Teekay Corp Ltd (TK) 2013 Q2 法說會逐字稿

Welcome to Teekay Corporation's second quarter 2013 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 introductions, I would like to turn the call over to Mr. Peter Evensen, Teekay's President and Chief Executive Officer. Please go ahead.

Before Mr. Evensen begins, I would like to direct all participants to our website at www.Teekay.com where you will find a copy of the second quarter 2013 presentation. Mr. Evensen and Mr. Lok 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 2013 earnings release and earnings presentation available on our website.

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

Thank you, Kent.

Good morning, everyone, and thank you for joining us today for Teekay Corporation's second quarter of 2013 earnings call. I'm joined this morning by our CFO Vince Lok and for the Q&A session we also have our Chief Strategy Officer, Kenneth Hvid, and Group Controller, Brian Fortier.

During our call today I will be walking through the second quarter 2013 earnings presentation, which can be found on our website. Beginning on slide 3 of the presentation, I will briefly review some recent highlights for Teekay Corporation and our three publicly traded daughter entities. For the second quarter, Teekay Corporation generated $184 million of total consolidated cash flow from vessel operations or CFVO. Teekay Corporation reported a consolidated adjusted net loss of $33 million or $0.47 per share for the second quarter compared to a consolidated adjusted net loss of $0.25 per share reported in the second quarter of 2012.

The increase in our adjusted net loss for the quarter is mainly attributable to lower revenues in our FPSO fleet, partially offset by contributions from strategic acquisitions and organic projects that delivered throughout the past year. And savings from the redelivery of 13 chartered and conventional tankers since the start of 2012 and other cost reduction initiatives. Unfortunately, we had anticipated and unanticipated operational issues in our FPSO fleet.

We had anticipated the ex-free of the Petrojarl 1 FPSO charter in April, and it's subsequent off-hire for the rest of the quarter, as will as the lost cash flow of approximately $9 million per quarter due to the Banff FPSO being off-hire while it undergoes repairs following damage from a December 2011 storm event. What we had not anticipated was the lower production on the Foinaven and the inability to book revenue on the Voyageur Spirit from first oil, both because of temporary operating issues.

The operational issues on the Voyageur Spirit and Foinaven FPSO units cost us approximately $0.11 per share in net income in the second quarter. Fortunately, repairs to these units are in progress, as I will discuss in more detail later in this presentation. In May and June Teekay Parent completed the sale of the Voyageur Spirit FPSO and it's 50% interest in the Cidade de Itajai FPSO to Teekay Offshore. These transactions contributed to a reduction in Teekay Parent's net debt by approximately $334 million.

Our three publicly traded daughter entities have also been executing on their respective business plans during the quarter. For the quarter ended June 30, Teekay LNG Partners declared a cash distribution of $0.675 per unit. The cash distribution received by Teekay Parent based on its GP and LP ownership interests in Teekay LNG totaled $23 million of cash flow for the quarter. Recently, Teekay LNG Partners announced some near-term growth through an agreement to acquire up to two newbuilding LNG carriers from Norway-based Awilco LNG for a net price of $155 million each.

The first ship, which is expected to deliver from DSME Shipyard in South Korea in September of this year, will be acquired by Teekay LNG and chartered back to Awilco under a fixed rate bareboat charter for a firm period of five years with an option for one additional year. At the end of the five- or six-year charter, Awilco has an obligation to purchase the vessel from Teekay LNG at a predetermined price.

In addition, Teekay LNG has offered to acquire a second ship from Awilco under identical terms to the first vessel, which is expected to be delivered in the fourth quarter of 2013 or latest early in 2014. In July Teekay LNG secured new five-year time-charter contracts commencing in 2016 for our two fuel-efficient LNG carrier newbuildings ordered in December 2012. The charters are with a subsidiary of Shaner Energy, which will be exporting LNG from their Sabine Pass LNG export facility in Louisiana.

Based on the customer reception to our newbuilding design and now success of its chartering efforts, Teekay LNG exercised options to order two more fuel-efficient 173,000 cubic meter LNG carrier newbuildings from DSME. The latest two newbuildings will also be constructed with the m-type electronically controlled gas injection or MEGI twin engines, which are expected to be significantly more fuel-efficient and have lower emission levels than engines currently being used in LNG shipping.

Teekay LNG expects to secure long-term contract employment for both vessels prior to their scheduled delivery in 2016. In connection with the exercise of these two options, Teekay LNG secured further options from DSME to order up to five additional LNG carrier newbuildings in the future. Teekay LNG needed these options, as they are experiences a strong pace of business development opportunities for both LNG transportation and floating storage and regasification, or FSRU, projects.

The partnership is currently bidding on several projects which are expected to startup in the time period beginning 2016 when new liquefaction plants are scheduled to come online. Moving to our other master limited partnership. For the quarter ended June 30, Teekay Offshore Partners declared a cash distribution of $0.5253 per unit. The cash distribution received by the Teekay Parent, based on its GP and LP ownership interest in Teekay Offshore totaled $16 million of cash flow for the quarter.

On May 2, Teekay Offshore Partners completed its accretive acquisition of the Voyageur Spirit FPSO from Teekay Parent for $540 million. On June 10, Teekay Offshore completed the accretive acquisition of a 50% interest in Cidade de Itajai FPSO from Teekay Parent for $204 million. Following first oil in February 2013, the Cidade de Itajai commenced a nine-year time-charter with Petrobras.

