("HFO") by ships in Arctic waters on and after July 1, 2024. The draft amendments introduced
at MEPC 75 were adopted at the MEPC 76 session on June 2021 and are expected to enter into force in November 2022, with the requirements
for EEXI and CII certification coming into effect from January 1, 2023. MEPC 77 adopted a non-binding resolution which urges Member States
and ship operators to voluntarily use distillate or other cleaner alternative fuels or methods of propulsion that are safe for ships and
could contribute to the reduction of black carbon emissions from ships when operating in or near the Arctic.
We may incur costs to comply
with these revised standards. Additional or new conventions, laws and regulations or industry practice may be adopted that could require
the installation of expensive emission control systems or other modifications and could adversely affect our business, results of operations,
cash flows and financial condition.
Safety Management System Requirements
The SOLAS Convention was
amended to address the safe manning of vessels and emergency training drills. The Convention of Limitation of Liability for Maritime Claims
(the "LLMC") sets limitations of liability for a loss of life or personal injury claim or a property claim against ship owners.
We believe that our vessels are in substantial compliance with SOLAS and LLMC standards.
Under Chapter IX of the
SOLAS Convention, or the International Safety Management Code for the Safe Operation of Ships and for Pollution Prevention (the "ISM
Code"), our operations are also subject to environmental standards and requirements. The ISM Code requires the party with operational
control of a vessel to develop an extensive safety management system that includes, among other things, the adoption of a safety and environmental
protection policy setting forth instructions and procedures for operating its vessels safely and describing procedures for responding
to emergencies. We rely upon the safety management system that we and our technical management team have developed for compliance with
the ISM Code. The failure of a vessel owner or bareboat charterer to comply with the ISM Code may subject such party to increased liability,
may decrease available insurance coverage for the affected vessels and may result in a denial of access to, or detention in, certain ports.
The ISM Code requires that
vessel operators obtain a safety management certificate for each vessel they operate. This certificate evidences compliance by a vessel's
management with the ISM Code requirements for a safety management system. No vessel can obtain a safety management certificate unless
its manager has been awarded a document of compliance, issued by each flag state, under the ISM Code. We have obtained applicable documents
of compliance for our offices and safety management certificates for all of our vessels for which the certificates are required by the
IMO. The documents of compliances and safety management certificates renewed as required.
Regulation II-1/3-10 of
the SOLAS Convention governs ship construction and stipulates that ships over 150 meters in length must have adequate strength, integrity
and stability to minimize risk of loss or pollution. Goal-based standards amendments in SOLAS regulation II-1/3-10 entered into force
in 2012, with July 1, 2016 set for application to new oil tankers and bulk carriers. The SOLAS Convention regulation II-1/3-10
on goal-based ship construction standards for bulk carriers and oil tankers, which entered into force on January 1, 2012, requires that
all oil tankers and bulk carriers of 150 meters in length and above, for which the building contract is placed on or after July 1, 2016,
satisfy applicable structural requirements conforming to the functional requirements of the International Goal-based Ship Construction
Standards for Bulk Carriers and Oil Tankers ("GBS Standards").
Amendments to the SOLAS
Convention Chapter VII apply to vessels transporting dangerous goods and require those vessels be in compliance with the International
Maritime Dangerous Goods Code ("IMDG Code"). Effective January 1, 2018, the IMDG Code includes (1) updates to the provisions
for radioactive material, reflecting the latest provisions from the International Atomic Energy Agency, (2) new marking, packing and classification
requirements for dangerous goods, and (3) new mandatory training requirements. Amendments which took effect on January 1, 2020 also
reflect the latest material from the UN Recommendations on the Transport of Dangerous Goods, including (1) new provisions regarding IMO
type 9 tank, (2) new abbreviations for segregation groups, and (3) special provisions for carriage of lithium batteries and of vehicles
powered by flammable liquid or gas. The upcoming amendments, which will come into force on June 1, 2022, include (1) addition of a definition
of dosage rate, (2) additions to the list of high consequence dangerous goods, (3) new provisions for medical/clinical waste, (4) addition
of various ISO standards for gas cylinders, (5) a new handling code, and (6) changes to stowage and segregation provisions.
The IMO has also adopted
the International Convention on Standards of Training, Certification and Watchkeeping for Seafarers ("STCW"). As of February
2017, all seafarers are required to meet the STCW standards and be in possession of a valid STCW certificate. Flag states that have
ratified SOLAS and STCW generally employ the classification societies, which have incorporated SOLAS and STCW requirements into their
class rules, to undertake surveys to confirm compliance.
The IMO's Maritime Safety
Committee and MEPC, respectively, each adopted relevant parts of the International Code for Ships Operating in Polar Water (the "Polar
Code"). The Polar Code, which entered into force on January 1, 2017, covers design, construction, equipment, operational, training,
search and rescue as well as environmental protection matters relevant to ships operating in the waters surrounding the two poles. It
also includes mandatory measures regarding safety and pollution prevention as well as recommendatory provisions. The Polar Code
applies to new ships constructed after January 1, 2017, and after January 1, 2018, ships constructed before January 1, 2017 are required
to meet the relevant requirements by the earlier of their first intermediate or renewal survey.
Furthermore, recent action
by the IMO's Maritime Safety Committee and United States agencies indicates that cybersecurity regulations for the maritime industry are
likely to be further developed in the near future in an attempt to combat cybersecurity threats. By IMO resolution, administrations are
encouraged to ensure that cyber-risk management systems must be incorporated by ship-owners and managers by their first annual Document
of Compliance audit after January 1, 2021. In February 2021, the U.S. Coast Guard published guidance on addressing cyber risks in a vessel’s
safety management system. This might cause companies to create additional procedures for monitoring cybersecurity, which could require
additional expenses and/or capital expenditures. The impact of future regulations is hard to predict at this time.
Pollution Control and Liability Requirements
The IMO has negotiated international
conventions that impose liability for pollution in international waters and the territorial waters of the signatories to such conventions.
For example, the IMO adopted an International Convention for the Control and Management of Ships' Ballast Water and Sediments (the "BWM
Convention") in 2004. The BWM Convention entered into force on September 8, 2017. The BWM Convention requires ships to manage their
ballast water to remove, render harmless, or avoid the uptake or discharge of new or invasive aquatic organisms and pathogens within ballast
water and sediments. The BWM Convention's implementing regulations call for a phased introduction of mandatory ballast water exchange
requirements, to be replaced in time with mandatory concentration limits, and require all ships to carry a ballast water record book and
an international ballast water management certificate.
On December 4, 2013, the
IMO Assembly passed a resolution revising the application dates of the BWM Convention so that the dates are triggered by the entry into
force date and not the dates originally in the BWM Convention. This, in effect, makes all vessels delivered before the entry into
force date "existing vessels" and allows for the installation of ballast water management systems on such vessels at the first
International Oil Pollution Prevention ("IOPP") renewal survey following entry into force of the convention. The MEPC adopted
updated guidelines for approval of ballast water management systems (G8) at MEPC 70. At MEPC 71, the schedule regarding the BWM Convention's
implementation dates was also discussed and amendments were introduced to extend the date existing vessels are subject to certain ballast
water standards. Those changes were adopted at MEPC 72. Ships over 400 gross tons generally must comply with a "D-1 standard,"
requiring the exchange of ballast water only in open seas and away from coastal waters. The "D-2 standard" specifies the
maximum amount of viable organisms allowed to be discharged, and compliance dates vary depending on the IOPP renewal dates. Depending
on the date of the IOPP renewal survey, existing vessels must comply with the D-2 standard on or after September 8, 2019. For most ships,
compliance with the D-2 standard will involve installing on-board systems to treat ballast water and eliminate unwanted organisms.
Ballast water management systems, which include systems that make use of chemical, biocides, organisms or biological mechanisms, or which
alter the chemical or physical characteristics of the ballast water, must be approved in accordance with IMO Guidelines (Regulation D-3).
As of October 13, 2019, MEPC 72's amendments to the BWM Convention took effect, making the Code for Approval of Ballast Water Management
Systems, which governs assessment of ballast water management systems, mandatory rather than permissive, and formalized an implementation
schedule for the D-2 standard. Under these amendments, all ships must meet the D-2 standard by September 8, 2024. Costs
of compliance with these regulations may be substantial. Additionally, in November 2020, MEPC 75 adopted amendments to the BWM Convention
which would require a commissioning test of the ballast water management system for the initial survey or when performing an additional
survey for retrofits. This analysis will not apply to ships that already have an installed BWM system certified under the BWM Convention.
These amendments are expected to enter into force on June 1, 2022.
Once mid-ocean exchange
ballast water treatment requirements become mandatory under the BWM Convention, the cost of compliance could increase for ocean carriers
and may have a material effect on our operations. However, many countries already regulate the discharge of ballast water carried
by vessels from country to country to prevent the introduction of invasive and harmful species via such discharges. The U.S. for
example, requires vessels entering its waters from another country to conduct mid-ocean ballast exchange, or undertake some alternate
measure, and to comply with certain reporting requirements.
The IMO also adopted the
International Convention on Civil Liability for Bunker Oil Pollution Damage (the "Bunker Convention") to impose strict liability
on ship owners (including the registered owner, bareboat charterer, manager or operator) for pollution damage in jurisdictional waters
of ratifying states caused by discharges of bunker fuel. The Bunker Convention requires registered owners of ships over 1,000 gross tons
to maintain insurance for pollution damage in an amount equal to the limits of liability under the applicable national or international
limitation regime (but not exceeding the amount calculated in accordance with the LLMC). With respect to non-ratifying states, liability
for spills or releases of oil carried as fuel in ship's bunkers typically is determined by the national or other domestic laws in the
jurisdiction where the events or damages occur.
Ships are required to maintain
a certificate attesting that they maintain adequate insurance to cover an incident. In jurisdictions, such as the United States where
the CLC or the Bunker Convention has not been adopted, various legislative schemes or common law govern, and liability is imposed either
on the basis of fault or on a strict-liability basis.
Anti-Fouling Requirements
In 2001, the IMO adopted
the International Convention on the Control of Harmful Anti-fouling Systems on Ships, or the "Anti-fouling Convention." The
Anti-fouling Convention, which entered into force on September 17, 2008, prohibits the use of organotin compound coatings to prevent the
attachment of mollusks and other sea life to the hulls of vessels. Vessels of over 400 gross tons engaged in international voyages will
also be required to undergo an initial survey before the vessel is put into service or before an International Anti-fouling System Certificate
(the “IAFS Certificate”) is issued for the first time; and subsequent surveys when the anti-fouling systems are altered or
replaced.
In November 2020, MEPC 75
approved draft amendments to the Anti-fouling Convention to prohibit anti-fouling systems containing cybutryne, which would apply to ships
from January 1, 2023, or, for ships already bearing such an anti-fouling system, at the next scheduled renewal of the system after that
date, but no later than 60 months following the last application to the ship of such a system. In addition, the IAFS Certificate
has been updated to address compliance options for anti-fouling systems to address cybutryne. Ships which are affected by this ban on
cybutryne must receive an updated IAFS Certificate no later than two years after the entry into force of these amendments. Ships which
are not affected (i.e. with anti-fouling systems which do not contain cybutryne) must receive an updated IAFS Certificate at the next
Anti-fouling application to the vessel. These amendments were formally adopted at MEPC 76 in June 2021.
We have obtained Anti-fouling
System Certificates for all of our vessels that are subject to the Anti-fouling Convention.
Compliance Enforcement
Noncompliance with the ISM
Code or other IMO regulations may subject the ship owner or bareboat charterer to increased liability, may lead to decreases in available
insurance coverage for affected vessels and may result in the denial of access to, or detention in, some ports. The USCG and E.U. authorities
have indicated that vessels not in compliance with the ISM Code by applicable deadlines will be prohibited from trading in U.S. and EU
ports, respectively. As of the date of this annual report, each of our vessels is ISM Code certified. However, there can be no assurance
that such certificates will be maintained in the future. The IMO continues to review and introduce new regulations. It is
impossible to predict what additional regulations, if any, may be passed by the IMO and what effect, if any, such regulations might have
on our operations.
United States Regulations
The U.S. Oil Pollution Act of 1990 and
the Comprehensive Environmental Response, Compensation and Liability Act
The U.S. Oil Pollution Act
of 1990 ("OPA") established an extensive regulatory and liability regime for the protection and cleanup of the environment from
oil spills. OPA affects all "owners and operators" whose vessels trade or operate within the U.S., its territories and possessions
or whose vessels operate in U.S. waters, which includes the U.S.'s territorial sea and its 200 nautical mile exclusive economic zone around
the U.S. The U.S. has also enacted the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), which
applies to the discharge of hazardous substances other than oil, except in limited circumstances, whether on land or at sea. OPA and CERCLA
both define "owner and operator" in the case of a vessel as any person owning, operating or chartering by demise, the vessel.
OPA and CERCLA may affect us because we carry oil as fuel and lubricants for our engines, and the discharge of these could cause environmental
hazards. Both OPA and CERCLA impact our operations.
