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Teekay LNG Partners L.P. (NYSE:TGP)

Q2 2012 Earnings Call

August 10, 2012, 11:00 am ET

Executives

Scott Gayton - IR

Peter Evensen - CEO

David Wong - MLP Controller

Analysts

Paul Jacob - Raymond James

TJ Schultz - RBC Capital Markets

Jeff Lewis - Venture Publishing

Operator

Welcome to Teekay LNG Partners second quarter 2012 earnings results conference call. During the call all participants will be in a listen-only mode. Afterwards you will be invited to participate in a question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded.

Now for opening remarks and introduction, I would like to turn the call over to Mr. Peter Evensen, Teekay LNG Partners’ Chief Executive Officer. Please go ahead sir.

Scott Gayton

Before Mr. Evensen begins, I would like to direct all participants to our website at www.teekaylng.com where you will find a copy of the second quarter 2012 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 materially differ from those in the forward-looking statements is contained in the second quarter of 2012 earnings release and earnings presentation available on our website.

I will now turn the call over to Mr. Evensen to begin.

Peter Evensen

Thank you, Scott. Good morning everyone and thank you for joining us on our second quarter of 2012 investor conference call. I am joined today by Teekay Corporation’s CFO Vince Lok; Chief Strategy Officer, Kenneth Hvid and MLP Controller David Wong. This quarter’s call will be brief as we recently provided a comprehensive presentation at our mid-June Investor Day in New York.

Turning to slide number three of the presentation, I will review some recent highlights. The Partnership generated distributable cash flow of $56.8 million in the second quarter of 2012, up 51% from the same quarter last year when we generated $37.6 million of distributable cash flow. The year-over-year increase highlights the growth our fleet has experienced over the past year including the recent deliveries of our new building gas carriers and our accretive acquisition in February of this year of a 52% interest in the six mass LNG carriers.

For the second quarter, we declared and today paid a cash distribution of $0.675 per unit which is consistent with last quarter. We entered into a new three year forward start time charter for the Magellan Spirit which will commence in September 2013 upon the expiry of the vessel’s current time charter.

Importantly, this new time charter is at a day rate which is approximately 20% higher than the current charter rate. As we discussed at our Investor Day, we continue to see backward-ization in the market where medium-term charters with a forward startup being done closer to the long term charter level. In that light, we consider this picture to be strong.

Turning to slide number four, you can see that the big growth in LNG supply and therefore LNG transport will be in 2015 and beyond. There isn’t much liquefaction growth until then that does not have dedicated LNG transport.

Our customer discussions and tenders for new LNG transport are focused on moving the new LNG supply that will come online from 2015 till the end of the decade as can be seen in the graph at the bottom of the slide, with Australia expected to take the lead with approximately 80 million tons per annum by 2020, but also projects in Russia and Africa.

The ultimate demand for U.S. exports is still an unknown at this point. However, it is encouraging that there are over 100 million tons per annum of planned projects. However, it’s an open question how much of this will come online and when. If all the incremental gas does come online by 2020, we anticipate there will be a need for approximately an additional 170 LNG carriers. For this reason we are bullish on the long-term fundamentals of LNG shipping and believe Teekay LNG is well positioned to take advantage of this expected growth which will ramp beyond 2015.

Turning to slide number five, I will review our consolidated operating results for the quarter comparing an adjusted Q2 income statement against an adjusted Q1 income statement which includes the items listed in appendix say of our earnings release and reallocates realized gains and losses from derivatives to their respective income statement line item.

Net voyaged revenues decreased by $2.7 million mainly as a result of a scheduled dry docking of one of our LNG carriers during the second quarter. For the third quarter of 2012, no off hire from dry docking our schedule. Vessel operating expenses decreased slightly as a result of lower crew manning due to foreign exchange fluctuations. We expect higher vessel operating expenses next quarter due the timing of certain repairs and maintenance.

Depreciation and amortization remained relatively consistent from Q1 as expected. General and administrative expenses decreased by $600,000 due to the timing of expenses. Net interest expense increased by $1.1 million primarily due to interest expense related to the Norwegian Kroner bonds that we issued in May 2012. Equity income increased by $7.6 million primarily as a result of a full quarter of our income from our 52% interest in six LNG carriers which were acquired on February 28 as well as increase in the charter rate on the methane spirit which took effect in April.

Non-controlling interest remained relatively consistent from Q1. I won’t walk through all of Slide number six which was included in our recent earnings release however, as was communicated last quarter, with the inclusion of a full quarter’s contribution from the Maersk LNG vessels, our coverage has increased to 1.15 times from 1.03 last quarter and 0.93 one year ago.

I would also like to point out the figures in the red circle, due to the large number of ships we own jointly with our various joint venture partners, the distributable cash flow from these equity investments is increasing. However under GAAP, this cash flow is not reflected in our consolidated revenues nor the cash flow from vessel operations because their equity accounted for.