In May 2013 Teekay Offshore was awarded a new project with Statoil to convert the 1995 shuttle tanker, the Randgrid, to an FSO unit, which will operate on the Gina Krog oil and gas field in the North Sea under a new three-year charter contract plus 12 additional one-year extension options commencing in the first quarter of 2017.

Teekay Offshore is also currently bidding on several new offshore project opportunities, which if awarded will contribute to future distributable cash flow growth and is also involved in several customer funded front-end engineering and design or feed studies which greatly improve the partnership's potential for being awarded projects to build and operate offshore units.

For the second quarter, Teekay Tankers declared at fixed dividend of $0.03 per share. Based on its total ownership of class A and class B shares, Teekay Parent received a cash dividend of approximately $600,000. For the second quarter Teekay Tankers generated cash available for distribution, or CAD, of $0.07 per share, down from $0.10 per share in the first quarter of 2013, mainly due to lower time-charter revenues and lower average realized spot tanker rates.

In June of 2013 Teekay Tankers took delivery of a 2013 build VLCC newbuilding to its 50/50 joint venture with China-based [Wakwong] Transport Holdings. Following delivery, the vessel commenced a five-year time-charter contract to a major Chinese charter at an attractive time-charter rate. Teekay Tankers has continued to tactically manage its fleet employment profile to maintain strong fixed rate coverage through this period of tanker margin weakness.

Including the recent VLCC newbuilding charter and a new three year Aframax time-charter, fixed coverage for the next 12 months is approximately 40%. Turning to slide 4. I want to take a moment to update you on the operational start up issue we experienced with Voyageur Spirit FPSO unit in the second quarter. On April 13 the Voyageur Spirit achieved first oil and commenced production on the Huntington field in the North Sea. And following this on May 2, Teekay Offshore acquired the FPSO unit from Teekay Parent.

Under its time-charter contract the unit had a specified period from first oil to achieve full production and receive its certificate of final acceptance from the charterer, E.ON. However, due mainly to a defect in one of the FPSOs two gas compressors, the unit was unable to reach full production levels within the allowable timeframe under the contract and subsequently E.ON declared the Voyageur Spirit off-hire retroactive to first oil.

Because the Voyageur Spirit did not achieve final acceptance from E.ON as of the date of Teekay Offshore's acquisition, which was a condition of the sale contract, Teekay Parent as a seller has agreed to indemnify Teekay Offshore for revenue it would have otherwise earned had the unit not been declared off-hire, up to 10% of the initial purchase price or $54 million. Teekay Parent's indemnification will be effectively treated as a reduction in the $540 million purchase price that Teekay Offshore paid to Teekay Parent to acquire the unit.

As a result, the Voyageur Spirit indemnification will not impact Teekay Parent's operating cash flows or earnings. For the second quarter of 2013, the amount of the purchase price adjustment was approximately $12.5 million from the date of acquisition to the end of the quarter. We expect there will be another adjustment in the third quarter, as well. Note that Teekay Parent's sales price to Teekay Offshore based on discounted cash flows was approximately $75 million more than Teekay Parent's cost to acquire and upgrade the FPSO unit.

Following the completion of repairs and testing, the unit is expected to ramp up to full production by the end of August, which would result in a total indemnification amount well below the $54 million cap. It is important to note that the Voyageur Spirit FPSO has actually been producing, albeit at partial capacity, since April, and did produce volumes for oil for E.ON during the second and third quarters. Accordingly, Teekay Parent and Teekay Offshore intend to enter into commercial negotiations with E.ON to recoup a portion of losses on the contract.

Any recouped losses will be credited toward the Teekay Parent indemnification payments paid to Teekay Offshore. Turning to slide 5. I'll discuss a separate operational issue related to the Foinaven FPSO. Under the Foinaven FPSO charter contract a portion of the revenues are based on certain operational performance measures, oil production levels and average oil prices. Unfortunately, between the fourth quarter of 2012 and the second quarter of 2013, the Foinaven FPSO experienced some equipment related operating issues, which led to production being reduced to less than budgeted quarterly production levels.

In mid July, Teekay Parent and the charterer mutually agreed to shut down the unit to repair the FPSO unit's gas compression trains and the subsea system, the later of which is the responsibility of the charterer. Currently we expect the compressor train A to be repaired by mid August, allowing the Foinaven FPSO to recommence operations under the charter contract and producing up to 30,000 barrels of oil per day.

Once compressor train B is expected to be repaired by November, at which point the unit is expected to return to full production of over 40,000 barrels of oil per day. Given lower production levels in the first and second quarter and the shutdown in the third quarter to fully repair the two gas compressors trains and the subsea system, Teekay Parent is expected to generate lower quarterly charter revenue and reduced annual production tariff income, which is typically recognized in the fourth quarter of each year.

For the second quarter the Foinaven FPSO's revenue contribution was approximately $4 million less than expected due to lower production or approximately $0.06 per share. Vince will later discuss the expected impact on the third and fourth quarter revenues. I want to point out that these financial results for the Foinaven FPSO in the second and third quarters are based on a conservative assumption that we will receive no recovery amounts from the charterer for the lower production levels.