Under OPA, vessel owners
and operators are "responsible parties" and are jointly, severally and strictly liable (unless the spill results solely from
the act or omission of a third party, an act of God or an act of war) for all containment and clean-up costs and other damages arising
from discharges or threatened discharges of oil from their vessels, including bunkers (fuel). OPA defines these other damages broadly
to include:
| i. | injury to, destruction or loss of, or loss of use of natural resources and related assessment costs; |
| ii. | injury to, or economic losses resulting from, the destruction of real and personal property; |
| iii. | loss of subsistence use of natural resources that are injured, destroyed or lost; |
| iv. | net loss of taxes, royalties, rents, fees or net profit revenues resulting from injury, destruction or
loss of real or personal property, or natural resources; |
| v. | lost profits or impairment of earning capacity due to injury, destruction or loss of real or personal
property or natural resources; and |
| vi. | net cost of increased or additional public services necessitated by removal activities following a discharge
of oil, such as protection from fire, safety or health hazards, and loss of subsistence use of natural resources. |
OPA contains statutory caps
on liability and damages; such caps do not apply to direct cleanup costs. Effective November 12, 2019, the USCG adjusted the
limits of OPA liability for a tank vessel, other than a single-hull tank vessel, over 3,000 gross tons liability to the greater of $2,300
per gross ton or $19,943,400 (subject to periodic adjustment for inflation). These limits of liability do not apply if an
incident was proximately caused by the violation of an applicable U.S. federal safety, construction or operating regulation by a responsible
party (or its agent, employee or a person acting pursuant to a contractual relationship), or a responsible party's gross negligence or
willful misconduct. The limitation on liability similarly does not apply if the responsible party fails or refuses to (i) report the incident
as required by law where the responsible party knows or has reason to know of the incident; (ii) reasonably cooperate and assist as requested
in connection with oil removal activities; or (iii) without sufficient cause, comply with an order issued under the Federal Water Pollution
Act (Section 311(c), (e)) or the Intervention on the High Seas Act.
CERCLA contains a similar
liability regime whereby owners and operators of vessels are liable for cleanup, removal and remedial costs, as well as damages for injury
to, or destruction or loss of, natural resources, including the reasonable costs associated with assessing the same, and health assessments
or health effects studies. There is no liability if the discharge of a hazardous substance results solely from the act or omission of
a third party, an act of God or an act of war. Liability under CERCLA is limited to the greater of $300 per gross ton or $5.0 million
for vessels carrying a hazardous substance as cargo and the greater of $300 per gross ton or $500,000 for any other vessel. These limits
do not apply (rendering the responsible person liable for the total cost of response and damages) if the release or threat of release
of a hazardous substance resulted from willful misconduct or negligence, or the primary cause of the release was a violation of applicable safety,
construction or operating standards or regulations. The limitation on liability also does not apply if the responsible person fails or
refused to provide all reasonable cooperation and assistance as requested in connection with response activities where the vessel is subject
to OPA.
OPA and CERCLA each preserve the right to
recover damages under existing law, including maritime tort law. OPA and CERCLA both require owners and operators of vessels to establish
and maintain with the USCG evidence of financial responsibility sufficient to meet the maximum amount of liability to which the particular
responsible person may be subject. Vessel owners and operators may satisfy their financial responsibility obligations by providing a
proof of insurance, a surety bond, qualification as a self-insurer or a guarantee. We comply with and plan to comply going forward with
the USCG's financial responsibility regulations by providing applicable certificates of financial responsibility. Ships calling at U.S.
ports hold a valid COFR coverage in accordance with the CFR requirements.
The 2010 Deepwater
Horizon oil spill in the Gulf of Mexico resulted in additional regulatory initiatives or statutes, including higher liability
caps under OPA, new regulations regarding offshore oil and gas drilling and a pilot inspection program for offshore facilities.
However, several of these initiatives and regulations have been or may be revised. For example, the U.S. Bureau of Safety and Environmental
Enforcement's ("BSEE") revised Production Safety Systems Rule ("PSSR"), effective December 27, 2018, modified and
relaxed certain environmental and safety protections under the 2016 PSSR. Additionally, the BSEE amended the Well Control Rule,
effective July 15, 2019, which rolled back certain reforms regarding the safety of drilling operations, and former U.S. President Trump
has proposed leasing new sections of U.S. waters to oil and gas companies for offshore drilling. In January 2021, U.S. President
Biden signed an executive order temporarily blocking new leases for oil and gas drilling in federal waters. However, attorney generals
from 13 states filed suit in March 2021 to lift the executive order, and in June 2021, a federal judge in Louisiana granted a preliminary
injunction against the Biden administration, stating that the power to pause offshore oil and gas leases “lies solely with Congress.”
With these rapid changes, compliance with any new requirements of OPA and future legislation or regulations applicable to the operation
of our vessels could impact the cost of our operations and adversely affect our business.
OPA specifically permits
individual states to impose their own liability regimes with regard to oil pollution incidents occurring within their boundaries, provided
they accept, at a minimum, the levels of liability established under OPA and some states have enacted legislation providing for unlimited
liability for oil spills. Many U.S. states that border a navigable waterway have enacted environmental pollution laws that impose
strict liability on a person for removal costs and damages resulting from a discharge of oil or a release of a hazardous substance. These
laws may be more stringent than U.S. federal law. Moreover, some states have enacted legislation providing for unlimited liability for
discharge of pollutants within their waters, although in some cases, states which have enacted this type of legislation have not yet issued
implementing regulations defining vessel owners' responsibilities under these laws. The Partnership intends to comply with all applicable
state regulations in the ports where the Partnership's vessels call.
We currently maintain pollution
liability coverage insurance in the amount of $1.0 billion per incident for each of our vessels. If the damages from a catastrophic spill
were to exceed our insurance coverage, it could have an adverse effect on our business and results of operation.
Other United States Environmental Initiatives
The U.S. Clean Air Act of
1970 (including its amendments of 1977 and 1990) ("CAA") requires the EPA to promulgate standards applicable to emissions of
volatile organic compounds and other air contaminants. The CAA requires states to adopt State Implementation Plans, or "SIPs,"
some of which regulate emissions resulting from vessel loading and unloading operations which may affect our vessels.
The U.S. Clean Water
Act ("CWA") prohibits the discharge of oil, hazardous substances and ballast water in U.S. navigable waters unless
authorized by a duly-issued permit or exemption, and imposes strict liability in the form of penalties for any unauthorized
discharges. The CWA also imposes substantial liability for the costs of removal, remediation and damages and complements the
remedies available under OPA and CERCLA. In 2015, the EPA expanded the definition of "waters of the United States"
("WOTUS"), thereby expanding federal authority under the CWA. Following litigation on the revised WOTUS rule, in
December 2018, the EPA and Department of the Army proposed a revised, limited definition of WOTUS. In 2019 and 2020, the agencies
repealed the prior WOTUS Rule and promulgated the Navigable Waters Protection Rule (“NWPR”) which significantly reduced
the scope and oversight of EPA and the Department of the Army in traditionally non-navigable waterways. On August 30, 2021, a
federal district court in Arizona vacated the NWPR and directed the agencies to replace the rule. On December 7, 2021, the EPA and
the Department of the Army proposed a rule that would reinstate the pre-2015 definition, which is subject to public comment until
February 7, 2022.
The EPA and the USCG
have also enacted rules relating to ballast water discharge, compliance with which requires the installation of equipment on our
vessels to treat ballast water before it is discharged or the implementation of other port facility disposal arrangements or
procedures at potentially substantial costs, and/or otherwise restrict our vessels from entering U.S. Waters. The EPA will
regulate these ballast water discharges and other discharges incidental to the normal operation of certain vessels within United
States waters pursuant to the Vessel Incidental Discharge Act ("VIDA"), which was signed into law on December 4, 2018 and
replaces the 2013 Vessel General Permit ("VGP") program (which authorizes discharges incidental to operations of
commercial vessels and contains numeric ballast water discharge limits for most vessels to reduce the risk of invasive species in
U.S. waters, stringent requirements for exhaust gas scrubbers, and requirements for the use of environmentally acceptable
lubricants) and current Coast Guard ballast water management regulations adopted under the U.S. National Invasive Species Act
("NISA"), such as mid-ocean ballast exchange programs and installation of approved USCG technology for all vessels
equipped with ballast water tanks bound for U.S. ports or entering U.S. waters. VIDA establishes a new framework for the
regulation of vessel incidental discharges under Clean Water Act (CWA), requires the EPA to develop performance standards for those
discharges within two years of enactment, and requires the U.S. Coast Guard to develop implementation, compliance, and enforcement
regulations within two years of EPA's promulgation of standards. Under VIDA, all provisions of the 2013 VGP and USCG regulations
regarding ballast water treatment remain in force and effect until the EPA and U.S. Coast Guard regulations are finalized.
Non-military, non-recreational vessels greater than 79 feet in length must continue to comply with the requirements of the VGP,
including submission of a Notice of Intent ("NOI") or retention of a PARI form and submission of annual reports. We have
submitted NOIs for our vessels where required. Compliance with the EPA, U.S. Coast Guard and state regulations could require the
installation of ballast water treatment equipment on our vessels or the implementation of other port facility disposal procedures at
potentially substantial cost, or may otherwise restrict our vessels from entering U.S. waters.
European Union Regulations
In October 2009, the EU
amended a directive to impose criminal sanctions for illicit ship-source discharges of polluting substances, including minor discharges,
if committed with intent, recklessly or with serious negligence and the discharges individually or in the aggregate result in deterioration
of the quality of water. Aiding and abetting the discharge of a polluting substance may also lead to criminal penalties. The directive
applies to all types of vessels, irrespective of their flag, but certain exceptions apply to warships or where human safety or that of
the ship is in danger. Criminal liability for pollution may result in substantial penalties or fines and increased civil liability claims. Regulation (EU) 2015/757 of the European Parliament and of the Council of April 29, 2015 (amending EU Directive 2009/16/EC) governs the
monitoring, reporting and verification of carbon dioxide emissions from maritime transport, and, subject to some exclusions, requires
companies with ships over 5,000 gross tonnage to monitor and report carbon dioxide emissions annually, which may cause us to incur additional
expenses.
The EU has adopted
several regulations and directives requiring, among other things, more frequent inspections of high-risk ships, as determined by
type, age and flag as well as the number of times the ship has been detained. The EU also adopted and extended a ban on substandard
ships and enacted a minimum ban period and a definitive ban for repeated offenses. The regulation also provided the EU with greater
authority and control over classification societies, by imposing more requirements on classification societies and providing for
fines or penalty payments for organizations that failed to comply. Furthermore, the EU has implemented regulations requiring vessels
to use reduced sulfur content fuel for their main and auxiliary engines. The EU Directive 2005/33/EC (amending Directive 1999/32/EC)
introduced requirements parallel to those in Annex VI relating to the sulfur content of marine fuels. In addition, the EU imposed a
0.1% maximum sulfur requirement for fuel used by ships at berth in the Baltic, the North Sea and the English Channel (the so called
"SOx-Emission Control Area"). As of January 2020, EU member states must also ensure that ships in all EU waters, except
the SOx-Emission Control Area, use fuels with a 0.5% maximum sulfur content. On September 15, 2020, the European Parliament voted to
include greenhouse gas emissions from the maritime sector in the EU's carbon market. On July 14, 2021, the European Parliament
formally proposed its plan, which would involve gradually including the maritime sector from 2023 and phasing the sector in over a
three-year period. This will require shipowners to buy permits to cover these emissions. Contingent on negotiations and a formal
approval vote, these proposed regulations may not enter into force for another year or two.
International Labour Organization
The International Labour Organization (the
"ILO") is a specialized agency of the UN that has adopted the Maritime Labor Convention 2006 ("MLC 2006"). A Maritime
Labor Certificate and a Declaration of Maritime Labor Compliance is required to ensure compliance with the MLC 2006 for all ships that
are 500 gross tonnage or over and are either engaged in international voyages or flying the flag of a Member and operating from a port,
or between ports, in another country. We believe that all our vessels are in substantial compliance with and are certified to meet
MLC 2006.
Greenhouse Gas Regulation
Currently, the emissions
of greenhouse gases from international shipping are not subject to the Kyoto Protocol to the United Nations Framework Convention on Climate
Change, which entered into force in 2005 and pursuant to which adopting countries have been required to implement national programs to
reduce greenhouse gas emissions with targets extended through 2020. International negotiations are continuing with respect to a successor
to the Kyoto Protocol, and restrictions on shipping emissions may be included in any new treaty. In December 2009, more than 27 nations,
including the U.S. and China, signed the Copenhagen Accord, which includes a non-binding commitment to reduce greenhouse gas emissions.
The 2015 United Nations Climate Change Conference in Paris resulted in the Paris Agreement, which entered into force on November 4, 2016
and does not directly limit greenhouse gas emissions from ships. The U.S. initially entered into the agreement, but on June 1, 2017, former
U.S. President Trump announced that the United States intends to withdraw from the Paris Agreement and the withdrawal became effective
on November 4, 2020. On January 20, 2021, U.S. President Biden signed an executive order to
rejoin the Paris Agreement, which the U.S. officially rejoined on February 19, 2021.
