Seapeak LLC annual report, Q4 FY2014

Filing summary

Entity and period: The supplied filing is Teekay LNG Partners L.P.’s annual Form 20-F for the fiscal year ended December 31, 2014, filed April 22, 2015. It is not identified in the filing as a Seapeak LLC report, and it reports annual—not standalone fourth-quarter—results. Financial amounts below are U.S. dollars.

Business context and financial performance

Teekay LNG provides marine transportation of LNG, LPG and crude oil, primarily through long-term charters and equity-accounted joint ventures. At year-end its fleet included 29 LNG carriers, 21 LPG carriers, seven Suezmax tankers and one Handymax tanker, excluding newbuildings.

Reported vessel-operations margin was approximately 45.6% of voyage revenue, compared with 44.2% in 2013. The filing reports no single consolidated gross-margin measure. Cash distributions declared were $2.7672 per unit for 2014; the fourth-quarter distribution of $0.70 per unit was declared after year-end and paid in February 2015.

Changes versus prior year

• Revenue increased modestly, while income from vessel operations rose $7.5 million. Liquefied-gas segment vessel income increased 8.6% to $156.9 million, supported mainly by the Awilco LNG carriers and the November 2014 acquisition of the Norgas Napa.
• Conventional-tanker segment vessel income fell 15.6% to $27.0 million, primarily reflecting the sale and redelivery of three CEPSA-chartered vessels and fewer revenue days.
• Net income rose, but limited partners’ income per unit declined from $2.48 to $2.30, reflecting, among other factors, a larger weighted-average unit count and a higher general partner allocation.
• Equity income from joint ventures declined to $115.5 million from $123.3 million. Derivative losses increased to $44.7 million from $14.0 million; a $28.4 million foreign-exchange gain in 2014 compared with a $15.8 million loss in 2013 partly offset the impact.
• Operating cash flow improved by $7.6 million. Investing cash use declined to $271.6 million from $492.3 million, while financing cash flow was $100.7 million, down from $334.7 million.

Liquidity, debt and investment commitments

Year-end total liquidity, defined by the company as cash plus undrawn medium-term facilities, was $295.2 million, down from $332.2 million. Undrawn facilities were $135.6 million. The company reported a $117.9 million working-capital deficit, including $57.7 million of debt maturing in the second quarter of 2015, which it expected to refinance. Management said the remaining deficit would be managed mainly with operating cash flow, refinancing and available revolvers. The company and its affiliates reported compliance with debt covenants at year-end.

In December 2014, a joint venture in which Teekay LNG held a 70% interest ended leases on three RasGas II LNG carriers, acquired the vessels and refinanced a prior $278 million facility with a $450 million loan due in 2026. Total contractual obligations were reported at $4.8 billion, including $2.5 billion of newbuilding installments and shipbuilding-supervision commitments; this includes significant future spending and is not equivalent to funded debt. The filing also reports a $2.1 billion estimated fully built-up cost for the six Yamal LNG joint-venture vessels, with financing not yet in place for that venture at year-end.

Outlook, commentary and material risks

• Growth plans center on LNG and LPG vessels, joint ventures and long-term charters. Five LNG newbuildings secured Shell charters of six to eight years plus options; two ordered LNG newbuildings lacked charter contracts at the time described. A February 2015 order added another MEGI LNG carrier, for which the company intended to obtain long-term employment before delivery.
• Six customized Arctic LNG carriers for the Yamal project were contracted under charters intended to run through 2045. The filing highlights project completion, financing, Russian sanctions and the limited redeployment prospects of these specialized vessels as material risks.
• A MALT joint-venture LNG carrier suffered a January 2015 grounding. Its charterer asserted a right to terminate; the venture disputed the claim. If termination were upheld, the partnership’s stated 52% share of potential lost revenue through September 2016 was $27.3 million, before any rechartering proceeds. Another MALT charter expired in March 2015.
• Management warned that lower oil and gas prices since mid-2014 could defer or cancel projects, weaken charter demand and vessel values, and constrain growth. Other risks include customer concentration, charter expirations, newbuilding delays and cost overruns, floating-rate debt, foreign-currency movements, derivatives, environmental regulation and the ability to sustain distributions.
• HMRC was challenging similar UK lease tax structures. The company did not consider an adverse outcome probable, but estimated its 70% share of potential exposure related to the terminated RasGas II leases at approximately $60 million. Certain lease-related tax indemnities remain in place.
• The company stated that it had no material legal proceedings known to it, no off-balance-sheet arrangements, and no 2014 vessel impairment. Four conventional tankers had market values below carrying values, but management reported that estimated undiscounted cash flows exceeded carrying values.

Investor verification priorities

• Confirm the issuer and period: the source is Teekay LNG Partners L.P.’s 2014 annual 20-F, not a Seapeak LLC quarterly filing.
• Review the detailed financial statements and reconciliations for derivative losses, foreign-exchange gains, equity-method income and non-GAAP Adjusted EBITDA.
• Track refinancing of the $57.7 million 2015 maturity, liquidity and covenant headroom, and funding for the newbuilding program—especially Yamal financing.
• Verify the MALT charter termination dispute, vessel rechartering prospects and related revenue exposure.
• Assess the $60 million estimated RasGas II tax-indemnity exposure and developments in the HMRC proceedings.
• Evaluate whether operating cash generation supports distributions alongside debt service, maintenance spending and committed expansion capital.

KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2014.