Peter Evensen - Chief Executive Officer of Teekay Offshore GP LLC, President of Teekay Offshore GP LLC, Chief Financial Officer of Teekay Offshore GP LLC, Principal Accounting Officer of Teekay Offshore GP LLC and Director of Teekay Offshore GP LLC
Nishant Mani - JP Morgan Chase & Co, Research Division
Teekay Offshore Partners LP (TOO) Q3 2013 Earnings Call November 8, 2013 12:00 PM ET
Welcome to the Teekay Offshore Partners Third Quarter 2013 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 Offshore Partners Chief Executive Officer. Please go ahead, sir.
Before Mr. Evensen begins, I'd like to direct all participants to our website at www.teekayoffshore.com, where you'll find a copy of the third quarter 2013 earnings presentation. Mr. Evensen will review this presentation during today's conference call.
Please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from results projected by those forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the third quarter 2013 earnings release and earnings presentation available on our website.
I'll now turn the call over to Mr. Evensen to begin.
Thank you, Ryan. Good morning, everyone, and thank you for joining us on our third quarter of 2013 investor conference call. I'm joined today by Teekay Corporation's CFO, Vince Lok; Chief Strategy Officer, Kenneth Hvid; and MLP Controller, David Wong. During our call today, I'll be walking through the third quarter of 2013 earnings presentation, which can be found on our website.
Starting on Slide #3 of the presentation, I will briefly review some of the Teekay Offshore's recent highlights. We generated distributable cash flow of $43 million in the third quarter, an 11% increase from the same quarter 1 year ago. We declared a cash distribution of $0.5253 per unit for the third quarter.
In September, we took delivery of the Bossa Nova Spirit, the third newbuilding shuttle tanker, which will commence a 10-year contract to BG in mid-November following its arrival in Brazil. In mid-November, we also expect to take delivery of the Sertanejo Spirit, the fourth and final BG shuttle tanker, from the shipyard, and this vessel is expected to commence its 10-year contract with BG in Brazil early in the new year.
During the quarter, we completed our acquisition of the HiLoad Dynamic Positioning unit from Remora AS. The modifications to the unit required to service the long-term contract with Petrobras were recently completed, and the unit is currently in transit and is expected to arrive in Brazil early next week. After a 4-month testing period, the DP HiLoad unit is expected to commence its 10-year charter with Petrobras in the second quarter of 2014. As previously announced, the total purchase price of the DP HiLoad unit is approximately $55 million including modification cost, and the unit is expected to generate approximately $7.5 million of distributable cash flow per year.
We intend to increase the partnership's fourth quarter distribution per unit by approximately 2.5% or $0.052 per annum, bringing Teekay Offshore's total annual distribution to approximately $2.15 per unit, representing a yield of approximately 6.2% based on Wednesday's closing unit price. Combined with the 2.5% distribution increase in Q1 earlier this year, the Q4 distribution increase will bring the total increase for 2013 to 5%. With several visible FPSO acquisition opportunities at our sponsor, Teekay Corporation, and a number of offshore tender opportunities that we're directly bidding on or engaged in front-end engineering or FEED studies, Teekay Offshore remains well positioned for growth in its distributable cash flow over the next several years.
Turning to Slide #4. I want to take a moment to update you on the Voyageur Spirit FPSO operational start-up issue we discussed in detail on last quarter's call. I'm pleased to report that the repairs to the defective gas compressor were made, and the FPSO achieved full production capacity and has been on full rate since August 27. As a reminder, Teekay Corporation, as the seller, agreed to indemnify Teekay Offshore for revenue it would have otherwise earned had the unit not been declared off-hire. And accordingly, the partnership was fully indemnified for the period prior to August 27. The partnership continues to be indemnified by Teekay Corporation until the certificate of final acceptance from E.ON is received, subject to a $54 million cap. We're still awaiting the certificate of final acceptance, which is subject to us completing certain operational production tests. However, the commencement of these tests has been delayed due to operational issues at the oilfield, which are the responsibility of the charterer. Once we're permitted to proceed with the operational tests, we do not anticipate any difficulties in receiving the certificate of final acceptance, as we are operating at full production before the customer alerted us about the operational issues at the field.
2013 has been a busy year for Teekay Offshore, as we've laid out on Slide #5. We started with the acquisition of the Voyageur Spirit FPSO, which despite the operational issues on start-up, is now generating cash flows for the charterer -- from the charterer and has been indemnified for revenue foregone prior to August 27. In June, we acquired a 50% interest in the Cidade de Itajai FPSO, which is currently operating in Brazil on a long-term contract with Petrobras. And to date, we have successfully taken delivery of 3 shuttle tanker newbuildings, with the fourth vessel in the series is expected to deliver in the next couple of weeks. Based on the distributable cash flow growth in 2013 from these transactions, we intend to increase the partnership's quarterly distribution by 2.5% commencing with the fourth quarter's distribution to be paid in 2014.