At MEPC 70 and MEPC 71,
a draft outline of the structure of the initial strategy for developing a comprehensive IMO strategy on reduction of greenhouse gas emissions
from ships was approved. In accordance with this roadmap, in April 2018, nations at the MEPC 72 adopted an initial strategy to reduce
greenhouse gas emissions from ships. The initial strategy identifies "levels of ambition" to reducing greenhouse gas emissions,
including (1) decreasing the carbon intensity from ships through implementation of further phases of the EEDI for new ships; (2) reducing
carbon dioxide emissions per transport work, as an average across international shipping, by at least 40% by 2030, pursuing efforts towards
70% by 2050, compared to 2008 emission levels; and (3) reducing the total annual greenhouse emissions by at least 50% by 2050 compared
to 2008 while pursuing efforts towards phasing them out entirely. The initial strategy notes that technological innovation, alternative
fuels and/or energy sources for international shipping will be integral to achieve the overall ambition. These regulations could cause
us to incur additional substantial expenses. At MEPC 77, the Member States agreed to initiate the revision of the Initial IMO Strategy
on Reduction of GHG emissions from ships, recognizing the need to strengthen the ambition during the revision process. A final draft Revised
IMO GHG Strategy would be considered by MEPC 80 (scheduled to meet in spring 2023), with a view to adoption.
The EU made a unilateral
commitment to reduce overall greenhouse gas emissions from its member states from 20% of 1990 levels by 2020. The EU also committed to
reduce its emissions by 20% under the Kyoto Protocol's second period from 2013 to 2020. Starting in January 2018, large ships over
5,000 gross tonnage calling at EU ports are required to collect and publish data on carbon dioxide emissions and other information. As
previously discussed, regulations relating to the inclusion of greenhouse gas emissions from the maritime sector in the EU's carbon market
are also forthcoming.
In the United States, the EPA issued a
finding that greenhouse gases endanger the public health and safety, adopted regulations to limit greenhouse gas emissions from
certain mobile sources and proposed regulations to limit greenhouse gas emissions from large stationary sources. However, in March
2017, former U.S. President Trump signed an executive order to review and possibly eliminate the EPA's plan to cut greenhouse gas
emissions, and in August 2019, the Administration announced plans to weaken regulations for methane emissions. On August 13, 2020,
the EPA released rules rolling back standards to control methane and volatile organic compound emissions from new oil and gas
facilities. However, U.S. President Biden recently directed the EPA to publish a proposed rule suspending, revising, or rescinding
certain of these rules. On November 2, 2021, the EPA issued a proposed rule under the CAA designed to reduce methane emissions from
oil and gas sources. The proposed rule would reduce 41 million tons of methane emissions between 2023 and 2035 and cut methane
emissions in the oil and gas sector by approximately 74 percent compared to emissions from this sector in 2005. EPA also anticipates
issuing a supplemental proposed rule in 2022 to include additional methane reduction measures following public input and anticipates
issuing a final rule by the end of 2022. If these new regulations are finalized, they could affect our operations.
Any passage of climate control
legislation or other regulatory initiatives by the IMO, the EU, the U.S. or other countries where we operate, or any treaty adopted at
the international level to succeed the Kyoto Protocol or Paris Agreement, that restricts emissions of greenhouse gases could require us
to make significant financial expenditures which we cannot predict with certainty at this time. Even in the absence of climate control
legislation, our business may be indirectly affected to the extent that climate change may result in sea level changes or certain weather
events.
Vessel Security Regulations
Since the terrorist attacks
of September 11, 2001 in the United States, there have been a variety of initiatives intended to enhance vessel security such as the U.S.
Maritime Transportation Security Act of 2002 ("MTSA"). To implement certain portions of the MTSA, the USCG issued regulations
requiring the implementation of certain security requirements aboard vessels operating in waters subject to the jurisdiction of the United
States and at certain ports and facilities, some of which are regulated by the EPA.
Similarly, Chapter XI-2
of the SOLAS Convention imposes detailed security obligations on vessels and port authorities and mandates compliance with the International
Ship and Port Facility Security Code ("the ISPS Code"). The ISPS Code is designed to enhance the security of ports and ships
against terrorism. To trade internationally, a vessel must attain an International Ship Security Certificate ("ISSC") from a
recognized security organization approved by the vessel's flag state. Ships operating without a valid certificate may be detained, expelled
from, or refused entry at port until they obtain an ISSC. The various requirements, some of which are found in the SOLAS Convention,
include, for example,
| · | on-board installation of automatic identification systems to provide a means for the automatic transmission
of safety-related information from among similarly equipped ships and shore stations, including information on a ship's identity, position,
course, speed and navigational status; |
| · | on-board installation of ship security alert systems, which do not sound on the vessel but only alert
the authorities on shore; |
| · | the development of vessel security plans; |
| · | ship identification number to be permanently marked on a vessel's hull; |
| · | a continuous synopsis record kept onboard showing a vessel's history including, the name of the ship,
the state whose flag the ship is entitled to fly, the date on which the ship was registered with that state, the ship's identification
number, the port at which the ship is registered and the name of the registered owner(s) and their registered address; and |
| · | compliance with flag state security certification requirements. |
The USCG regulations, intended
to align with international maritime security standards, exempt non-U.S. vessels from MTSA vessel security measures, provided such vessels
have on board a valid ISSC that attests to the vessel's compliance with the SOLAS Convention security requirements and the ISPS Code.
Future security measures could have a significant financial impact on us. We intend to comply with the various security measures
addressed by MTSA, the SOLAS Convention and the ISPS Code. Procedures are outlined in the IT Systems and Cyber Security Manual included
in our Company’s Management System while the Partnership holds an ISO 27001 certification as of February 11, 2020 for our in-house
of IT services.
The cost of vessel security
measures has also been affected by the escalation in the frequency of acts of piracy against ships, notably off the coast of Somalia,
including the Gulf of Aden and Arabian Sea area. Substantial loss of revenue and other costs may be incurred as a result of detention
of a vessel or additional security measures, and the risk of uninsured losses could significantly affect our business. Costs are incurred
in taking additional security measures in accordance with Best Management Practices to Deter Piracy, notably those contained in the BMP5
industry standard.
Inspection by Classification Societies
The hull and machinery of
every commercial vessel must be classed by a classification society authorized by its country of registry. The classification society
certifies that a vessel is safe and seaworthy in accordance with the applicable rules and regulations of the country of registry of the
vessel and SOLAS. Most insurance underwriters make it a condition for insurance coverage and lending that a vessel be certified "in
class" by a classification society which is a member of the International Association of Classification Societies, the IACS.
The IACS has adopted harmonized Common Structural Rules, or "the Rules," which apply to oil tankers and bulk carriers contracted
for construction on or after July 1, 2015. The Rules attempt to create a level of consistency between IACS Societies. All
of our vessels are certified as being "in class" by all the applicable Classification Societies (e.g., Lloyd's Register of Shipping
and Bureau Veritas).
A vessel must undergo annual
surveys, intermediate surveys, drydockings and special surveys. In lieu of a special survey, a vessel's machinery may be on a continuous
survey cycle, under which the machinery would be surveyed periodically over a five-year period. Every vessel is also required to be drydocked
every 30 to 36 months for inspection of the underwater parts of the vessel. If any vessel does not maintain its class and/or fails
any annual survey, intermediate survey, drydocking or special survey, the vessel will be unable to carry cargo between ports and will
be unemployable and uninsurable which could cause us to be in violation of certain covenants in our loan agreements. Any such inability
to carry cargo or be employed, or any such violation of covenants, could have a material adverse impact on our financial condition and
results of operations.
Risk of Loss and Liability Insurance
General
The operation of any cargo
vessel includes risks such as mechanical failure, physical damage, collision, property loss, cargo loss or damage and business interruption
due to political circumstances in foreign countries, piracy incidents, hostilities and labor strikes. In addition, there is always an
inherent possibility of marine disaster, including oil spills and other environmental mishaps, and the liabilities arising from owning
and operating vessels in international trade. OPA, which imposes virtually unlimited liability upon shipowners, operators and bareboat
charterers of any vessel trading in the exclusive economic zone of the United States for certain oil pollution accidents in the United
States, has made liability insurance more expensive for shipowners and operators trading in the United States market. We carry insurance
coverage as customary in the shipping industry. However, not all risks can be insured, specific claims may be rejected, and we might
not be always able to obtain adequate insurance coverage at reasonable rates.
Hull and Machinery Insurance
We procure hull and machinery
insurance, protection and indemnity insurance and war risk insurance and freight, demurrage and defense insurance for our fleet. The
agreed deductible on each vessel averages $250,000 increased to $500,000 when trading outside Institute Warrantee Limits.
We have also obtained loss
of hire insurance to protect us against loss of income in the event one of our vessels cannot be employed due to damage that is covered
under the terms of our hull and machinery insurance. Under our loss of hire policies, our insurer will
pay us the daily rate agreed in respect of each vessel for each day, in excess of a certain number of deductible days, for the time that
the vessel is out of service as a result of damage, for a maximum of between 120 and 180 days. The number of deductible days for the vessels
in our Fleet is 14 days per vessel increased to 30 days when trading outside Institute Warrantee Limits.
Protection and Indemnity Insurance
Protection and indemnity
insurance is provided by mutual protection and indemnity associations, or "P&I Associations," and covers our third-party
liabilities in connection with our shipping activities. This includes third-party liability and other related expenses of injury or death
of crew, passengers and other third parties, loss or damage to cargo, claims arising from collisions with other vessels, damage to other
third-party property, pollution arising from oil or other substances, and salvage, towing and other related costs, including wreck removal.
Protection and indemnity insurance is a form of mutual indemnity insurance, extended by protection and indemnity mutual associations,
or "clubs."
Our current protection and
indemnity insurance coverage for pollution is $1 billion per vessel per incident. The 13 P&I Associations that comprise the International
Group insure approximately 90% of the world's commercial tonnage and have entered into a pooling agreement to reinsure each association's
liabilities. The International Group's website states that the Pool provides a mechanism for sharing all claims in excess of US$ 10 million
up to, currently, approximately US$8.2 billion. As a member of a P&I Association, which is a member of the International Group, we
are subject to calls payable to the associations based on our claim records as well as the claims records of all other members of the
individual associations and members of the shipping pool of P&I Associations comprising the International Group. Information contained
on this website does not constitute part of this annual report.
| C. | ORGANIZATIONAL STRUCTURE |
We were formed on May 30,
2013 as a Marshall Islands limited partnership for the purpose of owning, operating, and acquiring LNG carriers and other business activities
incidental thereto. We own (i) a 100% limited partner interest in Dynagas Operating LP, which owns a 100% interest in our Fleet through
intermediate holding companies and (ii) the non-economic general partner interest in Dynagas Operating LP through our 100% ownership of
its general partner, Dynagas Operating GP LLC. We own our vessels through separate wholly-owned subsidiaries that are incorporated in
the Republic of the Marshall Islands and Republic of Malta.
Please see Exhibit 8.1 to
this annual report for a list of our current subsidiaries.
| D. | PROPERTY, PLANT AND EQUIPMENT |
For a description of our
Fleet, please see "Item 4. Information on the Partnership—B. Business Overview—Our Fleet."
We do not own any real
property.
| ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
The following
management's discussion and analysis of our financial condition and results of operations should be read in conjunction with the
accompanying audited consolidated financial statements and the related notes included in "Item 18. Financial Statements"
of this annual report. Amounts relating to percentage variations in period—on—period comparisons shown in this section
are derived from the actual numbers in our books and records. 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. Our actual results could differ materially from those discussed in these
forward-looking statements. See "Item 3. Key Information—D. Risk Factors" and the section entitled
"Forward-Looking Statements" at the beginning of this annual report. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed may not occur.
Overview
Since our IPO in November
2013 we have been a growth-oriented limited partnership focused on owning and operating LNG carriers growing our fleet from three vessels
at the time of our IPO to six vessels to date. However, as a result of the significant challenges facing the listed midstream energy
MLP industry, our cost of equity capital remained elevated for a prolonged period, making the funding of new acquisitions challenging.
As of the date of this annual report, all six vessels in our Fleet vessels are contracted to time charters, with international energy
companies, including Gazprom, Equinor and Yamal, providing us with the benefits of stable cash flows and high utilization rates.
We believe that we are well regarded by our charterers for our expertise and history of safety in conducting our operations. We are now
focusing our capital allocation on debt repayment, prioritizing balance sheet strength, in order to reposition the Partnership for potential
future growth if our cost of capital allows us to access debt and equity capital on acceptable terms. As a result, if we are able
to raise new debt or equity capital on terms acceptable to the Partnership in the future, 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, 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. In connection with such plans for growth, we 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 and businesses that we may acquire, and, subject to favorable market conditions, we may raise capital in
the public or private markets, including through incurring additional debt, debt or equity offerings of our securities or in other transactions.
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 future plans for growth.
