Seapeak LLC annual report, Q4 FY2018

Full document

Filing summary

Entity and period: The supplied filing is Teekay LNG Partners L.P.’s Form 20-F annual report for the fiscal year ended December 31, 2018, filed April 5, 2019. It is not a standalone fourth-quarter report. The request metadata names Seapeak LLC, which does not match the registrant identified in the filing.

Business context

Teekay LNG provides marine transportation of LNG, LPG and crude oil, principally through long-term, mostly fixed-rate charters. At year-end, its fleet included 49 LNG carriers (including newbuildings), 29 LPG/multi-gas carriers and two conventional tankers; it also held a 30% interest in a Bahrain LNG receiving and regasification terminal under construction. Most LNG assets are held through joint ventures, so reported equity income and cash distributions from those ventures are important to results and liquidity.

Financial and operating performance

  • Revenue: Voyage revenue was $510.8 million, up 18.0% from $432.7 million in 2017. Net voyage revenue, a non-GAAP measure, was $482.5 million versus $424.5 million.
  • Operating results and profit: Income from vessel operations was $147.8 million, slightly below $148.6 million. Net income fell to $26.9 million from $48.9 million; limited partners’ interest in net income was $2.6 million, or $0.03 per common unit, versus $19.6 million, or $0.25 per unit. Approximate net margin was 5.3% versus 11.3% in 2017.
  • Equity income: Increased to $53.5 million from $9.8 million, chiefly reflecting improved MALT joint-venture results and deliveries of vessels into the Pan Union and Yamal ventures.
  • Non-GAAP earnings measures: EBITDA was $279.0 million versus $233.3 million; Adjusted EBITDA was $492.3 million versus $424.4 million. Adjusted EBITDA adds back substantial items, including equity-accounted adjustments and the $53.0 million tax-indemnification expense; it should not be treated as GAAP profit or cash flow.
  • Cash flow: Operating cash flow was $131.2 million, down from $218.8 million. Investing activities used $632.9 million, mainly for vessel construction and joint ventures; financing activities provided $385.1 million. Cash, cash equivalents and restricted cash together were $222.9 million at year-end.
  • Liquidity: Unrestricted cash was $149.0 million; total liquidity, including $175.6 million of undrawn revolving facilities, was $324.6 million. The partnership reported a $32.8 million working-capital deficit.
  • Debt: Long-term debt was $2.0 billion and capital-lease obligations were $1.3 billion, totaling approximately $3.3 billion. The filing reports compliance with debt and lease covenants at year-end. Debt service, refinancing needs and restrictions on distributions remain significant considerations.
  • Distributions: Common-unit distributions declared totaled $0.56 per unit for 2018, unchanged from 2017. Management announced a planned 36% increase to $0.19 per quarter beginning with the first-quarter 2019 distribution, subject to board approval and applicable restrictions.

Material changes versus 2017

  • Revenue grew with LNG vessel deliveries and increased fleet days, while vessel operating income was nearly flat. LNG segment operating income rose to $226.5 million from $184.1 million; LPG and conventional tanker segments recorded operating losses of $57.4 million and $21.3 million, respectively.
  • Net income declined despite higher revenue and equity income, reflecting higher interest expense ($128.3 million versus $80.9 million), higher general and administrative costs, vessel and goodwill write-downs, and a $53.0 million tax-indemnification expense.
  • Write-downs of goodwill and vessels totaled $54.7 million, including $33.0 million on four multi-gas carriers, $13.0 million on the Alexander Spirit, and $7.9 million on two Suezmax tankers. The filing also reports $1.8 million of restructuring charges.
  • Operating cash flow and total liquidity decreased. Capital spending remained high, while the company refinanced several facilities and issued NOK 850 million of senior unsecured bonds, with payments swapped into U.S. dollars at a fixed 7.89% rate.
  • The partnership repurchased 326,780 common units for $3.7 million in December 2018 under a program authorizing up to $100 million. It repurchased an additional 0.8 million units for $9.3 million in January 2019.
  • Reporting segments changed from two to three—LNG, LPG and conventional tankers—with comparative segment results retrospectively recast.

Outlook, commentary and risks

  • Management expected 2019–2020 liquidity, operating cash flow and joint-venture dividends to cover most needs, including the equity share of committed projects; refinancing 2020 loan maturities remained a stated need. Management estimated sufficient liquidity for at least one year after the financial statements were issued.
  • At December 31, 2018, the partnership’s share of remaining newbuilding and terminal commitments was approximately $652 million. It reported approximately $636 million of financing in place in January 2019, including the Yamal Spirit sale-leaseback and proportionate joint-venture financing.
  • Hire payments on the Marib Spirit and Arwa Spirit, chartered to Yemen LNG, had been deferred following the plant’s 2015 closure. A further suspension arrangement of up to three years was anticipated. Management estimated a $7–$8 million quarterly reduction in the partnership’s proportionate equity income in 2019 versus original charter rates, partly offset by sub-chartering; repayment of deferred amounts depends on plant resumption and YLNG’s ability to pay.
  • Awilco charter-hire deferrals and vessel purchase obligations were scheduled for 2019. The filing cautions that Awilco may not have the funds to meet them.
  • Principal risks include customer and charter concentration, weak spot markets and rechartering risk, high debt and refinancing exposure, vessel impairments, joint-venture dependence, political instability (including Yemen and Russia-related Yamal exposure), and construction or project delays. Environmental compliance costs include the IMO global 0.50% sulfur-fuel limit effective January 1, 2020; the company said it had not installed scrubbers and intended to use low-sulfur fuel.
  • Effective January 1, 2019, the partnership elected to be taxed as a corporation for U.S. federal tax purposes; investors were expected to receive Forms 1099 rather than Schedule K-1s. The filing notes potential U.S. tax costs and uncertainty concerning PFIC status.
  • KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. The filing also notes adoption of new revenue-recognition guidance in 2018 and upcoming lease-accounting changes in 2019.

Important facts for investors to verify

  • Confirm the issuer: this filing is for Teekay LNG Partners L.P., not Seapeak LLC, and covers the full 2018 fiscal year rather than Q4 alone.
  • Review the reconciliation and composition of Adjusted EBITDA, particularly equity-accounted adjustments and the $53.0 million tax-indemnification add-back.
  • Track cash generation, unrestricted versus restricted cash, the working-capital deficit, covenant headroom and refinancing of 2020 maturities.
  • Verify collection prospects for deferred YLNG hire and Awilco obligations, and monitor the impact of any Yemen charter suspension on joint-venture income and distributions.
  • Assess funding and delivery progress for LNG newbuildings and the Bahrain terminal, alongside actual financing availability and remaining capital commitments.
  • Confirm whether the planned common-unit distribution increase was approved and paid, and assess its sustainability against debt service, investment needs and distribution restrictions.