On Slide #6, I will review our consolidated operating results for the quarter, comparing an adjusted third quarter 2013 income statement with an adjusted second quarter 2013 income statement, which excludes the items listed in Appendix A of our third quarter earnings release and reallocates realized gains and losses from derivatives to their respective income statement line items. Starting at the top of the income statement. Net revenues increased by $9.3 million, mainly due to the revenue from the Voyageur Spirit FPSO as the unit commenced full hire on August 27 and from higher shuttle fleet revenues from the commencement of the charter contracts on the first 2 BG shuttle tankers, partially offset by redeliveries of 2 of our shuttle tankers as they completed their time charter contracts.
Similar to the second quarter of 2013, I'd like to point out that $13 million was received during the third quarter under the indemnification from Teekay Corporation associated with the lost revenue from the Voyageur Spirit FPSO. This amount is effectively treated as a reduction in the purchase price paid by the partnership and is not included in net revenues or cash flow from vessel operations. However, this amount is included in our calculation of distributable cash flow and is being treated as a reduction to the maintenance capital expenditure reserve. The result is a distributable cash flow amount for the third quarter the same as if the $13 million was recorded in revenues.
Vessel operating expenses increased by $4.3 million, primarily due to a full quarter of operations from the Voyageur Spirit FPSO and the 2 BG shuttle tankers. Time charter hire expenses were consistent with the prior quarter. Depreciation and amortization expense increased by $2.8 million, mainly due to the delivery of the first 3 BG shuttle tanker newbuildings and a full quarter of depreciation for the Voyageur Spirit FPSO. General and administrative expense increased mainly due to a full quarter of operations from the Voyageur Spirit FPSO, which included costs to focus on resolving the start-up issues on the unit. Net interest expense, including realized losses on interest rate swaps, increased by $1.3 million, mainly due to interest income earned in the second quarter on the $150 million prepayment to Teekay Corporation for the Voyageur Spirit.
Equity income increased by $800,000, relating to a full quarter of earnings from our 50% ownership in the Cidade de Itajai FPSO, which was acquired in early June. Net loss from discontinued operations increased $2.1 million as a result of the sale of the Poul Spirit and the Gotland Spirit conventional tankers in the second and third quarters of 2013, respectively. Net income attributable to noncontrolling interest decreased $2.4 million, mainly from the drydock of one of our shuttle tankers in which the partnership owns through a 50% owned subsidiary.
I won't walk through all of Slide #7, which was included in our recent earnings release. However, I would like to highlight the information in the box at the bottom of the slide. We generated approximately $43 million in distributable cash flow, which, when compared to our total description payout, resulted in the coverage ratio of 0.90x for the third quarter, which was in line with the last quarter. Looking ahead to the fourth quarter, even after taking into account the intended cash distribution increase of 2.5% in Q4, we're expecting an increase in our coverage ratio compared to the third quarter, primarily due to growth in our distributable cash flows from the shuttle tanker newbuilding deliveries over the past several months and the redelivery of one of our in-chartered shuttle tankers.
On Slide #8, we provided a summary of the Teekay Offshore's visible and potential growth opportunities. Our visible growth includes the fourth BG shuttle tanker; the Remora HiLoad unit, which I mentioned earlier, and the 2 FSO conversion projects discussed last quarter; the Salamander project, which is scheduled to come onstream in the middle of next year; and the Gina Krog, which is expected to come online in early 2017. The Knarr FPSO is expected to deliver on to its long-term contract with BG during the second half of 2014, at which time we expect receive an offer to acquire at least a portion of that billion-dollar FPSO from our sponsor, Teekay Corporation.
In addition to these firm projects, the partnership has several potential growth opportunities including 4 on-the-water FPSOs currently owned by Teekay Corporation, which may be offered to us under the existing Omnibus Agreement upon securing suitable contracts for these units. And as I mentioned previously, we're currently bidding several -- directly on several multiple offshore projects. And finally, we have agreements in place with Sevan Marine and Remora, which may provide us with additional growth opportunities in the future.
Thank you all for listening. And operator, I'm now available to take questions.
[Operator Instructions] And our first question comes from Michael Webber from Wells Fargo Securities.
This is Samit [ph] again on for Mike. In terms of the way we think about Teekay Offshore, we kind of see you guys in terms of the pre-Knarr and post-Knarr period in terms of growth. Just wondering if we can get some additional color from you guys in terms of FPSOs, if there are any potential drop-downs, which we can see pre-Knarr at this time?
