Business Context and Reporting Period
Company: Teekay LNG Partners L.P. (NYSE: TGP)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Date: November 25, 2008
Context: The Partnership announced the completion of a financial restatement covering fiscal years 2003 through 2007 and the first two quarters of 2008. The restatement addresses accounting treatments for derivative transactions (SFAS 133), vessel dropdown transactions (SFAS 141), and the gross-up presentation of RasGas joint venture interests. Management emphasizes that all adjustments are non-cash and have no impact on distributable cash flow, liquidity, or cash distributions.
Key Financial Metrics
Restated Net Income (Loss):
- Three Months Ended June 30, 2008: $31.7 million (Previously reported: $7.6 million).
- Three Months Ended March 31, 2008: $(42.2) million loss (Previously reported: $(25.0) million loss).
- Six Months Ended June 30, 2008: $(10.5) million loss (Previously reported: $(17.4) million loss).
- Three Months Ended June 30, 2007: $41.4 million (Previously reported: $2.5 million).
Distributable Cash Flow (Non-GAAP):
- Three Months Ended June 30, 2008: $24.4 million (Unchanged from previously reported).
- Three Months Ended June 30, 2007: $22.2 million.
Cash Distributions:
- $0.55 per unit (Paid August 14, 2008).
- $0.57 per unit (Declared November 3, 2008; Paid November 14, 2008).
Liquidity and Balance Sheet (As of June 30, 2008):
- Cash and Cash Equivalents: $78.8 million.
- Total Assets (Restated): $4.1 billion (Previously reported: $3.6 billion).
- Total Liabilities and Partners' Equity (Restated): $4.1 billion.
Material Changes Versus Prior Period
The restatement resulted in significant volatility in reported Net Income due to the reclassification of unrealized gains and losses on derivative instruments from equity to the income statement. However, operating fundamentals remained stable.
- Net Income Volatility: The Q2 2008 restated net income increased by $24.1 million compared to the prior reported figure, primarily driven by a $22.8 million adjustment for derivative instruments. Conversely, Q1 2008 net loss widened by $17.2 million due to similar derivative adjustments.
- Year-Over-Year Comparison: Restated net income for Q2 2008 ($31.7 million) decreased compared to Q2 2007 ($41.4 million). This decline is attributed to unrealized foreign currency translation losses ($29,000 in Q2 2008 vs. $5.7 million in Q2 2007) and changes in fair value of derivatives.
- Dropdown Adjustments: Historical results for vessels acquired from Teekay Corporation were retroactively included from the date of their original acquisition by Teekay, rather than the date of transfer to the Partnership. This adjustment impacted historical net income and equity but had no cash impact.
Guidance, Outlook, and Risks
Management Commentary: CEO Peter Evensen stated that the restatement adjustments are exclusively due to changes in accounting treatment and have no impact on the economics of the Partnership or its actual cash flows. The Partnership discontinued the use of hedge accounting for interest rate swaps and profit-sharing swaps; consequently, unrealized gains and losses on these instruments will now be reflected in voyage revenues and interest expense going forward.
Outlook: The increase in the Q3 2008 cash distribution to $0.57 per unit reflects the contribution from the Partnership's joint venture interest in four RasGas 3 LNG carriers delivered between May and July 2008.
Risks and Contingencies:
- Accounting Complexity: The restatement highlights risks associated with complex derivative accounting (SFAS 133) and the classification of related-party vessel acquisitions (SFAS 141).
- Foreign Exchange: The Partnership faces exposure to foreign currency translation losses, primarily related to long-term debt denominated in Euros.
- Joint Venture Exposure: While the gross-up presentation of RasGas joint ventures increases reported assets and liabilities, management confirms no change in net exposure.
Investor Verification Checklist
- Verify that the restatement adjustments are strictly non-cash and do not alter the Partnership's ability to meet its cash distribution obligations.
- Review the upcoming amended Form 20-F/A and Form 6-K/A filings (expected by December 5, 2008) for detailed historical restatement data for fiscal years 2003–2007.
- Monitor the impact of discontinued hedge accounting on future quarterly net income volatility, specifically regarding unrealized gains/losses on interest rate swaps.
- Confirm the delivery schedule and operational status of the two newbuild LNG carriers and five newbuild LPG carriers mentioned in the fleet overview.
- Assess the magnitude of foreign exchange translation losses on Euro-denominated debt in future reporting periods.