A.
|
SELECTED FINANCIAL DATA
|
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, 2020. The following financial data should be read in conjunction with "Item 5. Operating and Financial Review and Prospects." 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, 2020 and 2019, and for the years
ended December 31, 2020, 2019 and 2018 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, 2018, 2017 and 2016
and for the years ended December 31, 2017 and 2016 have been derived from our audited consolidated financial statements that are not included in this annual report.
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
STATEMENT OF INCOME
|
|
(In thousands of Dollars, except for units, per unit data and TCE rates)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage revenues
|
|
$
|
137,165
|
|
|
$
|
130,901
|
|
|
$
|
127,135
|
|
|
$
|
138,990
|
|
|
$
|
169,851
|
|
Voyage expenses- including related party (1)
|
|
|
(2,994
|
)
|
|
|
(2,709
|
)
|
|
|
(2,802
|
)
|
|
|
(3,619
|
)
|
|
|
(2,961
|
)
|
Vessel operating expenses
|
|
|
(28,830
|
)
|
|
|
(28,351
|
)
|
|
|
(25,042
|
)
|
|
|
(27,067
|
)
|
|
|
(26,451
|
)
|
General and administrative expenses- including related party
|
|
|
(2,528
|
)
|
|
|
(2,708
|
)
|
|
|
(2,209
|
)
|
|
|
(1,686
|
)
|
|
|
(1,885
|
)
|
Management fees
|
|
|
(6,752
|
)
|
|
|
(6,537
|
)
|
|
|
(6,347
|
)
|
|
|
(6,162
|
)
|
|
|
(5,999
|
)
|
Depreciation
|
|
|
(31,797
|
)
|
|
|
(30,680
|
)
|
|
|
(30,330
|
)
|
|
|
(30,319
|
)
|
|
|
(30,395
|
)
|
Dry-docking and special survey costs
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,422
|
)
|
|
|
(6,193
|
)
|
|
|
(81
|
)
|
Operating income
|
|
$
|
64,264
|
|
|
$
|
59,916
|
|
|
$
|
52,983
|
|
|
$
|
63,944
|
|
|
$
|
102,079
|
|
Interest income
|
|
|
221
|
|
|
|
2,331
|
|
|
|
1,051
|
|
|
|
203
|
|
|
|
-
|
|
Interest and finance costs
|
|
|
(27,058
|
)
|
|
|
(58,591
|
)
|
|
|
(50,490
|
)
|
|
|
(46,281
|
)
|
|
|
(34,991
|
)
|
Loss on Derivative Financial Instruments
|
|
|
(3,148
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other, net
|
|
|
(227
|
)
|
|
|
(43
|
)
|
|
|
69
|
|
|
|
(527
|
)
|
|
|
(234
|
)
|
Net Income
|
|
$
|
34,052
|
|
|
$
|
3,613
|
|
|
$
|
3,613
|
|
|
$
|
17,339
|
|
|
$
|
66,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS/(LOSS) PER UNIT (2) (basic and diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Unit (basic and diluted)
|
|
$
|
0.63
|
|
|
$
|
(0.22
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
0.27
|
|
|
$
|
1.69
|
|
Weighted average number of units outstanding (basic and diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common units
|
|
|
35,546,823
|
|
|
|
35,490,000
|
|
|
|
35,490,000
|
|
|
|
34,545,740
|
|
|
|
20,505,000
|
|
Cash distributions declared and paid per common unit
|
|
$
|
-
|
|
|
$
|
0.13
|
|
|
$
|
1.17
|
|
|
$
|
1.69
|
|
|
$
|
1.69
|
|
BALANCE SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
27,120
|
|
|
$
|
18,172
|
|
|
$
|
112,963
|
|
|
$
|
70,404
|
|
|
$
|
60,195
|
|
Vessels, net
|
|
|
884,900
|
|
|
|
916,697
|
|
|
|
947,377
|
|
|
|
977,298
|
|
|
|
1,007,617
|
|
Total assets
|
|
|
965,837
|
|
|
|
989,187
|
|
|
|
1,063,436
|
|
|
|
1,054,319
|
|
|
|
1,106,676
|
|
Total current liabilities
|
|
|
62,845
|
|
|
|
64,635
|
|
|
|
272,742
|
|
|
|
22,898
|
|
|
|
53,056
|
|
Total long-term debt, including current portion, gross of deferred financing fees
|
|
|
615,000
|
|
|
|
663,000
|
|
|
|
722,800
|
|
|
|
727,600
|
|
|
|
722,500
|
|
Total partners' equity
|
|
|
336,493
|
|
|
|
313,707
|
|
|
|
326,485
|
|
|
|
318,318
|
|
|
|
367,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOW DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
68,603
|
|
|
$
|
43,177
|
|
|
$
|
42,994
|
|
|
$
|
59,339
|
|
|
$
|
103,618
|
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
(409
|
)
|
|
|
-
|
|
|
|
(37,472
|
)
|
Net cash used in financing activities*
|
|
|
(59,830
|
)
|
|
|
(86,888
|
)
|
|
|
(132
|
)
|
|
|
(74,470
|
)
|
|
|
(32,844
|
)
|
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)
|
|
|
10.4
|
|
|
|
9.4
|
|
|
|
8.4
|
|
|
|
7.4
|
|
|
|
6.4
|
|
Available Days (4)
|
|
|
2,196.0
|
|
|
|
2,190.0
|
|
|
|
2,144.7
|
|
|
|
2,140.3
|
|
|
|
2,196.0
|
|
Fleet utilization (5)
|
|
|
99.8
|
%
|
|
|
98.5
|
%
|
|
|
100
|
%
|
|
|
98
|
%
|
|
|
100
|
%
|
OTHER FINANCIAL DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time Charter Equivalent (in US dollars) (6)
|
|
$
|
61,098
|
|
|
$
|
58,535
|
|
|
$
|
57,972
|
|
|
$
|
63,249
|
|
|
$
|
75,997
|
|
Adjusted EBITDA (6)
|
|
$
|
96,451
|
|
|
$
|
90,357
|
|
|
$
|
96,094
|
|
|
$
|
107,545
|
|
|
$
|
139,531
|
|
*
|
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. 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)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Voyage revenues
|
|
$
|
137,165
|
|
|
$
|
130,901
|
|
|
$
|
127,135
|
|
|
$
|
138,990
|
|
|
$
|
169,851
|
|
Voyage expenses - including related party
|
|
$
|
(2,994
|
)
|
|
$
|
(2,709
|
)
|
|
$
|
(2,802
|
)
|
|
$
|
(3,619
|
)
|
|
$
|
(2,961
|
)
|
Time charter equivalent revenues
|
|
$
|
134,171
|
|
|
$
|
128,192
|
|
|
$
|
124,333
|
|
|
$
|
135,371
|
|
|
$
|
166,890
|
|
Total Available Days
|
|
|
2,196.0
|
|
|
|
2,190.0
|
|
|
|
2,144.7
|
|
|
|
2,140.3
|
|
|
|
2,196.0
|
|
Time charter equivalent (TCE) rate
|
|
$
|
61,098
|
|
|
$
|
58,535
|
|
|
$
|
57,972
|
|
|
$
|
63,249
|
|
|
$
|
75,997
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
34,052
|
|
|
$
|
3,613
|
|
|
$
|
3,613
|
|
|
$
|
17,339
|
|
|
$
|
66,854
|
|
Net interest and finance costs (1)
|
|
|
29,985
|
|
|
|
56,260
|
|
|
|
49,439
|
|
|
|
46,078
|
|
|
|
34,991
|
|
Depreciation
|
|
|
31,797
|
|
|
|
30,680
|
|
|
|
30,330
|
|
|
|
30,319
|
|
|
|
30,395
|
|
Class survey costs
|
|
|
-
|
|
|
|
-
|
|
|
|
7,422
|
|
|
|
6,193
|
|
|
|
81
|
|
Amortization of fair value of acquired time charter
|
|
|
-
|
|
|
|
-
|
|
|
|
5,267
|
|
|
|
7,247
|
|
|
|
7,268
|
|
Amortization of deferred revenue
|
|
|
400
|
|
|
|
(377
|
)
|
|
|
(45
|
)
|
|
|
369
|
|
|
|
(58
|
)
|
Amortization of deferred charges
|
|
|
217
|
|
|
|
181
|
|
|
|
68
|
|
|
|
-
|
|
|
|
-
|
|
Adjusted EBITDA
|
|
$
|
96,451
|
|
|
$
|
90,357
|
|
|
$
|
96,094
|
|
|
$
|
107,545
|
|
|
$
|
139,531
|
|
(1) Includes interest and finance costs, net of interest income, and (gain)/ loss on derivative instruments, if any.