Historically spot and short-term
charter hire rates for LNG carriers have been uncertain and volatile, as has the supply and demand for LNG carriers. An excess of LNG
carriers first became evident in 2004 before reaching a peak in the second quarter of 2010, when spot and short-term charter hire rates
together with utilization reached historic lows. Due to a lack of newbuilding orders placed between 2008 and 2010, this trend then
reversed from the third quarter of 2010, such that the demand for LNG shipping was not being met by available supply in 2011 and the first
half of 2012. Spot and short-medium term charter hire rates together with fleet utilization reached historic highs as a result. What turned
the tide for LNG shipping demand from the second quarter of 2011 was the unprecedented rise in Japanese LNG demand following the Fukushima
nuclear leak.
Charter rates for LNG vessels
started declining from 2013 as the supply increased more than the increase in demand. Global liquefaction capacity grew marginally with
only Angola LNG plant becoming operational in 2013. The trend continued in 2014 to 2017 as additional tonnage negated the effect of new
liquefaction plants coming online. The impact of excess vessel supply caused by the delivery of 28, 27, 28 and 24 vessels in 2014, 2015,
2016 and 2017 respectively showed on spot rates, which fell sharply. Low crude oil prices intensified the challenges in the LNG shipping
market as it delayed the completion of liquefaction projects. Moreover, demand from traditional Asian buyers such as Japan and South Korea
remained flat due to a weaker macroeconomic environment and greater preference for coal in power production, and in the case of Japan
a switch back to nuclear power. Towards the end of 2017, a surge in the Chinese LNG imports, due to a switch from coal to gas for heating
purposes, helped the LNG freight rates recover sharply. In 2018, average spot LNG charter rates were more than double of 2017 mainly driven
by the vessel shortage as Asian LNG imports surged. Spot charter rates declined in 2019 on account of decline in Chinese LNG import growth
rate, higher LNG inventory levels in Europe and Asia and mild winter. Spot LNG shipping rates declined in 2020 as COVID-19 adversely impacted
global LNG trade. Many U.S. LNG cargos were cancelled due to weak Asian LNG demand. However, spot LNG shipping rates increased from November
on account of the cold snap in Asia, congestion in the Panama Canal, and availability of fewer LNG ships in the spot market. High Asian
LNG demand supported spot LNG shipping rates in
2021. LNG shipping spot rates have declined since December 2021 as most LNG cargos are moving from the U.S. to Europe rather than to Asia
on account of strong LNG demand in Europe.
The following table presents
our selected historical consolidated financial and operational data as of and for each of the years in the five-year period ended December
31, 2021. The following financial data should be read in conjunction with the information presented in this item below. Our selected historical
consolidated financial data have been derived from our audited consolidated financial statements, which have been prepared in accordance
with U.S. generally accepted accounting principles ("U.S. GAAP"). Our selected historical consolidated financial information
as of December 31, 2021 and 2020, and for the years ended December 31, 2021, 2020 and 2019 is derived from our audited consolidated financial
statements included in "Item 18. Financial Statements" herein. Our selected historical consolidated financial information as
of December 31, 2019, 2018 and 2017 and for the years ended December 31, 2018 and 2017 have been derived from our audited consolidated
financial statements that are not included in this annual report.
|
|
Year Ended December 31, |
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|
2018 |
|
|
2017 |
STATEMENT OF INCOME |
|
(In thousands of Dollars, except for units, per unit data and TCE rates) |
Voyage revenues |
$ |
137,746 |
|
$ |
137,165 |
|
$ |
130,901 |
|
$ |
127,135 |
|
$ |
138,990 |
Voyage expenses- including related party (1) |
|
(2,657) |
|
|
(2,994) |
|
|
(2,709) |
|
|
(2,802) |
|
|
(3,619) |
Vessel operating expenses |
|
(29,640) |
|
|
(28,830) |
|
|
(28,351) |
|
|
(25,042) |
|
|
(27,067) |
General and administrative expenses- including related party |
|
(3,105) |
|
|
(2,528) |
|
|
(2,708) |
|
|
(2,209) |
|
|
(1,686) |
Management fees |
|
(6,023) |
|
|
(6,752) |
|
|
(6,537) |
|
|
(6,347) |
|
|
(6,162) |
Depreciation |
|
(31,710) |
|
|
(31,797) |
|
|
(30,680) |
|
|
(30,330) |
|
|
(30,319) |
Amortization of dry-docking and special survey costs |
|
- |
|
|
- |
|
|
- |
|
|
(7,422) |
|
|
(6,193) |
Operating income |
$ |
64,611 |
|
$ |
64,264 |
|
$ |
59,916 |
|
$ |
52,983 |
|
$ |
63,944 |
Interest income |
|
- |
|
|
221 |
|
|
2,331 |
|
|
1,051 |
|
|
203 |
Interest and finance costs |
|
(21,420) |
|
|
(27,058) |
|
|
(58,591) |
|
|
(50,490) |
|
|
(46,281) |
Gain/ Loss on Derivative Financial Instruments |
|
10,104 |
|
|
(3,148) |
|
|
- |
|
|
- |
|
|
- |
Other income/ (loss), net |
|
(35) |
|
|
(227) |
|
|
(43) |
|
|
(69 ) |
|
|
(527) |
Net Income |
$ |
53,260 |
|
$ |
34,052 |
|
$ |
3,613 |
|
$ |
3,613 |
|
$ |
17,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS/(LOSS) PER UNIT (2) (basic and diluted): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Unit (basic and diluted) |
$ |
1.14 |
|
$ |
0.63 |
|
$ |
(0.22) |
|
$ |
(0.11) |
|
$ |
0.27 |
Weighted average number of units outstanding (basic and diluted): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common units |
|
36,504,120 |
|
|
35,546,823 |
|
|
35,490,000 |
|
|
35,490,000 |
|
|
34,545,740 |
Cash distributions declared and paid per common unit |
$ |
- |
|
$ |
- |
|
$ |
0.13 |
|
$ |
1.17 |
|
$ |
1.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2021 |
|
2020 |
|
2019 |
|
2018 |
|
2017 |
BALANCE SHEET DATA: |
|
(In thousands of Dollars, except for units, per unit data and TCE rates) |
Total current assets |
$ |
51,167 |
|
$ |
27,120 |
|
$ |
18,172 |
|
$ |
112,963 |
|
$ |
70,404 |
Vessels, net |
|
853,190 |
|
|
884,900 |
|
|
916,697 |
|
|
947,377 |
|
|
977,298 |
Total assets |
|
965,481 |
|
|
965,837 |
|
|
989,187 |
|
|
1,063,436 |
|
|
1,054,319 |
Total current liabilities |
|
64,928 |
|
|
62,845 |
|
|
64,635 |
|
|
272,742 |
|
|
22,898 |
Total long-term debt, including current portion, gross of deferred financing fees |
|
567,000 |
|
|
615,000 |
|
|
663,000 |
|
|
722,800 |
|
|
727,600 |
Total partners' equity |
|
381,484 |
|
|
336,493 |
|
|
313,707 |
|
|
326,485 |
|
|
318,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOW DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
$ |
79,591 |
|
$ |
68,603 |
|
$ |
43,177 |
|
$ |
42,994 |
|
$ |
59,339 |
Net cash used in investing activities |
|
- |
|
|
- |
|
|
- |
|
|
(409 |
|
|
- |
Net cash used in financing activities* |
|
(57,555) |
|
|
(59,830) |
|
|
(86,888) |
|
|
(132) |
|
|
(74,470) |
FLEET PERFORMANCE DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of vessels at the end of the year |
|
6 |
|
|
6 |
|
|
6 |
|
|
6 |
|
|
6 |
Average number of vessels in operation (3) |
|
6.0 |
|
|
6.0 |
|
|
6.0 |
|
|
6.0 |
|
|
6.0 |
Average age of vessels in operation at end of year (years) |
|
11.4 |
|
|
10.4 |
|
|
9.4 |
|
|
8.4 |
|
|
7.4 |
Available Days (4) |
|
2,190.0 |
|
|
2,196.0 |
|
|
2,190.0 |
|
|
2,144.7 |
|
|
2,140.3 |
Fleet utilization (5) |
|
100% |
|
|
99.8% |
|
|
98.5% |
|
|
100% |
|
|
98% |
OTHER FINANCIAL DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time Charter Equivalent (in US dollars) (6) |
$ |
61,684 |
|
$ |
61,098 |
|
$ |
58,535 |
|
$ |
57,972 |
|
$ |
63,249 |
Adjusted EBITDA (6) |
$ |
97,009 |
|
$ |
96,451 |
|
$ |
90,357 |
|
$ |
96,094 |
|
$ |
107,545 |
| * | Comparative amounts have been reclassified due to the current presentation of restricted cash following
the adoption of ASU No. 2016-18-Statement of Cash Flows-Restricted Cash. |
| (1) | Voyage expenses include mainly commissions of 1.25% paid to our Manager. |
| (2) | In July 2020 and as amended and restated in August 2020, we entered into an ATM Sales Agreement for the
offer and sale of common units representing limited partnership interests, having an aggregate offering price of up to $30.0 million.
In August 2020, the Partnership terminated the above mentioned ATM Sales Agreement and entered into an amended and restated ATM Sales
Agreement (the “A&R Sales Agreement”), for the offer and sale of common units representing limited partnership interests,
having an aggregate offering price of up to $30.0 million. For more information on our current "at-the-market" offering program,
please see "Item 4.—Information on The Partnership History and Development of The Partnership." |
| (3) | Represents the number of vessels that constituted our Fleet for the relevant year, 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 that 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) | Non-GAAP Financial Information |
TCE. Time charter equivalent
rates, or TCE rates, are measures of the average daily revenue performance of a vessel. For time charters, this 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 or will likely 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 rates are a standard shipping industry performance measure
used primarily to compare period-to-period changes in a company's performance and to assist our management in making decisions regarding
the deployment and use of our vessels and in evaluating their financial performance. Our calculations of TCE rates may not be comparable
to those reported by other companies. The following table reflects the calculation of our TCE revenues for the periods presented, which
are expressed in thousands of U.S. dollars) and TCE rates, which are expressed in U.S. dollars and Available Days):
|
Year Ended December 31, |
(In thousands of Dollars, except for TCE rate data) |
2021 |
|
2020 |
|
2019 |
|
2018 |
|
2017 |
Voyage revenues |
$ |
137,746 |
|
$ |
137,165 |
|
$ |
130,901 |
|
$ |
127,135 |
|
$ |
138,990 |
Voyage expenses - including related party |
$ |
(2,657) |
|
$ |
(2,994) |
|
$ |
(2,709) |
|
$ |
(2,802) |
|
$ |
(3,619) |
Time charter equivalent revenues |
$ |
135,089 |
|
$ |
134,171 |
|
$ |
128,192 |
|
$ |
124,333 |
|
$ |
135,371 |
Total Available Days |
|
2,190.0 |
|
|
2,196.0 |
|
|
2,190.0 |
|
|
2,144.7 |
|
|
2,140.3 |
Time charter equivalent (TCE) rate |
$ |
61,684 |
|
$ |
61,098 |
|
$ |
58,535 |
|
$ |
57,972 |
|
$ |
63,249 |
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 operating performance 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, (b) monitoring our ongoing financial and operational strength, and (c) 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 Net Income to Adjusted
EBITDA
(In thousands of U.S. dollars) |
|
2021 |
|
2020 |
|
2019 |
|
2018 |
|
2017 |
Reconciliation to Net Income |
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
53,260 |
|
$ |
34,052 |
|
$ |
3,613 |
|
$ |
3,613 |
|
$ |
17,339 |
Net interest and finance costs (1) |
|
|
11,316 |
|
|
29,985 |
|
|
56,260 |
|
|
49,439 |
|
|
46,078 |
Depreciation |
|
|
31,710 |
|
|
31,797 |
|
|
30,680 |
|
|
30,330 |
|
|
30,319 |
Amortization of dry-docking and special survey costs |
|
|
- |
|
|
- |
|
|
- |
|
|
7,422 |
|
|
6,193 |
Amortization of fair value of acquired time charter |
|
|
- |
|
|
- |
|
|
- |
|
|
5,267 |
|
|
7,247 |
Amortization of deferred revenue |
|
|
222 |
|
|
400 |
|
|
(377) |
|
|
(45) |
|
|
369 |
Amortization of deferred charges |
|
|
501 |
|
|
217 |
|
|
181 |
|
|
68 |
|
|
- |
Adjusted EBITDA |
|
$ |
97,009 |
|
$ |
96,451 |
|
$ |
90,357 |
|
$ |
96,094 |
|
$ |
107,545 |
(1) Includes interest and
finance costs, net of interest income, and (gain)/ loss on derivative instruments, 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 annual report, all the vessels in our Fleet are
employed under multi-year 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. 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; |
| · | 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 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 vessels’ dry-docking and maintenance costs, are paid, can cause our vessel operating expenses to
increase; |
| · | 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 charterer's obligations under their charter agreements; |
| · | The effective and efficient technical management of the vessels under our Management Agreements; |
| · | Our ability to obtain acceptable debt financing to fund our capital commitments; |
| · | The supply and demand relationship for LNG shipping services; |
| · | 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 includes 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 amortizations 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 charterer's ability to make
charter payments to us; and |
| · | The level of any distribution on all classes of our units. |
The following table illustrates our ownership
days, Available Days, Revenue Earning Days, Time Charter Equivalent (or TCE) rate, daily operating expenses and Fleet Utilization for
the periods presented:
|
Year Ended December 31, |
(expressed in United states dollars except for operational data) |
2021 |
|
2020 |
|
2019 |
Ownership days (4) |
|
2,190.0 |
|
|
2,196.0 |
|
|
2,190.0 |
Available Days (1) |
|
2,190.0 |
|
|
2,196.0 |
|
|
2,190.0 |
Revenue Earning Days (2) |
|
2,190.0 |
|
|
2,190.7 |
|
|
2,156.3 |
Time Charter Equivalent (1) |
$ |
61,684 |
|
$ |
61,098 |
|
$ |
58,535 |
Daily operating expenses (3) |
$ |
13,534 |
|
$ |
13,128 |
|
$ |
12,946 |
Fleet Utilization (1) |
|
100.0% |
|
|
99.8% |
|
|
98.5% |
| (1) | For these definitions see above. |
| (2) | Revenue Earning Days are the total number of Available Days of our vessels net of unscheduled off-hire
days, during a period. |
| (3) | Daily vessel operating expenses, which include crew costs, provisions, deck and engine stores, lubricating
oil, insurance, spares and repairs and flag taxes, are calculated by dividing
vessel operating expenses by fleet Ownership Days for the relevant time period. |
| (4) | Ownership days are the total days that the Partnership possessed the vessels in its fleet for the relevant
period. |
See "Item 3. Key Information—D.
