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Executives

Kent Alekson - IR Officer

Bjorn Moller - President and CEO

Vincent Lok - EVP and CFO

Peter Evensen - Chief Strategy Officer

Analysts

Jonathan Chappell - JPMorgan

Gregory Lewis - Credit Suisse

Justine Fisher - Goldman Sachs

Urs Dur - Lazard Capital

Daniel Burke - Johnson & Rice

Teekay Corporation (TK) Q2 FY08 Earnings Call August 7, 2008 11:00 AM ET

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Teekay Corporation Second 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.

And now, for opening remarks and introductions, I would like to turn the call over to Mr. Bjorn Moller, Teekay's President and Chief Executive Officer and Mr. Vince Lok, Teekay's Chief Financial Officer. Please go ahead.

Kent Alekson - Investor Relations Officer

Before Mr. Moller 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 2008 earnings presentation. Mr. Moller 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 those 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 our earnings release and the earnings release presentation available on our website.

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

Bjorn Moller - President and Chief Executive Officer

Thank you, Kent and good morning ladies and gentlemen. Thanks for joining us on our second quarter earnings call. I am speaking to you from London this quarter and I am joined by our CFO, Vince Lok in Vancouver. For the Q&A session, we also have our Chief Strategy Officer, Peter Evensen and our Corporate Controller Ryan [ph] on the line.

I am pleased to report on one of the strongest second quarter operating performances in our company's history, starting with the highlights for the quarter on slide 3. We earned net income on an operating basis of $77.1 million or $1.05 per share. We have determined that Teekay will need to restate certain financial results to adjusted accounting for certain derivatives on the hedge accounting rules and the results presented today do not reflect these adjustments. Vince will discuss this issue in more detail later in the call, but I should note that none of these adjustments will affect our cash flows or stockholders'.

Cash flow from vessel operations or CFVO was $221.7 million, of which 53% came from our fixed rate businesses. The higher than normal percentage of CFVO generated in our spot tanker business was a result of us achieving our highest ever Q2 sot tanker rates. We acquired the remaining 35% of Teekay Petrojarl, taking our ownership of our FPSO business to 100%.

We completed follow-on equity issuances in Teekay Offshore and Teekay LNG, raising more than $300 million of new third-party equity and in the process demonstrating that our unique financial structure provides us with access to reasonably priced capital even in today's difficult financial markets, and we remains active in the execution of our value creation strategy through accretive drop down from Teekay Corporation to each of our publicly listed daughter companies, which have enabled them to increase their distributions.

On the next few slides I will briefly describe the key events for the quarter in each of our business segments and in each corresponding daughter company. I'll first look at our Conventional Tanker business on slide four. In what is normally a seasonally weak period of tankers, rates soared across sectors of the crude market due to a combination of strong demand and satisfactory supply. We have also witnessed very high volatility in rates typically an indication that the world fleet is operating at on near full utilization.

Our Suezmax spot fleet earned the TCE of $73,400 a day, our highest ever quarterly result. Our Aframax spot fleet earned an average TCE of $43,600, with our usual 50-50 east-west fleet split approximately 50% of our days were in the less volatile in the Pacific market which lagged the Atlantic in the timing of the run-off in rates and also did not reach the same peak levels.

Typically, this lag effect tends to benefit us during periods of declining rates. It should also be noted that some of our Suezmax tankers are employed on time charters under which we participate in profit sharing arrangements. However, since the profit share amounts are determined and settled annually, they are not accrued on a quarterly basis. Based on Q2 spot tanker rates, approximately $5.8 million or $0.07 per share of share profit was not accrued by Teekay, so it substantially carried forward into future quarters.

Q3 is shaping out to be another very strong quarter, with 50% of our Suezmax fleets picked an average rate of $75,000 a day and 50% of our Aframax picked an average rate of $48,000 per day. Rates have softened over the past week, but this is consistent with the pattern of volatility we've seen throughout 2008 and on an absolute basis, rates remain strong for this time of the year. I will provide further comments on market fundamentals later in my presentation.