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 our cash distribution policy.
Our cash distribution policy is consistent with the terms of our Partnership Agreement, which requires that we distribute all of our
available cash quarterly. 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 particular, 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.
Our business strategy currently is to focus our capital allocation on debt repayment, prioritizing 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 businesses that reinvest their available cash to expand ongoing
operations. Accordingly, 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, 2020, during which we derived our operating revenues from four 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 similar epidemics and pandemic 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:
|
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the vessel suffers a total loss or is damaged beyond repair;
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we default on our obligations under the charter, including prolonged periods of vessel off-hire;
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war or hostilities significantly disrupt the free trade of the vessel;
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the vessel is requisitioned by any governmental authority; or
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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.
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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. 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.
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.
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.
None of our vessels are scheduled to be dry-docked in 2021.
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:
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restructuring our debt;
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seeking additional debt or equity capital;
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reducing distributions relating to our preferred units;
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reducing, delaying or cancelling our business activities, acquisitions, investments or capital expenditures; or
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seeking bankruptcy protection.
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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 outbreak of COVID-19 pandemic, which originated in China in late 2019 and subsequently spread around the world,
has negatively affected economic conditions, the supply chain, the labor market, the demand for shipping regionally as well as globally and may otherwise 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 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 are approving 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 restore or sustain the business and financial condition of companies in the shipping industry. These measures, though contemplated to be temporary in nature, may continue and increase as countries
attempt to contain the outbreak or any reoccurrences thereof.
At this stage, it is difficult to determine the full impact of COVID-19 on our business. Effects of the current pandemic have or may include, among others:
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deterioration of economic conditions and activity and of demand for shipping;
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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);
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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;
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reduced cash flow and financial condition, including potential liquidity constraints;
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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;
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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;
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potential decreases in the market values of our vessels and any related impairment charges or breaches relating to vessel-to-loan financial covenants;
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potential disruptions, delays or cancellations in the construction of new vessels, which could reduce our future growth opportunities;
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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;
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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 fulfillment. 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
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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.
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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. As a result, in
2020, we experienced and may continue to experience disruptions to our normal vessel operations caused by increased deviation time associated with positioning our vessels to countries in which we can undertake a crew rotation in compliance with such
measures. 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 dividends.
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.
Acquisitions that expand our Fleet have been an important component of our business strategy.
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. Our growth strategy going forward 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 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.
In light of recent master limited partnership ("MLP") market volatility and the fall 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, our acquisition growth strategy exposes 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:
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fail to realize anticipated benefits, such as new customer relationships, cost-savings or cash flow enhancements;
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be unable to attract, hire, train or retain qualified shore and seafaring personnel to manage and operate our growing business and Fleet;
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decrease our liquidity by using a significant portion of available cash or borrowing capacity to finance acquisitions;
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significantly increase our interest expense or financial leverage if we incur additional debt to finance acquisitions;
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incur or assume unanticipated liabilities, losses or costs associated with the business or vessels acquired; or
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incur other significant charges, such as impairment of goodwill or other intangible assets, asset devaluation or restructuring charges.
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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.
Our 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. 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 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:
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the rates we obtain from our charters;
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the level of our operating costs, such as the cost of crews and insurance;
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the continued availability of natural gas production;
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supply of LNG carriers;
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prevailing global and regional economic and political conditions, including the any economic downturns caused by the spread of the novel COVID-19 virus;
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currency exchange rate fluctuations; and
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the effect of governmental regulations and maritime self-regulatory organization standards on the conduct of our business.
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In addition, the actual amount of cash available for distribution to our unitholders will depend on other factors, including:
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the level of capital expenditures we make, including for maintaining or replacing vessels, building new vessels, acquiring secondhand vessels and complying with regulations;
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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;
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our debt service requirements and restrictions on distributions contained in our debt instruments;
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the level of debt we will incur to fund future acquisitions;
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fluctuations in interest rates;
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fluctuations in our working capital needs;
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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;
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our ability to make, and the level of, working capital borrowings;
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the performance of our subsidiaries and their ability to distribute cash to us; and
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the amount of any cash reserves established by our Board of Directors.
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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 $1.14 billion for the vessels in our Fleet as of the date of this annual report, $0.15
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:
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size, age, technical specifications and condition of the ship;
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efficiency of ship operation and reputation for operation of highly specialized vessels;
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LNG shipping experience and quality of ship operations;
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shipping industry relationships and reputation for customer service;
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technical ability and reputation for operation of highly specialized ships;
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quality and experience of officers and crew;
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the ability to finance ships at competitive rates and financial stability generally;
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relationships with shipyards and the ability to get suitable berths;
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its willingness to assume operational risks;
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construction management experience, including the ability to obtain on-time delivery of new ships according to customer specifications; and
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competitiveness of the bid in terms of overall price.
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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.
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."
LIBOR has historically been volatile, with the spread between LIBOR and the prime lending rate widening significantly at times. These
conditions are the result of the disruptions in the international credit markets. Because the interest rates borne by our outstanding indebtedness fluctuate with changes in LIBOR, if this volatility were to occur, it would affect the amount of
interest payable on our debt, which in turn, could have an adverse effect on our profitability, earnings and cash flow.
Furthermore, the calculation of interest in most financing agreements in our industry has been based on published LIBOR rates. On July 27,
2017, the United Kingdom Financial Conduct Authority ("FCA"), which regulates LIBOR, announced that the continuation of LIBOR in its current form is not guaranteed after 2021. Due in part to uncertainty relating to the LIBOR calculation process in
recent years, it is likely that LIBOR will be phased out in the future. There is therefore no guarantee the LIBOR reference rate will continue in its current form post 2021. Various alternative reference rates are being considered in the financial
community. As a result, lenders have insisted on provisions that entitle the lenders, in their discretion, to replace published LIBOR as the base for the interest calculation with their cost-of-funds rate. If we are required to agree to such a
provision in future financing agreements, our lending costs could increase significantly, which would have an adverse effect on our profitability, earnings and cash flow.
