Teekay LNG Partners L.P.
Q3 2016 Earnings Call Transcript

Published: 5 Nov 2016

[Operator:]

Welcome to Teekay LNG Partners' Third Quarter 2016 Earnings Results Conference Call. During the call all participants will be in a listen-only mode. After-wards you will be invited to participate in a question-and-answer session. [Operator Instruction] As a reminder, this call is being recorded. Now, for opening remarks and introductions, I would like to turn the call over to Mr. Peter Evensen, Teekay LNG Partners' Chief Executive Officer. Please go ahead, sir.

[Ryan Hamilton:]

Before Mr. Evensen begins, I'd like to direct all participants to our website at www.teekay.com, where you will find a copy of the third-quarter 2016 earnings presentation. Mr. Evensen will review this presentation during today's conference call. Please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from results projected by those forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the third quarter 2016 earnings release and earnings presentation available on our website. I will now turn over the call to Mr. Evensen to begin.

[Peter Evensen:]

Thank you, Ryan. Good morning, everyone, and thank you for joining us on our third-quarter investor conference call for Teekay LNG Partners. I'm joined today, on what will be my final Teekay LNG quarterly conference call, by Mark Kremin, the current President of Teekay Gas and CEO-Elect of Teekay Gas Group Limited; Vince Lok, Teekay Corporation's CFO; and Brian Fortier, Teekay Corporation's Controller. During our call today, I'll be taking you through the earnings presentation, which can be found on our website. Turning to Slide 3 of the presentation, I'll review some of Teekay LNG's recent highlights. For the third quarter of 2016, the Partnership generated distributable cash flow, or DCF, of $54 million, and cash flow from vessel operations, or CFVO of $116 million. The Partnership continued to generate strong cash flows during the quarter, with the delivery of our second MEGI LNG carrier newbuilding, the Oak Spirit, which commenced its five-year charter contract with Cheniere Energy in early August. We generated DCF per limited common unit of $0.68 per unit, resulting in a strong distribution coverage ratio of 4.8 times. Since reporting earnings in August, the Partnership has secured charter contracts for all of its previously uncommitted LNG carrier newbuildings. We now have secured a short-term charter contract with a major energy company and a new 15-year charter contract with the Yamal LNG project for the Partnership's two previously unchartered MEGI LNG carrier newbuildings, which are delivering in early 2017 and early 2019 respectively, and I'll talk more about that on the next slide. I'm pleased to report that we've continued to make significant progress on securing long-term financing for the Partnership's growth projects that deliver through early 2020. We're currently on track to complete $1.3 billion in new long-term financings on various growth projects in the next few months. Lastly, in October the Partnership again demonstrated its access to the capital markets and bolstered its liquidity position through the recent issuance of $125 million in a preferred equity offering and $110 million five-year Norwegian krone bond issuance. The preferred unit issuance was the Partnership's first such offering and contributes to further increasing our financial flexibility while delevering the balance sheet. As part of the oversubscribed Norwegian krone bond offering, the Partnership agreed to repurchase NOK292 million of bonds which were due in May of 2017. Overall, the Partnership's liquidity at the end of September 2016, after giving pro forma effect for these capital markets transaction, was approximately $490 million. Turning to Slide 4, as I mentioned in my opening remarks, the Partnership has now secured charter contracts for all of its new building LNG carriers. The Torben Spirit, which is expected to deliver in late February, will commence a 10-month plus one-year option charter contract to a major oil, energy company. Prior to the conclusion of this charter, the Partnership will seek to secure a long-term contract for this vessel. In addition, the Partnership's other remaining uncommitted LNG new building vessel, which delivers in early 2019, will operate under a 15 year charter contract with the fully financed Yamal LNG project, providing conventional LNG transportation services. The Partnership will now provide this strategically important project with both icebreaking and conventional LNG transportation services. The Yamal project remains on track for startup in late 2017. With the addition of these two charter contracts, the Partnership's forward fee-based revenue now stands at $12.2 billion, with a weighted average remaining contract duration of 13 years. Turning