Business Context and Reporting Period
Company: Teekay LNG Partners L.P. (NYSE: TGP)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Fourth Quarter and Full Year ended December 31, 2018
Date of Report: February 21, 2019
Teekay LNG Partners is a master limited partnership and one of the world's largest independent owners and operators of LNG carriers. The company operates through three segments: Liquefied Natural Gas (LNG), Liquefied Petroleum Gas (LPG), and Conventional Tankers. During the reporting period, the company expanded its fleet with newbuilding deliveries and completed the financing for the Yamal Spirit.
Key Financial Metrics
| Metric (in millions USD) | Q4 2018 | Q4 2017 | Full Year 2018 | Full Year 2017 |
|---|---|---|---|---|
| Voyage Revenues | $149.8 | $126.3 | $510.8 | $432.7 |
| Income from Vessel Operations | $65.2 | $62.4 | $147.8 | $148.6 |
| GAAP Net Income (Partners & Preferred) | $6.6 | $39.9 | $28.4 | $34.0 |
| GAAP Net Income per Common Unit | $0.00 | $0.42 | $0.03 | $0.25 |
| Adjusted Net Income (Partners & Preferred) | $32.6 | $34.0 | $87.7 | $93.9 |
| Adjusted Net Income per Common Unit | $0.32 | $0.35 | $0.76 | $0.98 |
| Total Cash Flow from Vessel Operations (CFVO) | $150.1 | $126.8 | $515.3 | $449.6 |
| Distributable Cash Flow (DCF) | $51.2 | $52.1 | $158.9 | $176.1 |
Liquidity and Debt: As of December 31, 2018, total liquidity was $324.6 million, comprised of $149.0 million in cash and cash equivalents and $175.6 million in undrawn credit facilities. Total long-term debt and obligations related to capital leases were approximately $3.05 billion.
Material Changes vs. Prior Period
- GAAP Net Income Decline: GAAP net income for Q4 2018 dropped significantly to $6.6 million from $39.9 million in Q4 2017. This was primarily due to unrealized losses on derivative instruments ($11.5 million) and foreign currency exchange losses ($7.2 million), as well as a $53.0 million tax indemnification liability recognized in the Teekay Nakilat Joint Venture.
- Adjusted Net Income Stability: Adjusted net income remained relatively stable year-over-year for the quarter ($32.6 million vs. $34.0 million), driven by increased earnings from 12 new LNG carrier deliveries and the Magellan Spirit charter-in, offset by lower earnings on multi-gas carriers following charter terminations.
- Segment Performance: The LNG segment saw increased income and CFVO due to newbuilding deliveries. The LPG segment reported a loss from vessel operations due to the termination of contracts for seven multi-gas carriers. The Conventional Tanker segment income decreased due to the sale of three Suezmax tankers during 2018.
- Share Repurchases: Since late December 2018, the company repurchased over 1.1 million common units at an average price of $11.38 per unit for a total cost of approximately $13 million.
Guidance, Outlook, and Risks
2019 Guidance
Management provided the following estimated guidance for fiscal 2019:
- Adjusted Net Income per Common Unit: $1.85 to $2.20 (representing a 143% to 190% increase over 2018).
- Total CFVO: $635 million to $660 million (representing a 23% to 28% increase over 2018).
- Distributions: Common unit distributions are expected to increase by 36% commencing in the first quarter of 2019.
Management Commentary
CEO Mark Kremin highlighted that the LNG segment results are expected to be significantly higher in 2019 due to the delivery of 15 newbuilding LNG carriers and the start-up of the Bahrain LNG regasification terminal. The company plans to delever its balance sheet while returning cash to unitholders via repurchases and increased distributions.
Risks and Contingencies
- Derivatives and FX: Significant volatility in GAAP results due to unrealized losses on non-designated derivative instruments and foreign currency exchange revaluations.
- Charter Termination: Risk of early termination of long-term contracts or inability to renew/replace contracts at favorable rates.
- Construction Delays: Potential delays in newbuilding deliveries or the Bahrain regasification terminal project.
- Market Conditions: Changes in global LNG/LPG production, trading patterns, and fleet sizes could impact vessel tonnage requirements.
Investor Verification Checklist
- Derivative Impact: Verify the reconciliation of GAAP net income to Adjusted Net Income to understand the magnitude of unrealized derivative and FX losses impacting reported earnings.
- Deleveraging Strategy: Monitor the execution of the capital allocation strategy, specifically the balance between debt repayment, unit repurchases, and distribution increases.
- Newbuilding Deliveries: Confirm the timing and charter rates of the 15 newbuilding LNG carriers expected to be delivered in 2019 to validate the 2019 guidance.
- Bahrain Terminal: Track the construction progress and expected start-up date of the Bahrain LNG regasification terminal (30% interest).
- LPG Segment Turnaround: Assess the strategy for the seven multi-gas carriers that lost their charter contracts in late 2017/2018.