Along with the Voyageur Spirit FPSO operational start up issues, resolving the Foinaven FPSO production issues and recommencing operations at full capacity is a top priority and our FPSO operation teams have been working diligently to get the unit back into full production as soon as possible.

Turning to slide 6, we continue to make progress on our existing portfolio of growth projects. I won't cover all the projects on this slide. However, I would like to provide you with brief updates on a few of the projects shown here.

In July 2013 Teekay LNG's 50/50 LPG joint venture with Belgium-based Exmar exercised options to order an additional two medium-sized LPG carriers, bringing the total number of LPG newbuildings ordered through this joint venture to 10 vessels. This is quite a start for a joint venture that is less than a year old. These two latest newbuildings will be constructed by Hanjin Heavy Industries at their shipyard in the Philippines and are scheduled for delivery in 2017.

Construction on the Petrojarl Knarr FPSO continues to progress and the project is on time for expected delivery and field startup in mid 2014. Our finance team is currently working to secure long-term debt financing, which is progressing well and is expected to be finalized by the fourth quarter of this year.

As previously highlighted, in April the Petrojarl 1 FPSO completed its previous contract with Statoil and has since departed the [Glintna] field and is currently in lay-up. We continue to evaluate several potential redeployment opportunities for this unit, which has been redeployed on ten different fields in the North Sea since 1986.

The Teekay group also continues to add new projects, with the recently announced projects done directly at the daughter level, including the previously mentioned purchase and lease transaction with Awilco LNG and the order for the two additional MEGI LNG carrier newbuildings, as well as Teekay Offshore's Gina Krog FSO conversion project for Statoil.

Importantly, all of these projects, whether completed directly at the daughter entities or at Teekay Parent being warehoused for drop-down at inception of the contract, support the growth and distributable cash flows at Teekay Offshore and at Teekay LNG, which will translate into increased general partnership and limited partnership cash flows to Teekay Parent.

I will now turn the call over to Vince to discuss the Company's financial results.

Thanks, Peter, and good morning, everyone.

Starting with slide 7, I will review our consolidated results for the second quarter. In order to present the results on a comparative basis, as we do each quarter, we have shown an adjusted income statement for the second quarter against an adjusted income statement for the first quarter, which exclude the items listed in appendix A to our release.

As we did in the first quarter, we have removed the pre-ownership activity of the Voyageur Spirit FPSO, which is treated as a variable interest entity for accounting purposes until the unit was acquired from [Savon] on May 2. Later on I will also provide our outlook for the third quarter. Starting at the top of the page, net revenues decreased by $21 million, most of which related to the FPSO fleet. $10 million of this decrease was from a Petrojarl 1 FPSO since its charter contract expired in April of 2013.

Revenues from the Foinaven FPSO declined due to the lower oil production, as discussed earlier, and due to other revenue adjustments. The Hummingbird FPSO revenue declined due to feed study revenues included in the first quarter, as well as a reduction in the amortization of non-cash revenues. These decreases were partially offset by OpEx recovery of revenue from the Voyageur Spirit FPSO, which we will continue to receive even during the period when the unit is considered off-hire.

As Peter mentioned, the indemnification to Teekay Offshore for the loss of the Voyageur Spirit revenues did not have any effect on our consolidated income or our operating cash flows. However, the off-hire of the Voyageur Spirit did result in a $12.5 million reduction of external revenues during the second quarter. We are in negotiations with the charterer to recover some of the lost revenue in respect of the production that was achieved, which, if recovered, would be reflected as revenue in the period an agreement is reached with the charterer and this is the same with the Foinaven FPSO.

Vessel operating expenses increased by $8 million, primarily from the Voyageur Spirit FPSO during its operating period and increased maintenance activities on various vessels. Time charter hire expense was consistent with the prior quarter. Depreciation and amortization increased by $6 million, due mainly to the Voyager FPSO and the delivery of the two BG shuttle tanker newbuildings.

G&A expenses decreased by approximately $5 million, mainly due to the timing of recognition of short-term and long-term incentive compensation expenses, which are typically higher in the first quarter of each year. The lower G&A figure also reflects the cost reduction initiatives we have implemented over the past year. Interest expense increased by approximately $5 million, mainly due to new debt facilities relating to the Voyageur Spirit and the two BG shuttle tanker newbuildings.

Equity income increased by approximately $8 million, due to a full quarter's income from the Exmar LPG joint venture, which was acquired in mid February, and higher equity income from the Itajai FPSO, which commenced operation also in February of this year. Income tax expense was consistent with the prior quarter. Non-controlling interest expense decreased to $30 million, mainly as a result of lower adjusted earnings in Teekay Offshore and Teekay Tankers.

Looking at the bottom line, adjusted net loss was $0.47 per share in the second quarter, down from the previous quarter's adjusted net loss of $0.17 per share, primarily due to the lower revenues and higher operating expenses in our FPSO segment. We estimate that the operational issues relating to the Voyageur and Foinaven FPSO resulted in a net loss of approximately $0.11 per share in the second quarter, which if excluded would have resulted in an adjusted net loss of $0.36 per share in Q2.

