TGP-B Teekay LNG Partners LP

6-KfalseSeptember 30, 20202020Q3Teekay LNG Partners L.P.0001308106December 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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

  _____________________________________________________________

FORM 6-K

  _____________________________________________________________

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 under

the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2020

Commission file number 1-32479

  _____________________________________________________________ 

TEEKAY LNG PARTNERS L.P.

(Exact name of Registrant as specified in its charter)

   _____________________________________________________________

4th Floor, Belvedere Building

69 Pitts Bay Road

Hamilton, HM 08 Bermuda

(Address of principal executive office)

   _____________________________________________________________

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F  ý             Form 40-F  ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1).

Yes  ¨            No   ý

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7).

Yes  ¨            No   ý

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

REPORT ON FORM 6-K FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020

INDEX

PART I: FINANCIAL INFORMATION			PAGE
Item 1. Financial Statements (Unaudited)
Unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019			3
Unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019			4
Unaudited Consolidated Balance Sheets as at September 30, 2020 and December 31, 2019			5
Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019			6
Unaudited Consolidated Statement of Changes in Total Equity for the three and nine months ended September 30, 2020 and 2019			7
Notes to the Unaudited Consolidated Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
PART II: OTHER INFORMATION			42
SIGNATURES			43

ITEM 1 – FINANCIAL STATEMENTS

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

Related party transactions (note 10)

The accompanying notes are an integral part of the unaudited consolidated financial statements.

The accompanying notes are an integral part of the unaudited consolidated financial statements.

The accompanying notes are an integral part of the unaudited consolidated financial statements.

Supplemental cash flow information (notes 10e and 16)

The accompanying notes are an integral part of the unaudited consolidated financial statements.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. Dollars, except unit and per unit data and foreign currency exchange rates or unless otherwise indicated)

1.Basis of Presentation

The unaudited interim consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (or GAAP). These unaudited consolidated financial statements include the accounts of Teekay LNG Partners L.P. (or the Partnership), which is a limited partnership formed under the laws of the Republic of the Marshall Islands, its wholly-owned and controlled subsidiaries and any variable interest entities (or VIEs) of which it is the primary beneficiary.

Certain information and footnote disclosures required by GAAP for complete annual financial statements have been omitted and, therefore, these unaudited interim consolidated financial statements should be read in conjunction with the Partnership’s audited consolidated financial statements for the year ended December 31, 2019, which are included in the Partnership’s Annual Report on Form 20-F for the year ended December 31, 2019 filed with the U.S. Securities and Exchange Commission (or SEC) on April 9, 2020. In the opinion of management of Teekay GP L.L.C., the general partner of the Partnership (or the General Partner), these unaudited interim consolidated financial statements reflect all adjustments consisting solely of a normal recurring nature, necessary to present fairly, in all material respects, the Partnership’s consolidated financial position, results of operations, changes in total equity and cash flows for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of those for a full fiscal year. Significant intercompany balances and transactions have been eliminated upon consolidation. Certain comparative figures have been reclassified to conform to the presentation adopted in the current period relating to certain expenses reclassified from income tax expense to other expense which resulted in increases in other expense of $0.7 million and $1.4 million, and offsetting decreases in income tax expense for the three and nine months ended September 30, 2019, respectively.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. It is possible that the amounts recorded as derivative liabilities could vary by material amounts prior to their settlement.

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (or COVID-19) as a pandemic. Given the dynamic nature of these circumstances, the full extent to which the COVID-19 pandemic may have direct or indirect impact on the Partnership's business and the related financial reporting implications cannot be reasonably estimated at this time, although it could materially affect the Partnership's business, results of operations and financial condition in the future. At this time, the Partnership has not yet experienced any material negative impacts to its business, results of operations, or financial position as a result of COVID-19, other than it being a contributing factor to the write-down of six of the Partnership's multi-gas vessels during the nine months ended September 30, 2020 as described in Note 15.

2.Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (or FASB) issued Accounting Standards Update (or ASU) 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (or ASU 2016-13). ASU 2016-13 introduced a new credit loss methodology, which requires earlier recognition of potential credit losses, while also providing additional transparency about credit risk. This new credit loss methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity debt securities and other receivables at the time the financial asset is originated or acquired. The expected credit losses are subsequently adjusted each period for changes in expected lifetime credit losses. This methodology replaced multiple existing impairment methods under previous GAAP for these types of assets, which generally required that a loss be incurred before it was recognized.