We're increasing our exposure in a couple of ways to what we expect will be a strong tanker market in the second half of the year. We took delivery of the first of our 10 Suezmax newbuildings and we expect the remaining three Samsung newbuilding to deliver between August 2008 and January 2009. We expect our four Chinese Suezmax newbuildings to be somewhat delayed. The first ship by four to five months and expect it to deliver in late 2008 or early 2009.

We stepped up our Aframax in-chartering activity in recent weeks with in-charters of 8 vessels and the extension of several existing in-charters. And this would boost our spot voyage stays from August onwards, before being partially offset by the redelivery of a smaller number of in-charters during November and December.

We are taking advantage of high ship values by reducing our involvement in the small to medium size product tanker segment, we lack scale in this product segment and don't see attractive near term opportunities to build scale, so as mentioned on our last earnings call, we sold four ex-OMI Handymax product tankers early in the quarter, and two of these have been delivered to the new owners, a third vessel was due to deliver in September and the fourth vessel which is currently under construction is due to deliver in early 2009.

In June, we agreed to sell one of our ex-OMI MR product tankers and we also sold one of our older Aframaxes. In July, we sold our 50% interest in the Swift product tanker pool to our partner, Maersk Tankers for $49 million. Prior to the sale, our contribution to that pool consisted of 10 in-charters intermediate sized vessels, and the transaction is subject to regulatory approval.

Looking at the TNK box at the bottom of this slide, during the quarter, we dropped down two Suezmaxes to TNK for $187 million. We are obligated to offer TNK an additional two Suezmaxes within the next 12 months. TNK enjoyed a strong quarter performance and earlier this week declared a quarterly dividend of $0.90 per share. In addition to receiving dividend payments from TNK, TK is entitled to performance fee equal to 20% of annual TNK dividends in access of $3.20 per share.

Turning to slide 5, we had a fairly quiet quarter in our Liquefied Gas segment in terms of new business, although we did finalize a previously announced agreement to acquire the two Skaugen multi-gas carriers scheduled for 2010 delivery, and we did arrange an $840 million debt financing of the four Angola LNG carriers in which we have a one-third interest.

So we arranged this facility under preferential terms and conditions we received in a tough credit market is testimony to a growing competitive advantage that Teekay has relative to many ship owning companies.

Turning to Teekay LNG, both on slide five, in Q2 we dropped down two LNG carriers in the Kenai project to TGP for $230 million. Between April and late July, TGP took delivery of the four newly constructed RasGas 3 Q-Flex LNG carriers, completing the biggest single newbuilding project in Teekay's history. As a result of the Kenai LNG acquisition, TGP announced a 4% increase in its quarterly distributions in Q2 and has stated its intention to make a further increase in Q3 related to the RasGas 3 project.

TGP completed a follow-on equity offering of $209 million including $50 million taken up by Teekay. The Teekay owned general partner is currently in the 25% bracket from incented distribution right or IDRs.

Turning to Offshore segment on slide 6, I'll come back to Teekay Petrojarl and our FPSO business on the next slide in a moment, our shuttle tanker franchise performed strongly in the quarter. We achieved very high speed utilization in our shuttle tanker fleet aided by the current spot tanker market in which we employ any surplus shuttle tanker days. We continue to see an upward rate trend for shuttle tankers illustrated by recent renewals of certain smaller contracts. The current availability and firm rates bode well for the prospects for the four shuttle tanker newbuildings we have on order for delivery in beginning in 2010.

On the bottom of slide 6 you see reference to the sale with TOO of an additional 25% of OPCO and the drop-down of two Aframax lightering vessels for a total consideration of $311 million. Following these transactions, TOO has announced an intention to increase distributions by 12% to 15% effective from Q3. And this increase will move the general partner directly from the current 2% IDR bracket to positive 15% bracket and by directly into the 25% IDR split.

During the quarter TOO completed a follow-on equity offering up $217 million, which included the $65 million investment by Teekay.

Looking at Teekay Petrojarl in slide 7, since acquiring 65% of Teekay Petrojarl for NOK17 per share nearly two years ago, we have been patiently awaiting an opportunity to acquire the rest of the company at a fair price. In June, we acquired the 30% stake held by Prosafe at NOK59, which enabled us to squeeze out the remaining 5% minority shareholders and delist Teekay Petrojarl. The 5% shareholders that were squeezed out have until September to join the fairness of the prices they are being offered for their interest or under any circumstance... but they are under any circumstance obligated to sell the shares to Teekay.