Turning to slide 8, we have provided some guidance on our consolidated financial results for the third quarter of 2013. We expect revenues from the fixed rate fleet to increase in the third quarter as a result of the following; $8 million from the Voyageur Spirit, assuming it achieves final acceptance by the end of August; $8 million from the BG shuttle tanker newbuilding deliveries; and $4 million from fewer dry docking days in the gas leak in Q3.

These increases are offset by the following expected decreases; $9 million from the Petrojarl 1 FPSO completing its charter during middle of Q2; $8 million from the shuttle tanker charter expirations and dry dockings; $3 million from fixed rate conventional tanker charter expirations and dry dockings; and $3 million from lower interest income on the VLCC term loans. We expect revenue from the Foinaven FPSO to remain consistent with Q2, as a reduction in the production during the early Q3 shutdown is expected to be offset by higher production during the post- shutdown period later in Q3.

Spot revenue days are expected to remain consistent with Q2, as vessels redelivering from our fixed rate fleet are offset by increased dry docking activity in our spot fleet and re-deliveries of chartered end vessels. So far in Q3, we have fixed approximately 45% of our Aframax and Suezmax spot revenue days at average TC rates of $14,000 per day and $10,600 per day respectively. Vessel operating expenses are expected to increase by approximately $4.5 million due to repairs on the gas compressor and other maintenance on the Foinaven FPSO; $4 million for increased maintenance activities in the rest of the offshore fleets; and $1.5 million as a result of the BG shuttle tanker newbuilding deliveries. These increases are expected to be partially offset by a reduction of approximately $3.5 million from the Petrojarl 1 FPSO.

Time-charter hire expense is expected to decrease by approximately $1 million, reflecting lower spot in-chartering in the shuttle fleet and the redelivery of one conventional tanker in Q3. Depreciation and amortization is expected to increase by $2 million, due primarily to the Voyageur Spirit and the BG shuttle tanker deliveries. We expect G&A to be approximately $34 million in Q3, which was similar to Q2.

Net interest expense is expected to increase by $1 million, due to the BG shuttle tanker deliveries. Equity income is expected to be approximately $27 million in Q3. Income tax expense remains at approximately $2 million. Non-controlling interest expense is expected to be in the range of $27 million to $29 million, primarily as a result of lower expected earnings in Teekay Offshore and Teekay Tankers. So, in summary, the third quarter results are expected to be weaker than the second quarter for the reasons discussed above.

However, we are anticipating a much stronger fourth quarter due to an expected full quarter of -- revenue from the Voyageur Spirit FPSO; higher expected production on the Foinaven FPSO, including the recognition of annual production incentives; additional contribution from the BG shuttle tanker newbuildings; and a lighter dry docking schedule in the fourth quarter.

With that I will turn the call back to Peter to conclude.

Thank you, Vince.

Turning to slide 9, despite the temporary FPSO operational issues experienced in the second and third quarter to date, Teekay Corporation's strategy remains on course. Our FPSO operation teams continue to work diligently to bring the Voyageur Spirit and Foinaven FPSO units back to full production levels and recommence operations under their respective contracts. And the current operational issues are expected to be resolved fully during the second half of 2013.

We're also still on track for the Banff FPSO to return to the Banff field and restart production later in the fourth quarter. With the drop-down of the Voyageur Spirit FPSO and the Cidade de Itajai FPSO to Teekay Offshore completed and the continuing progress on the construction of the Petrojarl Knarr FPSO, Teekay Parent remains on track to further deleverage its balance sheet in the coming quarters. Finally, we continue to bid for and secure accretive acquisitions and organic growth opportunities directly at the daughter level without the need for Teekay Parent's balance sheet.

Successful projects at our daughter entities will contribute to future growth in Teekay Parent's cash flows, as a result of its general partner and limited partnership and interest in these entities, especially with the incentive distribution rights of our GP interest in Teekay Offshore and Teekay LNG, both now in the 50% high splits.

Thank you for joining us on the call today and, operator, we're now ready to take questions.

(Operator Instructions)

Michael Webber with Wells Fargo Securities.

Good morning, guys. How are you?

Find.

You did a pretty thorough job in covering the downtime for the FPSOs and it seems like they are a bit compounded by the fact that it happened on top of a drop-down. I'm just curious Peter, is it that maybe the thought process and the structure around disclosing the downtime on the Voyageur considering that it was down prior to the sale to TOO. Maybe just some conversation there.

It actually wasn't down previous to its drop-down to TOO. As I said in my prepared remarks, it commenced first oil in April. It was dropped down in May and we only received a notice from E.ON in -- at the beginning of July.

Okay.

So, unfortunately, if not reduced in commercial negotiations, it goes back retroactively to April. So that is the time stamp.

No, I just saw that it was just the dates that overlapped. Your notification was post dropped. Kind of along those lines, you've got four FPSOs now that are either down or not at full strength and they all seem to be shorter-term issues. But, does that color your view in terms of the kind of EBITDA concentration that you've got at the Knarr and at the Voyageur in terms of the JV partners, the revenue insurance and maybe just some conversation there.

Well, we probably, given the size of Petrojarl Knarr, we probably will take out loss of hire insurance. That's a decision we had already made. But I think we're -- what we have found is that its easier to be with a contract that you've started from inception. When you take over FPSO midway, that always has certain issues that come up. We haven't got a full root cause analysis, but I would say that has complicated things.

