Welcome to Teekay Corporation's Second Quarter 2014 Earnings Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Now for opening remarks and introductions, I would like to turn the call over to Mr. Peter Evensen, Teekay's President and Chief Executive Officer. Please go ahead, sir.

Before Mr. Evensen begins, I'd like to direct all participants to our website at www.teekay.com, where you will find a copy of the second quarter 2014 earnings 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 2014 earnings release and earnings presentation available on our website. I will now turn the call over to Mr. Evensen to begin.

Thank you, Ryan. Good morning, everyone, and thank you for joining us today for Teekay Corporation's Second Quarter 2014 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 our Group Controller, Brian Fortier. During our call today, we will be taking you through the 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. For the second quarter of 2014, Teekay Corporation generated $224 million of total consolidated cash flow from vessel operations or CFVO, an increase of 22% from the same period of prior year. Teekay Corporation reported a consolidated adjusted net loss of $20.1 million or $0.28 per share for the second quarter compared to a consolidated adjusted net loss of $33.3 million or $0.47 per share in the same period of the prior year. The decrease in our second quarter adjusted net loss is mainly due to contributions from acquisitions and organic growth projects that delivered during the past year, stronger spot tanker rates and savings as a result of the redelivery of several charter and conventional tankers since the first quarter of 2013, partially offset by lower revenues from our FPSO fleet due to the Petrojarl 1 FPSO coming off its previous contract in April of 2013. In late June of 2014, construction on the Petrojarl Knarr FPSO was completed, and we took delivery from the Samsung shipyard in South Korea. The unit is currently in transit to the North Sea for field installation and offshore testing, which I'll talk about more in detail later on the call. In July 2014, the Petrojarl Banff FPSO recommenced operations under its charter contract. The unit…

Thanks, Peter, and good morning, everyone. Starting with Slide 9, I will review our consolidated results for the quarter, comparing the adjusted income statement for the second quarter 2014 against an adjusted income statement for the first quarter of 2014, which excludes the items listed in Appendix A to our release. Later on, I will also provide our outlook for the third quarter of 2014. Starting at the top of the page, net revenues decreased by $53 million, primarily due to the $15 million of catch up interest income recognized on our 3 VLCC term loans in Q1, declines in spot tanker rates in Q2 from the high rates we experienced in Q1, a $7 million decrease from recent conventional tanker sales, a $9 million decrease from our shuttle tanker fleet, primarily due to lower COA days and higher drydocking activity and an $8 million decrease related to the Foinaven FPSO due to the commercial settlement we received in Q1 in relation to the Foinaven's 2013 production. These revenue decreases were partially offset by S&P fees we earned from Tanker Investments Ltd. in Q2 relating to the recent vessel acquisitions. Vessel operating expenses decreased by $3 million, mainly due to lower repairs and maintenance costs on our FPSO units and the sale of our 4 conventional tankers in the first quarter. Time charter hire expense decreased by $7 million, mainly related to our in-chartered cell tanker fleet due to a reduction in the number of in-charters, as well as scheduled drydockings. G&A expense decreased by $1 million, partly due to the timing of recognition of long-term incentive compensation expenses, which are typically higher in the first quarter of each year. Equity income increased by $2 million, primarily due to higher VLGC rates earned by the Exmar LPG joint venture in…

Thanks, Vince. Before we turn the call over to questions, I'd like to turn your attention to Slide 11, which provides some key information regarding the Teekay group's 2014 Investor Day, which is scheduled for the morning of Tuesday, September 30. The event will take place at The St. Regis Hotel in New York, at which time, we'll provide a detailed presentation on the Teekay group of companies, covering our strategy, financial position and market outlook for Teekay Corporation, and our 3 publicly traded daughter companies. The event will be webcast live for all interested investors. We encourage everyone to mark this date in your calendars, and we look forward to presenting and meeting with all of our current and prospective investors. Thank you for joining us on the call today, and operator, we're now ready to take questions.

[Operator Instructions] And your first question comes from the line of Keith Mori from Barclays.

Peter, you've gone on Teekay Offshore and you went a little bit further into the supply chain on that side. When we look at TGP, are there other opportunities that you can kind of get that come across your desk, such as regasification units or ethylene, that maybe has you want to go further into that supply chain?

Sure. So yes, we have branched out more in Teekay Offshore and Teekay LNG. We're looking at a few, I would call it, macro headwinds right now. On the Teekay LNG Partner side, on the LNG side, we've had a downturn in spot LNG rates. That doesn't affect our partnership because we're all sold out, but right now, we think that now isn't the right time to invest in short-term LNG assets. So that's why we've been looking more at point-to-point tenders farther out. But we're also working on floating storage regas, and while we haven't gotten a new project that we can announce, I assure you that our development companies have been working on that. But when you look at it, we still have a forward order book or pipeline of $2.5 billion. So I'm not worried about that. I would rather wait for the best project that we have. On the LPG side, we have some ethylene projects, but again, when you look at the LPG market, if you look at VLGCs, 50% of the fleet is on order. So you have a right to be a little cautious there. We like our -- what we've done in Exmar LPG, we're focused in on the ethane markets, we're focused in on the ammonia markets, and we think those were going to be more stable projects. So we were one of the people that were competing on the Reliance deal. Reliance decided to order and own themselves, but we think there will be more of those types of projects going forward. In fact, we think the ethane market is pretty much where the LNG market was in the early '80s. So we're hopeful.