In addition, on November 30, 2020, ICE Benchmark Administration, the administrator of LIBOR, with the support of the United States Federal
Reserve and the United Kingdom's Financial Conduct Authority, announced plans to consult on ceasing publication of U.S. Dollar LIBOR on December 31, 2021 for only the one-week and two-month U.S. Dollar LIBOR tenors, and on June 30, 2023 for all other
U.S. Dollar LIBOR tenors. The United States Federal Reserve concurrently issued a statement advising banks to stop new U.S. Dollar LIBOR issuances by the end of 2021. Such announcements indicate that the continuation of LIBOR on the current basis
will not be guaranteed after 2021. 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. The impact of such a transition from LIBOR to SOFR 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, we may 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, which could harm our business. Our Sponsor and its affiliates may compete with us, subject to the restrictions contained in the Omnibus Agreement,
and 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:
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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;
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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;
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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
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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.
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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 $2,750 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 $8.5
million in connection with the commercial and technical management of our Fleet for the year ended December 31, 2020.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, 2020, 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, 2020, 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.
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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.
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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.
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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.
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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.
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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.
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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.
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There are no restrictions in our Partnership Agreement on our ability to issue additional equity securities.
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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:
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renew existing charters upon their expiration;
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successfully interact with shipyards;
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obtain financing on commercially acceptable terms;
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maintain access to capital under the Sponsor credit facility; or
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maintain satisfactory relationships with suppliers and other third-parties.
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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 certain of our debt agreements 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 that we have entered into with 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:
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the amount and timing of asset purchases and sales;
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estimates of maintenance and replacement capital expenditures;
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the issuance of additional units; and
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the creation, reduction or increase of reserves in any quarter.
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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:
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increases in interest rates or other events that may affect the availability of sufficient financing for LNG projects on commercially reasonable terms;
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increases in the cost of natural gas derived from LNG relative to the cost of natural gas generally;
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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;
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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;
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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;
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any significant explosion, spill or other incident involving an LNG facility or carrier;
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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;
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labor or political unrest or military conflicts affecting existing or proposed areas of LNG production or regasification;
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concerns regarding the spread of disease, for example, the COVID-19 virus, safety and terrorism;
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decreases in the price of LNG, which might decrease the expected returns relating to investments in LNG projects;
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new taxes or regulations affecting LNG production or liquefaction that make LNG production less attractive; or
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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.
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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 2020. 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 US cargos were
cancelled. However, LNG demand recovered in 2H20.
A continuation of the recent low prices in natural gas and volatile oil prices may adversely affect our growth prospects and results of
operations.
Natural gas prices are volatile and have recently reached their lowest levels since 2009 in certain geographic areas. Natural gas prices
are affected by numerous factors beyond our control, including but not limited to the following:
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price and availability of crude oil and petroleum products;
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worldwide and regional supply of, demand for and price of natural gas;
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the costs of exploration, development, production, transportation and distribution of natural gas;
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expectations regarding future energy prices for both natural gas and other sources of energy, including renewable energy sources;
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the level of worldwide LNG production and exports;
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government laws and regulations, including but not limited to environmental protection laws and regulations;
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local and international political, economic and weather conditions, including an economic downturn caused by the spread of the novel COVID-19 virus;
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political and military conflicts; and
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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.
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Due in part to COVID-19 outbreak as well as actions by OPEC members and other oil producing countries, energy prices have 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. 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;
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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;
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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;
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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;
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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;
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customers potentially seeking to renegotiate or terminate existing vessel contracts, or failing to extend or renew contracts upon expiration;
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the inability or refusal of customers to make charter payments to us due to financial constraints or otherwise; or
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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.
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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.
Demand for LNG shipping could be significantly affected by volatile natural gas prices and the overall demand for natural gas.
Gas prices are volatile and are affected by numerous factors beyond our control, including but not limited to, the following:
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worldwide supply and demand for natural gas;
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the cost of exploration, development, production, transportation and distribution of natural gas;
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expectations regarding future energy prices for both natural gas and other sources of energy;
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the level of worldwide LNG production and exports;
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government laws and regulations, including but not limited to environmental protection laws and regulations;
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local and international political, economic and weather conditions, such as the recent worldwide economic downturn caused by the spread of the novel COVID-19 virus;
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political and military conflicts; and
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the availability and cost of alternative energy sources, including alternate sources of natural gas in gas importing and consuming countries.
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Seasonality in demand, peak-load demand and other short-term factors such as pipeline gas disruptions and maintenance schedules of
utilities affect charters of less than two years and rates. In general, reduced demand for LNG, LNG carriers or LNG shipping would have a material adverse effect on our future growth and could harm our business, results of operations and financial
condition.
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:
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prevailing economic conditions in the natural gas and energy markets;
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a substantial or extended decline in demand for LNG;
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increases in the supply of vessel capacity;
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the size and age of a vessel; and
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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.
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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 March 2021, the global fleet of LNG carriers grew from 360 to 607 vessels due to the
construction and delivery of new LNG carriers and low levels of vessel demolitions. Only 30 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 March 31, 2021, the newbuilding orderbook consisted of vessels with a combined capacity of 21.9 million cbm, equivalent to 23.7% of the current
global LNG carrier fleet capacity, according to Drewry. The delivery of these newbuildings will be spread out between 2021 and 2025.
According to Drewry, as of March 31, 2021, 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 placed increasing importance on the implications and social cost of their investments. The increased
focus 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 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. 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, 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:
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environmental accidents and hazards;
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grounding, fire, explosions and collisions;
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war, political unrest and terrorism.
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An accident involving any of our vessels could result in any of the following:
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death or injury to persons, loss of property or environmental damage;
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delays or failure in the delivery of cargo;
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loss of revenues from or termination of charter contracts;
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governmental fines, penalties or restrictions on conducting business;
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spills, pollution and the liability associated with the same;
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higher insurance rates; and
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damage to our reputation and customer relationships generally.
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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. 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 and the economic
slow-down resulting from COVID-19 and the international governmental responses to the virus may also adversely affect the market price of our common units.
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. The COVID-19 outbreak has negatively impacted, and may continue to negatively impact,
global economic activity, demand for energy, including LNG and LNG shipping, and funds flows and sentiment in the global financial markets. Continued economic disruption caused by the continued failure to control the spread of the virus could
significantly impact our ability to obtain additional debt financing.
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. We may be targeted by
individuals, organizations or groups seeking to sabotage, damage, steal or disrupt our information technology systems and networks, or to sabotage, damage, steal, disrupt or manipulate data. 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.
Any such cyber-attack or other security breach of our information technology systems 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.
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 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 2021 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.
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.
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 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 on or after September 8, 2017. Our six
vessels currently do not comply with the updated guideline and costs of compliance may be substantial and adversely affect our revenues and profitability.
Furthermore, United States regulations are currently changing. Although the 2013 Vessel General Permit ("VGP") program and U.S. National
Invasive Species Act ("NISA") are currently in effect to regulate ballast discharge, exchange and installation, the Vessel Incidental Discharge Act ("VIDA"), which was signed into law on December 4, 2018, requires that the 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. Within two years after the EPA publishes its final Vessel Incidental Discharge National Standards of Performance, the U.S. Coast Guard 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."
