Teekay LNG Partners (TGP) Q1 2018 Earnings Conference Call Transcript

Teekay LNG Partners (TGP)
Q1 2018 Earnings Conference Call
May. 17, 2018 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Please stand by, we're about to begin. Welcome to Teekay LNG Partners' first-quarter 2018 earnings results conference call. [Operator instructions] As a reminder, this call is being recorded. Now for opening remarks and introductions, I would like to turn the call over to Mr.

Mark Kremin, Teekay Gas Group's president and chief executive officer. Please go ahead, sir.

Scott Gayton -- Vice President, Finance

Before Mark begins, I would like to direct all participants to our website at www.teekaylng.com, where you'll find a copy of the first-quarter 2018 earnings presentation. Mark Kremin and Brody Speers 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 materially differ from those in the forward-looking statements is contained in the first-quarter 2018 earnings release and earnings presentation available on our website. I will now turn the call over to Mark to begin.

Mark Kremin -- President and Chief Executive Officer

Thank you, Scott. Good morning, everyone, and thank you for joining us on the first-quarter 2018 investor conference call for Teekay LNG Partners. I'm joined today by Brody Speers, Teekay Gas Group's CFO. Turning to Slide 3 of the presentation, I will review some of Teekay LNG's recent highlights. For the first quarter of 2018, the partnership generated total cash flow from vessel operations, or CFVO, of approximately $118 million and distributable cash flow, or DCF, of approximately $35 million, resulting in DCF per limited partner unit of $0.44. Our GAAP earnings were impacted by certain nonrecurring items, the most material of which is a tax indemnification provision we have now made due to a determination for additional lease rentals from the lessor of our three 70%-owned RasGas 2 joint venture vessels.

As is customary for these types of lease arrangements, our RasGas 2 joint ventures had guaranteed that the economics to the lessor would be maintained should the underlying tax rules change. This resulted in an additional tax indemnification guarantee liability of $53 million during the quarter, in addition to the $12.6 million that had previously been accrued. Although Teekay LNG owns a 70% interest in these vessels, we consolidate this joint venture for accounting purposes and thus show 100% of this liability on our financial statements. Additionally, I think it's important to note that the total liability of $65.6 million on a 100% basis is approximately equal to the upfront benefit our joint venture received upon entering into the lease in 2006. We were also active during the quarter, securing three important charters for contract rollovers the partnership was facing in 2018.

Two of these, the Arctic Spirit and Polar Spirit, which were recently redelivered from Teekay Corporation to Teekay LNG, as scheduled, were rechartered to PETRONAS for four years and for nine months, respectively, to service niche trades in China. Importantly, these charters will ensure these two specialized vessels are fully utilized at charter rates that are above the current spot market assessment for larger, modern LNG vessels. In addition, the charter on the Torben Spirit MEGI LNG carrier was extended out to December 2018 at an increased rate and positions this vessel to take advantage of a potentially strong market in early 2019 on the back of strong Chinese imports, similar to the second half 2017 and into 2018. And as you will hear from me later, we continue to execute on our newbuilding program and are in the early innings of significant cash flow growth.

Our seventh newbuilding delivery in as many months, the Myrina, delivered last week onto its long-term contract with Shell. And we expect another 11 LNG carriers plus the Bahrain regasification terminal to deliver between now and early 2020. In total, and including the LNG carrier deliveries starting in October 2017, our LNG newbuilding order book is expected to provide Teekay LNG with $310 million of incremental cash flows annually. Slide 4 is a visual representation of our existing LNG fleet, updated for our recent charters and excluding the recently delivered and soon to be delivered newbuilds, which are depicted on the next slide.

We think there are three key takeaways from this slide that help to differentiate us from our peers. First is the length of our contracts with roughly half of them with more than 10 years remaining. Second is the contract laddering we have been able to achieve with very few contracts expiring concurrently, especially over the next six to seven years. And third is the diverse portfolio of customers, with most of them being household names in the gas space. We have shown Slide 5 before, and similar to the previous slide, the majority of contracts on our newbuilding portfolio extend well into the future. And our contracts are with blue-chip charters, including Shell, BP and the Yamal consortium led by Novatek, Total, and CNPC.

All told, once our entire newbuild book has delivered in 2020, we will have a young LNG fleet with an average age of just over eight years. Turning to Slide 6, we look at the fundamentals in the LNG market. We see strong supply and demand fundamentals in the LNG market through the remainder of this decade and longer term, which we expect will translate into a significant increase in global LNG shipping and the demand for new LNG vessels. In 2017, global LNG imports increased by approximately 10% compared to the previous year, which was the strongest growth since 2010 according to the International Group of Liquefied Natural Gas Importers. Partly as a result, utilization of the LNG carrier fleet increased and short-term charter rates for LNG vessels reached a four-year high in December 2017. Although rates have since declined seasonally, average rates in the first quarter of 2018 remained 60% higher compared to a year earlier, which indicates a much tighter fleet balance, which we expect will continue to support charter rates in the coming years. On the liquefaction side, it is encouraging to see several export projects progressing toward final investment decisions.