All right, that's helpful. Just one more for me, I'll turn it over. You mentioned at the end of your prepared remarks talking around new business and doing them directly at the daughters. I think, as of the last quarter, there's about $2.7 billion in new offshore projects you guys were looking at to some degree. Can you maybe talk to where that figure is and then just reiterate your conviction level around those being done directly at the daughter and not the Parent.

Our plan is for all the projects to be done down at the daughter level. And that remains what we are doing. I think the best indication is the three FPSO feed studies that we are doing, as well as the new feed study we are doing for the Remora unit. The technology that we are doing. It is always hard to gauge the timing of when the awards get put together. With the exception of losing one FSO unit, we have not so far lost on any of our FPSO opportunities. So, those are still in process.

And then I think the timing on those was for sometime mid to late 2013 in terms of some sort of resolution. Is that still the case or are they dragging on.

That is still the case. So, we were bidding on two FSO projects, we won one of them. Actually, sorry, we bid on three FSO projects and we won two of them. I was only thinking of the North Sea ones. I am looking at our head of FSOs here. He reminded me of that. So, I feel good about our hit rate or win rate, whatever you want to talk about as it relates to that. So, I am feeling good about that.

Okay, good. Thanks for the time, I appreciate it, Peter.

Thank you.

Justin Yagerman with Deutsche Bank.

Hey, good morning, guys.

Good morning.

Wanted to just touch on the VLCC launch for a second here. It looks like there was a small write-down on those values. Was that just asset value driven or is there anything going on with second lien lenders complicating issues or anything else going on there?

Hi Justin. The total loss provision on the VLCC loans was about $7 million for the second quarter. About $4.5 million of that is in Teekay Tankers and the rest is at the Parent. It is basically an accounting loss provision based on our expected cash flows and recovery from the security of those loans, which are the three VLCCs. That provision could actually move up and down depending on any changes to our expected cash flows. Just also I wanted to point out that, that provision was taken after we had accrued the second quarter interest income for the Teekay Tankers loans. So, our principal remains intact. So, the provision effectively is taking a provision on the accrued interest not received to date.

Okay, that makes sense. Moving on to the various different LNG projects that are out there. Was curious, it looks like Golar recently won a FSRU project and I just wanted to get a little bit of color on what the competitive nature of that environment is like right now. I know that there aren't too many projects, but there also aren't too many folks out there who are bidding on those projects. So, wanted to get a sense of how you guys feel those tenders or bids are going.

First of all, we always look and see which projects meet our requirements. For example, I think its good color one Jordan and Kuwait, but we did not bid on them. And so we are bidding, as I said in my prepared remarks, on FSRU projects and we encounter some of the usual suspects. But not everybody bids on all the projects. And once again, having a early time or being part of the engineering and realizing what advantage you have comes in -- gives you an advantage and makes you go toward some projects and not toward other projects. We haven't won one yet and we possibly been more conservative -- I would definitely say we have been more conservative than other people, but, again, I'm fully convinced that we will get some FSRUs.

Part of our conservatism was that we didn't jump in with both feet. We waited for the design unit that we think is going to stabilize and that is the 170,000 class. And, so, we're quite comfortable having those units be FSRUs. And that is what we have seen in the FSRUs, as will as the LNGs, which is that the size component went up and people are asking for this cubic that can go through the Panama Canal. That is true with FSRUs, because if you have an undersized FSRU and you come in with 170,000 cubic, you will have to stay on station a little longer and time is money. So, that's a little bit more color on how we see the market.

That is really helpful, thanks. Moving on to something a little more conceptual and maybe just using the [Channel] LNGs as an example. With these projects as all the different pieces have to come together, the asset, the contracts and the project itself. How does it work if Channel is not able to produce on time, yet you guys take delivery of the asset. Is there anything from a contingency standpoint that can disrupt how that contract comes on to cover you guys from an asset return standpoint.

I think it all depends on the nature of why you have an interruption. We have seen, for example, with our Angola LNG that we delivered the vessels and it has taken over two years for the Angola LNG transportation or the Angola LNG liquefaction to come on line. We've continued to be paid during those two years and Angola LNG you did not need the vessels, sub chartered them to other operators. And I would expect the same thing to happen. In fact, for the 10 years we have been in the LNG market every single liquefaction project has been on-time. What I think is great about the Channel project is it is actually coming in ahead of schedule and that has been confirmed by other people who have volumes there. They are actually showing an earlier start up and maybe that is because of where they are building it. And the fact that it is a brownfield start rather than a greenfield start.

Lastly, I will turn it over to somebody else, just another kind of conceptual question. When you guys look out over the next couple of years, do you have a soft deadline for having everything dropped out of Teekay Parent and down to the daughters? And then as a tag-on to that, is there -- I know you just said to Mike that there basically is any project you are looking to do it is to do at the daughter level, but is there a price tag at which you guys feel like Teekay Parent is going to have to step in? So, you get three FSRUs at once and all of a sudden it is too much for one day, and that is an arbitrary number, but is there a price tag that the Parent then needs to step in and help out the daughters?

You're talking conceptually. On the one hand, you worry about the fact that you won't get projects and then you're saying what happens if you get too many projects.

Of course.