As the sole owner of Petrojarl, Teekay tends to receive more of the upside from future contract rollovers and asset deployments in today's high offshore market. It will now also be easier for Teekay to drop down FPSO to TOO and this would accelerate the value elimination of our offshore business. We will also be able to further integrate Petrojarl into Teekay.

The renegotiation of certain Teekay Petrojarl's existing FPSO contracts is ongoing. In terms of new FPSO business, the activity level remains high in the sector led by Brazil, but also on a global basis. Industry analysts are forecasting an average to 15 to 20 new FPSO projects will be awarded each year through 2012. Petrojarl is considering new projects on a selected basis, seeking out opportunities which play to its core strength.

Recently supply chain pressures in the offshore sector have caused some major FPSO companies to announce significant cost overruns from projects they had been awarded over the last 12 to 18 months based on aggressive bid tactics. We feel that these reports demonstrate the prudence of the disciplined approach to protect economics adopted by Petrojarl. We expect these development to eventually lead to a more attractive pricing on future projects, especially since there should be sufficient FPSO demand to provide work for all the key players.

On slide 8 we show our updated sum-of-the-parts value, which currently stands at $60 per share. But this figure does not include the value upside from the TOO, GP moving into the 25% splits nor the improved prospect of being able to drop down FPSO assets to TOO relatively soon. We've already made considerable progress so far this year in executing on our value creating strategy and we believe our continued focus in the strategy will allow to narrow the gap between some of the part value in Teekay share price.

Given the very strong market in Q2, I wanted to spend a few minute discussing the latest market fundamentals. The graph on slide 9 compare tanker rates to oil production, which is the most direct driver of tanker demand. Q2 was the second highest product ever for tanker rates, indicated by the blue line and easily the strongest Q2 on record. For 2008 year-to-date, crude oil tanker average earnings are at record highs. We are seeing the familiar picture of tanker rates closely tracking rising Middle East OPEC oil output over the past year and with Saudi Arabia leading the upward charge, by raising its ton mile intensive crude production to the highest level in 25 years.

Saudi Arabia expects to reach production capacity of 12.5 million a day by the end of next year, has announced that it is studying plans to raise the capacity, to 50 million barrels a day. The non-OPEC production growth coming up short year-after-year, this ramp up in spare capacity by Saudi Arabia is likely to become a very significant source for future tanker demand growth.

On slide 10, we look at the impact on tanker rates... I am sorry, tanker demand created by the combination of oil demand volumes and transportation differences. In recent months, oil demand forecast have been gradually reduced due to weakness in the OECD. However, global oil demand is still expected to grow by 1% this year, and another 1% next year driven by China, India and other developing economics, and as is evidenced from tanker rates, tanker demand amount is very high.

As we stated in the past, China is an excellent example of how tanker demand is being created not only by increasing oil import core volumes, but also by the souring of that oil from further fields. The bar chart on slide 10 present this information visually giving you a sense of the leverage effect on tanker demand growth, when both oil volumes and transportation distance is increased.

Since 2003, China's oil imports have grown by 100% by 1.8 million barrels a day. But because the proportion of long haul crude shown in red has risen faster than our supply sources, the ton-mile effect of China's import has grown even faster, estimated to be up by 133% over the same period. Today, 25% of China's oil imports originate from West Africa and a growing amount of its oil comes from Venezuela. However, this effect is in no way unique to China. In fact there are more and more examples of increasing average voyage length. Just to name a few, U.S. imports of Venezuela and Mexican crudes are down by 0.5 million barrels a day over the last five years, while imports from West Africa and the Mediterranean are up by 700,000 barrels a day.

U.S. West Coast refiners are replacing depleting Alaskan crude volumes with oil from West Africa, Brazil and the Middle East and India is ramping up its import from the Atlantic, supply is rapidly expanding refining base.

Bottom line is, nowadays because of growing average transportation businesses; you need more tankers than before to move the same amount of oil.

Looking at proved tanker supply on slide 11, on the left half of the table, we've shown that the fleet grew by only seven vessels during the first half of 2008, its slowest rate of growth since 2002. 45 ships delivered while 38 vessels were scrapped or converted for light cargo offshore use.