Risk Factors" for a discussion of certain risks inherent in our business.
Important Financial and Operational Terms
and Concepts
We use a variety of financial
and operational terms and concepts when analyzing our performance. These include the following:
Voyage Revenues. Our
time charter revenues are driven primarily by the number of vessels in our Fleet, the amount of daily charter hire that our LNG carriers
earn under time charters and the number of Revenue Earning Days during which our vessels generate revenues. These factors are, in turn,
affected by our decisions relating to vessel acquisitions, the amount of time that our LNG carriers spend dry-docked undergoing repairs,
maintenance and upgrade work, the age, condition and specifications of our vessels and the levels of supply and demand in the LNG carrier
charter market. Our revenues will also be affected if any of our charterers cancel a time charter or if we agree to renegotiate charter
terms during the term of a charter resulting in aggregate revenue reduction. Our time charter arrangements have been contracted in varying
rate environments and expire at different times. We recognize revenues from time charters over the term of the charter as the applicable
vessel operates under the charter. Under time charters, revenue is not recognized during days a vessel is off-hire. Revenue is recognized
from delivery of the vessel to the charterer, until the end of the time charter period. Under time charters, we are responsible for providing
the crewing and other services related to the vessel's operations, the cost of which is included in the daily hire rate, except when off-hire.
Off-hire
(Including Commercial Waiting Time). When a vessel is "off-hire"—or not available for service—the
charterer generally is not required to pay the time charter hire rate and we are responsible for all costs. Prolonged off-hire may
lead to vessel substitution or termination of a time charter. Our vessels may be out of service, that is, off-hire, for several
reasons: scheduled dry-docking, special survey, vessel upgrade or maintenance or inspection, which we refer to as scheduled
off-hire; days spent waiting or positioning for a charter, which we refer to as commercial waiting time; and unscheduled repairs,
maintenance, operational efficiencies, equipment breakdown, accidents, crewing strikes, certain vessel detentions or similar
problems, or our failure to maintain the vessel in compliance with its specifications and contractual standards or to provide the
required crew, which we refer to as unscheduled off-hire. We have obtained loss of hire insurance to protect us against loss of
income in the event one of our vessels cannot be employed due to damage that is covered under the terms of our hull and machinery
insurance. Under our loss of hire policies, our insurer generally will pay us the hire rate agreed in respect of each vessel for
each day in excess of 14 days (increased to 30 days while navigating outside Institute Warrantee Limits) and with a maximum period
of between 120 and 180 days.
Voyage Expenses. Voyage
expenses primarily include port and canal charges, bunker (fuel) expenses and agency fees which are paid for by the charterer under our
time charter arrangements or by us during periods of off-hire except for commissions, which are always paid for by us. 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 a period of dry-docking. Voyage expenses can be higher when vessels trade on charters with initial
terms of less than two years due to fuel consumption during idling, cool down requirements, commercial waiting time in between charters
and positioning and repositioning costs. From time to time, in accordance with industry practice, we pay commissions ranging up to 1.25%
of the total daily charter rate under the charters to unaffiliated ship brokers, depending on the number of brokers involved with arranging
the charter. These commissions do not include the fees we pay to our Manager, which are described below under "—Management
Fees."
Available Days. Available
Days are the total number of ownership 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.
Average Number of
Vessels. Average number of vessels is 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 ownership days in the
period.
Fleet utilization. We
calculate fleet utilization by dividing the number of our Revenue Earning Days 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 such as unscheduled repairs but excluding scheduled off-hires for vessel upgrades,
dry-dockings or special or intermediate surveys.
Vessel Operating
Expenses. Vessel operating expenses include crew wages and related costs, the cost of insurance, expenses for repairs and
maintenance, the cost of spares and consumable stores, lubricant costs, statutory and classification expenses, forwarding and communications
expenses and other miscellaneous expenses.
Vessel operating expenses are paid by the ship-owner under time charters and are
recognized as expenses when incurred. We expect that vessel operating expenses will increase as our vessels age. Factors beyond our control,
some of which may affect the shipping industry in general—for instance, developments relating to market premiums for insurance,
industry and regulatory requirements and changes in the market price of lubricants due to increases in oil prices—may also cause
vessel operating expenses to increase.
Dry-docking. We
must periodically dry-dock each of our vessels for inspection, repairs and maintenance and any modifications required to comply with
industry certification or governmental requirements. In accordance with industry certification requirements, we mandatorily dry-dock
our vessels every 60 months until the vessel is 15 years old. If a vessel is less than 15 years old, an "in water survey in lieu
of dry-dock" can take place in between the two special surveys, which statutorily must occur every five years. For vessels that
are 15 years or older, dry-docking takes place every 30 months as required for the renewal of certifications required by classification
societies, or, subject to special considerations, an "in water survey in lieu of dry-dock" can take place between the two special
surveys. Special survey and dry-docking costs (consisting of direct costs, including shipyard costs, paints and class renewal expense,
and peripheral costs, including spare parts, service engineer attendance) are expensed as incurred. The number of dry-dockings undertaken
in a given period and the nature of the work performed determine the level of dry-docking expenditures. We expense costs related to routine
repairs and maintenance performed during dry-docking or as otherwise incurred. We expect that dry-docking and special survey costs will
increase as our vessels age. The three steam turbine vessels in our Fleet completed their most recent scheduled special survey and dry-docking
repairs in 2017. One of our steam turbine vessels, the Clean Energy completed its scheduled dry-docking, as well as the installation
of the BWTS in April 2022. Our other two steam turbine vessels, the Ob River and the Amur River are scheduled
to be dry-docked and have their BWTS installed within 2022. The latest scheduled special survey and dry-docking repairs for the three
TDFE propulsion system vessels in our Fleet occurred in 2018 with the next ones due within 2023.
Depreciation. We
depreciate our LNG carriers on a straight-line basis over their remaining useful economic lives. Depreciation is based on the cost of
the vessel less its estimated salvage value. We estimate the useful life of the LNG carriers in our Fleet to be 35 years from their initial
delivery from the shipyard, consistent with LNG industry practice. Vessel residual value is estimated based on historical market trends
and represents Management's best estimate of the current selling price assuming the vessels are already of age and condition expected
at the end of its useful life. The assumptions made reflect our experience, market conditions and the current practice in the LNG industry;
however, they required more discretion since there is a lack of historical references in scrap prices of similar types of vessels.
Interest and Finance
Costs. We incur interest expense on outstanding indebtedness under our existing debt agreements which we include in interest
and finance costs. Interest expense depends on our overall level of borrowings and may significantly increase when we acquire or refinance
ships. Interest expense may also change with prevailing interest rates, although interest rate swaps or other derivative instruments may
reduce the effect of these changes. We also incur financing and legal costs in connection with establishing debt agreements, which are
deferred and amortized to interest and finance costs using the effective interest method. We will incur additional interest expense in
the future on our outstanding borrowings and under future borrowings. For a description of our existing credit facilities, please see
"—B. Liquidity and Capital Resources—Our Borrowing Activities."
Vessel Lives and
Impairment. Vessels are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. If circumstances require a long-lived asset or asset group to be tested for possible impairment,
we first compare the undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying
value of the long lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the
carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models,
quoted market values and third-party independent appraisals as considered necessary. Since our inception, no impairment loss was recorded
in any of our Fleet Vessels.
Insurance
Hull and Machinery
Insurance. We have obtained hull and machinery insurance on all our vessels to insure against marine and war risks, which
include the risks of damage to our vessels, salvage and towing costs, and also insures against actual or constructive total loss of any
of our vessels. However, our insurance policies contain deductible amounts for which we will be responsible. We have also arranged additional
total loss coverage for each vessel. This coverage, which is called disbursements increased value coverage, provides us additional coverage
in the event of the total loss or the constructive total loss of a vessel. The agreed deductible on each vessel averages $250,000 increased
to $500,000 when trading outside Institute Warrantee Limits.
Loss of Hire Insurance. We
have obtained loss of hire insurance to protect us against loss of income in the event one of our vessels cannot be employed due to damage
that is covered under the terms of our hull and machinery insurance. Under our loss of hire policies, our insurer will pay us the hire
rate agreed in respect of each vessel for each day, in excess of a certain number of deductible days, for the time that the vessel is
out of service as a result of damage, for a maximum of between 120 and 180 days. The number of deductible days for the vessels in our
Fleet is 14 days per vessel increased to 30 days when trading outside Institute Warrantee Limits.
Protection and Indemnity
Insurance. Protection and indemnity insurance, which covers our third-party legal liabilities in connection with our shipping
activities, is provided by a mutual protection and indemnity association, or P&I club. This includes third-party liability and other
expenses related to the injury or death of crew members, passengers and other third-party persons, loss or damage to cargo, claims arising
from collisions with other vessels or from contact with jetties or wharves and other damage to other third-party property, including pollution
arising from oil or other substances, and other related costs, including wreck removal. Our current protection and indemnity insurance
coverage is unlimited, except for pollution, which is limited to $1 billion per vessel per incident.
Critical Accounting Policies and Estimates
The discussion and analysis
of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in
accordance with U.S. GAAP. The preparation of our financial statements requires us to make estimates and judgments in the application
of our accounting policies that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosure at
the date of our consolidated financial statements. Because future events and their effects cannot be determined with certainty, actual
results could differ from our assumptions and estimates, and such differences could be material. Actual results may differ from these
estimates under different assumptions and conditions.
Critical accounting policies
are those that reflect significant judgments of uncertainties and potentially result in materially different results under different assumptions
and conditions. For a description of all our significant accounting policies, see Note 2 to our consolidated financial statements included
under "Item 18. Financial Statements" of this annual report.
Voyage Revenues and related expenses
Revenues are generated
from time charter agreements, which contain a lease as they meet the criteria of a lease under ASC 842. Certain of our time charters
provide for variable lease payments, charterers' option to extend the lease terms, termination clauses and charterers' option to purchase
the underlying assets. Each lease term is assessed at the inception of such lease. Under our time charter agreements, the charterer pays
a specified daily charter hire rate for the use of the vessel. Additionally, we pay for the operation and the maintenance of the vessel,
including crew, insurance, spares and repairs, which are recognized in operating expenses.
We, as lessor, have elected
not to allocate the consideration in the agreement to the separate lease and non-lease components (operation and maintenance of the vessel)
as their timing and pattern of transfer to the charterer, as the lessee, are the same and the lease component, if accounted for separately,
would be classified as an operating lease. Additionally, the lease component is considered the predominant component as we have assessed
that more value is ascribed to the vessel rather than to the services provided under our time charter agreements.
Our voyage revenues are
recognized on a straight line basis at the average minimum lease revenue over the rental periods of such charter agreements, as service
is performed. Revenues generated from variable lease payments are recognized in the period when changes in facts and circumstances on
which the variable lease payments are based occur.
Apart from the agreed hire
rate, we may be entitled to an additional income, such as ballast bonus, which is considered as reimbursement of our expenses and is recognized
together with the lease component over the duration of the charter. We have made an accounting policy election to recognize the related
ballast costs, which mainly consisting of bunkers, incurred over the period between the charter party date or the prior redelivery date
(whichever is latest) and the delivery date to the charterer, as contract fulfilment costs in accordance with ASC 340-40 and amortized
over the charter period. Voyage expenses, primarily consist of commissions which are paid by us as well as port, canal and bunker expenses
that are unique to a particular charter and which are paid by the charterer under the time charter arrangements or by us during periods
of off-hire. All voyage expenses are expensed as incurred, except for commissions. Commissions paid to brokers are deferred and amortized
over the related charter period to the extent revenue has been deferred since commissions are earned as our revenues are earned.