to Slide 5, now that we've secured charters for all of our new buildings, we've seen strong interest from financing institutions, particularly in Asia, to fund all of our new buildings. And so, we're now in active dialog on the secured financing of all of our new buildings. If we look at each project, I'm pleased to report that we're now in the final stages of completing a $710 million sale-leaseback transaction to finance four of our MEGI LNG new buildings, which deliver in 2017 and 2018. We anticipate the sale-leaseback transaction will be completed by the end of 2016. The financing of our four remaining MEGI LNG carrier new buildings, which are all employed on long-term charter contracts to Shell, BP or Yamal, and deliver in late 2017 through early 2019, is currently in negotiation and is also expected to be completed in 2017. Moving down the list, we expect to conclude within the fourth quarter the financing with the commercial banks and export credit agencies for the Bahrain regasification, in which Teekay LNG owns a 30% interest. In addition, we're currently evaluating financing offers for Teekay LNG's 100%-owned new building FSU, which will commence a 20 year time charter to this project upon startup in the fourth quarter of 2018. And we anticipate completing this FSU financing in the first half of 2017. The four LNG carrier new buildings which deliver in 2017 through 2019 on long-term charter with Shell, formerly BG Group, are already fully financed through a long-term non-recourse debt facility. Together with our 50/50 joint venture partner, China LNG Shipping, or CLNG, we continue to make good progress toward completing the financing of our first two ARC7 LNG carrier new buildings, which deliver in 2018. These two vessels, which are already credit approved by our lenders, will be financed through a long term lease facility at leverage of approximately 80% of the delivered cost of the vessels. Financing of our joint venture's remaining four ARC7 vessels, delivering in 2019 and 2020, is currently being negotiated. Finally, I'm pleased to report that our 50/50 joint venture partner, EXMAR, we have now completed financing of all of our LPG carrier new building vessels, which will deliver through the first quarter of 2018. As you can see at the bottom of the slides, since we funded a large portion of initial yard installments of these projects with equity in previous quarters, we now expect all of the remaining CapEx payments will be funded through a combination of new committed or anticipated debt facilities, as well as the proceeds from the Partnership's recent $125 million preferred equity issuance in October. In addition to the new financing that's detailed on this slide, the Partnership has several refinancing requirements which are also currently in progress. In regards to our near-term refinancing needs, I'm pleased to report that they're progressing very well, and we anticipate concluding our corporate revolver renewal this month, and we have an agreed term sheet in place for the refinancing requirements within our 52% owned joint venture with Marubeni, which we expect to conclude in the first quarter of 2017. Looking further out into 2018, in addition to our Norwegian bond maturity in that year, the Partnership has several refinancings which are supported by vessels with firm contracts in place or relatively low loan-to-value; in addition to two maturities relating to our vessels chartered to Awilco LNG, where Awilco has the repurchase obligations which exceed the value of our loan repayments. Overall, we remain on track to execute on our new financings and refinancing requirements, and expect our new growth projects to make a significant cash flow contribution to the Partnership going forward. Before wrapping up today's call, as announced last week, I've decided to retire from Teekay, which means I'll also retire from my positions as CEO, CFO and a Director of Teekay LNG Partners, effective January 31, 2017. Mark Kremin, President of Teekay Corporation's gas division, will take over as President and CEO of Teekay Gas Group Limited, and I'm absolutely confident that Mark is the right person to lead Teekay LNG going forward. Mark has over 20 years of experience in the shipping industry and is a highly experienced leader in the gas industry. And since December 2015, he's headed up the teams which are responsible for our LNG commercial and technical operations as well. The Partnership is now well-positioned with a market-leading position; strong operations; a pipeline of built-in growth projects which are expected to provide significant cash flow growth over the next coming years; and, most importantly, a great team that will now be led by Mark, while the existing corporate finance team continues to have responsibility for all of Teekay LNG's financing. I'll now pass the call over to Mark.