We operate our vessels worldwide, which could expose us to political, governmental and economic instability, terrorist attacks,
international hostilities and global public health threats that could harm or have a material adverse effect 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 dividends, 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 challenges, including trade tensions between the United States and China and between the
United States and the European Union, continuing turmoil and hostilities in the Middle East, the Korean Peninsula, North Africa, Venezuela, Iran and other geographic areas and countries, continuing economic weakness in the European Union,
geopolitical events such as the withdrawal of the U.K. from the European Union ("Brexit"), continuing threat of terrorist attacks around the world, continuing instability and conflicts and other recent occurrences in the Middle East and in other
geographic areas and countries such as those between the United States and North Korea or Iran, or between the Houthi and Arab counties in Yemen, or internally in Libya, and stabilizing growth in China, as well as the public health concerns stemming
from the COVID-19 outbreak. The threat of future terrorist attacks around the world and continuing instability in the Middle East and elsewhere continue to cause economic uncertainty in the global financial markets and international commerce and may
affect our business, operating results and financial condition. Continuing conflicts and recent developments in the Middle East may lead to additional acts of terrorism and armed conflict around the world, which may contribute to further economic
instability in the global financial markets and international commerce. Additionally, any escalations between the U.S. and Iran could result in retaliation from Iran that could potentially affect the shipping industry, through increased attacks on
vessels in the Strait of Hormuz (which already experienced an increased number of attacks on and seizures of vessels in recent years). Any of these occurrences could have a material adverse impact on our operating results, revenues and costs.
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 based in Russia. Economic, political and governmental conditions in these and other regions have from time to time resulted in military conflicts,
terrorism, attacks on ships, mining of waterways, piracy and other efforts to disrupt shipping. Future hostilities or other political instability in the geographic regions where we operate or may operate 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. In addition, our business could also be harmed by tariffs, trade embargoes and other economic sanctions by the United
States or other countries against countries in the Middle East, Southeast Asia, Russia or elsewhere as a result of terrorist attacks, hostilities or diplomatic or political pressures that limit trading activities with those countries.
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.
The U.K.'s withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business.
In June 2016, a majority of voters in the U.K. elected to withdraw from the EU in a national referendum (informally known as "Brexit"), a process that the
government of the U.K. formally initiated in March 2017. Since then, the U.K. and the EU have been negotiating the terms of a withdrawal agreement, which was approved in October 2019 and ratified in January 2020. The U.K. formally exited the EU on
January 31, 2020, although a transition period remained in place until December 2020, during which the U.K. was subject to the rules and regulations of the EU. On December 24, 2020, the U.K. and the EU entered into a trade and cooperation agreement
(the "Trade and Cooperation Agreement"), which was applied on a provisional basis from January 1, 2021. While the new economic relationship does not match the relationship that existed during the time the U.K. was a member state of the EU, the Trade
and Cooperation Agreement sets out preferential arrangements in certain areas such as trade in goods and in services, digital trade and intellectual property. Negotiations between the U.K. and the EU are expected to continue in relation to other
areas which are not covered by the Trade and Cooperation Agreement. The long term effects of Brexit will depend on the effects of the implementation and application of the Trade and Cooperation Agreement and any other relevant agreements between the
U.K. and EU.
Brexit has also given rise to calls for the governments of other EU member states to consider withdrawal. These developments and uncertainties, or the
perception that any of them may occur, have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity and restrict the
ability of key market participants to operate in certain financial markets. Any of these factors could depress economic activity and restrict our access to capital, which could have a material adverse effect on our business and on our consolidated
financial position, results of operations and our ability to pay distributions. Additionally, Brexit or similar events in other jurisdictions, could impact global markets, including foreign exchange and securities markets; any resulting changes in
currency exchange rates, tariffs, treaties and other regulatory matters could in turn adversely impact our business and operations.
Brexit contributes to considerable uncertainty concerning the current and future economic environment. Brexit could adversely affect European or worldwide
political, regulatory, economic or market conditions and could contribute to instability in global political institutions, regulatory agencies and financial markets.
The smuggling of drugs or other contraband onto our vessels may lead to governmental claims against us.
We expect that our vessels will call in ports where smugglers may attempt to hide drugs and other contraband on vessels, with or without
the knowledge of crew members. To the extent our vessels are found with contraband, whether inside or attached to the hull of our vessels and whether with or without the knowledge of any of our crew, we may face governmental or other regulatory
claims that could have an adverse effect on our business, 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.
Acts of piracy on ocean-going vessels could adversely affect our business.
Acts of piracy have historically affected ocean-going vessels trading in regions of the world such as the South China Sea, the Indian Ocean, the Gulf of Aden
off the coast of Somalia and in particular, the Gular of Guinea region off Nigeria, which experienced increased incidents of piracy in 2019. Acts of piracy could, in the future, result in harm or danger to the crews that man our vessels. In
addition, if these piracy attacks result in regions in which our vessels are deployed being characterized by insurers as "enhanced risk" zones or "war risk" zones or Joint War Committee "war and strikes" listed areas, premiums payable for such
coverage could increase significantly and such insurance coverage may be more difficult to obtain. In addition, crew costs, due to employing onboard security guards, could increase in such circumstances. We may not be adequately insured to cover
losses from these incidents, which could have a material adverse effect on us. In addition, detention hijacking, involving the hostile detention of a vessel, as a result of an act of piracy against our vessels, or an increase in cost, or
unavailability of insurance for our vessels, could have a material adverse impact on our business, financial condition and results of operations.
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 2020, 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 2020,
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. 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,
and entities that are owned 50% or more by Gazprom maybe subject to Directive 4 as well. 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 are currently involved and 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:
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our payment of cash distributions to our unitholders;
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actual or anticipated fluctuations in quarterly and annual results;
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fluctuations in the seaborne transportation industry, including fluctuations in the LNG carrier market;
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mergers and strategic alliances in the shipping industry;
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changes in governmental regulations or maritime self-regulatory organization standards;
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shortfalls in our operating results from levels forecasted by securities analysts; announcements concerning us or our competitors;
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the failure of securities analysts to publish research about us, or analysts making changes in their financial estimates;
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general economic conditions;
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business interruptions caused by the ongoing COVID-19 pandemic;
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future sales of our units or other securities;
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investors' perception of us and the LNG shipping industry;
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the general state of the securities market; and
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other developments affecting us, our industry or our competitors.
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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 $2.00 and $3.37 over the last six months without any discernable 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:
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investor reaction to our business strategy;
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our continued compliance with the listing standards of Nasdaq;
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regulatory or legal developments in the United States and other countries, especially changes in laws or regulations applicable to our industry;
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variations in our financial results or those of companies that are perceived to be similar to us;
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our ability or inability to raise additional capital and the terms on which we raise it;
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declines in the market prices of stocks generally;
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trading volume of our common units;
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sales of our common units by us or our unitholders;
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general economic, industry and market conditions;
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an increase in interest rates or reduction in demand for our common units resulting from other relatively more attractive investment opportunities; and
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other events or factors, including those resulting from such events, or the prospect of such events, including war, terrorism and other international conflicts, 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.
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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:
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our existing unitholders' proportionate ownership interest in us will decrease;
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the amount of cash available for distribution per unit may decrease;
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the relative voting strength of each previously outstanding unit may be diminished; and
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the market price of our common units may decline.