On the right hand side of the table, we've projected these figures out to the end of the year using conservative assumptions. Consistent with the format we use last quarter, we've resumed that 50% of newbuildings due to delivery from China in the second half of this year will be delayed into 2009. Based on our first-hand experience in China, that number could easily be even higher. We've assumed that only a few IMO mandated scrapings will take place despite the temptation of today's record nice scrap prices and we have assumed that only 75% of the ships already sold for conversion earlier this year, but not yet converted will leave the fleet by year end and also that no additional vessels will be sold for conversion in time to leave the fleet this year.

On this basis, our projection suggests the tanker supply should grow only marginally for the rest of the year. On top of this, a variety of factors contribute to growing inefficiency in the world fleet and we've talked about these before. They include the growing discrimination against single hull tankers, which still make up 20% of the world fleet. For example, so far this year, single hull fleets just to South Korea are down by 25% compared to last year

Another factor that's beginning to add up and which we're also seeing currently is the longer duration of dry-dockings and repairs due to bottlenecking at repair yards, deal renewals on 15 year old ships that used to take 30 or 40 days are now routinely taking 60 to 80 days or more.

And thirdly, higher bunker prices are expected to lead to more slow steaming even in relatively strong tanker markets. Our estimate show that at bumper prices of $700 a ton, the approximate threshold TCE rates below which voyage economics would improve from modern tanker to slowdown $110,000 a day for VLCC, $60,000 for Suezmax and 50,000 for an Aframax.

Finally, adding it all up in slide 12, we've updated our chart measuring tanker rates shown by the red line in relation to tanker and fleet utilization shown by the green area. According to Platou, world fleet utilization in Q2 was extremely high at 92.6%, levels not seen since the record year of 2004. Underscoring the cumulative effect of changes in transportation distances, Platou calculates that average tanker ton-mile demand in the first half of 2008 was 6.8% higher than the average for all of 2007, while our tanker supply according to Platou only rose 2.1%.

What it tells us is that world fleet is fully stretched, explaining the high volatility and the spike in tanker rates to new highs. The dynamics I've just described give us reason to be excited about the outlook for tanker rates in the second half of the year, and through the winter. I will now hand it over to Vince to discuss our financial results. Vince?

Vincent Lok - Executive Vice President and Chief Financial Officer

Thanks, Bjorn and good morning everyone. Before dealing with the preliminary second quarter results, I will just discuss our plans to restate our financial payments from 2003 through to the end of the second quarter of 2008.

During a process of finalizing our second quarter results, it was determined that certain of our derivative instruments did not technically qualify for hedging accounting treatment under FAS 133, the accounting standard for derivative instruments and hedging activities. These derivative instruments were used to hedge our interest rate, foreign currency and tanker freight risk and to-date had been accounted for as hedges.

Our accounting for hedges, hedging activity is an extremely complex area. In excess of 10 implementation guidelines have been issued in addition to the FAS 133 standards. We recently discovered that the hedged documentation we prepared relating to certain of our derivatives do not meet all of the strict technical requirements of FAS 133. Accordingly, we will have to restate our financial results to recognize the change in fair value of such derivatives through the income statement rather than as a component of accumulated other comprehensive income, which is part of stockholders' equity on the balance sheet.

As a result, the restatement will result in greater fluctuations in recorded net income, but will not have impact on our cash flows, liquidity, total stockholders' equity or adjusted EPS as reported by equity analysts. Also, there will no impact on any of our financial covenants. It is important to note that this is a strictly a change in accounting treatment for such derivatives. The derivative estimates that are the subject of this restatement are provided and continue to provide effective economic hedges even though they don't technically qualify as hedges for accounting purposes.

As the necessity for restatement was recently discovered, we and our auditors are currently reviewing all of our hedge documentation and we will finalize the restatement amount for the current period and applicable previous periods as soon as possible. We will release restated results and call amendments to our previous filling with the SEC as required.

Again, the results included in our second quarter earnings release and presentations do not include these restatements and therefore should be considered preliminary.

