Teekay Offshore Partners L.P. (TOO)

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Teekay Offshore Partners L.P. (TOO)

Q2 2008 Earnings Call Transcript

August 8, 2008 12:00 pm ET


Kent Alekson – IR

Peter Evensen – CEO

Vince Lok – CFO


Darren Horowitz – Raymond James

Stephen Williams – Simmons & Co.

Ron Londe – Wachovia

George Dess – Private Investor



Ladies and gentlemen, thank you for standing by. Welcome to Teekay Offshore first [ph] quarter 2008 earnings release 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, Chief Executive Officer of Teekay Offshore GP. Please go ahead sir.

Kent Alekson

Before Mr. Evensen begins, I would like to direct all participants to our web site at www.teekayoffshore.com where you will find a copy of the second quarter 2008 earnings release. Please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from those projected by those forward-looking statements as a result of various important factors. Additional information concerning these factors is contained in our earnings release available on our web site. I will now turn the call over to Mr. Evensen to begin.

Peter Evensen

Thank you, Kent. Good morning, ladies and gentlemen, and thank you for joining us for our second quarter earnings call. This morning I am joined by Teekay Corporation’s CFO, Vince Lok and its Corporate Controller, Brian Fortier [ph], who are online from Vancouver.

As we did in the prior quarter, I’d like to focus today’s call on the high level results of the second quarter and the strategic opportunities for the partnerships rather than having a detailed discussions of financials results, which is also already provided in our earnings release. As a result, we have not prepared a slide presentation; however, we’re more than happy to take any financial or strategic questions as part of the Q&A.

Before I begin, I would like to note that we have determined that we will need to restate our historical financial results to adjust our accounting for certain derivatives under hedge accounting rules, and the results presented in our Q2 earnings release do not reflect these adjustments and should be considered preliminary. I will discuss this issue in more detail at the end of the call, but I should note that the restatements are all non-cash adjustments and therefore, they do not or will not affect the partnership’s distributable cash flow, liquidity or partner’s equity.

The second quarter results for Teekay Offshore were very strong. During the second quarter, we generated $10.5 million of distributable cash flow, which is up 54% from the previous quarter. This increase was mainly due to very high fleet utilization in our shuttle tanker fleet as well as the partial benefit from the acquisition of the 25% interest in OPCO on June 18.

We were also starting to see an upward weight trend for shuttle tanker illustrated by recent renewals of certain smaller contracts. We declared a cash distribution of $0.40 per unit, which is payable on August 14 to all unit holders of record on August 7. Excluding the cash distribution related to the units issued in our follow-on offering on June 18, our coverage ratio for the quarter was a very healthy 1.20 times.

As I referred to earlier on June 18, the Partnership acquired an additional 25% interest in Teekay Offshore Operating L.P. also known as OPCO from the parent of our general partner Teekay Corporation. Concurrently OPCO acquired two Aframax lightering vessels from Teekay Corporation. We now own 51% of OPCO, while Teekay Corporation owns the remaining 49%.

As a result of these acquisitions, we intend to recommend a 12% to 15% distribution increase to our board of directors, which will be effective for the third quarter distribution to be paid in November. On July 9, Teekay Corporation completed the acquisition of the remaining 35% of Teekay Petrojarl that it didn’t already own. Based on pre-existing agreements, Teekay is now obligated to offer us Teekay Petrojarl's existing FPSO’s that have a remaining contract term greater than three years within a year of acquisition. We are very excited about the potential distribution growth that would come with these FPSO dropdown opportunities and to become involved directly in FPSOs.

I’d like to take a few minutes to discuss our plans to restate our financial results from 2006 through to the end of the second quarter of 2008. During the process of finalizing our second quarter results, it was determined that certain of our derivative instruments did not technically qualify for hedge accounting treatment under SFAS 133, the accounting standard for Derivative Instruments and Hedging Activities.

These Derivative Instruments were used to hedge our interest rate risks and to-date have been accounted for as hedges. Accounting for Hedging Activities is an extremely complex area. In excess of a hundred implementation guidelines have been issued in addition to the SFAS 133 standard. We recently discovered that the hedge documentation we prepared relating to certain of our derivatives did not meet all of the strict technical requirements of SFAS 133.

Accordingly, we will have to restate our financial results to recognize the change in the fair value of such derivatives through the income statement rather than as a component of accumulated other comprehensive income, which is a component of partner’s equity on our balance sheet. Therefore, the restatement will result in greater fluctuations in reported net income, but will not have an impact on our distributable cash flow, our liquidity or total partner’s equity.

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