The Partnership adopted this update on January 1, 2020 with a modified-retrospective approach, whereby a cumulative-effect adjustment was made to reduce partner's equity on January 1, 2020 without any retroactive application to prior periods. The Partnership's net investments in direct financing and sales-type leases, advances to equity-accounted joint ventures, guarantees of indebtedness of equity-accounted joint ventures and receivables related to non-operating lease revenue arrangements are subject to ASU 2016-13. On adoption, the Partnership decreased the carrying value of partners' equity by $50.8 million, investments in and advances, net to equity-accounted joint ventures by $40.0 million, net investments in direct financing and sales-type leases by $11.2 million and non-controlling interest by $2.5 million, and increased its other long-term liabilities by $2.1 million. The cumulative adjustment recorded on initial adoption of this update does not reflect an increase in credit risk exposure to the Partnership compared to previous periods presented.

In December 2019, the FASB issued ASU 2019-12 - Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes (or ASU 2019-12), as part of its initiative to reduce complexity in the accounting standards. The amendments in ASU 2019-12 eliminate certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences, among other changes. The guidance becomes effective for annual reporting periods beginning after December 15, 2020 and interim periods within those fiscal years with early adoption permitted, including adoption in any interim period. The Partnership is currently evaluating the effect of adopting this new guidance.

In March 2020, the FASB issued ASU 2020-04 - Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting (or ASU 2020-04). This ASU provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as the London Interbank Offered Rate (or "LIBOR"). This ASU applies only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. This ASU is effective through December 31, 2022. The Partnership is currently evaluating the effect of adopting this new guidance.

3.    Financial Instruments

a) Fair Value Measurements

For a description of how the Partnership estimates fair value and for a description of the fair value hierarchy levels, see Item 18 – Financial Statements: Note 3 to the Partnership’s audited consolidated financial statements filed with its Annual Report on Form 20-F for the year ended December 31, 2019. The following table includes the estimated fair value and carrying value of those assets and liabilities that are measured at fair value on a recurring and non-recurring basis, as well as the estimated fair value of the Partnership’s financial instruments that are not accounted for at fair value on a recurring basis.

(i)The advances to equity-accounted joint ventures together with the Partnership’s equity investments in the joint ventures form the net aggregate carrying value of the Partnership’s interests in the joint ventures in these unaudited consolidated financial statements. The fair values of the individual components of such aggregate interests are not determinable.

b) Credit Losses

The Partnership's exposure to potential credit losses under ASU 2016-13 includes its three direct financing leases, its two loans to equity-accounted joint ventures and its guarantees of its proportionate share of secured loan facilities and finance leases of five of its equity-accounted joint ventures. In addition, the Partnership's exposure to potential credit losses within its equity-accounted joint ventures under ASU 2016-13 primarily includes direct financing and sales-types leases for 18 liquefied natural gas (or LNG) carriers, one floating storage unit (or FSU) and an LNG regasification terminal within the Yamal LNG Joint Venture, the Bahrain LNG Joint Venture, the Pan Union Joint Venture, the RasGas III Joint Venture and the Angola Joint Venture. See Item 18 – Financial Statements: Note 7a to the Partnership’s audited consolidated financial statements filed with its Annual Report on Form 20-F for the year ended December 31, 2019 for a description of these equity-accounted joint ventures.

The following table includes the amortized cost basis of the Partnership’s direct interests in financing receivables and net investment in direct financing leases by class of financing receivables and by period of origination and their associated credit quality.

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. Dollars, except unit and per unit data and foreign currency exchange rates or unless otherwise indicated)

						Amortized Cost Basis by Origination Year
						Credit Quality Grade (1)						2018						2016						Prior to 2016						Total
As at September 30, 2020												$						$						$						$
Direct financing leases
Tangguh Hiri and Tangguh Sago						Performing						—						—						335,336						335,336
Bahrain Spirit						Performing						212,312						—						—						212,312
												212,312						—						335,336						547,648
Loans to equity-accounted joint ventures
Exmar LPG Joint Venture						Performing						—						—						52,266						52,266
Bahrain LNG Joint Venture						Performing						—						73,375						—						73,375
												—						73,375						52,266						125,641
												212,312						73,375						387,602						673,289

(1)The Partnership's credit quality grades are based on internal risk credit ratings whereby a credit quality grade of performing is consistent with a low likelihood of loss. The Partnership assesses the credit quality of its direct financing leases and loan to the Exmar LPG Joint Venture on whether there are no past due payments (30 days late), no concessions granted to the counterparties and whether the Partnership is aware of any other information that would indicate that there is a material increase of likelihood of loss. The same policy is applied by the equity-accounted joint ventures. The Partnership assesses the credit quality of its loan to the Bahrain LNG Joint Venture based on whether there are any past due payments from the Bahrain LNG Joint Venture’s primary customer, whether the Bahrain LNG Joint Venture has granted any concessions to its primary customer and whether the Partnership is aware of any other information that would indicate that there is a material increase of likelihood of loss. As at September 30, 2020, all direct financing and sales-type leases held by the Partnership and the Partnership’s equity-accounted joint ventures had a credit quality grade of performing.