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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.
We are a "foreign private issuer" under the securities laws of the United States and the rules of the NYSE. Under the securities laws of
the United States, "foreign private issuers" 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:
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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);
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are brought in a derivative manner on our behalf;
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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;
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assert a claim arising pursuant to any provision of the Partnership Act; or
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assert a claim governed by the internal affairs doctrine,
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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, 2020, we had total outstanding long-term debt of $615 million, consisting of amounts outstanding under our $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:
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incur or guarantee indebtedness outside of our ordinary course of business;
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sell, lease, transfer or otherwise dispose of our assets;
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redeem, repurchase or otherwise reduce any of our equity or share capital; and
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declare or pay any dividend, charge, fee or distribution to our common unitholders (as described below).
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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:
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maintain cash and cash equivalents of not less than 8 per cent of our total liabilities; and
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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.
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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 and changes in vessel earnings and asset valuations and
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:
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obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes on favorable terms, or at all;
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make distributions to unitholders;
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incur additional indebtedness, create liens or issue guarantees;
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charter our vessels or change the terms of our existing charter agreements;
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sell, transfer or lease our assets or vessels or the shares of our vessel-owning subsidiaries;
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make investments and capital expenditures;
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reduce our partners' capital; and
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undergo a change in ownership or Manager.
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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:
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failure to pay any principal, interest, fees, expenses or other amounts when due;
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failure to observe any other agreement, security instrument, obligation or covenant beyond specified cure periods in certain cases;
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default under other indebtedness;
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an event of insolvency or bankruptcy;
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failure of any representation or warranty to be materially correct; and
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a change of control whereby the Partnership or its affiliates no longer hold, indirectly or directly, 100% of the interests in Arctic LNG Carriers.
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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:
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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;
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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;
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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;
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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;
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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
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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.
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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 its assets or any affiliate of our General Partner or its 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 otherwise are 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:
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•
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on terms no less favorable to us than those generally being provided to or available from unrelated third-parties; or
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•
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"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).
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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, 2020, 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, 2020 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, 2020 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, 2020 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.
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INFORMATION ON THE PARTNERSHIP
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A.
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HISTORY AND DEVELOPMENT OF THE PARTNERSHIP
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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. No common units were sold under the A&R Sales Agreement as of December 31, 2020.
As of the date of this annual report, we have outstanding 36,795,807 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. On October 30, 2019, we redeemed the entire outstanding balance of our 6.25% Senior Unsecured Notes due 2019, or our 2019 Notes, of $250 million aggregate principal amount using proceeds from the $675 Million Credit Facility (as
described below) together with cash on hand. 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, 2021, 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, 2021, the vessels in our Fleet had an average age of 10.7 years and are contracted under
multi-year charters with an average remaining charter term of approximately 7.8 years. All of the vessels in our Fleet vessels are currently employed or are contracted to be 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 $1.14 billion, $0.15 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 7.8 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 March 31, 2021, only 45 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:
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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;
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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;
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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
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•
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double-hull construction, based on the current LNG shipping industry standard.
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According to Drewry, as of March 31, 2021, 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 has a moss spherical containment system, a well-established spherical
containment system designed in Norway which has been in use for many years. The following table sets forth additional information about our Fleet as of the date of this annual report:
Vessel Name
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Year
Built
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Cargo Capacity
(cbm)
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Ice
Class
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Propulsion
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Charterer
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Estimated Earliest Charter
Expiration
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Latest Charter
Expiration
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Estimated Latest Charter
Expiration including options to extend
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Clean Energy
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2007
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149,700
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No
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Steam
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Gazprom
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March 2026
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April 2026
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n/a
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Ob River
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2007
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149,700
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Yes
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Steam
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Gazprom
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March 2028
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May 2028
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n/a
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Amur River
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2008
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149,700
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Yes
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Steam
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Gazprom
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June 2028
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July 2028
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n/a
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Arctic Aurora
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2013
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155,000
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Yes
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TFDE *
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Equinor
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September 2023
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October 2023(1)
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October 2023(1)
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Yenisei River
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2013
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155,000
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Yes
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TFDE *
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Yamal
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Q4 2033
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Q2 2034
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Q2 2049(2)
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Lena River
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2013
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155,000
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Yes
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TFDE *
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Yamal
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Q2 2034
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Q3 2034
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Q4 2049(3)
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* As used in this annual report, "TFDE" refers to tri-fuel diesel electric propulsion system.
(1)
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On August 2, 2018, the Arctic Aurora was delivered to Equinor under a time charter contact with an initial term of three years +/- 30 days. 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. 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 is expected to be delivered to Equinor in September
2021. This charter is in direct continuation of the current charter with Equinor, which means that it will commence immediately following the current charter.
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(2)
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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.
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(3)
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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.
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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.
The Arctic Aurora is currently employed on a three-year charter party with Equinor that has a firm
period of about 3 years +/- 30 days and expires in the third quarter of 2021. . 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 is expected to be delivered to Equinor in September 2021. This charter is in direct continuation of the current charter with Equinor, which means that it will commence immediately following the
current 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, 2021 we had estimated contracted revenue backlog of approximately $1.14 billion, $0.15 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 7.8 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.
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 23.5% in 2020.
Natural Gas Share of Primary Energy Consumption: 1970-20201
(% – 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 2020, worldwide
natural gas reserves are estimated at 198.8 trillion cubic meters (cbm), which is enough for nearly 51 years of supply at current rates of consumption. During 2010-2019, natural gas consumption rose 2.9% per annum, with growth of 4.7% per annum in
the Middle East, followed by 5.2% per annum in Asia-Pacific and 4.9% per annum in Africa. In 2020, world natural gas consumption declined 1.2% year over year to 3.5 million tons oil equivalent on account of the pandemic-led demand slump.
In the last decade, a large part of the growth in natural gas consumption has been accounted for by Asia-Pacific and the Middle East
regions, where gas consumption has increased nearly 1.5 times between 2010 and 2020.
World Natural Gas Consumption: 1970-20201
(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: 1970-20201
(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 US has grown and a number of new liquefaction plants are now planned. 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.
Natural Gas Prices: 2009-2020
(US $ 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, 101.6 million tons of new LNG production capacity is under construction, 290.6 million tons of new LNG production capacity is
planned, and 550.6 million tons of speculative LNG production capacity is under consideration, for which no confirmed plans exist.
World LNG Production Capacity – March 2021
(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 2020, there were 20 producers and exporters of LNG compared
with just 17 in 2009. As a result, world trade in LNG has risen from 177.2 million tons in 2009 to an estimated 357.3 million tons in 2020.