You can either be too fat or too thin. But the fact of the matter is that we actually have another way that we go when we have too many projects is we usually invite in other joint venture partners. And we did that when we were acquiring Sevon and Maersk LNG, we sold half of it or invited Marubeni to take half of that. And I think we would do the same thing if we had too many projects that were at the daughter Company level. Rather than have them up at Teekay Corporation, we would invite in other partners, who by the way, we get a lot of reverse inquiry from. So, that's our plan. But I want to emphasize we don't feel that we have too many.

Okay. And then the soft deadline for Teekay Parent to be clean from a project standpoint.

Sure. We look at each asset and as Teekay Corporation we will sell the asset for what it is worth. So, we're optimizing each one of these assets. For example, the Petrojarl 1, we want to get a contract for. The Petrojarl Banff we will turn on a better contract in 2015 and the Hummingbird Spirit, as we get a longer contract then we think it will fit better inside of Teekay Offshore. We're optimizing the assets so that the value that we create up at Teekay Corporation is the maximum, rather than just saying here is an arbitrary timeline and cost being, as I like to tell everybody, a dollar is a dollar is a dollar.

Fair enough. Thanks for the time, we really appreciate it.

Thank you.

Brandon Oglenski with Barclays.

Good morning, Keith Mori on for Brandon. Just wanted to follow-up on the operational issues that have been going on the past two quarters with the two FPSOs. Are you guys putting any risk mitigants in place on the operations side to address these types of events earlier?

Ultimately, we well of course conduct an investigation so that we can make sure our processes are better going forward. As I said in my remarks, we -- unfortunately, there isn't like one cause and the causes we have had in the Foinaven are different from the causes that we have had on the Voyageur. But near term, our focus is on getting things back to production. But certainly medium term, we will be looking at are there things we can do better. That is just the natural course of our continuous self-improvement.

That is helpful. Going back to Justin's questions around the drop-down schedule, understand that you don't want to maybe commit to a pipeline per se, but going back to your Analyst Day and prior quarters you had mentioned that you would like to be run rate profitable at the Parent level sometime this year, I believe. How do these two FPSOs being impacted and the Foinaven for the fourth quarter the tariff not being as high kind of impacting your outlook on that end? And can you give us some time (multiple speakers)?

First of all, the drop downs are not affecting our ability to get run rate profitable by this year. But I would have to say that the revenue shortfalls we have experienced on the Voyageur Spirit and the Foinaven, as well as the premature termination of the Petrojarl 1 is going to mean that we will have to delay the run rate profitability into 2014.

That's helpful. And one last one for me, I'm looking at the some of the parts valuation in your appendix and about $45 a share and it's relatively similar to what was presented at the Analyst Day about 12 months ago. When you look across your business segments, is there any particular ones that you think can -- you can drive extra value from and drive a higher sum of the parts value from your end? Maybe if you could just speak to that.

I think you hit the nail on the head. We have to execute better. We did not execute well in our FPSO operations. And that has cost us money. My focus actually isn't on gaining new projects. I can already see that our net asset value per share is going to go up as we redeliver some of these units and get like Petrojarl Knarr coming in 2014. So, I can already see the run rate of this projects that I talked about increasing our net asset value per share. That isn't what worries me.

I'm focused in on the near-term execution right now. But we are getting new FPSOs, particularly the Knarr coming in. We will get back the Banff and so those operational issues I think are important. Not only to increase the net asset value per share, but to turn us to profitability, which is part of our strategy to close the sum of the parts gap.

Thank you very much, guys, I will pass it along.

Thank you.

Fotis Giannakoulis with Morgan Stanley.

Good morning and thank you. A couple of more questions about the two FPSOs. You mentioned that they are going come back to operation pretty soon. I just want to make sure that how to model future revenues. Are we still expect something like $70 million for the Voyageur Spirit in terms of EBITDA and another $40 for Foinaven? Also, are there any risks of seeing any contract renegotiation because of these operation issues?

Hi, Fotis. First of all on your questions about the impact on the EBITDA. The Voyageur EBITDA is roughly, the foregone amount is roughly about $6.5 million per month. As we mentioned in the second quarter, that amount was about $12.5 million. If we get back into full production by the end of August then it's probably another $12.5 million. That will be a reduction of about 25 for this year. On the Foinaven, obviously, it's a little hard to estimate that because the revenue, as you know, is based on production partly and oil prices and all that. But clearly given this incident, it is coming in below our budget. But if you were to compare it actually to last year's revenues, it is actually slightly even higher than last year's given that last year's production was also relatively low. Not a big change from last year on the Foinaven.

And can you comment if there are any risks of being forced to renegotiate the levels of the contracts?

We don't see that.

Okay, thank you. I want to go a little bit on the tanker side. You have still a number of tankers chartering right now. If I count correctly around 13 to 15 vessels. What is the plan for these vessels? Is the plan to let the contracts rollover and transfer the entire tanker business to TNK?

First of all we don't have 13 to 15. In the appendix we outlined that we have eight that are in charter. So, that continues to reduce and in fact, we have three rolling off at the end of this year. And so we are -- that continues to be a legacy business that we are getting out of up at Teekay Parent. And in addition we have the four [bo-highs] that we own upstairs and at the appropriate time we will sell them, but as we have said and as Bruce Chan will talk about at the Teekay Tankers call, we continue to see the tanker market having a better future. And so now is not the time to sell some of our modern Suezmaxes. Again, I am in the business of maximizing all the dollars that we can get upstairs. And so now isn't the time to sell those vessels.