Changes in the Partnership's allowance for credit losses for the three and nine months ended September 30, 2020 are as follows:

(1)The credit loss provision related to the lease receivable component of the net investment in direct financing and sales-type leases is based on an internal historical loss rate, as adjusted when asset specific risk characteristics of the existing lease receivables at the reporting date are not consistent with those used to measure the internal historical loss rate and as further adjusted when management expects current conditions and reasonable and supportable forecasts to differ from the conditions that existed to measure the internal historical loss rate. During the nine months ended September 30, 2020, two LNG project counterparties maintained investment grade credit ratings. As such, the internal historical loss rate used to determine the credit loss provision at both January 1, 2020 and September 30, 2020 was adjusted downwards to reflect a lower risk profile for these two LNG projects at such dates compared to the average LNG project used to determine the internal historical loss rate. In addition, the internal historical loss rate was adjusted upwards for (a) one LNG project to reflect a lower credit rating for the counterparty, including consideration of the critical infrastructure nature of assets, and (b) a second LNG project to reflect a larger potential risk of loss given potential default as the vessels servicing this project have fewer opportunities for redeployment compared to the Partnership’s other LNG carriers. The credit loss provision for the residual value component is based on a reversion methodology whereby the current estimated fair value of the vessel as depreciated to the end of the charter contract is compared to the expected carrying value, with such potential gain or loss on maturity being included in the credit loss provision in increasing magnitude on a straight-line basis the closer the contract is to its maturity. Risks related to the net investments in direct financing and sales-type leases consist of risks related to the underlying LNG projects and demand for LNG carriers at the end of the time-charter contracts. The provision for potential credit loss as at January 1, 2020 and September 30, 2020 has been developed in part based on the Partnership's understanding that LNG production is critical infrastructure.

The changes in credit loss provision for the Partnership's consolidated vessels for the three and nine months ended September 30, 2020 of $13.8 million and $14.2 million, respectively, are included in other expense and primarily reflects a decline in the estimated charter-free valuations for certain types of its LNG carriers at the end of their time-charter contract which are accounted for as direct financing and sales-type leases. These estimated future charter-free values are subject to change from period to period based on the underlying LNG shipping market fundamentals. The changes in the credit loss provision for the Partnership's consolidated vessels for the three and nine months ended September 30, 2020 do not reflect any material changes in expectations of the charterers' ability to make their time-charter hire payments as they come due compared to the beginning of such periods.

The changes in credit loss provision of $7.1 million and $15.7 million for the three and nine months ended September 30, 2020, respectively, relating to the direct financing and sales-type leases and other within the Partnership's equity-accounted joint ventures are included in equity income and reflects a decline in the estimated charter-free valuations for certain types of LNG carriers at the end of their time-charter contract which are accounted for as direct financing and sales-type leases for the three months ended September 30, 2020, combined with the initial credit loss provision recognition upon commencement of the sales-type lease for the LNG regasification terminal and associated FSU in the Bahrain LNG Joint Venture in January 2020.

(2)The determination of the credit loss provision for such loans is based on their expected duration and on an internal historical loss rate of the Partnership and its affiliates, as adjusted when asset specific risk characteristics of the existing loans at the reporting date are not consistent with those used to measure the internal historical loss rate and as further adjusted when management expects current conditions and reasonable and supportable forecasts to differ from the conditions that existed to measure the internal historical loss rate. These two loans rank behind secured debt in each equity-accounted joint venture. As such, they are similar to equity in terms of risk. The Exmar LPG Joint Venture owns and charters-in liquefied petroleum gas (or LPG) carriers with a primary focus on mid-size gas carriers. Their vessels are trading on the spot market or short-term charters. Adverse changes in the spot market for mid-size LPG carriers, as well as operating costs for such vessels, may impact the ability of the Exmar LPG Joint Venture to repay its loan to the Partnership. The Bahrain LNG Joint Venture owns an LNG receiving and regasification terminal in Bahrain. The ability of Bahrain LNG Joint Venture to repay its loan to the Partnership is primarily dependent upon the Bahrain LNG Joint Venture’s customer, a company owned by the Kingdom of Bahrain, fulfilling its obligations under the 20-year agreement, as well as the Bahrain LNG Joint Venture’s ability to operate the terminal in accordance with the agreed upon operating criteria.

