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, 2016
Date of Report: November 3, 2016
Business Overview: Teekay LNG is a master limited partnership and one of the world's largest independent owners and operators of LNG carriers, providing marine transportation services primarily under long-term, fee-based charter contracts. The fleet includes interests in 50 LNG carriers, 29 LPG/Multigas carriers, and 6 conventional tankers.
Key Financial Metrics
| Metric (in thousands, except per unit) | Q3 2016 | Q2 2016 | Q3 2015 |
|---|---|---|---|
| Voyage Revenues | $100,658 | $99,241 | $98,415 |
| Income from Vessel Operations | $50,634 | $47,554 | $42,197 |
| GAAP Net Income (Attributable to Partners) | $50,107 | $43,071 | $7,498 |
| Adjusted Net Income (Non-GAAP) | $32,093 | $53,780 | $37,121 |
| Distributable Cash Flow (DCF) | $54,325 | $76,067 | $61,098 |
| DCF per Common Unit | $0.68 | N/A | $0.66 |
| Cash Flow from Vessel Operations (CFVO) | $115,973 | $135,127 | $114,196 |
| Total Liquidity (Pro Forma) | ~$490 million | N/A | N/A |
Note: Liquidity figure of ~$490 million includes pro forma effect of October 2016 capital raises. Reported liquidity as of Sept 30, 2016, was $315.8 million.
Material Changes vs. Prior Period
- Revenue Growth: Voyage revenues increased 2.3% year-over-year (Q3 2016 vs. Q3 2015) and 1.4% sequentially, driven by the delivery of the Creole Spirit and Oak Spirit MEGI LNG carriers which commenced five-year charters with Cheniere Energy.
- Profitability: GAAP Net Income attributable to partners surged to $50.1 million from $7.5 million in Q3 2015, largely due to unrealized gains on derivative instruments ($5.0 million in Q3 2016 vs. losses of $26.8 million in Q3 2015). Adjusted Net Income decreased 13.5% year-over-year to $32.1 million.
- Segment Performance:
- Liquefied Gas Segment: Income from vessel operations increased significantly due to new vessel deliveries. However, equity income decreased due to lower mid-sized LPG spot rates and temporary deferral of charter payments in the MALT Joint Venture.
- Conventional Tanker Segment: Income from vessel operations declined due to the sale of two Suezmax tankers (Bermuda Spirit and Hamilton Spirit) and lower charter rates on extension options.
- Equity Income Volatility: Equity income dropped from $29.6 million in Q2 2016 to $13.5 million in Q3 2016, impacted by unrealized gains/losses on derivatives and operational issues in joint ventures.
Guidance, Outlook, and Management Commentary
- Charter Secured: Management announced that all LNG newbuildings now have secured charter contracts. This includes a 15-year contract with the Yamal LNG project (delivering early 2019) and a short-term contract with a major energy company (delivering early 2017).
- Financing Progress: The Partnership anticipates completing approximately $1.3 billion in long-term financings for growth projects over the next few months. In October 2016, they issued $125 million in preferred units and NOK 900 million (~$110 million) in bonds, bolstering liquidity.
- Leadership Transition: CEO Peter Evensen announced his retirement after 11 years. Mark Kremin has been named President and CEO of Teekay Gas Group Ltd., with Evensen expressing confidence in the transition.
- Risks and Contingencies:
- Yamal LNG Project: Risks include potential delays or cancellation due to sanctions against Russian entities, which could impact the fully-financed project's start-up scheduled for late 2017.
- Market Conditions: Exposure to changes in LNG/LPG production, trading patterns, and the ability of charterers to make payments.
- Derivatives: Significant volatility in GAAP results due to unrealized gains/losses on non-designated derivative instruments and foreign currency revaluations.
Investor Verification Checklist
- Charter Contract Terms: Verify the specific terms and duration of the short-term charter for the vessel delivering in early 2017, as management intends to seek a long-term replacement.
- Yamal LNG Execution: Monitor the status of the Yamal LNG project start-up and any geopolitical developments regarding sanctions that could affect the 15-year charter.
- Financing Completion: Confirm the closing of the anticipated $1.3 billion in long-term debt financing for growth projects.
- Derivative Exposure: Review the reconciliation of GAAP to Non-GAAP measures to understand the magnitude of unrealized derivative gains/losses impacting reported net income.
- Liquidity Position: Verify the actual cash position post-October 2016 capital raises against the pro forma liquidity figure of $490 million.