As you can see, the distributable cash flow from these equity accounted JVs has almost tripled since the second quarter of 2011, however we expect it will stabilize at approximately this level now that we have reached the run rate quarterly contribution levels from the Maersk LNG vessels.

Operator, I am now available to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Paul Jacob from Raymond James Please go ahead.

Paul Jacob - Raymond James

Just curious if you could give us some numbers on what the day rate might be on the Magellan following the re-chartering and then in terms of future re-contractings can you just update us on how that might play out over the next couple of years?

Peter Evensen

Sure due to client confidentiality we are not at liberty to say who the charterer is or what the rate is at this time. So we are happy, but I can tell you that we are happy with the rate that we've been able to achieve. So you will have to wait as it relates to that. In terms of charter rates I don't have anything coming off of charter at anytime soon. So we are in a good position I think because all of our fleet is contracted out.

Paul Jacob - Raymond James

Okay and then could you just give us an update on what you are seeing in terms of new buildings new LNG vessels in the back half of 2012 and in 2013?

Peter Evensen

Yeah so there are about 76 new buildings in order and the existing fleet is about 371. What we are seeing now is that with the softening in rates for example LNG spot prices in Asia have fallen from $18 down to below $14 over the last month and that's so with that decline we've sort of seen the oil come off on LNG rates and so they are trending down and we are seeing some options that some ship owners had for uncontracted ships that they're letting it lapse. So we expect the market to get a little bit softer as it relates to new builds.

Paul Jacob - Raymond James

Okay and that's 76 that's how through 2020?

Peter Evensen

There really isn't anything contracted out to beyond 2014 there's a couple of ships in 2015. So there aren't that many new ships coming in 2012, bulk of the ships are coming in 2013 and 2014. We don't have any there and so there's a question in the market about what rates those 2013 and 2014 ships that aren't already contracted, what rate they will receive? Obviously with the Fukushima effect, the rates were higher. They seem to be getting lower and so a lot of market participants are wondering whether rates will soften when you get that supply coming on, but TK LNG because we are all contracted out, we’re not affected by that.

Paul Jacob - Raymond James

Okay, so you don’t have any recontractings coming in 2014?

Peter Evensen

No we don’t.

Paul Jacob - Raymond James

And then, final question is, just wondering if you could quantify the magnitude of increase in the 3Q vessel OpEx that you alluded to earlier?

David Wong

Yeah, we’re looking at maybe $2 million increase relative to the current quarter.

Operator

Thank you. The next question comes from TJ Schultz from RBC Capital Markets. Please go ahead.

TJ Schultz - RBC Capital Markets

I guess from an Analyst Day, there were some indications that work on couple of FSRU projects. Can you just kind of update us on how are you viewing kind of near-term or long-term opportunities within FSRUs. I mean I understand there maybe is a chance to look at more larger new builds here, but what are some of the challenges for you or how close are you from a return hurdle perspective for some of the smaller conversions near-term?

Peter Evensen

Well, the market has actually changed. Because there isn’t that much new equity gas coming on, people are willing to wait for new buildings rather than go for conversions and so the market has changed.

We bid on numerous projects, but we haven't won any yet. So I think we're continuing to bid on requirements, but these are all in a 2015 and beyond. We think that market along with the point to point to market will experience growth, but it’s moved to being a new build. Before there was premium on getting to market quickly and so ships there were a 125,000, 145,000 cubic were preferred. Now, because the size of point-to-point LNG carries is up to 160,000 to 170,000, people want the receiving terminal to be able to take a full load and that’s why it’s moving more toward new builds.

TJ Schultz - RBC Capital Markets

I guess on the Spirit I understand you are not going to give any, David out but I guess as you went through that charter process was there anything particularly new on kind of backwardation structures since you contracted methane or do you see that narrowing at all?

Peter Evensen

Get a view that we were willing to contract out a on a forward start basis for September 2013. Now that we felt that now is a better time to enter into a contract rather than to wait a year and contract it near to when the charter would start.

Operator

Thank you. The next question comes from Jeff Lewis from Venture Publishing.

Jeff Lewis - Venture Publishing

Just a quick question regarding new LNG supplies, you note that the US is a bit of wild card moving forward, what’s your view of the Canadian LNG market and opportunities related to liquefaction projects taking shape on the west coast.

Peter Evensen

We definitely believe that the Kitimat projects which that’s the port that they will be built at the liquefaction projects. We definitely think that those projects will go through. The economics there are compelling and it’s a short transport to the biggest market which is Asia. So we are a big believer in Kitimat.

Operator

Thank you. (Operator Instructions) There are no further questions at this time, please continue.

Peter Evensen

Alright thank you all very much. We look forward to reporting back to you next quarter.

Operator

Thank you. Ladies and gentlemen this concludes the conference call for today, we thank you for your participation. You may now disconnect your lines and have a great day.

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