Thank you, Peter, very clear. I want to move on the LNG space and you mentioned earlier the newly ordered vessels, they can enjoy certain efficiencies in terms of fuel consumption, compared even to existing modern vessels. Can you give us a little bit more color and compare what would be the effective time-charter rate differential between the new building vessels and existing vessels?

I don't think for competitor reasons I'm going to get drawn on that, but I can say that what happens is that our ships get preferred. So, although we ordered them in December, we get preferred as being a better ship both because of the propulsion. In other words, it is a simpler engine and it has lower OpEx, as well as the size that we have. So, it's actually the whole vessel design, not just the engine. People focus in on the engine because everybody is hot on eco-ships and of course that saves money, but the big thing is you can save money by being able to take a bigger lot. 173,000 versus 155,000 or 160,000. And so these are preferred for going through the Panama Canal. It is the biggest that can go through the Panama Canal. So, that's -- those are, as we like to say, take us to the head of the line. But we are not going to get drawn on what is happening because we are bidding them right now against TFD and DFD vessels. I am sorry, Fotis, I can't give you better color than that.

I understand and thank you. Can you also please comment on the state of the LNG shipping market? We would expect that the spot rates will drop below $100,000 given the number of new buildings that they are coming this few months. Spot rates have stayed strong. How long do you think that they will stay at such a high premium compared to long-term rates? And the fact that you ordered two more vessels, does this mean that you have become a little bit more optimistic about the LNG market.

I think it's a function of a few things. First of all, we are sold out. We don't have any ships for the next three years. We don't have any open ships. We don't have a ship open until 2015. It is rather an academic discussion on our side. But as I have said previously, we like the idea that LNG is going to take off in post 2016, because you actually need more gas to come on and that is more liquefaction plants coming on. So, when we placed our order we strategically placed it for 2016 and to get the timing right.

Obviously, there is about 29 ships that are sitting without contracts and as you pointed out, they are going to be coming starting later this year and into 2014. And so ultimately, we will compete against those in a 2016 timeframe. I like our chances with bigger ships that are less thirsty, in other words more fuel friendly. And, so, that is what we are looking at. And we have been consistent with that. We have been consistent with that.

The other thing I would just add, if you want some color on today's market, is you also have to look at the utilization. What we have seen is that some -- it cost a lot to have a vessel that you keep cold. And so some people have elected to put those in warm lay-up and therefore it cost a lot of money to bring them out. And that's why you also see some inherent tightness, because some of the older ships have actually just gone into lay-up and it takes a lot to get them out. They are not going to come out for one voyage. So, that is what we are seeing on that market.

But we're focused in not on the spot market, we are focused in on the charter market. And we're seeing lots of people who want our ships in a 2016, 2017 timeframe. So, we feel good about where our ships are delivering. We were happy about the deal we did with Awilco that had two open ships. We think that's the right kind of deal for us. But it ends up with us having a fixed rate charter. It also gives us the opportunity to cooperate with the Awilco LNG if there is some near-term charter opportunities. I hate not to have a ship, if there's an opportunity. I always like to give a customer an opportunity and our deal with Awilco does do that without giving us the financial exposure.

Thank you, Peter. One more question about the FSRU market. We saw very recently that you started a Corporation, a joint venture on the LPG side sector that you are not so much involved. Do you feel that on the FSRU side you have the operational capabilities to grow and win a number of contracts that they might come available the next few years or you believe that you might try to strengthen your expertise with some additional JVs.

Those are two different things. One you're talking about Exmar LPG, then you are asking about the FSRUs. (multiple speakers) We own 50% of a FSRU in another joint venture we have with Exmar. We are already getting a lot of experience. Although Exmar operates it, we get a lot of experience on the operation of FSRUs. But given the talent that we have on land and our engineers and their past experience with FSRU both building and operations, we have the manuals, we have the knowledge in order to do it. And that is acknowledged by the bids that we are working on, that we have that. And we have continued to work with the yards on the new designs for FSRUs and in the usual TK way, we are taking a conservative way of looking at it and testing our designs with customers rather than just ordering it going forward. I am happy with our position. And I think it will result in FSRU contracts, most probably by the end of this year.

Thank you very much, Peter.

Thank you.

T.J. Schultz with RBC Capital Markets.

The timeline on the obligation for the Foinaven for offer to TOO I think is into July of '14. Just any update on the ability to effect the transfer prior to that timeframe or how some of these recent issues have impacted that process.

I would say the recent impact has meant that the total focus that we have both with the charter and internally is to get the Foinaven backup and operating. And clearly we don't want to offer it for sale unless it's at full production going forward. There isn't a buyer who wants to buy something that has uncertain cash flows. Even before that, we were waiting approval from the charterer to allow the sale, so we have had to extend it by one year, but clearly TOO was going to do their numbers and they want to make sure that is it back to full production and that the charterer is happy with what is going on. And as we said, the charterer is also doing some work on the sub-sea. So, I anticipate when it gets back to full production we will return to our ultimate goal, which is to have -- which is drop the Foinaven FPSO down to TK Offshore.

Petrojarl 1, you have a pretty broad window for expectation on redeployment. Just any information on how that process is going and the potential to redeploy sometime this year.