Okay. We appreciate the color on that side. I'd like to just pivot for one moment here, Peter. The FPSO Knarr seems to be on schedule here, the drop-downs look to be coming over the next 12 to 18 months. I know some of the other FPSOs are a little bit smaller than the Knarr, extremely smaller. Should we be expecting a dividend reset, maybe in fourth quarter or first quarter here? And will you, like we've talked about in the past, be utilizing that analyst data, kind of give us a little bit more of an outlook?

Yes. So we're -- we have told people we're going to come and announce the new dividend policy at Investor Day and talk about what's going on, but the key event as we've told everyone for over a year, is when the Petrojarl Knarr drops down and goes on charter. That has beneficial effects, lots of places. First of all, of the Teekay Parent, it'll delever the company, which will set up positively for its dividend prospects; and then secondly, of course, the drop-down to Teekay Offshore will be beneficial, in terms of increased LP and GP units. So that's the key event that we're looking for, so I would say that has an effect from 2015.

And then one last one for me. Vince, the FPSO Foinaven has a true-up in the fourth quarter. How has the gas compressor repairs kind of impacted that true-up in the fourth quarter? Could you maybe help us frame the type of cash flow we should expect from that?

That's right. We do recognize more revenue in the fourth quarter of each year from the Foinaven contract. It's a little bit difficult to predict at this point because the Foinaven is gradually increasing its production over the course of the third quarter. I think typically, the additional pickup in the fourth quarter is in the range of $20 million to $30 million, and I would expect that this year would be somewhat in that range as well, but we'll give a better update next quarter too or perhaps at Investor Day.

And your next question comes from the line of Fotis Giannakoulis from Morgan Stanley.

Peter, obviously, the delivery of the Knarr FPSO is a -- the big event. Can you remind us how much of your operating cash flow is going to increase after this drop-down? And if you can give us some guidance on the dividend potential for TOO after this drop-down.

Yes, we haven't given specific guidance on what the accretiveness is of the Petrojarl Knarr when it drops down, but the operating cash flows, what we expect to get...

Yes, in terms of annual EBITDA from the unit, it's about $130 million to $140 million per year. A very profitable unit, and should be very accretive to Teekay Offshore and therefore, to the parent.

And you have some more FPSOs at the parent level, and you just mentioned that you started -- was it the Banff started again the operating? What is the expectation of a potential drop-down of the -- these vessels to TOO?

Yes, I've always said that a dollar is a dollar is a dollar. So we've been waiting until we get the right contract negotiations, in order to go forward. Obviously, as I've said on my prepared remarks, the Banff will be eligible because its contract becomes much better after January 1, 2015, but we also have the Foinaven and the Hummingbird, that are -- that will ultimately be drop-down. And we're just waiting till we get the right contract in order to, so that when it drops down, it'll be maximum accretive to TOO and therefore, beneficial to the Teekay Parent. So we don't really want to drop it until it'll give us our maximum value. But we intend to drop all the FPSOs that we have at Teekay Parent down to Teekay Offshore over the next couple of years.

And regarding the Hummingbird, can you remind us when -- are you in the process of looking for a contract? Is there a contract there? And if there is going to be a need for additional CapEx that you will have to spend for the deployment of this asset?

For the Hummingbird is on an existing contract, but it's a short-term contract, and as I said last quarter, we're in negotiations or discussions with the existing charterer because that field looks like it'll -- it looks like it'll need to be -- stay on that field longer than the existing contract. So if we can recontract that for a longer period, then it becomes eligible for drop-down.

And can you give us an estimate? I think this expires in early 2016. Is there going to be a possibility for another 5 years that will make it suitable for a drop-down? Or it's something that you still do not have a view yet?

We haven't finished our discussions with Centrica, which is the charterer of the unit, so I don't want to be locked in on exactly what time period that will be. But the good news is that the field is producing at a higher rate than what was forecast, and therefore, there's a need for the FPSO on the field, and therefore, obviously being there already will be better for us. And we become in the pole position to continue there.

One last question about your new JV. It comes to -- as a surprise, given how weak the dry bulk market has been developing this year. Can you explain your thesis about the dry bulk market? Is this one of these projects with a long-term potential employment to Cargill that make you feel more comfortable? Or you see that the asset values that are going to turn -- are -- the market's going to turn around and asset values will move even higher than where they are today?