Intangible assets/liabilities related
to time charter acquired
Where we identify any assets
or liabilities associated with the acquisition of a vessel, we record all such identified assets or liabilities at fair value, determined
by reference to market data. The amount to be recorded as an asset or liability at the date of vessel acquisition is determined by comparing
the existing charter rate in the acquired time charter agreement with the market rates for equivalent time charter agreements prevailing
at the time the vessel is acquired. When the present value of the time charter assumed is greater than the current fair value of
such charter, the difference is recorded as an asset; otherwise, the difference is recorded as liability. Such assets and liabilities,
respectively, are amortized as an adjustment to revenues, over the remaining term of the assumed time charter and are classified as non-current
asset/ liability in the consolidated balance sheets. Impairment testing is performed when events or changes in circumstances indicate
that the carrying amount of the intangible asset may not be recoverable.
Vessels Lives and Impairment
The carrying value of a
vessel represents its historical acquisition or construction cost, including capitalized interest, supervision, technical and delivery
cost, net of accumulated depreciation and impairment loss, if any. Expenditures for subsequent conversions and major improvements are
capitalized provided that such costs increase the earnings capacity or improve the efficiency or safety of the vessels.
We depreciate the original
cost, less an estimated residual value, of our LNG carriers on a straight-line basis over each vessel's estimated useful life. The carrying
values of our vessels may not represent their market value at any point in time because the market prices tend to fluctuate with changes
in hire rates and the cost of newbuilds. Both hire rates and newbuild costs tend to be cyclical in nature.
We review vessels for impairment
whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. When such indications are
present, we determine undiscounted projected net operating cash flows for each vessel and compare it to the vessel's carrying value.
In developing estimates of future cash flows, we must make assumptions about future charter rates, vessel operating expenses, dry-docking
expenditures, fleet utilization, and the estimated remaining useful life of the vessels. These assumptions are based on historical trends
as well as future expectations and are also consistent with the plans and forecasts that we use to conduct our business.
The future undiscounted
net operating cash flows are determined by considering the charter revenues from existing time charters for the fixed vessel days and
by estimating charter rates for the unfixed days over the estimated remaining economic life of each vessel. Estimates of the daily time
charter equivalent for the unfixed days are based on a combination of the average of the trailing 10-year historical charter rates adjusted
for expected off hires due to scheduled vessels' maintenance and estimated unexpected breakdown off hires. Expected outflows for scheduled
vessel maintenance and vessel operating expenses are based on the Partnership’s budget by using historical data, which is adjusted
annually with the assumption of an annual inflation rate of up to 3%. In developing the estimate for the effective fleet utilization,
the Partnership takes into account the period(s) each vessel is expected to undergo its scheduled maintenance (dry-docking and special
surveys) and each vessel’s loss of hire resulting from repositioning or other conditions.
The estimated salvage value
of each vessel is $500 per lightweight ton, in accordance with our vessel depreciation policy. We use a probability-weighted approach
for developing estimates of future cash flows used to test our vessels for recoverability when alternative courses of action are under
consideration (i.e. sale or continuing operation of a vessel). If the estimated future undiscounted cash flows of an asset exceed the
asset's carrying value, no impairment is recognized even though the fair value of the asset may be lower than its carrying value. If the
estimated future undiscounted cash flows of an asset is less than the asset's carrying value and the fair value of the asset is less than
its carrying value, the asset is written down to its fair value. The fair value at the date of the impairment becomes the new cost basis
and will result in a lower depreciation expense than for periods before the recorded vessel impairment loss. Historically, there was no
impairment loss recorded in any of the six vessels in our Fleet.
We determine the fair value
of our vessels based on our estimates and assumptions and by making use of available market data and taking into consideration third-party
valuations. We employ our LNG carriers on fixed-rate charters with major companies. These charters typically have original terms of two
or more years in length. Consequently, while the market value of a vessel may decline below its carrying value, the carrying value of
a vessel may still be recoverable based on the future undiscounted cash flows the vessel is expected to obtain from servicing its existing
and future charters.
Using the framework for
estimating future undiscounted net operating cash flows described above, we completed our impairment analysis for the years ended December
31, 2021 and 2020, for those operating vessels whose carrying values were above their respective market values. Our impairment analysis
as of December 31, 2021 and 2020, indicated that the carrying amount
of our vessels, was recoverable, and therefore concluded that no impairment charge was necessary.
Certain assumptions relating to our estimates
of future cash flows are more predictable by their nature in our experience, including estimated revenue under existing charter terms,
on-going operating costs and remaining vessel life. Certain assumptions relating to our estimates of future cash flows require more discretion
and are inherently less predictable, such as future hire rates beyond the firm period of existing charters and vessel residual values,
due to factors such as the volatility in vessel hire rates and the lack of historical references in scrap prices of similar type of vessels.
Although we believe that
the assumptions used to evaluate potential asset impairment are based on historical trends and are reasonable and appropriate, at the
time they are made, such assumptions are highly subjective and we can make no assurances, however, as to whether our estimates of future
cash flows, particularly future vessel hire rates or vessel values, will be accurate. To minimize such subjectivity, our analysis for
the year ended December 31, 2021, also involved sensitivity analysis to the model input we believe is most important, being the historical
rates. In particular, in terms of our estimates for the charter rates for the unfixed period, we use the average of the trailing 10-year
historical charter rates as of December 31, 2021. Although the trailing 10-year historical charter rates, cover at least a full business
cycle, we sensitized our model with regards to long-term historical charter rate assumptions for the unfixed period beyond the first year.
Our sensitivity analysis revealed that, to the extent that going forward the 10-year historical charter rates would not decline by more
than 40% for LNG carrier vessels and we would not be required to recognize impairment.
Depreciation on our LNG
carriers is calculated using an estimated useful life of 35 years, commencing at the date the vessel was originally delivered from the
shipyard. However, the actual life of a vessel may be different than the estimated useful life, with a shorter actual useful life resulting
in an increase in the depreciation and potentially resulting in an impairment loss. The estimated useful life of our LNG carriers takes
into account design life, commercial considerations and regulatory restrictions. Vessel residual values are based on our estimation over
our vessels sale price at the end of their useful life, being a product of a vessel's lightweight tonnage times an estimated scrap rate
and the estimated resale price of certain equipment and material. Residual values are periodically reviewed and revised to recognize
changes in conditions, new regulations or for other reasons.
An increase in the
useful life of a vessel or in its residual value would have the effect of decreasing the annual depreciation and extending it into later
periods. A decrease in the useful life of a vessel or in its residual value would have the effect of increasing the annual depreciation
and accelerating it into earlier periods.
A decrease in the useful
life of the vessel may occur as a result of poor vessel maintenance, harsh ocean going and weather conditions, or poor quality of shipbuilding.
When regulations place limitations over the ability of a vessel to trade on a worldwide basis, its remaining useful life is adjusted to
end at the date such regulations preclude such vessel’s further commercial use. Weak freight market rates result in owners scrapping
more vessels and scrapping them earlier in their lives due to the unattractive returns.
An increase in the useful
life of the vessel may occur as a result of superior vessel maintenance performed, favorable ocean going and weather conditions, superior
quality of shipbuilding, or high freight market rates, which result in owners scrapping the vessels later in their lives due to the attractive
cash flows.
Actual outcomes may differ
from estimates. Such estimates are reviewed and updated at each reporting period.
The table set forth below
indicates the carrying value of each of our vessels as of December 31, 2021 and 2020.
|
|
|
|
|
|
Carrying Value
(in millions of U.S. dollars) as of |
Vessel |
|
Capacity
(cbm) |
|
Year Built/
Purchased |
|
December 31,
2021 |
|
December 31,
2020 |
Clean Energy |
|
149,700 |
|
|
2007 |
|
$ |
111.1 |
|
$ |
115.8 |
Ob River |
|
149,700 |
|
|
2007 |
|
|
111.4 |
|
|
116.1 |
Amur River |
|
149,700 |
|
|
2008 |
|
|
120.2 |
|
|
125.1 |
Arctic Aurora |
|
155,000 |
|
|
2014 |
|
|
168.5 |
|
|
174.2 |
Yenisei River |
|
155,000 |
|
|
2014 |
|
|
158.1 |
|
|
163.5 |
Lena River |
|
155,000 |
|
|
2015 |
|
|
183.9 |
|
|
190.2 |
TOTAL |
|
914,100 |
|
|
|
|
$ |
853.2 |
|
$ |
884.9 |
As of December 31, 2021,
the carrying amounts for three of the vessels in our Fleet were above the average of their values as assessed by third-party valuations
and therefore we tested these three vessels for potential impairment. In assessing the recoverability of our vessels' carrying
amounts, the undiscounted projected net operating cash flows of the vessels significantly exceeded their carrying amounts resulting in
no impairment loss being recognized. As of December 31, 2020, the carrying amounts for two of the vessels in our Fleet were above the
average of their values as assessed by third-party valuations and therefore we tested these two vessels for potential impairment.
In assessing the recoverability of our vessels' carrying amounts, the undiscounted projected net operating cash flows of the vessels
significantly exceeded their carrying amounts resulting in no impairment loss being recognized. We refer you to the risk factor
entitled "Vessel values may fluctuate substantially and, if these values are lower at a time when we are attempting to dispose of
vessels, we may incur a loss" and the discussion herein under the heading "Item 3. Key Information—D. Risk Factors —Risks
relating to our Partnership."
Our estimates of
basic market value assume that our vessels are all in good and seaworthy condition without need for repair and if inspected, would be
certified in class without notations of any kind. Our estimates are based on information available from various industry sources, including:
| · | reports by industry analysts and data providers that focus on our industry and related dynamics affecting
vessel values; |
| · | news and industry reports of similar vessel sales; |
| · | news and industry reports of sales of vessels that are not similar to our vessels where we have made certain
adjustments in an attempt to derive information that can be used as part of our estimates; |
| · | approximate market values for our vessels or similar vessels that we have received from shipbrokers, whether
solicited or unsolicited, or that shipbrokers have generally disseminated; and |
| · | vessel sale prices and values of which we are aware through both formal and informal communications with
ship-owners, shipbrokers, industry analysts and various other shipping industry participants and observers. |
As we obtain information
from various industry and other sources, our estimates of basic market value are inherently uncertain. In addition, vessel values are
highly volatile; as such, our estimates may not be indicative of the current or future basic market value of our vessels or prices that
we could achieve if we were to sell them.
Depreciation
We depreciate our
vessels on a straight-line basis over their estimated useful lives, after considering their estimated residual values. Management
estimates residual value of our vessels to be equal to the product of its lightweight tonnage ("LWT") and an estimated
scrap rate per LWT per LNG carrier, which represents our estimate of the market value of the ship at the end of its useful life.
Useful economic live of each vessel in our Fleet is estimated to be 35 years from their initial delivery from the shipyard. A
decrease in the useful life of a vessel or in its residual value would have the effect of increasing the annual depreciation charge.
Up to September 30, 2019, we applied an average scrap rate of $0.685 per lightweight ton per LNG carrier and following a
reassessment of the scrap rates effective from October 1, 2019, we reduced the average scrap rate estimate to $0.500 per lightweight
ton per LNG carrier. The effect of the change in this estimate for the year ended December 31, 2021 was a decrease by $1.4 million
in the net income and a decrease by $0.04 in the earnings per common unit. When regulations place limitations over the ability of a
vessel to trade on a worldwide basis, its remaining useful life is adjusted at the date such regulations become effective.
Recent Accounting Pronouncements
For a discussion on Recent
Accounting Pronouncements, see Note 2 to our consolidated financial statements included in this annual report.
Results of Operations
Year ended December 31, 2021 compared
to the year ended December 31, 2020
Voyage Revenues.
Voyage revenues increased by $0.5 million, or 0.4%, to $137.7 in the year ended December 31, 2021, compared to $137.2 million for the
year ended December 31, 2020. Excluding non cash items, voyage revenues increased by $0.4 million. This increase in cash revenues was
primarily due to the higher revenues earned on:
| i) | the Yenisei River and Lena River, which were attributable to the increase in the opex
component of the daily hire in the year to December 31, 2021 compared to the prior year, as per the terms of the multi-year charter contract
with Yamal and; |
| ii) | Arctic Aurora, which were attributable to the increase of the daily hire rate from August 2020
and onwards, as per the terms of the charter contract with Equinor. |
The abovementioned increase
was partially counterbalanced by lower revenues earned on the Amur River, which were attributable to the decrease of the daily
hire rate from July 01, 2021 and onwards, as per the terms pf the charter contract with Gazprom.
Voyage Expenses—including
related party. In the year ended December 31, 2021, voyage expenses were $2.7 million, compared to $3.0 million for
the year ended December 31, 2020, representing a decrease of $0.3 million or 10.0%. The decrease is primarily associated with the decreased
bunkers expenses in the year to December 31, 2021 compared to the prior year.