LNG Exports: 2009-20201
(Million Tons)
Exporters
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
2020e
|
% Change 19-20
|
ALG
|
15.3
|
14.1
|
12.5
|
10.5
|
10.9
|
12.6
|
11.8
|
11.6
|
12.3
|
12.0
|
12.2
|
10.9
|
-10.9%
|
USA#
|
0.6
|
1.2
|
1.5
|
0.5
|
0.1
|
0.3
|
0.6
|
3.2
|
12.2
|
18.5
|
33.8
|
50.8
|
50.4%
|
LIB
|
0.5
|
0.0
|
0.1
|
-
|
-
|
-
|
-
|
-
|
-
|
|
0.0
|
0.0
|
-
|
BRU
|
6.4
|
6.4
|
6.9
|
6.6
|
6.9
|
6.0
|
6.4
|
6.0
|
6.9
|
6.8
|
6.4
|
6.3
|
-1.3%
|
UAE
|
5.1
|
5.8
|
5.8
|
5.5
|
5.4
|
5.8
|
5.6
|
5.4
|
5.6
|
5.8
|
5.8
|
5.0
|
-14.4%
|
INO
|
19.0
|
22.9
|
21.3
|
17.5
|
16.4
|
15.8
|
16.0
|
15.5
|
18.7
|
18.0
|
15.5
|
13.7
|
-11.4%
|
MAL
|
21.6
|
22.3
|
24.3
|
23.2
|
24.7
|
24.8
|
24.9
|
23.4
|
26.9
|
24.3
|
26.2
|
23.0
|
-12.1%
|
AUS
|
17.7
|
18.5
|
18.9
|
20.5
|
22.1
|
23.1
|
29.0
|
41.5
|
55.6
|
67.8
|
75.4
|
77.9
|
3.3%
|
QAT
|
36.1
|
55.3
|
74.9
|
76.7
|
77.0
|
75.5
|
77.6
|
76.2
|
77.5
|
78.0
|
77.8
|
76.9
|
-1.2%
|
TNT
|
14.4
|
15.1
|
13.8
|
13.7
|
14.4
|
14.1
|
12.4
|
10.4
|
10.2
|
10.1
|
12.5
|
11.9
|
-4.8%
|
NIG
|
11.7
|
17.4
|
18.9
|
19.9
|
16.3
|
18.5
|
20.1
|
17.3
|
20.3
|
20.0
|
20.8
|
18.9
|
-9.5%
|
OMA
|
8.4
|
8.4
|
8.0
|
8.2
|
8.4
|
7.8
|
7.4
|
7.8
|
8.2
|
8.0
|
10.3
|
8.5
|
-17.1%
|
EGY
|
9.4
|
7.1
|
6.3
|
4.9
|
2.7
|
0.3
|
-
|
0.5
|
0.8
|
0.8
|
3.5
|
3.4
|
-1.4%
|
EQG
|
3.4
|
3.8
|
3.8
|
3.5
|
3.7
|
3.7
|
3.6
|
3.2
|
3.9
|
3.8
|
2.8
|
2.6
|
-7.1%
|
NOR
|
2.3
|
3.4
|
2.9
|
3.3
|
2.8
|
3.9
|
4.4
|
4.6
|
3.9
|
3.9
|
4.7
|
3.3
|
-30.1%
|
RUS
|
4.8
|
9.8
|
10.5
|
10.8
|
10.4
|
10.6
|
10.6
|
10.2
|
11.5
|
16.2
|
29.3
|
30.8
|
5.1%
|
YMN
|
0.3
|
4.0
|
6.5
|
5.2
|
7.0
|
6.5
|
1.4
|
-
|
-
|
|
0.0
|
0.0
|
-
|
PER
|
-
|
1.3
|
3.7
|
3.9
|
4.1
|
4.2
|
3.6
|
4.0
|
3.7
|
3.8
|
3.8
|
3.6
|
-5.3%
|
FRA
|
|
|
|
|
|
|
|
1.1
|
1.1
|
1.0
|
0.0
|
0.0
|
-
|
BEL#
|
0.2
|
0.4
|
0.4
|
0.3
|
1.1
|
1.1
|
0.9
|
-
|
0.0
|
0.0
|
0.0
|
0.0
|
-
|
ESP#
|
-
|
-
|
0.5
|
1.2
|
2.1
|
3.8
|
2.3
|
0.1
|
0.0
|
0.0
|
0.0
|
0.0
|
-
|
Papua
|
-
|
-
|
-
|
-
|
-
|
3.4
|
7.1
|
7.6
|
8.1
|
8.0
|
8.2
|
8.2
|
-1.0%
|
Others##
|
-
|
-
|
-
|
0.7
|
0.9
|
1.5
|
1.4
|
3.2
|
3.2
|
6.2
|
5.7
|
1.7
|
-70.3%
|
Total
|
177.2
|
217.3
|
241.5
|
236.9
|
237.5
|
243.3
|
247.4
|
253.0
|
290.7
|
313.0
|
354.7
|
357.3
|
0.7%
|
# Include re-exports
## Includes re-exports from Brazil, France, Portugal, South Korea, Japan and Greece
(1) Provisional estimate
Source: BP statistical review, Drewry
Historically, LNG exporters were located in just three regions: Algeria and Libya in North Africa; Indonesia, Malaysia, Brunei and
Australia in Southeast Asia/Australasia; and Abu Dhabi and Qatar in the Middle East (excluding small-scale LNG exports from Alaska). However, the entries of Trinidad and Tobago, Nigeria, and Norway have added a significant regional diversification to
LNG exports in the Atlantic basin. In addition, the entry of Oman as an exporter and the rapid expansion of Qatar's production have also positioned the Middle East as an increasingly significant player in the global LNG business. Australia surpassed
Qatar as the largest LNG producer and exporter in 2019. Australia's LNG exports constituted 21.8% of the global LNG exports in 2020. Qatar is now the world's second largest producer and exporter of LNG, accounting for close to 21.5% of the global LNG
export in 2020.
U.S. LNG exports have ramped up significantly in the last five years, increasing from 3.2 million tons in 2016 to 50.8 million tons in
2020. The country's LNG exports have mainly benefited from the Sabine Pass LNG terminal, launched in 2016, with four trains becoming operational at the end of January 2018. In 2019, major U.S. liquefaction projects to come on-stream 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). Currently, LNG export terminals with an aggregate capacity of 30.1 million tons per annum are under construction in the US.
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 2009,
there were 22 countries importing LNG and by December 2020, the number increased to 42.
LNG imports by country between 2006 and 2020 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 51% of the total LNG imports as of the end of 2020. 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 67.9 million tons in 2020. 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.
China's coal to natural gas switch is driven by the country's intent to reduce pollution. China's 13th Five-Year Plan aims to reduce the
share of coal in the country’s overall energy demand – from 64% in 2015 to 58% in 2020 – while increasing the use of gas from 6% to 10% during the same period. 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 by 2060 is expected to accelerate its switch from coal to gas and aid LNG demand.