[Mark Kremin:]

Thank you, Peter, and hello, everyone. First off, I'm excited and honored to take on this new opportunity to build upon Teekay LNG's success. With our world-class operations and market-leading LNG and LPG businesses, the Partnership is well-positioned going forward. My priorities as Teekay LNG's new leader will be to continue where Peter left, including a focus on safety and providing strong operational performance; further building on our customer relationships; executing on our new financings for committed growth projects; delivering on our newbuilding program on time and on budget, which is expected to contribute significant cash flow growth going forward; and to increase the LP distributions at the appropriate time. Thank you all for joining us on the call today. Operator, we are now available to take questions.

[Operator:]

[Operator Instruction] And we will first go to Michael Webber from Wells Fargo.

[Michael Webber:]

Before I start, Peter, congrats on the retirement. Depending on how firm that January 31 date is, you've got anywhere between three or seven more Teekay earnings calls to go through. But I wanted to say congrats. To start on the financing, you get some short-term employment for the Torben Spirit. I'm curious, can you go out with one -- roughly a year, and get long-term financing on that; and if so, what kind of gearing ratio could you realistically expect? And then, I guess, it follows to that, what level of leverage is available in that [indiscernible] Marubeni refi?

[Peter Evensen:]

Well, why don't I start, and then Vince can take over?

[Michael Webber:]

Okay.

[Peter Evensen:]

Actually, we have secured -- the Torben Spirit, we've put it together with three of our LNGs that are on, to Shell. So, it's a four-vessel package, and that's the $710 million loan facility that I talked about in my prepared remarks. So, we're able to get a high advance ratio on that.

[Vince Lok:]

Yes, that's right. The Torben Spirit is part of that four-ship financing that we're expecting to close during this quarter, Mike. I think you were asking about the Malt refinancing. Is that correct?

[Michael Webber:]

Yes. Well, the loan -- the remaining unemployed spot LNG carrier financing on that, which you just touched on with the Torben. And then Peter referenced the Marubeni JV. You've got a term sheet there that's signed for refinancing that. I'm just curious what the rough terms are on that, and the level of leverage you were able to get on [indiscernible] assets.

[Vince Lok:]

Yes. That one is not due until sometime in first quarter of 2017. We do have an agreed term sheet on that one, as Peter mentioned. Given that those four vessels are trading in the short-term market, we are having to reduce the leverage on those four ships a bit. So, we'd expect to pay down a portion of that balloon. Our share is probably in the neighborhood of about 35 million or so.

[Michael Webber:]

Okay, all right. That's helpful. Maybe just conceptually, when we think about the remaining boxes that TGP needs to check, in terms of financing, you've got the Bahrain FSU project. You've got a handful of other assets that -- generally, everything's got employment, or some degree of employment at this point. What's the right order or sequencing we should think of, in terms of the way you guys go about kind of checking these remaining boxes, getting to a point where you could potentially reestablish the distribution? How do you think that order goes?

[Peter Evensen:]

Well, I would say that right now our focus area is on both securing the long-term financing for the growth projects, as I talked about -- and we're well on our way to completing all of those financings, but as Vince just talked about, we're also looking and making sure that we have the prospects for refinancing the Partnership's debt maturities in 2017 and 2018. And we think, as Vince said, that's achievable given the progress that we're making right now. And those vessels are whether they have short-term charters or long-term charters, we're able to refinance. And that is a positive. So, that remains our goal. We won't say exactly when the distribution will be raised, but as Mark said in his prepared remarks, we will raise the distribution at the appropriate time. And when we do, Teekay LNG will have likely a higher coverage ratio, which we believe is a prudent strategy if we're going to have a sustainable dividend going forward.

[Michael Webber:]

Sure. And that makes sense. I guess what I'm asking is, when you look at the dashboard of different things that need to happen there, and you're making progress, I'm assuming, on all of them, are there any that fall naturally towards the front of that line, or towards the back, for whatever reason? How, what should we, vague sense, how should we think about that order, and things you can realistically tackle, and when?

[Peter Evensen:]

Well, we're tackling all of them, is what I was trying to say in my messaging. And we expect to complete them. And now that we have chartered all of, we had, now we've chartered all of the LNGs, we're aiming to complete, fully financed, all of our growth projects. So, there isn't a set order. We're out doing all of them. We see them as individual financing projects.

[Michael Webber:]

Okay. Just kind of a grab bag, I guess. Okay. I guess, finally…-

[Peter Evensen:]

[indiscernible] It isn, sorry. It isn't a grab bag. It is a comprehensive financing plan we've put in place, targeting financing institutions for each project, and we've been very methodical about it, and we're executing on it, as I showed on slide 5.

[Michael Webber:]

Right. I'm talking about what's disseminated to the market. There's really no way to tell what will get disseminated and when, or what order we could expect things to be taken care of. That's all I'm trying to nail down. Right? So, any….

[Peter Evensen:]

[Indiscernible]

[Michael Webber:]

Framework whatsoever, for how we should expect this to get relayed to the market.

[Peter Evensen:]

Well [Indiscernible].

[Michael Webber:]

It's fine. I can...

[Peter Evensen:]

That we complete.