Vessels' Operating
Expenses. Vessel operating expenses increased by 2.8%, or $0.8 million, to $29.6 million during the year ended December
31, 2021, from $28.8 million during the year ended December 31, 2020. Our daily operating expenses increased from $13,128 for the year
ended December 31, 2020 to $13,534 for the year ended December 31, 2021. This increase is primarily associated with the increased technical
maintenance and supply costs on certain of the Partnership's vessels for the year ended December 31, 2021.
General and administrative
expenses—including related party. General and administrative expenses increased by 24.0%, or $0.6 million, to $3.1
million during the year ended December 31, 2021, from $2.5 million during the year ended December 31, 2020. This increase of general and
administrative expenses is mainly attributable to increased D&O insurance and consultancy expenses. 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. We incurred an
aggregate of $6.0 million, or $2,750 per LNG carrier per day in management fees for the year ended December 31, 2021, compared to an aggregate
of $6.8 million, or $3,075 per LNG carrier per day in management fees for the year ended December 31, 2020. The 11.8%, or $0.8 million,
decrease in management fees is attributable to the reduction in the daily management fee in the year to December 2021 compared to the
prior year pursuant to the terms of the new Master Agreement
with our Manager (see also "Item 7. Major Unitholders and Related Party Transactions—B. Related Party Transactions").
Depreciation. Depreciation
expense decreased by 0.3%, or $0.1 million, to $ 31.7 million during the year ended December 31, 2021, from $31.8 million during the year
ended December 31, 2020.
Interest and Finance
Costs. Interest and finance costs decreased by 21.0%, or $5.7 million to $21.4 million during the year ended December 31,
2021, from $27.1 million during the year ended December 31, 2020. The decrease in interest and finance costs was predominantly due to
the decrease in the weighted average interest rate in the year ended December 31, 2021, which decreased to 3.1% in 2021 from 3.7% in 2020
as well as to the decrease in the average interest bearing debt to $596.5 million in 2021 from $644.5 million in 2020.
Gain/ (Loss) on
derivative instruments. On May 7, 2020 we entered into a floating to fixed interest rate swap transaction effective
from June 29, 2020. It provides a fixed 3-month LIBOR rate of 0.41% based on notional values that reflect the amortization schedule
of 100% of our debt outstanding under the $675 Million Credit Facility, until the $675 Million Credit Facility matures in September
2024. The interest rate swap did not qualify for hedge accounting and as of December 31, 2021 we recognized a gain on the derivative
financial instrument of $10.1 million compared to a loss on the derivative financial instrument of $3.1 million which was recognized
in 2020.
Year ended December 31, 2020 compared
to the year ended December 31, 2019
Voyage Revenues.
Voyage revenues increased by $6.3 million, or 4.8%, to $137.2 in the year ended December 31, 2020, compared to $130.9 million for the
year ended December 31, 2019. Excluding non cash items, voyage revenues increased by $7 million. This increase in cash revenues was primarily
due to the higher revenues earned on the Lena River which completed employment under its multi-month charter with
a major energy company in May 2019 and in July 2019 began employment under a fifteen-year charter party with Yamal in the Yamal LNG Project,
which may be extended at Charterers' option by three consecutive periods of five years at a higher charter rate;
Voyage Expenses—including
related party. In the year ended December 31, 2020, voyage expenses were $3.0 million, compared to $2.7 million for
the year ended December 31, 2019, representing an increase of $0.3 million or 11.1%. The increase is primarily associated with the increased
commissions as a result of the increased voyage revenues in the year ended December 31, 2020.
Vessels' Operating
Expenses. Vessel operating expenses increased by 1.4%, or $0.4 million, to $28.8 million during the year ended December 31,
2020, from $28.4 million during the year ended December 31, 2019. Our daily operating expenses increased from $12,946 for the year ended
December 31, 2019 to $13,128 for the year ended December 31, 2020. This increase is primarily associated with the increased technical
maintenance costs on certain of the Partnership's vessels for the year ended December 31, 2020.
General and administrative
expenses—including related party. General and administrative expenses decreased by 7.4%, or $0.2 million, to $2.5 million
during the year ended December 31, 2020, from $2.7 million during the year ended December 31, 2019. This decrease of general and administrative
expenses is mainly associated with decreased legal costs, partially offset by the increased D&O insurance expenses. 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. We
incurred an aggregate of $6.8 million, or $3,075 per LNG carrier per day in management fees for the year ended December 31, 2020, compared
to an aggregate of $6.5 million, or $2,985 per LNG carrier per day in management fees for the year ended December 31, 2019. The 4.6%,
or $0.3 million, increase in management fees is consistent with the annual 3% increase in daily management fees pursuant to our Management
Agreements.
Depreciation. Depreciation
expense increased by 3.6%, or $1.1 million, to $ 31.8 million during the year ended December 31, 2020, from $30.7 million during the
year ended December 31, 2019. The increase of depreciation expense is associated with the reduction in the estimated residual value
of our vessels further to the reassessment of the vessels' scrap rates effective from October 1, 2019 which were reduced from $0.685
per lightweight ton per LNG carrier to $0.500 per lightweight ton per LNG carrier.
Interest and Finance
Costs. Interest and finance costs decreased by 53.8%, or $31.5 million to $27.1 million, during the year ended December 31,
2020, from $58.6 million during the year ended December 31, 2019. The decrease in period interest and finance costs was predominantly
due to the decrease in the weighted average interest in the period ended December 31, 2020 (as the weighted average interest rate decreased
to 3.7% in 2020 compared to 5.4% in 2019), as well as due to the write off of deferred financing fees, which was incurred in the prior
year following the refinancing of the Term Loan B, which took place in the third quarter of 2019.
Loss on derivative
instruments. On May 7, 2020 we entered into a floating to fixed interest rate swap transaction effective from June 29, 2020.
It provides a fixed 3-month LIBOR rate of 0.41% based on notional values that reflect the amortization schedule of 100% of our debt outstanding
under the $675 Million Credit Facility, until the $675 Million Credit Facility matures in September 2024. The interest rate swap did not
qualify for hedge accounting and as of December 31, 2020 we recognized a loss on the derivative financial instrument of $3.1 million.
| B. | LIQUIDITY AND CAPITAL RESOURCES |
Liquidity and Cash Needs
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 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 the liquidity covenants contained in the $675 Million Credit
Facility. Our funding and treasury activities are intended to maximize investment returns while maintaining appropriate liquidity.
For the year ended
December 31, 2021, our principal sources of funds were our operating cash flows. Also, under the terms of the $675 Million Credit Facility,
the Partnership is restricted from paying distributions to its common unitholders while borrowings are outstanding under the $675 Million
Credit Facility. Scheduled distributions to the preferred unitholders under the existing Series A Preferred Units and Series B Preferred
Units are not restricted provided there is no event of default while the $675 Million Credit Facility remains outstanding. 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.
On July 2, 2020, we entered
into the Original Agreement, for the offer and sale, from time to time, of up to an aggregate of $30.0 million of our common units representing
limited partnership interests under the Prior ATM Program. In August 2020, we entered into the A&R Sales Agreement, for the offer
and sale of common units representing limited partnership interests, having an aggregate offering price of up to $30.0 million. Upon entry
into the A&R Sales Agreement, the Partnership terminated the Prior ATM Program. At the time of such termination, the Partnership had
issued and sold 122,580 common units resulting in net proceeds of $0.3 million, under the Original Agreement. As of the date of this annual
report, we have issued and sold 1,189,667 common units resulting in net proceeds of $3.3 million under the A&R Sales Agreement.
Our short-term liquidity
requirements relate to servicing the principal and interest on our debt and funding of the necessary working capital, including vessel
operating expenses and payments under our Master Agreement. On May 7, 2020 we entered into a floating to fixed interest rate swap transaction
with Citibank N.A. effective from June 29, 2020. It provides for a fixed 3-month LIBOR rate of 0.41% based on notional values that reflect
the amortization schedule of 100% of our debt outstanding under the $675 Million Credit Facility, until the $675 Million Credit Facility
matures in September 2024.
Our long-term liquidity
requirements relate primarily to funding capital expenditures, including the, repayment of our long-term debt and the potential acquisition
of additional vessels.
In accordance with our business
strategy, other liquidity needs may relate to funding potential investments and maintaining cash reserves against fluctuations in operating
cash flows. Because we distribute all of our available cash subject to the restrictions contained in our debt agreements, 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. Cash and cash equivalents are held in U.S. dollars. Please see "Item 8. Financial Information—A.
Consolidated Statements and Other Financial Information—Our Cash Distribution Policy" for a discussion of our cash distribution
policy and how we define "available cash" under the Partnership Agreement. We have not made use of derivative instruments
in any of the periods presented in the financial statements accompanying this annual report.
Cash
As of December 31, 2021,
we reported cash of $97.0 million (including $50.0 million of restricted cash) which represented an increase of $22 million, or 29.3%,
compared to $75.0 million, as of December 31, 2020.
Working capital position
Working capital is equal
to current assets minus current liabilities, including the current portion of long-term debt. As of December 31, 2021, we had a working
capital deficit of $13.8 million as compared to the working capital deficit of $35.7 million as of December 31, 2020, which is mainly
due to the current portion of our long-term debt. 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 and Series B Preferred Units in accordance with our Partnership Agreement.
Our Borrowing Activities
As of December 31,
2021, we had $567 million of indebtedness outstanding under the fully drawn $675 Million Credit Facility (discussed below) and had
access to $30 million of available borrowing capacity under our $30 Million Revolving Credit Facility (as defined below). As of
December 31, 2021, we were in compliance with all of the covenants, including the financial and liquidity covenants, contained in
the $675 Million Credit Facility.
$675 Million Credit Facility
On September 18, 2019, we
entered into a 5-year syndicated $675 million senior secured term loan (the "$675 Million Credit Facility") with leading international
banks for the purpose of refinancing the Partnership's existing total indebtedness under the Term Loan B and the 2019 Notes. All amounts
under the $675 Million Credit Facility were drawn on September 25, 2019, utilizing $470.4 million to repay the Partnership's outstanding
principal of its Term Loan B. The remaining amounts drawn together with cash on hand were utilized to repay the $250 million aggregate
principal amount of the 2019 Notes at their maturity on October 30, 2019.
The $675 Million Credit
Facility is repayable over five years in 20 consecutive quarterly payments (plus a balloon payment in year five) based on a 14 year amortization
profile and bears interest at U.S. LIBOR plus 3.00% margin and is secured by, among other things, first priority mortgages on the six
LNG vessels in the Partnership's fleet. Under the terms of the $675 Million Credit Facility, the Partnership is restricted from paying
distributions to its common unitholders while borrowings are outstanding under the $675 Million Credit Facility. Scheduled distributions
to the preferred unitholders under the existing Series A Preferred Units and Series B Preferred Units will not be restricted provided
there is no event of default while the $675 Million Credit Facility remains outstanding.
Pursuant to the terms of
the $675 million Credit Facility, it is considered a change of control, which could allow the lenders to declare the facility payable
within ten days, if, among other things, (i) Dynagas Holdings Ltd. ceases to own 30% of our total common units outstanding,
(ii) any person or persons acting in consent (other than certain permitted holders as defined therein) own a higher percentage of our
total common units than in Dynagas LNG Partners LP ("Parent") than our Sponsor and/or have the ability to control, either directly
or indirectly, the affairs or composition of the majority of the board of directors or the board of managers of the Parent, (iii) Mr.
George Prokopiou ceases to be our Chairman and/or member of our board, or (iv) Dynagas GP LLC ceases to be our general partner.
The $675 Million Credit
Facility is secured by a customary security package which includes, among other things (except as otherwise provided herein, capitalized
terms used herein but not otherwise defined herein shall have the meanings set forth in the $675 Million Credit Facility):
| · | the Mortgages over each of the Ships; |
| · | the Deeds of Covenant in relation to each of the Ships in respect of which the Mortgage is in account
current form; |
| · | the General Assignments in relation to each of the Ships in respect of which the Mortgage is in preferred
form; |
| · | the Charter Assignment in relation to each Ship's Charter Documents; |
| · | the Account Security in relation to each Account; |
| · | the Management Agreement Assignment in relation to each Management Agreement for each Ship; |
| · | a Manager's Undertaking by each Manager of each Ship; and |
| · | a Quiet Enjoyment Agreement for each of Ship E and Ship F duly executed by the relevant Owner, the Security
Agent and the relevant Charterer. |
The terms of the $675 Million
Credit Facility include the following financial covenants, which require the Partnership to maintain, among other things: (i) a minimum
cash balance of $50 million throughout the life of the $675 Million Credit Facility in a restricted collateral account, (ii) a consolidated
leverage ratio that is not higher than 0.7:1.0, at all times during each Measurement Period (as defined in the $675 Million Credit Facility)
and (iii) cash and cash equivalents as at the end of each Measurement Period of not less than 8% of the Total Liabilities (as defined
in the $675 Million Credit Facility) in relation to that Measurement Period. As of December 31, 2021, we were in compliance with
all the financial and liquidity covenants contained in the $675 Million Credit Facility.
