Seapeak LLC annual report, Q4 FY2016

Business context and reporting period

Filing/entity mismatch: The supplied filing is Teekay LNG Partners L.P.’s Form 20-F annual report for the fiscal year ended December 31, 2016, filed April 25, 2017. It is not a Seapeak LLC filing and does not report a standalone 2016 fourth quarter. Financial comparisons below are full-year 2016 versus full-year 2015 unless stated otherwise. Financial statements are prepared under U.S. GAAP.

Teekay LNG Partners provides marine transportation of LNG, LPG and crude oil, primarily under fixed-rate charters. Its strategy was to conserve cash for committed projects and debt repayment while pursuing LNG and LPG growth.

Financial and operating performance

Revenue was broadly flat, while vessel-operating income and net income fell. Income from vessel operations was about 38.6% of revenue, versus 45.6% in 2015; net income was about 39.8% versus 54.7%. The 2016 results included $39.0 million of vessel write-downs and sale losses, including a $27.4 million loss on the Bermuda Spirit and Hamilton Spirit and an $11.5 million impairment on the Asian Spirit.

At year-end, cash and cash equivalents were $126.1 million, restricted cash was $117.0 million, and undrawn revolving facilities were $243.7 million. Reported total liquidity was $369.8 million, comprising cash and undrawn facilities. Working capital was in deficit by $29.0 million. Debt and capital lease obligations totaled approximately $2.184 billion; total assets were $4.315 billion and total equity was $1.777 billion. Operating cash flow declined by $73.2 million year over year. Capital expenditures for vessels and equipment were $345.0 million.

Liquefied-gas segment income from vessel operations rose to $174.6 million from $151.2 million, helped by deliveries of two LNG carriers. Conventional tanker segment results shifted to a $21.4 million operating loss from $30.2 million of income, including the vessel losses and reduced revenue after vessel sales. Equity income fell to $62.3 million from $84.2 million, notably reflecting weaker Exmar LPG results and deferred Yemen charter payments.

Material changes, outlook and risks

• The partnership cut its quarterly common-unit distribution from $0.70 to $0.14 effective with the fourth-quarter 2015 distribution; 2016 declared distributions were $0.56 per unit. Management cited committed project spending, scheduled debt repayments and weak energy and MLP capital markets. No specific distribution increase guidance was provided.
• Management expected 2017–2018 liquidity needs to be met through operations, joint-venture distributions and financing, but said additional debt financing and refinancing were needed. The going-concern assessment stated that sufficient liquidity for at least one year was expected only after incorporating financing plans management considered probable. Four wholly owned LNG newbuildings had financing arrangements in place by year-end; other vessel and project financing remained a key execution need.
• Capital commitments were approximately $2.877 billion at year-end, including newbuildings and the Bahrain LNG project. The six Yamal LNG carriers had no project financing in place at year-end; the joint venture planned to seek debt financing. Delivery, financing, project completion and charter performance therefore remain material risks.
• Two LNG carriers chartered to Awilco faced counterparty and purchase-obligation risk amid Awilco’s financial difficulties. Six LPG carriers chartered to Skaugen had approximately $9.2 million of past-due hire invoices; $4.5 million was not recognized as revenue because collection was uncertain. The partnership later acquired the Skaugen LPG joint venture interest in April 2017.
• Two joint-venture LNG carriers serving Yemen had deferred charter payments after the LNG plant closed. The partnership’s share of the 2016 equity-income reduction was $21.2 million; the estimated 2017 reduction was $20–$30 million. Resumption of operations and repayment were uncertain.
• Other disclosed exposures include a potential approximately $60 million share of UK tax-indemnity exposure related to a former lease structure; customer concentration (three LNG customers each generated at least 11% of consolidated revenue); foreign-exchange and interest-rate exposure; vessel-value impairment risk; environmental compliance costs; and restrictions under debt covenants. The partnership reported compliance with its debt covenants at December 31, 2016.
• Subsequent events included $40 million received from the RasGas 3 joint venture refinancing and a $57 million additional equity investment in the Teekay LNG-Marubeni joint venture refinancing. The report also disclosed a $36 million bond add-on in January 2017 and the Torben Spirit delivery and charter commencement in early 2017.

KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.

Important facts for investors to verify

• Confirm the intended issuer and period: this is Teekay LNG Partners’ 2016 annual report, not a Seapeak LLC filing or a Q4-only report.
• Review current liquidity, refinancing progress and covenants, particularly the substantial 2017–2018 maturities and remaining newbuilding funding needs.
• Check collection and recovery of Skaugen’s past-due hire, Awilco’s charter and vessel-purchase obligations, and Yemen’s deferred payments.
• Assess whether newbuildings and the Bahrain and Yamal projects meet delivery, financing and operating assumptions; compare committed capital spending with available funding.
• Verify the sustainability of the reduced common-unit distribution and the 9.0% Series A preferred-unit distributions against cash generation, debt service and capital needs.
• Evaluate exposure to vessel impairments, customer concentration, foreign exchange and interest rates, and the unresolved UK lease-tax contingency.