Business Context and Reporting Period
Company: Teekay LNG Partners L.P. (NYSE: TGP)
Filing Type: Form 6-K (Earnings Release)
Reporting Period: Fourth Quarter and Full Year ended December 31, 2014
Date of Report: February 19, 2015
Teekay LNG Partners is a master limited partnership and one of the world's largest independent owners and operators of LNG carriers. The company operates primarily under long-term, fixed-rate charter contracts across three segments: Liquefied Gas, Conventional Tankers, and equity-accounted joint ventures.
Key Financial Metrics
| Metric | Q4 2014 | Q4 2013 | Full Year 2014 | Full Year 2013 |
|---|---|---|---|---|
| Distributable Cash Flow (DCF) | $69.0 million | $63.4 million | N/A | N/A |
| Adjusted Net Income (Partners) | $45.6 million | $46.2 million | $176.7 million | $175.0 million |
| GAAP Net Income (Partners) | $33.0 million | $47.5 million | $205.4 million | $201.2 million |
| Cash Distribution per Unit | $0.70 | $0.69 | N/A | N/A |
| Total Liquidity | $295.2 million | N/A | N/A | N/A |
| Net Voyage Revenues | $99.0 million | $104.0 million | N/A | N/A |
Note: Liquidity as of December 31, 2014, comprised $159.6 million in cash and cash equivalents and $135.6 million in undrawn credit facilities.
Material Changes vs. Prior Period
- Distributable Cash Flow: Increased 9% in Q4 2014 compared to Q4 2013. Growth was driven by the acquisition and charter-back of the LPG carrier Norgas Napa, the acquisition of a second LNG carrier from Awilco, and increased charter rates for two Suezmax tankers. These gains were partially offset by the sale of three conventional tankers.
- GAAP Net Income: Decreased in Q4 2014 ($33.0M) compared to Q4 2013 ($47.5M) primarily due to unrealized losses on derivative instruments and foreign exchange fluctuations, despite stable operational performance.
- Adjusted Net Income: Remained relatively flat for the quarter ($45.6M vs $46.2M) but increased for the full year ($176.7M vs $175.0M) due to the acquisition of the Exmar LPG joint venture and new vessel acquisitions.
- Liquidity: Improved significantly due to the termination of capital leases on the RasGas II LNG Carriers in December 2014, which released $467 million in restricted cash and removed $473 million in capital lease obligations, adding approximately $95 million to liquidity.
Guidance, Outlook, and Management Commentary
Strategic Growth and Newbuildings
- Shell Agreement: Secured time-charter contracts for five newbuilding LNG carriers with Shell in December 2014. Deliveries are scheduled between late 2017 and 2018. The Partnership exercised options for three additional vessels at a cost of approximately $630 million.
- Additional Orders: Ordered one additional LNG carrier in February 2015 with options for four more. The vessel is expected to deliver in Q4 2018.
- Yamal LNG Project: Through a 50/50 joint venture with China LNG, the Partnership is providing six icebreaker LNG carriers for the Yamal LNG project in Russia, with deliveries scheduled between 2018 and 2020.
- Forward Revenue: Management expects the fee-based contract portfolio, including equity interests, to generate approximately $11.3 billion in forward revenues.
Management Commentary
CEO Peter Evensen stated that the Shell agreement validates the strategy of pre-ordering fuel-efficient MEGI LNG carriers. Despite volatility in global energy markets, management believes LNG shipping fundamentals remain strong, with an estimated requirement for over 110 standard size LNG carriers above the existing orderbook by 2020.
Risks and Contingencies
- Derivative Volatility: GAAP net income is significantly impacted by unrealized gains and losses on derivative instruments and foreign currency revaluation, which do not affect cash flow.
- Project Execution: Risks include shipyard construction delays, cost overruns, and potential failure of the Yamal LNG project to start on time due to sanctions or funding issues.
- Market Conditions: Risks related to the inability to secure charter contracts for unchartered newbuildings prior to delivery and changes in global LNG production patterns.
Investor Verification Checklist
- Derivative Impact: Verify the reconciliation between GAAP Net Income and Adjusted Net Income to understand the magnitude of unrealized derivative losses ($23.1 million loss in Q4 2014).
- Liquidity Composition: Confirm the breakdown of the $295.2 million liquidity position, specifically the release of restricted cash following the RasGas II lease termination.
- Newbuilding Schedule: Monitor the delivery timelines for the Shell, BG, and Yamal LNG newbuildings to ensure alignment with the projected revenue stream starting in 2017-2018.
- Charter Rates: Review the specific terms of the Shell time-charters (6-8 years) and the impact of the Suezmax tanker rate reversion on future cash flows.
- Joint Venture Performance: Assess the performance of equity-accounted vessels, which contributed $50.9 million to CFVO in Q4 2014, noting the impact of unscheduled off-hire events.