The Partnership has learned that, on April 6, 2022, the U.S. Department
of the Treasury’s Office of Foreign Assets Control ("OFAC") designated Amsterdam Trade Bank NV (“ATB”) as
a Specially Designated National (“SDN”) pursuant to Executive Order 14024. To our knowledge, ATB is among several lenders
to our $675 Million Credit Facility representing an approximately 3.6% lender participation. Please see “Item 3. Key Information—D.
Risk Factors—Risks Relating to our Partnership—We are subject to certain risks with respect to our contractual counterparties,
and failure of such counterparties to perform their obligations under such contracts could cause us to sustain significant losses, which
could have a material adverse effect on our business, financial condition, results of operations and cash flows.”
$30 Million Revolving Credit Facility
On November 18, 2013, concurrently
with the consummation of our IPO, we entered into an interest free $30.0 million revolving credit facility with our Sponsor, or the $30
Million Revolving Credit Facility, with an original term of five years from the closing date, to be used for general partnership purposes.
No amounts have been drawn under the facility since 2013 (amounts drawn in 2013 were fully repaid in early 2014). On November 14, 2018,
we extended our $30 Million Revolving Credit Facility with our Sponsor for an additional five-year term on terms and conditions substantially
similar to the existing credit facility. As of December 31, 2021 and the date of this annual report, the full amount remains undrawn
under this facility.
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 that 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.
Cash Flows
The following table summarizes
our net cash flows from operating, investing and financing activities and our cash and cash equivalents for the years ended December 31,
2021, 2020 and 2019:
|
|
Year Ended December 31, |
(Amounts in thousands of Dollars) |
|
2021 |
|
2020 |
|
2019 |
Net cash provided by operating activities |
|
$ |
79,591 |
|
$ |
68,603 |
|
$ |
43,177 |
Net cash used in investing activities |
|
|
— |
|
|
— |
|
|
— |
Net cash used in financing activities |
|
|
(57,555) |
|
|
(59,830) |
|
|
(86,888) |
Cash and cash equivalents and restricted cash at beginning of year |
|
|
74,979 |
|
|
66,206 |
|
|
109,917 |
Cash and cash equivalents and restricted cash at end of year |
|
$ |
97,015 |
|
$ |
74,979 |
|
$ |
66,206 |
Net Cash Provided by Operating
Activities
Net cash provided by operating
activities increased by $11.0 million, or 16.0%, to $79.6 million for the year ended December 31, 2021, compared to $68.6 million for
the year ended December 31, 2020. This increase was directly correlated with the favourable working capital variations and decrease in
interest and finance costs, as discussed in "Item 5. Operating and Financial Review and Prospects".
Net cash provided by operating
activities increased by $25.4 million, or 58.8%, to $68.6 million for the year ended December 31, 2020, compared to $43.2 million for
the year ended December 31, 2019. This increase was directly correlated with the increase in voyage revenues and decrease in interest
and finance costs.
Net Cash Used in Investing Activities
No cash was used in investing
activities in the years ended December 31, 2021, 2020 and 2019.
Net Cash Used in Financing Activities
Net cash used in financing
activities decreased by $2.2 million, or 3.7% from net cash used in financing activities of $59.8 million in the year ended December 31,
2020 to net cash used in financing activities of $57.6 million in the year ended December 31, 2021. This decrease is mainly due to an
increase $3.1 million in proceeds from issuance of common units net of payments for securities registration and other filing costs, which
was partially offset by an increase in payments of derivative instruments by $0.9 million.
Net cash used in financing
activities decreased by $27.1 million, or 31.2% from net cash used in financing activities of $86.9 million in the year ended December
31, 2019 to net cash used in financing activities of $59.8 million in the year ended December 31, 2020. This decrease is mainly due to
the decrease of $11.8 million in the loan repayments (including the net effect from the refinancing of the Partnership's total indebtedness
under the Term Loan B and the 2019 Notes with the proceeds from the $675 Million Credit Facility in September 2019), a decrease of $10.6
million in loan transaction costs, a decrease of $4.8 million in distributions paid and an increase $0.3 million in proceeds from issuance
of common units net of payments for securities registration and other filing costs. The decrease was partially offset by an increase in
payments of derivative instruments by $0.5 million.
Distributions
Distributions on Common Units
We paid a cash distribution
of $0.0625 per unit to all common unitholders on February 14, 2019 and May 10, 2019. Since May 2019, we have not declared or paid any
cash distributions relating to our common units.
Under the terms of the $675
Million Credit Facility, which was entered into on September 18, 2019, the Partnership is restricted from paying distributions to its
common unitholders while borrowings are outstanding under the $675 Million Credit Facility. See "Item 5. Operating
and Financial Review and Prospects—B. Liquidity and Capital Resources—$675 Million Credit Facility" and "Item 8.
Financial Information—A. Consolidated Statements and Other Financial Information—Our Cash Distribution Policy."
Distributions on Series A Preferred
Units
We paid a cash distribution
of $0.5625 per unit to all Series A Preferred unitholders on February 12, 2019, May 13, 2019, August 12, 2019, November 12, 2019, February
12, 2020, May 12, 2020, August 12, 2020, November 12, 2020, February 12, 2021, May 12, 2021, August 12, 2021, November 12, 2021 and February
14, 2022.
Under the terms of the
$675 Million Credit Facility, which was entered into on September 18, 2019, the Partnership may be restricted from paying distributions
to its preferred unitholders if an event of default occurs while borrowings are outstanding under the $675 Million Credit Facility. See
"Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—$675 Million Credit Facility"
and "Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Our Cash Distribution
Policy."
Distributions on Series B Preferred
Units
We paid a cash distribution
of $0.7231 per unit to all Series B Preferred unitholders on February 22, 2019.
We paid a cash distribution
of $0.546875 per unit to all Series B Preferred unitholders on May 22, 2019, August 22, 2019, November 22, 2019, February 24, 2020, May
22, 2020, August 24, 2020, November 23, 2020 and February 22, 2021, May 24, 2021, August 23, 2021, November 22, 2021 and February 22,
2022.
Under the terms of the $675
Million Credit Facility, which was entered into on September 18, 2019, the Partnership may be restricted from paying distributions to
its preferred unitholders if an event of default occurs while borrowings are outstanding under the $675 Million Credit Facility. See
"Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—$675 Million Credit Facility"
and "Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Our Cash Distribution Policy."
General Partner Distributions
During the years ended December
31, 2021, 2020 and 2019, we paid our General Partner and holder of the incentive distribution rights in the Partnership, an aggregate
amount of nil, nil and $4,000.
The declaration and payment
of distributions, if any, is always subject to the discretion of our Board of Directors. We may reduce or eliminate our cash distributions
relating to our common units or preferred units at any time in our sole discretion.
Securities Offerings (following the IPO)
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 $250.0 million aggregate principal amount 6.25% Senior Notes due 2019, or our 2019 Notes. The
2019 Notes commenced trading on the NYSE on December 30, 2014 under the ticker symbol "DLNG 19." On October 30, 2019, we redeemed
the entire outstanding balance of the 2019 Notes of $250 million aggregate principal amount using proceeds from the $675 Million Credit
Facility (as described below) together with cash on hand.
In July 2015, we completed
our underwritten public offering of 3,000,000 9.00% Series A Cumulative Redeemable Preferred Units at $25.00 per unit. Our Series A Preferred
Units trade on the NYSE under the ticker symbol "DLNG PR A."
In October 2018, we completed
our underwritten public offering of 2,200,000 8.75% Series B Fixed to Floating Rate Cumulative Redeemable Perpetual Preferred Units at
$25.00 per unit. Our Series B Preferred Units trade on the NYSE under the ticker symbol "DLNG PR B."
On
July 2, 2020, we entered into the Original Agreement with Virtu Americas LLC, as sales agent, for the offer and sale, from time to time,
of up to an aggregate of $30.0 million of our common units representing limited partnership interests under an "at-the-market"
offering program. In August 2020, we entered into the A&R Sales Agreement with Virtu Americas LLC and DNB Markets, Inc., for the
offer and sale of common units representing limited partnership interests, having an aggregate offering price of up to $30.0 million.
Upon entry into the A&R Sales Agreement, the Partnership terminated its prior at-the-market program established in July of 2020 pursuant
to the Original Agreement (the "Prior ATM Program"). At the time of such termination, the Partnership had issued and
sold 122,580 common units resulting in net proceeds of $0.3 million, under the Original Agreement. As of the date of this annual report,
we have issued and sold 1,189,667 common units at an average price per unit of $2.9152 resulting in gross proceeds of $3.5 million under
the A&R Sales Agreement. Following these sales the Current ATM Program has $26.5 million of remaining availability and we have
36,802,247 units issued and outstanding.
Recent Developments
Distributions:
We declared a quarterly
cash distribution of $0.5625 on our Series A Preferred Units for the period from November 12, 2021 to February 11, 2022, which was paid
on February 14, 2022 to all applicable unit holders of record as of February 7, 2022.
We declared a quarterly
cash distribution of $0.546875 on our Series B Preferred Units for the period from November 22, 2021 to February 21, 2022, which was paid
on February 22, 2022 to all applicable unit holders as of February 14, 2022.
We declared a quarterly
cash distribution of $0.5625 on our Series A Preferred Units for the period from February 12, 2022 to May 11, 2022, which is payable on
May 12, 2022 to all applicable unit holders of record as of May 5, 2022.
We declared a quarterly
cash distribution of $0.546875 on our Series B Preferred Units for the period from February 22, 2022 to May 21, 2022, which is payable
on May 23, 2022 to all applicable unit holders as of May 16, 2022.
Conflict between Russia
and Ukraine
In 2021we earned 84% of
its revenues from charterers that are trading primarily from Russian LNG ports and to the best of our knowledge are owned or controlled
by Russian entities. Due to the recent conflicts between Russia and the Ukraine, the United States (“U.S.”), European Union
(“E.U.”), Canada and other Western countries and organizations announced and enacted from February 2022 until the date of
this annual report, numerous sanctions against Russia, which have not expressly prohibited LNG shipping in the main trading routes
of the Partnership’s vessels. Therefore, currently our time charter contracts have not been affected by the events in Russia and
Ukraine sanctions imposed to date. As also discussed in Note 5 of our consolidated financial statements, currently imposed sanctions,
do not affect our compliance with terms imposed by its $675 Million Credit Facility.
The terms of two of our
charter parties with counterparties owned or controlled by Russian entities, provide that following a sanctions event (as defined in the
relevant charter parties which is not triggered by the currently imposed sanctions) the parties may enter into discussions to evaluate
certain options to remedy a sanctions event provided it remains lawful for us to enter into such discussions and for a suspension period
of up to two years provided always that these options would not be contrary to the sanctions. During such suspension period we have the
right to trade the vessel for its own account provided that we shall seek Charterers’ consent on fixtures for a duration of longer
than six months, and Charterers have an option to purchase the vessel at a purchase price as agreed within the charter party provided
that the execution of such purchase option would not be contrary to the sanctions. The terms of three of our charter parties with counterparties
owned or controlled by Russian entities, do not provide specific clauses related to sanctions.
As there is currently uncertainty
regarding the global impact of the conflict, which is ongoing, it is possible that further developments in sanctions or escalation of
the conflict will affect the Partnership’s ability to continue to employ five out of its six vessels to the current charterers and
the suspension, termination or cancellation of such charter parties, could thus adversely affect our results of operations, cash flows
and financial condition.
Despite the continuing
uncertainty, we believe that in the event of suspension, termination, cancellation of any of these charters, we will be able to
enter into time charters with terms that that will be acceptable to the lenders. Thus, we believe that we will be in a
position to maintain sufficient cash generating capacity to cover our working capital needs and pay our instalment obligations under
the $675 Million Credit Facility, for the period ending one year after the issuance of our consolidated financial statements.
We
have learned that, on April 6, 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control ("OFAC") designated
Amsterdam Trade Bank NV (“ATB”) as a Specially Designated National (“SDN”) pursuant to Executive Order 14024.
To our knowledge, ATB is among several lenders to its $675 Million Credit Facility. Furthermore, we have been notified by the Agent
of the $675 Million Credit Facility that the facility has been blocked pursuant to Executive Order 14024 and as a result the Agent will
not be able to discharge any payments to any of the Lenders until the issue is resolved.
We have not been restricted in meeting our repayment obligations by continuing
to make payments of principal and/or interest to the Agent as required under the Facility Agreement and we are in compliance with the
terms of the Facility Agreement. Together with the Agent, we are evaluating the alternative courses of action, in order to alleviate the
sanctions effects to the facility agreement.
| E. | CRITICAL ACCOUNTING ESTIMATES |
For a description of all
our significant accounting policies, see Note 2 to our annual consolidated financial statements included elsewhere in this annual report,
and for our critical accounting estimates, see the paragraph entitled “Critical Accounting Estimates and Policies” under Item
5.A discussed above.