[Michael Webber:]

Okay. No, that's helpful. Just one more for Mark. And this came up on an earlier call. Friday -- I believe it was Friday, we saw an older steam asset catch a long-term contract in the mid to high $40,000 range. I mean, I'm just curious how you think about the implications of that deal for the broader fleet. The idea that a steam asset can catch longer term employment is generally encouraging. But I'm curious as to whether or not you think that that's indicative of maybe where that bid is going to come from, being around stranded fields or West African projects that are really focused on a much narrower cost structure and lower transportation cost, or what the overarching takeaway is for the market, seeing an asset like that catch an eight year contract.

[Mark Kremin:]

Well, we don't have any steamships, so we don't follow the differential exactly. But obviously, it looked like it was a bit of a package deal, Mike, in the sense that there were some other ships involved, I think, the one you're referring to. Nonetheless, we do see the market seems to be tightening. That [four] that you mentioned is certainly not out of the realm of the possibilities for starting even next year. And so, hopefully it's indicative of a strengthening market. Although, it was a package deal.

[Michael Webber:]

Okay. All right. That's helpful. Thanks, guys.

[Operator:]

And we now go to Spiro Dounis from UBS Securities.

[Spiro Dounis:]

Peter, congratulations, and Mark, good luck in your new role. Next, just wanted to start off just on the recent capital raises that got done. I guess, maybe two-part question. Just maybe some rationale around the timing of the preferred deal, and maybe how we should be thinking about the use of those proceeds, and why that deal was done, or I guess was the optimal way to do it; and then, obviously, the NOK bond that got done subsequent to that. Obviously was for refinancing purposes. But just as we're thinking about the future debt that's coming due, it's sounds like that market's open again. Could we expect you to go back there again at some point in the next year or two?

[Vince Lok:]

Yes. I'll cover both of those. The preferred unit offering, as you know, is our first preferred offering for TGP, and it was an opportunistic offering to increase our liquidity as well as delever our balance sheet. And we think it's a very cost-effective long-term cost of equity. And as you saw on Slide 5, if you allocate the 125 million from the preferred equity, we will have the fully-financed newbuilding program when you factor in the committed and anticipated debt financings. So, that puts us in good standing in terms of completing that program. The NOK bond offering was also a very positive event. It was well-oversubscribed. We ended up doing NOK900 million on that and it helped us to early refinance our May 2017 maturity. So, it got us a lot of duration on a five-year deal there. And I think both transactions are very positive. I think it demonstrates that the capital markets remain open to TGP. And it looks like the Norwegian bond market is reopening for higher-quality companies like TGP, and I think that is something we will access in the future as well, as we have other NOK bond maturities. We do have long-term intentions to get a U.S. credit rating for TGP, so we won't be just limiting ourselves to the Norwegian bond market, but certainly it's positive to see that market open right now.

[Spiro Dounis:]

Got it. Yes, I agree. And then just around Yemen, I believe the deferral on those two vessels, I guess ends in December, and it should go back to the old rate. And I think they are then supposed to repay you for the deferred revenue. But I guess obviously we saw on the news that one of your vessels was attacked in and around that region. So, I'm just wondering, just in light of that, one, what is your appetite to go back there right now, and what does that mean for restarting that LNG plant in Yemen right now?

[Mark Kremin:]

Just to sort of differentiate, the attack that we had was on a separate side of Yemen, on al-Mandab. But to your point on the Balhaf charter that we have, as you say, we do have a deferral agreement in place till the end of the year. There hasn't been any progress towards the restarting of the Balhaf plant in Yemen, and we do see that the conflict is throughout the country. So, as we've disclosed in our previous earnings presentations, our JV with Marubeni will probably reassess with LNG at the end of this year, and it could have a continuing negative impact on our cash flow from vessel operations into next year.

[Spiro Dounis:]

Great. I appreciate the color. Thanks, everyone.

[Operator:]

Noah Parquette from JPMorgan have our next question.

[Noah Parquette:]

I just follow up Spiro's question about the attack in Yemen. It's kind of out there in left field, but there's no secret, Al-Qaeda wants to attack commercial shipping. And do you see a situation where voyages go around that area, or there's any sort of displacement of trade flows? Or was this just a one-off thing you don't think will affect the ship flows?

[Mark Kremin:]

It's pretty speculative for us to say at this point who did it, whether it's Al-Qaeda or any other organization, or whether it's going to happen again. But what we do know is that, from the evidence suggests, it's not a piracy attack. We did have explosives and which obviously detonated, which is different from some of the small arms issues that other ships have had. So, I'm not sure whether it's going to continue in the future, but it's certainly something we've heightened our scrutiny on, and I think we gave an announcement to the industry so they can do the same.

