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, 2018
Date of Report: August 2, 2018
Teekay LNG Partners is a master limited partnership and one of the world's largest independent owners and operators of LNG carriers. The fleet consists of 49 LNG carriers (including nine newbuildings), 29 LPG/Multi-gas carriers, and four conventional tankers. The Partnership also holds interests in various joint ventures and a 30% stake in a regasification terminal under construction in Bahrain.
Key Financial Metrics
| Metric | Q2 2018 | Q2 2017 |
|---|---|---|
| Voyage Revenues | $122.3 million | $100.9 million |
| GAAP Net Income (Partners & Preferred) | $2.7 million | ($16.1 million) loss |
| GAAP Net Loss per Common Unit | ($0.05) | ($0.23) |
| Adjusted Net Income (Partners & Preferred) | $13.5 million | $17.9 million |
| Adjusted Net Income per Common Unit | $0.09 | $0.19 |
| Total Cash Flow from Vessel Operations (CFVO) | $115.0 million | $106.3 million |
| Distributable Cash Flow (DCF) | $31.1 million ($0.39/unit) | $40.6 million ($0.51/unit) |
| Total Liquidity (as of June 30, 2018) | $443.6 million | N/A |
Note: Liquidity comprised $177.1 million in cash/cash equivalents and $266.5 million in undrawn credit facilities.
Material Changes vs. Prior Period
- Revenue Growth: Voyage revenues increased by approximately 21% year-over-year, driven by the delivery of seven LNG and three LPG carrier newbuildings between July 2017 and May 2018.
- GAAP Profitability: GAAP net income improved from a loss of $16.1 million in Q2 2017 to a profit of $2.7 million in Q2 2018. This was aided by unrealized gains on derivatives and foreign currency exchange gains, partially offset by a $33.0 million write-down of four Multi-gas carriers.
- Adjusted Income Decline: Adjusted net income decreased from $17.9 million in Q2 2017 to $13.5 million in Q2 2018. This decline was primarily due to lower earnings on seven Multi-gas carriers following charter terminations and lower rates on two conventional tankers.
- Segment Performance:
- Liquefied Gas Segment: Income from vessel operations decreased due to Multi-gas carrier impairments, though CFVO increased due to new LNG carrier deliveries.
- Conventional Tanker Segment: Income from vessel operations improved due to a prior-year write-down of the European Spirit, though CFVO decreased due to vessel sales and lower charter rates.
Outlook, Risks, and Management Commentary
Management Commentary
CEO Mark Kremin highlighted increased earnings and cash flow from LNG carriers, noting the delivery of nine LNG carriers over the past nine months, including the Myrina and Megara on long-term charters to Shell. The Partnership anticipates the delivery of the Bahrain Spirit FSU and an accelerated delivery of a second ARC7 LNG carrier for the Yamal LNG project.
However, the seven Multi-gas carriers taken back in late 2017 due to non-payment continue to underperform. Management does not anticipate a significant turnaround for these vessels in the near term and has taken accounting impairments on four of them.
Debt and Financing
The Partnership has completed all 2018 secured debt refinancings, including facilities for the Woodside Donaldson, Polar Spirit, Arctic Spirit, and Madrid Spirit. They expect to commence refinancing their 364-day unsecured revolver shortly.
Risks and Contingencies
- Tax Indemnification Liability: The Teekay Nakilat Joint Venture recognized an additional tax indemnification guarantee liability of $53.0 million in the first half of 2018 (total liability $56.0 million) due to a UK tax authority challenge regarding capital allowances. This amount is expected to be paid in Q3 2018.
- Multi-gas Carrier Market: Continued underperformance of the seven Multi-gas carriers poses a risk to quarterly results.
- Forward-Looking Risks: Potential shipyard delays, cost overruns, changes in LNG production, and the ability to secure financing for newbuildings.
Investor Verification Checklist
- Multi-gas Carrier Strategy: Verify the timeline and potential outcomes for the seven underperforming Multi-gas carriers, including any pooling arrangements or market shifts.
- Tax Liability Payment: Confirm the payment of the $56.0 million tax indemnification liability to the Teekay Nakilat Joint Venture in Q3 2018 and its impact on liquidity.
- Unsecured Revolver Refinancing: Monitor the status and terms of the upcoming refinancing of the 364-day unsecured revolver.
- Newbuilding Deliveries: Track the delivery schedule for the nine remaining LNG newbuildings and the Bahrain Spirit FSU over the next 18 months.
- Yamal LNG Project: Verify the accelerated delivery of the second ARC7 LNG carrier and the start-up of the second LNG train in August 2018.