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: Second Quarter ended June 30, 2016
Date of Report: August 4, 2016
Teekay LNG Partners is a master limited partnership and one of the world's largest independent owners and operators of LNG carriers. The company provides LNG, LPG, and crude oil marine transportation services primarily under long-term, fee-based charter contracts. As of August 1, 2016, the fleet consisted of 85 vessels (50 LNG carriers, 29 LPG/Multigas carriers, and 6 conventional tankers), with ownership interests ranging from 20% to 100%.
Key Financial Metrics
| Metric (in thousands, except per unit) | Q2 2016 | Q1 2016 | Q2 2015 |
|---|---|---|---|
| Voyage Revenues | $99,241 | $95,771 | $98,608 |
| Income from Vessel Operations | $47,554 | $16,983 | $43,856 |
| GAAP Net Income (Attributable to Partners) | $43,071 | ($37,138) | $58,093 |
| Adjusted Net Income (Non-GAAP) | $53,780 | $34,151 | $39,464 |
| Distributable Cash Flow (DCF) | $76,067 | $54,404 | $65,768 |
| DCF per Common Unit | $0.95 | $0.68 | $0.73 |
| Cash Flow from Vessel Operations (CFVO) | $135,127 | $114,429 | $119,698 |
Liquidity: As of June 30, 2016, total liquidity was $261.4 million, comprised of $127.5 million in cash and cash equivalents and $133.9 million in undrawn credit facilities.
Debt: Total long-term debt was $1,662.7 million, with $227.6 million classified as current. The company secured lender credit approvals on over $900 million of new debt financings since May 2016.
Material Changes vs. Prior Period
- Profitability: GAAP net income attributable to partners turned positive at $43.1 million in Q2 2016, compared to a loss of $37.1 million in Q1 2016. This improvement was driven by a favorable settlement of a charter contract dispute in the MALT joint venture and a full quarter of earnings from the Creole Spirit LNG carrier.
- Revenue: Voyage revenues increased slightly to $99.2 million from $95.8 million in Q1 2016, remaining relatively flat compared to $98.6 million in Q2 2015.
- Segment Performance:
- Liquefied Gas Segment: Income from vessel operations increased to $42.5 million (from $37.8 million in Q2 2015) due to new vessel deliveries and the MALT joint venture settlement.
- Conventional Tanker Segment: Income from vessel operations decreased to $5.1 million (from $6.0 million in Q2 2015) following the sale of two Suezmax tankers (Bermuda Spirit and Hamilton Spirit) and lower charter rates on extension options.
- Non-GAAP Adjustments: Adjusted net income increased significantly year-over-year ($53.8 million vs. $39.5 million), excluding unrealized losses on derivative instruments and foreign currency exchange impacts that reduced GAAP net income.
Outlook, Management Commentary, and Risks
Management Commentary: CEO Peter Evensen highlighted strong cash flows augmented by the MALT joint venture settlement and the Creole Spirit earnings. The company continues to execute on profitable growth projects, with the Oak Spirit (second MEGI LNG carrier) commencing a five-year charter with Cheniere Energy on August 1, 2016. The Exmar LPG joint venture also took delivery of its seventh newbuilding, set to charter with Statoil in August 2016.
Guidance and Projects:
- Oak Spirit: Expected to generate approximately $25 million in annual CFVO and $15 million in annual DCF.
- Torben Spirit: An unchartered MEGI LNG carrier delivery was deferred from February 2017 to December 2017 pending employment opportunities.
- Financing: Significant progress made on debt financing for newbuildings delivering through 2020.
Risks and Contingencies:
- Derivatives: The company reported significant unrealized losses on non-designated derivative instruments ($10.7 million in Q2 2016) and foreign currency exchange losses, impacting GAAP results but not DCF.
- Market Conditions: Risks include potential shipyard delays, cost overruns, changes in LNG/LPG production, and the inability of charterers to make payments.
- Contract Renewals: Risk of inability to renew or replace long-term contracts on existing vessels.
Investor Verification Checklist
- Derivative Exposure: Verify the impact of unrealized losses on non-designated derivatives ($17.3 million total loss in Q2 2016) on GAAP net income versus the non-GAAP Adjusted Net Income.
- Debt Financing Status: Confirm the finalization of the $900 million+ in lender credit approvals mentioned for newbuilding projects.
- Unchartered Vessel: Monitor the status of the Torben Spirit and the decision on delivery deferral expected in late 2016.
- Liquidity Position: Review the pro-forma liquidity of $295 million post-Oak Spirit delivery against upcoming capital expenditure requirements.
- Joint Venture Settlements: Assess the sustainability of the $20.3 million gain from the MALT joint venture charter dispute settlement.