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, 2020
Date of Report: August 13, 2020
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 47 LNG carriers and 30 LPG/Multi-gas carriers (owned and in-chartered), with ownership interests ranging from 20% to 100%. The company primarily operates under long-term, fee-based charter contracts.
Key Financial Metrics
| Metric (in thousands, except per unit) | Q2 2020 | Q2 2019 | Q1 2020 |
|---|---|---|---|
| GAAP Net Income (Attributable to partners/preferred) | $44,934 | $16,435 | $(32,994) |
| GAAP Net Income per Common Unit | $0.46 | $0.12 | $(0.50) |
| Adjusted Net Income (Non-GAAP) | $62,643 | $34,435 | $52,236 |
| Adjusted Net Income per Common Unit | $0.67 | $0.35 | $0.58 |
| Total Adjusted EBITDA (Non-GAAP) | $192,340 | $162,069 | $188,388 |
| Distributable Cash Flow (DCF) (Non-GAAP) | $83,170 | $56,330 | $74,877 |
| Voyage Revenues | $148,205 | $153,060 | $139,887 |
| Total Liquidity (as of June 30, 2020) | $306.3 million | N/A | N/A |
Note: Liquidity comprised $226.3 million in cash and cash equivalents and $80.0 million in undrawn credit facilities.
Material Changes vs. Prior Periods
Year-Over-Year (Q2 2020 vs. Q2 2019)
- Profitability: GAAP net income increased significantly, driven by earnings from six LNG carrier newbuildings delivered in late 2019, fewer dry-docking off-hire days, and higher earnings from joint ventures.
- EBITDA: Total Adjusted EBITDA rose nearly 19% to a quarterly record of $192.3 million, marking the eighth consecutive quarterly increase.
- Offsetting Factors: Increases were partially offset by reduced earnings following the sale of two LNG carriers in January 2020 and an oil tanker in October 2019.
Quarter-Over-Quarter (Q2 2020 vs. Q1 2020)
- Turnaround: The Partnership moved from a GAAP net loss of $33.0 million in Q1 to a net income of $44.9 million in Q2.
- Drivers: Improvements were due to reduced operational performance claims, higher LPG rates in joint ventures, and lower income tax expenses.
- Q1 Specifics: Q1 results were negatively impacted by a $45.0 million write-down of six multi-gas carriers and unrealized losses on derivatives, which were not present or were reduced in Q2.
Guidance, Outlook, and Management Commentary
Management Commentary
CEO Mark Kremin highlighted that despite the unprecedented impact of COVID-19, the Partnership successfully serviced all charter contracts and received contracted cash flows. The company safely executed crew changes with no reported COVID-19 cases. Management emphasized a strategic focus on deleveraging the balance sheet and maximizing fleet utilization.
Outlook and Guidance
- Reaffirmed Guidance: The Partnership reaffirmed its 2020 financial guidance.
- Charter Coverage: The LNG fleet is fully fixed for the remainder of 2020 and 94% fixed for 2021, insulating the company from weak short-term market rates.
- Recent Transactions: In May 2020, the Partnership eliminated Incentive Distribution Rights (IDRs) held by the General Partner in exchange for 10.75 million new common units. Additionally, $111 million in NOK-denominated bonds were repaid.
Risks and Contingencies
- COVID-19: Ongoing challenges related to crew changes and global economic impacts.
- Market Conditions: Risks associated with changes in LNG/LPG production, trading patterns, and charter rates.
- Contractual Risks: Potential for early termination of long-term contracts or inability of customers to make payments.
Investor Verification Checklist
- Debt Reduction: Verify the impact of the $111 million bond repayment and the elimination of IDRs on future cash flow distribution and leverage ratios.
- Charter Expirations: Review the specific terms and renewal status of the 6% of the LNG fleet not fixed for 2021.
- Joint Venture Performance: Assess the contribution of equity-accounted vessels (which generated $87.7 million in Adjusted EBITDA) to total earnings, noting the lack of control over distribution timing.
- Cash Flow Stability: Confirm the sustainability of Distributable Cash Flow ($1.03 per unit) given the fixed-rate nature of the fleet versus potential spot market volatility.
- Derivative Exposure: Review the reconciliation of unrealized losses on non-designated derivative instruments, which significantly impacted GAAP net income in prior quarters.