LNG Imports by Country 2009-20201
(Million Tons)
Importer
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
2020e
|
Argentina
|
0.7
|
1.3
|
3.2
|
3.4
|
4.7
|
4.8
|
4.3
|
3.8
|
3.4
|
3.0
|
1.2
|
1.2
|
Belgium
|
4.8
|
4.7
|
4.8
|
3.1
|
1.6
|
2.1
|
2.8
|
2.1
|
0.9
|
1.6
|
5.1
|
5.3
|
Brazil
|
0.3
|
2.0
|
0.8
|
2.5
|
4.1
|
5.8
|
5.2
|
2.2
|
1.6
|
2.0
|
2.3
|
2.5
|
Canada
|
0.7
|
1.5
|
2.4
|
1.3
|
0.8
|
0.6
|
0.5
|
0.2
|
0.3
|
0.4
|
0.4
|
0.4
|
Chile
|
0.5
|
2.2
|
2.8
|
3.0
|
3.0
|
2.8
|
3.1
|
3.1
|
3.3
|
3.6
|
2.5
|
2.4
|
China
|
5.6
|
9.3
|
12.1
|
14.6
|
18.3
|
19.8
|
19.1
|
26.2
|
38.2
|
53.9
|
61.7
|
67.9
|
Dom. Rep.
|
0.4
|
0.6
|
0.7
|
0.9
|
1.2
|
0.9
|
1.3
|
1.3
|
0.9
|
1.2
|
1.2
|
1.0
|
Egypt
|
-
|
-
|
-
|
-
|
-
|
-
|
2.8
|
0.6
|
6.2
|
2.5
|
0.1
|
0.0
|
France
|
9.5
|
10.2
|
10.6
|
7.5
|
6.4
|
5.4
|
4.8
|
7.0
|
7.4
|
7.8
|
15.6
|
15.8
|
Greece
|
0.5
|
0.9
|
0.9
|
0.7
|
0.5
|
0.4
|
0.3
|
0.0
|
1.3
|
1.5
|
2.1
|
1.5
|
India
|
9.2
|
8.9
|
12.5
|
15.0
|
12.8
|
13.8
|
15.9
|
16.5
|
18.7
|
22.3
|
23.4
|
25.9
|
Indonesia
|
-
|
-
|
-
|
0.7
|
1.0
|
1.6
|
2.0
|
2.0
|
2.6
|
2.0
|
3.7
|
3.4
|
Israel
|
-
|
-
|
-
|
-
|
0.4
|
0.3
|
0.4
|
0.0
|
0.5
|
0.0
|
0.6
|
0.4
|
Italy
|
2.1
|
6.6
|
6.4
|
5.2
|
3.7
|
3.5
|
4.3
|
4.1
|
6.0
|
5.6
|
9.8
|
10.1
|
Japan
|
62.7
|
68.2
|
78.1
|
86.7
|
87.0
|
88.0
|
86.2
|
83.3
|
83.6
|
82.9
|
76.9
|
74.5
|
Jordan
|
-
|
-
|
-
|
-
|
-
|
-
|
2.9
|
3.3
|
3.3
|
3.0
|
1.4
|
1.3
|
Kuwait
|
0.7
|
2.0
|
2.3
|
2.0
|
1.6
|
2.7
|
2.7
|
2.7
|
3.5
|
3.0
|
3.6
|
3.2
|
Lithuania
|
-
|
-
|
-
|
-
|
-
|
0.1
|
0.4
|
0.0
|
0.9
|
0.0
|
1.4
|
1.2
|
Malaysia
|
-
|
-
|
-
|
0.1
|
1.5
|
1.7
|
1.6
|
1.2
|
1.8
|
1.1
|
2.7
|
2.5
|
Mexico
|
2.6
|
4.2
|
3.0
|
3.5
|
5.7
|
6.8
|
5.2
|
4.3
|
4.8
|
4.2
|
4.9
|
5.2
|
Netherlands
|
-
|
-
|
0.6
|
0.6
|
0.6
|
0.4
|
0.4
|
1.1
|
0.8
|
1.0
|
5.8
|
6.2
|
Pakistan
|
-
|
-
|
-
|
-
|
-
|
-
|
1.1
|
2.9
|
4.6
|
6.0
|
8.1
|
7.6
|
Portugal
|
2.1
|
2.2
|
2.2
|
1.5
|
1.8
|
1.2
|
0.7
|
0.7
|
2.7
|
1.2
|
4.1
|
3.7
|
Puerto Rico
|
0.6
|
0.6
|
0.5
|
1.0
|
1.3
|
1.3
|
1.2
|
0.9
|
0.9
|
1.0
|
1.4
|
1.1
|
South Korea
|
25.1
|
32.4
|
36.0
|
35.9
|
39.6
|
37.3
|
31.9
|
32.1
|
37.8
|
44.0
|
40.1
|
39.9
|
Spain
|
19.7
|
20.1
|
17.6
|
14.7
|
10.9
|
11.5
|
9.5
|
9.6
|
12.1
|
10.0
|
15.7
|
16.1
|
Singapore
|
-
|
-
|
-
|
-
|
0.9
|
1.9
|
2.2
|
2.2
|
3.0
|
3.2
|
3.3
|
3.1
|
Taiwan
|
8.6
|
10.9
|
11.9
|
11.7
|
12.6
|
13.2
|
13.7
|
14.2
|
16.6
|
16.7
|
16.7
|
18.3
|
Thailand
|
-
|
-
|
0.7
|
1.0
|
1.5
|
1.4
|
2.6
|
3.1
|
3.8
|
4.4
|
5.0
|
5.2
|
Turkey
|
4.2
|
5.8
|
4.5
|
5.7
|
4.0
|
5.3
|
5.5
|
5.6
|
7.3
|
7.1
|
9.4
|
10.6
|
UAE
|
-
|
0.1
|
1.0
|
1.0
|
1.1
|
1.3
|
1.6
|
1.5
|
2.5
|
2.8
|
1.4
|
1.2
|
UK
|
7.5
|
13.6
|
18.5
|
10.0
|
6.8
|
6.1
|
9.4
|
7.7
|
4.9
|
6.6
|
13.6
|
13.6
|
USA
|
9.3
|
8.9
|
7.3
|
3.7
|
2.0
|
1.2
|
1.9
|
1.8
|
1.5
|
1.8
|
1.0
|
0.8
|
Africa
|
|
|
|
|
|
|
|
7.4
|
|
|
|
|
Others
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
3.4
|
2.8
|
5.6
|
9.0
|
4.2
|
World Total
|
177.2
|
217.3
|
241.5
|
236.9
|
237.4
|
243.3
|
247.3
|
258.3
|
290.3
|
313.0
|
354.7
|
357.3
|
* 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 2009 and February 2021 are shown in the chart below.
Asian LNG Imports: 2009-February 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 46.1% between 2009 and 2020, with the volume of LNG trade currently being 2.0 times
greater than 2009 levels and accounting for nearly one-third of 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 2009-20201
(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 2020, 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, US to Europe, US 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 will be 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 2010-2019, demand for
LNG shipping services, expressed in terms of ton miles, has increased at a compound average growth rate (CAGR) of 8.6%, compared with a 5.6% increase in the volume of cargo carried. In 2020, the ton mile demand for LNG grew 7.6% year over year, lower
than in previous years with the slump in demand due to the pandemic.
LNG Seaborne Trade 2009-20201
(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)
• RMR Ice Class Rules
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
• Ice breaker assistance.
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 March 2021, there were only 30 LNG
carriers with Ice Class 1A and Ice-Class 1A Super Standard in operation and 24 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.
Northern Sea Route — Transit traffic
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
2020
|
Number of Vessels
|
34
|
46
|
71
|
23
|
18
|
19
|
NA
|
NA
|
37
|
64
|
Total Cargo Volume (tons)
|
820,789
|
1,261,545
|
1,355,897
|
274,000
|
39,586
|
214,513
|
NA
|
NA
|
697,277
|
1,281,010
|
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 16.5 million tons of LNG (as of March 31, 2021) . 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 LNG2 project to Asian and European countries will require a specialized category of ice-breaker LNG carriers
capable of taking the shorter Arctic route. Additionally, the price competitiveness of Russian LNG compared with that of the US is likely to boost Russian exports.
