SEAL-PA

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, 2014
Date of Report: August 7, 2014

Teekay LNG Partners L.P. is a master limited partnership and one of the world's largest independent owners and operators of LNG carriers. The company provides marine transportation services for LNG, LPG, and crude oil, primarily under long-term, fixed-rate charter contracts. As of August 1, 2014, the fleet consisted of 83 vessels (54 owned, 4 in-chartered, and 25 newbuildings).

Key Financial Metrics

Note: Liquidity figures reflect pro-forma proceeds from a $140.5 million equity offering completed in mid-July 2014.

Material Changes vs. Prior Period

• Distributable Cash Flow: Increased 11% to $61.5 million from $55.4 million in Q2 2013. Growth was driven by the acquisition of two LNG carriers from Awilco LNG in late 2013 and higher earnings from the Exmar LPG joint venture. This was partially offset by reduced cash flow from the sale of two conventional tankers (Tenerife Spirit and Algeciras Spirit) in late 2013 and early 2014.
• GAAP Net Income: Decreased significantly to $43.6 million from $69.7 million in Q2 2013. The decline was primarily due to a $16.3 million unrealized loss on derivative instruments in Q2 2014, compared to a $10.7 million unrealized gain in the same period of 2013.
• Segment Performance:
  • Liquefied Gas Segment: Cash flow from vessel operations (CFVO) increased to $112.8 million (including equity accounted vessels) from $112.6 million.
  • Conventional Tanker Segment: CFVO decreased to $9.7 million from $12.9 million due to the sale of two Suezmax tankers.

Guidance, Outlook, and Strategic Transactions

Management highlighted two major strategic transactions finalized in June and July 2014 that expand the fixed-rate contract portfolio to approximately $11 billion and extend the weighted-average contract duration to 14 years:

• Yamal LNG Project: Through a new 50/50 joint venture with China LNG Shipping, the Partnership agreed to provide six icebreaker LNG carrier newbuildings. Scheduled for delivery between 2018 and 2020, these vessels will operate under fixed-rate contracts until 2045.
• BG Group Acquisition: Acquired ownership interests in four LNG carrier newbuildings from BG Group. Scheduled for delivery between 2017 and 2019, these vessels will operate under 20-year fixed-rate charters with BG Group.

Outlook: Management cites strong long-term fundamentals for marine-based liquefied gas transportation, noting that U.S. LNG liquefaction projects starting from 2016 are expected to create demand for over 80 additional LNG carriers.

Risks: Forward-looking statements are subject to risks including shipyard construction delays, cost overruns, potential failure of the Yamal LNG project (including sanctions against Russia), and changes in global LNG/LPG production and trading patterns.

Investor Verification Checklist

• Derivative Accounting Impact: Verify the reconciliation between GAAP Net Income and Adjusted Net Income, noting the significant volatility caused by unrealized gains/losses on non-designated derivative instruments.
• Liquidity Position: Confirm the pro-forma liquidity of ~$498 million includes the $140.5 million equity offering proceeds and assess the sufficiency of funds for upcoming shipyard installments.
• Contract Duration: Validate the claim that total forward fixed-rate revenues have increased to approximately $11 billion with a 14-year weighted-average duration.
• Yamal LNG Execution: Monitor the progress of the six icebreaker newbuildings and the potential impact of geopolitical sanctions on the Yamal LNG project timeline.
• Equity Dilution: Review the impact of the 3.1 million common unit offering on per-unit metrics and future distribution coverage.