Business Context and Reporting Period
Company: Teekay LNG Partners L.P. (Note: Input metadata referenced "Seapeak LLC," but the filing text identifies the registrant as Teekay LNG Partners L.P.)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Nine months ended September 30, 2009 (Unaudited)
Business Overview: An international provider of marine transportation services for liquefied natural gas (LNG), liquefied petroleum gas (LPG), and crude oil. The fleet operates primarily under long-term, fixed-rate time-charters. The partnership consists of two reportable segments: Liquefied Gas (LNG and LPG carriers) and Suezmax Tankers.
Key Financial Metrics
| Metric (in thousands USD) | 9 Months Ended Sep 30, 2009 | 9 Months Ended Sep 30, 2008 |
|---|---|---|
| Voyage Revenues | $235,580 | $225,411 |
| Income from Vessel Operations | $104,049 | $92,258 |
| Net Income (Loss) | $19,037 | $25,146 |
| Net Income Attributable to Limited Partners | $(6,701) | $29,456 |
| Net Cash Flow from Operating Activities | $132,705 | $89,300 |
| Cash and Cash Equivalents (End of Period) | $90,485 | $59,731 |
| Total Debt (Long-term + Current) | $1,407,020 | $1,382,611 |
| Total Assets | $3,382,367 | $3,432,849 |
Per Unit Data (Limited Partners): Net loss per common unit of $(0.16) for the nine months ended September 30, 2009, compared to net income of $0.37 in the prior year period.
Material Changes vs. Prior Period
- Revenue Growth: Voyage revenues increased 4.5% year-over-year, driven by the commencement of charters for the two Tangguh LNG carriers and the Norgas Pan LPG carrier. This was partially offset by drydocking of other vessels and the weakening of the Euro against the U.S. Dollar.
- Net Income Decline: Consolidated net income decreased by 24.3% to $19.0 million. This decline was primarily due to a $41.5 million loss on derivative instruments (interest rate swaps) and a $19.5 million foreign currency exchange loss, compared to a $14.6 million gain in the prior year.
- Operating Cash Flow: Operating cash flow increased significantly by 48.6% to $132.7 million, reflecting higher vessel utilization and the addition of new vessels to the fleet.
- Interest Expense: Interest expense decreased by 53.9% to $46.6 million, largely due to the novation of debt related to the RasGas 3 Joint Venture to the joint venture itself (now equity accounted) and lower LIBOR rates.
- Restructuring: A restructuring charge of $3.1 million was incurred in 2009 related to moving ship management functions from Spain to a Teekay Corporation subsidiary. No such charge existed in the prior year.
Guidance, Outlook, and Risks
- Equity Offerings: In March 2009, the partnership raised $68.5 million net from a follow-on offering. Subsequent to the reporting period (November 2009), a second offering raised approximately $93.9 million net, reducing Teekay Corporation's ownership to 49.2%.
- Capital Commitments: The partnership has commitments to acquire the remaining Skaugen LPG carriers and two Skaugen Multigas carriers, totaling approximately $160 million, scheduled for delivery between 2010 and 2011.
- Derivative Risk: The partnership uses interest rate swaps to hedge floating-rate debt. Changes in fair value of these derivatives are recorded in net income, causing significant volatility in reported earnings despite stable cash flows.
- Taxation Risk: Significant uncertainty exists regarding U.S. federal income tax classification. A recent court decision (Tidewater Inc. v. United States) creates risk that time-charter income may be classified as rental income rather than qualifying service income. If the partnership fails the 90% "Qualifying Income" test, it could be taxed as a corporation. Additionally, the partnership may lose the Section 883 Exemption from U.S. tax on international transportation income starting in 2010 due to Teekay Corporation's ownership dropping below 50%.
- Goodwill: No goodwill impairment was recorded in 2009. Management does not believe there is a reasonable possibility of impairment in the next year, though market conditions remain a risk factor.
Investor Verification Checklist
- Derivative Impact: Verify the extent to which reported net income is distorted by unrealized losses on interest rate swaps versus actual cash flow generation.
- Tax Status: Confirm the partnership's ability to maintain "Qualifying Income" status under Section 7704 of the Internal Revenue Code, particularly given the Tidewater ruling and the shift in ownership structure.
- Section 883 Exemption: Assess the risk of incurring a 4% gross basis tax on U.S. source transportation income starting in 2010 due to the reduction in Teekay Corporation's ownership stake.
- Capital Expenditures: Review the funding strategy for the $160 million in committed vessel purchases and the $122 million new credit facility secured in October 2009.
- Joint Venture Accounting: Understand the shift from consolidation to equity method accounting for the RasGas 3 Joint Venture and its impact on debt reporting and interest expense.