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 March 2021, the global shipping fleet comprises 218 LNG-capable vessels (i.e., non-LNG carriers) with another 268 vessels on the
orderbook. The number of LNG-fueled vessels on the water is set to increase in coming years. 29 LNG-capable vessels aggregating 2.6 mdwt were delivered in 2020 and 89 vessels aggregating 4.0 mdwt will be delivered in 2021. These promising numbers
highlight the industry's rising inclination towards accepting LNG as a bunker fuel.
IMO 2030, IMO 2050 and Sea Cargo Charter
In addition to the recently implemented emission control regulations, the IMO has been devising strategies to reduce greenhouse gases
(“GHG”) and carbon emissions from ships. According to the latest announcement, IMO plans to initiate measures to reduce CO2 emissions 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 and encouraging ship owners to use alternative fuels such as biofuels and electro-/synthetic fuels such as hydrogen or
ammonia, and may also include limiting the speed of the ships. However, there is still 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 factor discouraging ship owners from ordering newbuild vessels, as these vessels may have a high environmental compliance cost in the future. Some shipowners are ahead of the curve by having ordered
LNG-fueled ships in order to comply with stricter regulations that may be announced in future.
In November 2020, Marine Environment Protection Committee (“MEPC”) approved a draft for the new mandatory regulations to cut the carbon
intensity of existing ships. Formal adoption of the proposal for GHG and CO2 emissions reduction action plan is expected in June 2021. It will be a combination of technical and operational measures which will be monitored by the flag
administration and corrective actions will be required in the event of constant non-compliance. The draft amendments would require the IMO to review the effectiveness of the implementation of the Carbon Intensity Indicator (“CII”) and Energy
Efficiency Existing Ship Index (“EEXI”) requirements, by 1 January 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 or E for three
consecutive years would have to submit a corrective action plan to show how the required index (C or above) would be achieved. Further, the European Union has endorsed a binding target of at least 55% domestic reduction in economy-wide GHG reduction
by 2030 compared to 1990. EU shipowners are required to comply with this regulation.
The Sea Cargo Charter, applicable to bulk ship charterers, is a global framework that allows for the integration of climate considerations
into chartering decisions to favor climate-aligned maritime transport. At present, 18 charterers are signatories to the charter and have vowed to make the details of their shipping carbon footprint public.
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 March 31, 2021, the worldwide fleet totaled 607 ships with a combined
capacity of 90.8 million cbm. The breakdown of the fleet by vessel size is shown below.
The LNG Fleet by Vessel Size: March 31, 2021
Size
|
No.
|
000 Cbm
|
0-17,999 cbm
|
31
|
198
|
18-49,999 cbm
|
21
|
540
|
50-74,999 cbm
|
4
|
278
|
75-124,999 cbm
|
3
|
255
|
125-149,999 cbm
|
192
|
26,921
|
150-199,999 cbm
|
311
|
52,253
|
200-219,999 cbm
|
31
|
6,608
|
220,000+ cbm
|
14
|
3,727
|
Total
|
607
|
90,782
|
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 7.4% per annum between 2014 and 2020. High deliveries in
the last three years have led to a sharp increase in LNG fleet in these years.
LNG Fleet: 2014-March 2021
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 March 31, 2021, is shown below. The average age of all LNG carriers in service is 10.4 years,
with lower fleet ages for comparatively bigger vessels and smaller vessels. Whereas, mid-sized vessels are relatively older.
LNG Fleet Age Profile: March 31, 2021
Size Range in CBM
|
|
Average Age (Years)
|
0-18,000
|
|
9.5
|
18-50,000
|
|
8.8
|
50-75,000
|
|
18.6
|
75-125,000
|
|
22.5
|
125-150,000
|
|
18.9
|
150-200,000
|
|
4.9
|
200-220,000
|
|
12.4
|
220,000+
|
|
11.7
|
Average Age -Total Fleet
|
|
10.4
|
Due to high-quality construction and in most cases, high-quality maintenance, LNG carriers tend to have longer trading lives than oil
tankers. It is not unusual to see ships older than 35 years still in service. However, older ships may find it harder to find employment. 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 six years are shown below.
LNG Fleet Delivery: 2014-March 2021
Source: Drewry, Note – YTD 2021 deliveries include deliveries between January and March 2021
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 25 to 30%.
Short-term LNG trade 2008-2020
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. Increased LNG spot buying by Japan, China, and South Korea following severe winter led to higher demand for LNG vessels. In December 2020, spot LNG shipping rates reached US$ 141,500 per day, but
have been sliding since mid-January 2021 with the fall in Asian LNG demand and lower arbitrage between Asian LNG prices and Henry Hub.
Spot rate for LNG ships January 2012 – March 2021
(US $ per day)
Source: Baltic exchange, Drewry
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: 2007-March 2021
(End Period - US $ 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 USD 189.3 mn 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.
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.
LNG Carrier Secondhand Prices: January 2016 - March 2021
(Monthly - US $ 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 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. 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 ("SEEMPS"), 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. Additionally, 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 may be adopted at the MEPC 76 session, to be held during 2021.
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 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. For example, cyber-risk management systems must be incorporated by ship-owners and managers by 2021. This might cause companies
to create additional procedures for monitoring cybersecurity, which could require additional expenses and/or capital expenditures. The impact of such 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 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. These amendments may be formally adopted at MEPC 76 in 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:
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injury to, destruction or loss of, or loss of use of natural resources and related assessment costs;
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injury to, or economic losses resulting from, the destruction of real and personal property;
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loss of subsistence use of natural resources that are injured, destroyed or lost;
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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;
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lost profits or impairment of earning capacity due to injury, destruction or loss of real or personal property or natural resources; and
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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.
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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 US 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 the former U.S. President Trump has proposed leasing new sections of U.S.
waters to oil and gas companies for offshore drilling. The effects of these proposals and changes are currently unknown, and recently, current U.S. President Biden signed an executive order temporarily blocking new leases for oil and gas drilling in
federal waters. 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 "waters of the United States." The proposed rule was published in the Federal Register on February 14, 2019 and was subject to public comment. On October 22, 2019, the agencies
published a final rule repealing the 2015 Rule defining "waters of the United States" and recodified the regulatory text that existed prior to the 2015 Rule. The final rule became effective on December 23, 2019. On January 23, 2020, the EPA published
the "Navigable Waters Protection Rule," which replaces the rule published on October 22, 2019, and redefines "waters of the United States." This rule became effective on June 22, 2020, although the effective date has been stayed in at least one U.S.
state pursuant to court order. The effect of this rule is currently unknown.
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
from 2022. This will require shipowners to buy permits to cover these emissions. Contingent on another formal approval vote, specific regulations are forthcoming and are expected to be proposed by 2021.
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.
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. The EPA or individual U.S. states
could enact environmental regulations that would 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,
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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;
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on-board installation of ship security alert systems, which do not sound on the vessel but only alert the authorities on shore;
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the development of vessel security plans;
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ship identification number to be permanently marked on a vessel's hull;
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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
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compliance with flag state security certification requirements.
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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 Company 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, Bureau Veritas and Russian Maritime Register of Shipping).
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.
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ORGANIZATIONAL STRUCTURE
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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.
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PROPERTY, PLANT AND EQUIPMENT
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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.