(3)The determination of the credit loss provision for such guarantees was based on a probability of default and loss given default methodology. In determining the overall estimated loss from default as a percentage of the outstanding guaranteed share of secured loan facilities and finance leases, the Partnership considers current and future operational performance of the vessels securing the loan facilities and finance leases and current and future expectations of the proceeds that could be received from the sale of the vessels securing the loan facilities and finance leases in comparison to the outstanding principal amount of the loan facilities and finance leases if the Partnership was called on its guarantees. See Note 7d relating to the guarantees the Partnership provides for its equity-accounted joint ventures.

4.    Segment Reporting

The Partnership has the following reportable segments, the liquefied natural gas segment, the liquefied petroleum gas segment and the conventional tanker segment. The Partnership sold its two remaining conventional tankers, the Toledo Spirit and the Alexander Spirit, in January and October 2019, respectively.

The following tables include results for the Partnership’s segments for the periods presented in these unaudited consolidated financial statements.

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. Dollars, except unit and per unit data and foreign currency exchange rates or unless otherwise indicated)

						Three Months Ended September 30,
						2019
						Liquefied  Natural Gas Segment $						Liquefied Petroleum Gas Segment $						Conventional Tanker Segment $						Total $
Voyage revenues						137,212						10,846						1,597						149,655
Voyage recoveries (expenses)						286						(4,778)						(469)						(4,961)
Vessel operating expenses						(21,890)						(4,804)						(627)						(27,321)
Time-charter hire expenses						(5,336)						—						—						(5,336)
Depreciation and amortization						(32,249)						(1,991)						(8)						(34,248)
General and administrative expenses(i)						(4,787)						(397)						(209)						(5,393)
Write-down of vessels						—						—						(785)						(785)
Income (loss) from vessel operations						73,236						(1,124)						(501)						71,611
Equity income						20,262						1,034						—						21,296

(i)Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to each segment based on estimated use of corporate resources).

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. Dollars, except unit and per unit data and foreign currency exchange rates or unless otherwise indicated)

A reconciliation of total segment assets to total assets presented in the consolidated balance sheets is as follows:

    

						September 30, 2020						December 31, 2019
						$						$
Total assets of the liquefied natural gas segment						4,432,664						4,924,627
Total assets of the liquefied petroleum gas segment						276,831						319,695
Unallocated:
Cash and cash equivalents						201,036						160,221
Advances to affiliates						1,953						5,143
Consolidated total assets						4,912,484						5,409,686

5.    Chartered-in Vessels

a) Obligations related to Finance Leases

						September 30, 2020						December 31, 2019
						$						$
Total obligations related to finance leases						1,358,485						1,410,904
Less current portion						(71,441)						(69,982)
Long-term obligations related to finance leases						1,287,044						1,340,922

As at September 30, 2020 and December 31, 2019, the Partnership was a party to finance leases on nine LNG carriers. These nine LNG carriers were sold by the Partnership to third parties (or Lessors) and leased back under 7.5 to 15-year bareboat charter contracts ending in 2026 through 2034. At inception of these leases, the weighted-average interest rate implicit in these leases was 5.1%. The bareboat charter contracts are presented as obligations related to finance leases on the Partnership's consolidated balance sheets and have purchase obligations at the end of the lease terms.

The obligations of the Partnership under the bareboat charter contracts for the nine LNG carriers are guaranteed by the Partnership. The guarantee agreements require the Partnership to maintain minimum levels of tangible net worth and aggregate liquidity, and not to exceed a maximum amount of leverage. These covenants are the same as the Partnership's other corporate debt covenants (see Note 8). As at September 30, 2020, the Partnership was in compliance with all covenants in respect of the obligations related to its finance leases.

As at September 30, 2020, the remaining commitments related to the financial liabilities of these nine LNG carriers, including the amounts to be paid for the related purchase obligations, approximated $1.8 billion, including imputed interest of $417.7 million, repayable through 2034, as indicated below:

b) Operating Leases

The Partnership has chartered a vessel from its 52%-owned joint venture with Marubeni Corporation (or the MALT Joint Venture) on a time-charter-in contract, whereby the MALT Joint Venture provides use of the vessel to the Partnership and operates the vessel for the Partnership (see Note 10a).

As at September 30, 2020, minimum commitments to be incurred by the Partnership relating to its time-charter-in contract with the MALT Joint Venture were approximately $6.0 million (remainder of 2020), $23.7 million (2021) and $11.1 million (2022). These amounts do not include commitments relating to two vessels owned by Teekay BLT Corporation (or the Tangguh Joint Venture) which are described in Note 12b.

6.    Revenue

The Partnership’s primary source of revenue is chartering its vessels to customers. The Partnership utilizes three primary forms of contracts consisting of time-charter contracts, voyage charter contracts and bareboat charter contracts. For a description of these contracts, see Item 18 – Financial Statements: Note 6 in the Partnership’s audited consolidated financial statements filed with its Annual Report on Form 20-F for the year ended December 31, 2019.