Yes, and the reason is has a long redeployment period is because we're looking at numerous opportunities. There are some opportunities where we don't have to do any upgrade work. Where we could just go down and hook up and really use the unit as more of an early well test unit. That way we would get it employed earlier, like Q4 2013 as opposed to other projects we are looking at which would necessitate going into the yard and doing some upgrades on the topsides as well as on the hull, because it would go onto a longer contract. In that case it would have a longer yard stay. So that is why you see anywhere from Q4 2013 to first-half 2014 that we are looking at it. But we do have numerous opportunities that we are looking at, as well as people who are interested in buying it. We are going down multiple avenues.

Okay, thanks. Just lastly the commentary that the GP cash flows continue to become more meaningful. Certainly, growth in MLP distributions and focus. So, with that and given some of the Voyageur issues, is it still your plan for at least another 2.5% increase on TOO distributions later this year?

Yes, it is. And in addition we added some accretive growth at TGP with the Awilco sale lease back. We just don't know if it is one or two vessels. So, we haven't changed course on that.

Thanks.

Thank you

(Operator Instructions)

Will Frohnhoefer with BTIG

Things for taking the call.

Hi.

Just a couple questions to follow-up on the LNG tankers on TGP option exercises. Would it be fair to say that using the MEGI technology here that the goal probably of most of the new entrants into the export market being largely in the Gulf are going to want to optimize vessels for the Asian trade, for the Pacific Rim trade and therefore fuel-efficiency is going to be a more important focus going forward than it certainly has been

Yes. Fuel-efficiency and to take the maximum cargo through the Panama Canal, which is the 173,000 that we have ordered. It is both.

Okay, that is fair. And there is another factor as well, most of these new entrants are also operators that use to have import facilities and they built docking facilities more for the 155,000 size vessel, so have a vessel that size is optimal for them in terms of their goal in the market they want to appeal to, at the same time still being the proper size for their existing docking facilities that were built close to a decade ago in many cases.

Actually, that is not true that they were optimized out there. The US import facilities, for example, were sized up to take up to Q flex and Q max, which were 210,000 and some could go all the way to 250,000 cubic. Like for instance the Exxon Qatar plant that it is. So, actually the sizing to go from 155 to 173 isn't an issue as it relates to the ports.

Excellent. And then I guess along the same kind of further lines, when we are talking about the take rate in the larger market and what's it look like in 2016, 2017. Now you guys said you are not looking to exploit this bottom market you're looking to do charter business. I guess the spot risk then would probably shift to the exporters themselves where they would charter those vessels out to exploit the excess capacity of their own facilities and they would enter the spot market and take that risk while you guys would simply service them. Is that kind of the plan?

I'm not sure I understood the question. I'm sorry.

If I'm one of these export projects and I want to go out and use the excess capacity that I have over and above my existing long-term contracts to go out into the spot market and market it, I would probably want to have a vessel chartered out that I could use for that purpose when those opportunities for marketing present themselves. So, I am wondering if that's kind of the -- you getting that interest or those contracts or discussions from exporters.

No, and the reason is it takes a while to debottlenecking a liquefaction plant. When you're starting with a liquefaction plant you want some day revenues, so you enter into contracts either to sell it yourself or to have some of the normal players buy your volumes, up to a contracted amount, whether it is 90%, 95%, or 100%. And then you look to debottleneck. But that debottlenecking, which gives you up an extra cargo, that's very spot oriented. And so that's nothing that you would probably take and look to charter a ship against, because by the time you get the cargo, the ship is not in the right place. We see that as a spot market. We are fully fine with the fact that there will be a spot market for LNG that continues to grow every year. But we are focused in on the US exports.

I would also say we're focused in on the Australian export. Those are also coming on. It isn't just about the US. I know we're talking here in North America, but there's other liquefaction plants that are coming in and being planned and some of the projects that we are looking at for charter revolve around other areas of the world.

Speaking of which, how about in your neck of the woods in the British Columbia area?

Well, absolutely. We're having on the West Coast of Canada, we definitely see that. And Kinemat is one of the places that is ground zero as it relates to that. But those volumes aren't going to come in a 2016/2017. There we're looking 2018 to 2020.

Fair enough.

The great part about our business is we have a chance to look forward to it. But we monitor a whole bunch of projects from Russia to Australia to Canada and we are monitoring what their transportation requirements will be. As well as, for example, Exxon with their plants in Papua, New Guinea.

And then I guess just one follow-up on the issues with the gas compressors. You said there was two really different issues for the two different vessels for the Spirit and for Foinaven. I am wondering if the issues with the compressors were due more to external factors, like subsea or resource quality, and less to do with the equipment itself and is there a common manufacturer of the equipment running through this as a thread or any further color there?

I don't really want to give too much color on that. I would just say that you have one FPSO that you are bringing through a commissioning phase, so you have brand-new equipment that you are bringing through. On the other hand, on the Foinaven, we have a unit that has been operating for many years and so you are looking at compressors that have been proven with themselves. And so they are unrelated issues. Unfortunately, they are both gas compression issues. But it is wrong to draw a common thread between them.

Thank you, that's all I have for now.

Thanks.

There are no further questions at this time. Please continue.

All right, thank you all very much. As I said it was a tough quarter operationally and we look forward to reporting better news next quarter. Thank you.

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