Turing to the results for the quarter, net income in the second quarter was $77.1 million or $1.05 per share when excluding the items listed in the Appendix A of our earnings release, which relate mainly to unrealized gains from foreign exchange translation and interest rate swaps. This compares to $67.7 million or $0.90 per share in the second quarter of 2007. As I noted earlier, the restatements will not affect the earning per share amount excluding the Appendix A items for any of the current or prior periods.

As any unrealized gains and losses relating to our derivatives which will be reflected in the P&L will be even included as items to Appendix A. Given the positive feedback we received after the first quarter on the presentation of our disaggregated financial statement, where we separate each of Teekay's publicly listed subsidiaries and Teekay standalone, this quarter I'll discuss the operating results on this basis rather than by business segments.

Looking at the income statement on slide 14, Teekay generated $222 million in cash flow from its operation or CFVO during the second quarter, up from $185 million in the previous quarter. Teekay Offshore had a strong second quarter with CFVO up by $7 million from the first quarter of 2008, primarily due to higher shuttle tanker utilization, a decrease in a number of dry-docking days during the second quarter and the acquisition of two lightering tankers from Teekay Corporation in June 2008. These increases were partially offset by an increase in vessel operating expenses due to the timing of repairs and maintenance expenditures, schedules that coincide with the expected seasonal maintenance of offshore oil [ph] in the North Sea.

Teekay LNG CFVO decreased by 2 million from the previous quarter, mainly due to timing of dry-docking. Teekay LNG had an unusually large number of dry-dockings in the second quarter of more than 5 vessels compared to none in the first quarter. The reduction in cash flow from the dry-dockings were partially offset by the acquisition of the two Kenai LNG carriers from Teekay Corporation in April. With no dry-docking is scheduled for the third quarter, we expect Teekay LNG's CFVO to increase by approximately $7 million next quarter.

As a reminder, our 40% interest in the RasGas 3 LNG carriers are accounted for as equity investments and therefore cash flows to these vessels are not included in CFVO. Teekay tankers also had a strong second quarter with CFVO increasing by $6 million from the first quarter, primarily due to an increase in spot tanker rates and the acquisition of two Suezmax tankers from Teekay Corporation in April. As Bjorn mentioned spot tanker rates in the third quarter have so far averaged higher than in the second quarter.

Teekay Petrojarl's CFVO decreased by $1 million from the previous quarter of 2008, due to an increase in vessel operating expenses, partially offset by the addition of the Siri FPSO unit which commenced its core charter hire rates in mid-April 2008.

Teekay Petrajarl's operating results reflect their existing FPSO contracts being significantly out of the money. However, contract renewal discussions are progressing on some of the units. The CFVO contribution from Teekay Corp. standalone increased by $27 million compared to the prior quarter, primarily due to the significant increase in stock tanker rates. Again spot tanker rates in the third quarter have so far averaged even higher than in the second quarter.

It should also be noted that the revenues of Teekay Corp. standalone include an $11.8 million unrealized mark-to-market loss from synthetic time charters, which were acquired as part of the OMI acquisition. This was not included in Appendix A of our earnings release and that's reduced our adjusted EPS by $0.16 this quarter.

Looking at the rest of the income statement in comparison to the prior quarter, G&A expenses were $69 million in the second quarter, up by approximately $2 million from the prior quarter, mainly due to addition of bonus accruals, which is inline with the stronger operating results and higher business development cost. We expect G&A expenses in the third quarter to the roughly inline with the second quarter.

We incurred $4.6 million in restructuring charges during the second quarter. These costs were primarily related to the reorganization of certain of our operations, including the amalgamation of our two Norwegian offices supporting our shuttle tanker operations. This restructuring is scheduled to be substantially completed by the fourth quarter of 2008 and thus we expect to incur additional restructuring costs during the second half of 2008.

Net interest expense from the second quarter includes an unrealized gain of $48 million from interest rate swaps. Excluding this, net interest expense would have been $57 million, which is similar to the comparable figure last quarter, which included unrealized losses on interest rate swaps of $12 million. We expect net interest expense to increase in the third quarter, as a result of the financing of the purchase of remaining 35% of Teekay Petrojarl.