[Noah Parquette:]

Okay. Thanks. And I just wanted to -- can you remind us, what is the debt associated with the Awilco vessels? So, how much capital will be freed up when those vessels are purchased?

[Vince Lok:]

Yes. The debt on each of those -- the balloon on those ships are roughly about 85 million to 95 million when they come due in '17 and '18. The purchase obligation amounts related to those are well in excess of those balloon amounts.

[Noah Parquette:]

Okay. Thanks.

[Operator:]

[Operator Instruction] We will go to Nick Raza from Citi.

[Nick Raza:]

Thank you. Congratulations, Peter, on the announcement. Just a quick few follow-up questions, in terms of the vessel that's contracted to Yamal, the MEGI, could you provide a little bit more color in terms of how that will be used? Because, understanding that the Yamal actually needed icebreaking vessels, how hard are they going to utilize these? Is it just going to be for trade just outside of that?

[Mark Kremin:]

Yes. This is -- the Yamal project is actually set up on the basis of ARC icebreaking ships, of which we have a fleet with our partner, CLNG; but also conventionals. So, when the ice is thicker in the winters, the ships will -- the icebreaking ships will come down and they'll transship at various places to conventional carriers. So, the award that we've announced for the conventional carrier will be intended to transship from one of the icebreaking ARC7 class vessels. So, we've chartered it to Yamal, and I think they'll have other off-takers of the LNG that will also transship it to other conventional vessels. So, it'll go around the southern route instead of the northern route, but the same project.

[Nick Raza:]

Okay. And is there more appetite for that, or is Yamal's current conventional requirement pretty fulfilled?

[Mark Kremin:]

No, we think there'll be more appetite for conventional carriers on this project, whether for Yamal or other off-takers. Perhaps Gunvor, for instance, will have also requirements for conventional carriers in the same way.

[Nick Raza:]

Fair enough. And I guess the only other question I had was about the Malt JV. In terms of extending the deferment, how is the financing company, or the bank's point of view changed, or has it at all, or do they continue to support you guys and say, hey, we'll continue to defer any payments, principal, interest, until this thing comes back online?

[Vince Lok:]

No, I think as we mentioned earlier on the call, the Malt refinancing is progressing well. We already have an agreed term sheet. The only thing is that we're going to use a more conservative gearing in that joint venture. So, that refinancing is expected to close in the first quarter. So, that's well underway.

[Nick Raza:]

Okay. Fair enough. Thanks, guys.

[Operator:]

[Operator Instruction] We will now go to Espen Landmark from Fearnley.

[Espen Landmark:]

I just wanted to a couple of questions on the LPG business. I mean, I know it's a small part of TGP and it's getting smaller, but you have quite a lot of CoAs within the midsize fleet. I'm just wondering what kind of renewal rates you're seeing for those vessels.

[Mark Kremin:]

Well, we have, the renewal rates have gone down. We are seeing is, we have, in 2017, we have 59% cover on our LPG fleet, and we have further cover already into 2018. So, about 41%. So, although we're seeing a softening of LPG rates, which we expect to, or, LPG shipping rates, which we expect to continue, we do have a fair amount of cover. Yes.

[Espen Landmark:]

All right. And then there's also, I think, five smaller vessels with a Norwegian listed company which has some liquidity problems at the moment. I mean, have you had any discussions with the company regarding the rates on those vessels?

[Mark Kremin:]

We have, and there is, been softening on those as well. So, we're still working through with that company. They have some good irons in the fire, I believe, and that could come to fruition within this quarter. And so, so far, we haven't had any deep and meaningful discussions. But, of course, we monitor it very closely. The ethylene market in particular, there have been some cancellations, and there have been some other factors that could drive ethylene going forward. So, there is a positive outlook. But I guess the other thing to mention is that, as a part of our portfolio, it is a relatively small aspect. So, even on the LPG side of our business, which is a relatively small part of our business, this particular customer you're referring to is, I wouldn't call it insignificant, but it's certainly relatively small.

[Espen Landmark:]

Yes, I agree. All right. That's it for me. Thanks.

[Operator:]

And there are no further questions. I'll turn the conference back over to our presenters for any additional or closing remarks.

[Peter Evensen:]

Okay. Thank you all very much. We didn't talk much about the LNG market, but we have been pleased to see that there's been good growth in LNG trade as more LNG plants have come on, particularly in Australia and the United States. So, that's why there's a positive bias toward increased LNG trade. Thank you very much.

[Operator:]

This concludes today's presentation. Thank you for your participation.