We are looking at -- as I mentioned in my prepared remarks, we have 4 FPSOs up at the parent company or the sponsor. And when those the optimal time charter contracts or we get permission from the charterer, then we're going to make those available. So I can't give you an exact time frame on when those 4 FPSOs will come down, but it is the intention that they will be dropped down.
Got you, and digging into one of those FPSOs a little closer, the Hummingbird specifically, just because we noticed that the contract got extended until March 2016, would you say in terms of time line that will be potentially the first one which could be offered to Teekay Offshore at this point?
I won't say exactly which one will be offered. But the Hummingbird, we're waiting to see if the charter will get extended. And since we're all about having medium-term contracts, we -- for the Hummingbird, we're waiting to see if the charterer, Centrica, will extend it by one more year, in which case it will probably become eligible, or if we can line up alternative employment for that should they not declare the option, which we'll know in the next 6 or 7 weeks. Then we have the Petrojarl Foinaven FPSO, which we're still working with the charterer to get permission to drop down.
Got you. That's helpful. And in terms of the growth post-Knarr, I mean, you mentioned that you're looking at about $3 billion in projects right now, of which the Gina Krog is one of the projects in the potential future. Could you give us more of a breakout in terms of the $3 billion projects you guys are looking at and more of a time frame in terms of when those projects could potentially come online?
Yes. well, first of all, the Gina Krog is not in the $3 billion. That one has already been ordered by the partnership -- or it's owned by the partnership, and we're going to convert it. So that one isn't in the $3 billion. But those are FPSOs that we're looking at. And our FPSOs cost anywhere from $800 million up to $1 billion if we're doing newbuildings. And so you can say we're looking at 3 FPSO projects. And in addition, we're looking at a few FSO projects and shuttle tanker opportunities.
The next question comes from Chris Combe from JPMorgan.
Nishant Mani - JP Morgan Chase & Co, Research Division
This is actually Nish Mani on for Chris. I just want to follow up on some of the points on growth that we just discussed. Specifically, you mentioned that for the Knarr, there is a likelihood of it potentially being a JV or perhaps 50% interest and not fully acquired at TOO. I just wanted to get a sense of whether or not there is any appetite to do it all at TOO just given the fact that the other FPSO projects have a degree of uncertainty built into them for both timing and contract structure.
Yes. When we started Teekay Offshore, we actually dropped the shuttle tanker franchise. We first started it with 25%, and then we dropped it down in increments of 25%. So our intention is that the Knarr will fully be in the partnership at some point. And going forward, that's why all of the fixed assets of the Teekay Corporation will ultimately be dropped down to their respective daughter companies. It's just a question of sizing. It's a lot to drop down all at one time, $1 billion, so we may drop it down in increments.
Nishant Mani - JP Morgan Chase & Co, Research Division
Okay, got it. That's helpful. And then I guess thinking about the coverage ratio, we've seen it tick up over the past couple of quarters, and we're still below the 1.0 threshold. I just want to get a sense of how you guys think about getting back to the target and eventually getting to a degree of comfort at the 1.15 to 1.2 guidance you guys have previously discussed.
Sure. Well, the good news is because we have the visible growth, we can see what the accretion will be. And for example, I mentioned the Remora, which is an extremely accretive deal, since we're spending a little over $50 million and getting $7.5 million of DCF. So we can start to see that we can rebuild it. We did have some, what I'll call, headwinds as we've had redeliveries of some of the shuttle tankers. That's what's caused us to drop below 1. But I'm fully confident we'll get back there because I can see the accretion of the future projects coming on. So I guess you can say we've had to use some of the accretion from the growth in order to make up for the redelivery of some of the conventional and shuttle tankers. But that's just part of having a big portfolio.
Nishant Mani - JP Morgan Chase & Co, Research Division
Understood. And in terms of distribution growth, I mean, congratulations on increasing the distribution this quarter, I just want to get a sense of where you guys think about distribution growth coming in the next year to 18 months. I mean, you've already baked in to some degree in your estimates for the Remora and the Salamander for the next year. But outside of that, you just mentioned previously the FPSO uncertainty. I mean, is there a chance -- I mean, I guess do you see material headwinds coming in 2014 where distribution growth might not be possible again?
No, I don't, actually. We continue to target at least mid-single digits. And if we are able to drop more projects down, then we can exceed that. But we always target about mid-single digits, and now you're seeing this year we'll have increased the distribution by 5%. When we see accretive deals like Knarr, which can power 2015 into 2016, and we have the built-in growth with the BG and Remora for 2014, as well as Salamander, then I'm very confident about that.
[Operator Instructions] And our next question comes from Edward Rowe from Raymond James.
All my questions have been answered.
Mr. Evensen, there are no further questions at this time. You may continue.
All right. Thank you, all, very much. We look forward to reporting back to you 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.
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