For example, Cheniere recently announced that they intend to make a final investment decision on a third train at their Corpus Christi LNG export project in the next few weeks. This project and many others will be needed in the years ahead to fill the gap between the supplied LNG from current -- from export projects currently in operation and construction and the growing long-term global demand for LNG. In the longer term, this growing demand for LNG is expected to result in a doubling of global LNG imports by 2040, according to BP. To accommodate this growth in LNG trade, the industry will require a significant investment in new LNG vessels. For example, the International Energy Agency estimates that approximately 220 additional LNG vessels will be needed on top of the current order book by 2030.

With the leading position as one of the world's largest LNG carrier, owners, and operators, Teekay LNG is well-positioned to benefit from this strong long-term growth in the LNG industry. Turning to Slide 7, we take a look at the growing role of China in the LNG market. Over the past decade, China's influence in the global LNG market has increased rapidly. In 2010, China was the seventh-largest LNG importer in the world, consuming less than 5% of global LNG imports. However, China LNGs -- China's LNG imports have since increased at a cumulative average growth rate of approximately 22% per year. And in 2017, China surpassed South Korea to become the world's second-largest LNG importer.

In fact, over the past two years, China has been responsible for roughly 40% of the total net growth in global LNG imports. We expect that China will continue to increase its share of the global LNG market. By 2030, BP expects that China will be responsible for almost 20% of global LNG imports and will be importing more LNG than Japan does today. In 2017, 14 vessels in LNG's fleet -- Teekay LNG's fleet delivered a total of 2 million tons of LNG to China, which is approximately 5% of China's total LNG imports. Our recent charter contracts for the Arctic Spirit and Polar Spirit, combined with our existing share of LNG deliveries to China, position Teekay LNG to capitalize on China's long-term growth in the LNG market.And I'd like to end today on Slide 8.

We believe Teekay LNG is at an inflection point, as we continue to execute on our newbuilding projects and financings and are in the early innings of significant cash flow growth which will create long-term value for our unitholders. I'm going to finish off today's presentation by digging into each of the key steps that we see contributing additional value for our unitholders. For the last few years, we have been focused on execution, both on securing financing for our newbuilds, delivering the new – delivering the vessels on schedule, and managing our ongoing refinancings. We have now substantially financed our newbuilding order book, which, at this time last year, stood at 18 LNG carriers.

Our final unfinanced LNG vessel, the Yamal Spirit, which delivers in 2019, is expected to be financed within second half of 2018. Finally, we have made excellent progress this year on our 2018 refinancings with two refinancings already completed and two more expected to be completed by the time we report Q2 results in early August. We have taken delivery of seven LNG carrier newbuilding vessels in the past seven months on top of two midsize LPG carrier newbuilding deliveries during the same period, including one midsize LPG carrier to be delivered next week. This has taken an inordinate amount of effort across the organization, and I'm proud of how everyone has stepped up during this critical time. We have many more ships to deliver onto contract, and I have no doubt, they will deliver on time and on budget, like those that have come before them. Importantly, and as I have mentioned previously during this call, for just the LNG fleet and regas terminal, we expect TGP to generate approximately $310 million of additional annual fixed-rate cash flow from our newbuilding order book.

However, this cash flow will not be fully realized until all the newbuildings have delivered right out to the final ARC7 in early 2020. This cash flow growth, which is all backed by long-term contracts, is coming, and it will create value for our unitholders. It is worth noting that this order book will have been financed through new debt and leasing facilities, through preferred equity offerings and retained earnings and without issuing any common units since July 2014. Next, we intend to maintain a balanced financial strategy that allows us to delever our balance sheet, return capital to unitholders and continue to service our customers' growing needs in the LNG space. Unlike many other marine MLPs, TGP has warehoused its entire order book on its own balance sheet in the form of pre-delivery yard payments.

The benefits that the vessels are required at the actual contracted price for the shipyards has provided TGP with an attractive portfolio of multiyear built-in growth. However, since the vessels do not generate cash flow until they deliver, this has resulted in temporarily elevating our credit metrics. As of March 31, 2018, our balance sheet leverage stood at approximately 8 times net debt to CFVO, taking into account a proportionate share of our equity-accounted joint ventures. Normalizing for the over $800 million in newbuilding installments that are not currently generating cash flow, our leverage sits at approximately 6.5 times as of March 31, which is still above our long-term target leverage of approximately 5.5 times CFVO.

Given the fixed-rate nature of our forward cash flows, our balance sheet will naturally delever over the next few years as our projects deliver and generate cash flow. Given the size and predictability of our projected cash flow growth, we believe that we will have the capacity to naturally delever our balance sheet, return capital to unitholders and grow accretively, which will all contribute to building long-term value for Teekay LNG and its unitholders. And finally, as I discussed on slides 6 and 7, we believe the short and longer-term fundamentals for the LNG shipping industry are strong and likely to strengthen further. China will be a big driver of this growth, and we are well-positioned to service this and other growing markets to our operational expertise, scale, and our strengthening financial position.