It's actually more of the latter. We actually see this as that the fundamentals of the dry bulk market are akin to the cyclical lows that we've had in the tanker markets. So just as we created Tanker Investments Ltd. and went into a spot play, we intend to do the same thing on the dry bulk side. The great news is with Cargill Ocean Transport, which operates over 800 vessels, they have great market insight. So I think that gives us an advantage over other shipping companies involved in the dry bulk because we're doing business with an end user. So if -- when you're talking with someone with Cargill they are long cargo, short ships, and this new venture is more of an asset play on dry bulk, and so it's more akin to till. It's not the same as our fixed rate contract opportunities that we have in gas and offshore. So, it's a spot play. And we think rates will get better over time. Obviously, we're one of the biggest in -- through Australia, we operate the tugs in Port Hedland, which is the biggest exporter of iron ore, and we're able to see the amount of new projects and the actual cargo volumes that are going to come out on dry bulk in the next few years.

[Operator Instructions] And your next question comes from Michael Webber from Wells Fargo Securities.

This is actually Sameed on for Michael. So I just had a couple of quick questions for you, one being on the KT Maritime towage newbuilds. Anyone in prior couple of quarters, you announced that those would be done directly, the parent would eventually be dropped on to either TO or TGP. Just wanted to get an update on that and see what the progress has been in terms of building those newbuilds and whether or not a decision has been made, whether it's going to be, more lift for the TO or TGP?

Yes. So we have -- so this is a contract we're investing $25 million in 3 tugs that will support the Shell Prelude project in Australia. We have a joint venture partner in KOTUG, so we're going to -- I think the combined expertise of Teekay Australia as well as KOTUG sets us up well for this project, as well as new projects. We haven't decided which MLP it's going to drop-down into, but it'll go down into one of the MLPs. It's a tug, so you see we have the deep-sea towage in Teekay Offshore, but we also -- it is also gas-related, so no decision has been taken. But they don't deliver until 2016.

Got it. And just a quick follow-up question on Fotis' question on the FPSOs. But I realize the Hummingbird Spirit is not really eligible to be a drop-down yet just because it didn't have a long-enough charter, but my understanding is that, that FPSOs will require some upgrades. So as you think about upgrading the unit, would it be more applicable for upgrading the unit at the parent level or potentially post drop-down?

No, I don't think so. What we're talking about, if you extend the license, that you may have to add gas compression, and just as we've done on several of our FPSOs, we could do with probably on the field. So we would continue to produce while we're on the field, and that benefits us, and then it also benefits the customer because we're not off-line. And so that's a life extension upgrade in order to take account for what the field dynamics are going to be and the fact that you're longer on it. So that's why it can be dropped in any time. We just think that as it gets a longer contract, it becomes more valuable, and therefore, we can sell it for a greater price to Teekay Offshore, and it's more valuable to Teekay Offshore. And that's why we're waiting. As I said earlier, a dollar's a dollar, and my job is to maximize the sale price of all of our units.

Got it. And one quick, final question, on the Libra FPSO project. I realize this may be more applicable for TOO, but just so I get a sense on the incremental opportunities which come from an FPSO there, would you say there's a greater opportunity beyond the FPSO, regarding FAU at the -- at this project? Or what other incremental business could Teekay get from this potential FPSO?

Well, this is early well test ship that will go on for 8 years, and we have another early well test ship actually that is already operating there. So there will ultimately be a permanent installation on the Libra field, maybe more than one, and then we can also bid on that. But we're excited about it. I think actually it's a 12-year contract, and so that would just be incremental. But they have not decided the full field development plan for the permanent FPSO that will be there. But if everything works out, I'm sure we'll be bidding on that in a few years’ time.

Got it. And just a little more detail on that potential FPSO. Would you say you're looking more at a ship-shaped design or a cylindrical design? And if we can also get some more color on the potential size of the deal and returns associated.

We'll talk more about the deal after we finalize it, probably at Investor Day. But the good news is we're going to use one of our existing shuttle tankers. We're going to convert one that's called the Norvegia, which is one of our older shuttle tankers. And that will be the hull that we'll use to convert, and make into an FPSO. So we've done that before, and obviously we just did it with the Salamander. And so -- and we just upgraded the Dampier Spirit. So whenever we can take one of our older tankers or shuttle tankers and convert it to an offshore unit, it's just totally beneficial for Teekay as well as the customer.

And your next question comes from the line of TJ Schultz from RBC.

Just on the Knarr drop-down. Would Teekay look to take back any TOO units there? And does that have any bearing on if you would drop it down in one sale? Or do you still think it needs to be 2 separate drops?

Yes, we're looking at those 2 options, whether we do it in 1 go or in 2 steps, and you're right, if we were to do it in one drop-down, then the Teekay Parent would more likely take back some TOO units, just given the size of that asset. So we are looking at both options right now.

Okay. I mean, I guess what's the gating factor, primarily? Is it still just TOO's ability on financing that in one drop? Are you leaning one way or the other at this point?

Yes, I think we will have a better picture of that later in this year. I think -- I guess it's dependent on, you're right, the TOO's ability to do it in one go, the state of the capital markets, et cetera, but we have both options available to us. We do have the debt facility already in place, it's an $815 million facility. So that would go along with the drop-down, whether it's 100% of 50% on a pro rata basis.

And gentlemen, there are no further questions at this time. I would like to turn the call back over to our speakers for closing remarks.

Okay. Thank you, all, for listening today, and we look forward to reporting to you about all -- everything in detail at our Investor Day. 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.