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: Third Quarter ended September 30, 2018
Date of Report: November 15, 2018
Teekay LNG Partners is a publicly-traded master limited partnership and one of the world's largest independent owners and operators of LNG carriers. The fleet includes 49 LNG carriers (including seven newbuildings), 29 LPG/multi-gas carriers, and three conventional tankers, with ownership interests ranging from 20% to 100%. The Partnership also holds a 30% interest in a regasification terminal under construction in Bahrain.
Key Financial Metrics
| Metric (in thousands USD) | Q3 2018 | Q2 2018 | Q3 2017 |
|---|---|---|---|
| Voyage Revenues | $123,336 | $122,315 | $104,285 |
| Income from Vessel Operations | $46,998 | $10,505 | $10,322 |
| GAAP Net Income (Partners & Preferred) | $25,950 | $2,734 | ($18,896) |
| GAAP Net Income per Common Unit | $0.24 | ($0.05) | ($0.27) |
| Adjusted Net Income (Partners & Preferred) | $19,474 | $13,535 | $20,925 |
| Adjusted Net Income per Common Unit | $0.16 | $0.09 | $0.22 |
| Total Cash Flow from Vessel Operations (CFVO) | $132,593 | $115,005 | $107,254 |
| Distributable Cash Flow (DCF) | $41,214 | $31,116 | $40,224 |
Liquidity and Debt: As of September 30, 2018, total liquidity was $310.5 million ($139.9 million cash and $170.6 million undrawn credit facilities). In early November 2018, the Partnership refinanced and upsized its revolving credit facility from $190 million to $225 million with a two-year term. Pro-forma liquidity following this refinancing is estimated at $345.5 million.
Material Changes vs. Prior Period
- Revenue Growth: Voyage revenues increased 18% year-over-year (Q3 2018 vs. Q3 2017) and 1% sequentially, driven by the delivery of new LNG and LPG carrier newbuildings and the commencement of short-term charters in joint ventures.
- Profitability Surge: GAAP net income swung from a loss of $18.9 million in Q3 2017 to a profit of $26.0 million in Q3 2018. This was primarily due to new vessel deliveries, unrealized gains on derivatives, and reduced vessel write-downs compared to the prior year.
- Segment Performance: The Liquefied Gas Segment generated $51.6 million in income from vessel operations, up from $44.9 million in Q3 2017. The Conventional Tanker Segment reported a loss of $4.6 million, a significant improvement from a $34.6 million loss in Q3 2017, aided by reduced write-downs.
- Equity Income: Equity income rose to $14.7 million from $1.4 million in the prior year quarter, reflecting higher utilization and new deliveries in joint ventures (Yamal LNG, Pan Union, Exmar LPG).
Guidance, Outlook, and Management Commentary
- Distribution Guidance: Management intends to increase quarterly cash distributions on common units by 36% in 2019, targeting an annualized distribution of $0.76 per unit.
- Tax Structure Change: The Board recommends amending the Partnership's U.S. tax structure to elect corporate treatment instead of partnership status, subject to unitholder approval. If approved, investors will receive Form 1099s instead of Schedule K-1s starting in 2019.
- Market Outlook: Management expects positive impacts from increased exposure to the strong spot LNG shipping market. Four remaining 50% owned ARC7 LNG carriers are expected to be delivered three to five months early.
- Capital Allocation: The strategy focuses on deleveraging the balance sheet toward a targeted leverage ratio of 5.5x CFVO while returning capital to unitholders.
- Risks and Contingencies:
- Tax Indemnification: A $53.0 million additional tax indemnification liability was recognized in the first nine months of 2018 related to the Teekay Nakilat Joint Venture due to UK tax authority challenges on lease structures. The total liability of $63.0 million was paid in Q2 and Q3 2018.
- Charter Termination: Earnings were partially offset by lower earnings on multi-gas carriers following the termination of charter contracts due to non-payment by a charterer.
Investor Verification Checklist
- Tax Election Approval: Verify the outcome of the special meeting of common unitholders scheduled for December 18, 2018, regarding the election to be treated as a corporation for U.S. tax purposes.
- Spot Market Exposure: Confirm the duration and rates of the five-month charter contract for the Magellan Spirit and the status of employment discussions for the Torben Spirit and joint venture vessels coming off-charter in late 2018/early 2019.
- Newbuilding Deliveries: Monitor the delivery schedule for the remaining LNG carrier newbuildings and the commencement of fixed-rate contracts for the Bahrain regasification facility (expected mid-February 2019).
- Debt Refinancing: Confirm the closing details and terms of the upsized $225 million revolving credit facility.
- Asset Dispositions: Track the final sale proceeds and delivery dates for the African Spirit and European Spirit conventional tankers.