This strong underlying market backdrop and need for more LNG vessel orders will create new opportunities for Teekay LNG. Operator, we are now available to take questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And we'll take our first question from Randy Giveans with Jefferies.

Randall Giveans -- Jefferies -- Analyst

Hey. Thanks, operator, and good call, guys. So just two quick questions. In the past, you've provided a slide showing the remaining capex and the completed kind of undrawn debt financing against that.

So for example, at the end of 4Q '17, you had $1.9 billion of remaining capex, $1.7 billion in completed undrawn debt refinancings, I think another almost $200 million in in-process debt financing. So can you provide an update for those amounts at the end of 1Q on remaining capex and then maybe the kind of completed financings against this?

Brody Speers -- Chief Financial Officer

Hey, Randy. Yeah, at the end of Q1, we had approximately $1.5 billion of remaining capex for our committed order book, and we had financing in place for just over $1.3 billion of that. And we have in-process debt financings for just under $200 million. So between the in-process financings and the committed financings, roughly the entire remaining capex was financed.

Randall Giveans -- Jefferies -- Analyst

OK. And then you made some comments there saying about 8x net debt to CFVO, but on adjusted kind of go-forward basis, that's closer to 6.5 times net debt currently, long-term target of 5.5 times. So is that kind of when you expect distribution increases to commence once you kind of get to that long-term run rate of 5.5 times, maybe sooner, maybe later? Just trying to get a little time frame or a benchmark per se for when that distribution increases could possibly come.

Brody Speers -- Chief Financial Officer

Yeah. I think, in terms of any distribution guidance as we've guided in previous quarters, we expect to provide more details on that in the second half of this year. And I think more specifically, we can say now that that's likely to be in Q4 of this year. In terms of our target leverage and achieving that target leverage, as Mark mentioned in his prepared remarks, we are warehousing a lot of advances on newbuildings for the order book, which is temporarily increasing our leveraging.

As those vessels begin to deliver in cash flow, we expect our leverage to naturally decrease. So we think a natural delevering process is going to occur over the next two years. And we think, ultimately, we can achieve our target of around 5.5 times kind of by the end of the period where these newbuildings deliver. But we don't necessarily need to wait for that to address the distribution policy we can -- we expect to be able to do both at the same time.

Randall Giveans -- Jefferies -- Analyst

Sure. OK. And the last question. Have you seen any kind of moves? Obviously, the kind of short-term rates have gone all over the place from 80,000-plus in December, January, February down to 30,000 kind of headline range talking and now recently kind of upticking to the low 40s or so.

Have you seen any movements in the three-, five-, seven-year time charters, kind of coinciding with those?

Mark Kremin -- President and Chief Executive Officer

Not so much yet, but we've seen an extraordinary amount of moves in multi-month. Multiyear, not so much. But multi-month from the likes of GDS and BP, ExxonMobil, Cheniere, a lot of folks have done multi-month. It hasn't necessarily moved full-wage rates yet.

I think it will in a nice way in second half. But hopefully, that answers your question, not the multiyear but a lot of multi-month.

Randall Giveans -- Jefferies -- Analyst

Yeah, I'm sure a lot of people are trying to cover 2018, '19 winter and maybe another '19, '20 winter, so makes sense. Well, that's it for me. Thanks, again. Good quarter.

Operator

And we'll take our next question from Fotis Giannakoulis with Morgan Stanley.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

Yes. [Inaudible] Can you give us some details about the refinancing of the five LPG carriers and the financing of the two additional vessels that were added in the collateral package. What is the balloon of this $90 million facility?

Brody Speers -- Chief Financial Officer

Hi, Fotis. Yeah, that financing, we just closed it last week. It's a six-year financing for the seven LPG vessels you mentioned. And it's got a balloon at the end of six years of approximately $25 million.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

For all the vessels?

Brody Speers -- Chief Financial Officer

Yes. That's right.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

OK. That's. No further any other questions. Thank you.

Operator

It appears there are no further questions at this time. Mr. Mark Kremin, I'd like to turn the conference back to you for any additional or closing remarks.

Mark Kremin -- President and Chief Executive Officer

Well, thank you. I'd like to thank everyone for the support. I look forward to seeing many of you in New York City next month. And in the meantime, have a great day.

So thank you very much, and goodbye.

Operator

[Operator signoff]

Duration: 23 minutes

Call Participants:

Scott Gayton -- Vice President, Finance

Mark Kremin -- President and Chief Executive Officer

Randall Giveans -- Jefferies -- Analyst

Brody Speers -- Chief Financial Officer

Fotis Giannakoulis -- Morgan Stanley -- Analyst

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