The income tax expense in the second quarter of 2008 was in line with expectations and included a $5 million one-time cash tax recovery. Excluding the effect of changes to foreign exchange rates, we expect our tax recovery in the third quarter to be approximately $3 million to $5 million. Excluding the minority interest portion of the items in Appendix A, minority interest expense in the second quarter would have been roughly $15.1 million, which has increased from the comparable figure last quarter of $12.6 million, due to the impact of the public offering to Teekay LNG and Teekay Offshore during the quarter as well as the strong results from Teekay tankers. Moving forward, minority interest expense will of course vary depending on the results of Teekay tankers, Teekay LNG and Teekay Offshore.

Turning to slide 15, the main change to our June consolidated balance sheet compared to the March consolidated balance sheet are the results of the acquisition of the remaining interest in Petrojarl late in the second quarter. As we had previously consolidated results of Teekay Petrojarl, the increases in vessels and equipments, goodwill and other long-term liabilities related to the fair value adjustments of these items for the percentage interest we acquired in June.

Our purchase price allocation for the recently acquired 35% of Teekay Petrojarl is preliminary and is subject to adjustments.

Teekay Corp standalone net debt declined by $400 million during the second quarter. This reflects the execution of our drop-down strategy and the related equity capital we have raised at the subsidiary level partially offset by the $250 million relating to the purchases of the Teekay Petrojarl shares. As we continue to execute on our plan to drop down more assets into our daughter companies, Teekay standalone's balance sheet to continues to delever which will provide us with further financial strength and flexibility going forward.

Overall, we had a strong second quarter and we are off to a good start in the third quarter.

I will now turn over the Bjorn to conclude.

Bjorn Moller - President and Chief Executive Officer

Thank you, Vince. I just want to amplify the comments we made about the financial restatement issue. Obviously, it's very unfortunate. We are taking it very seriously and addressing it as a high priority. But it surrounds a very technical issue around the interpretation of accounting rules and it does not affect our cash flows, our liquidity and our shareholder equity and it does not affect the fundamental soundness of our business, which is very strong.

With that, I would like to take it over to the operator to invite your questions. Thank you.

Question And Answer

Operator

Thank you. [Operator Instructions]. So our first question today comes from Jonathan Chappell of JPMorgan. Please go ahead.

Jonathan Chappell - JPMorgan

Thank you. Good morning and good afternoon there. Thanks for the detail on the restatements from the financial side. Just a quick question strategically. Does this restatement or the work you are doing on it has any impact whatsoever on the execution of dropdowns of your strategic initiations?

Bjorn Moller - President and Chief Executive Officer

Peter, would you care to take that?

Peter Evensen - Chief Strategy Officer

Hi Jonathan. No it doesn't. As it was pointed out it doesn't affect the cash flows going forward. So that FASB 133 doesn't affect that.

Jonathan Chappell - JPMorgan

Okay. Regarding share buyback you have a strengthening balance sheet as you do some of these drop-downs and you raised some equity in the first half of the year. That is some of the parts that was about 38% higher or just drops straight right now to 38% discount to your sum of the parts. I know you have been in the past had a systematic buyback program, what's your flexibility to get more aggressive on buybacks at times where you think that the markets are not really giving you value for the strategy in execution.

Bjorn Moller - President and Chief Executive Officer

Right. Well obviously we have taken note of where the share price is trading today and given the focus that I gave in my prepared remarks to this significant discount that we trade into as you mentioned relative to some of the costs that's only widened as a result of the trading today and when you couple that with the significant cash flows that Teekay's beginning to generate from its subsidiaries and new share buyback programs is something we will give careful consideration to how we make good progress to share our value creation strategy and I would also say that the risk return on any major project in our pipeline has to be fairly compelling when measured against the value creation of a share buyback. So it's certainly our [indiscernible] and all the more so at the moment.

Jonathan Chappell - JPMorgan

Okay. And a couple of years ago, maybe a year and half ago there was comments about potentially increasing the dividend more frequently than once a year as you raise up the split on some of these spin-offs or daughter companies. Now that the TOO and TGP [ph] moves up in splits and the cash is accelerating to the TEEKAY parent, do you see more frequent dividend increases in the near future?

Bjorn Moller - President and Chief Executive Officer

Well that's a technical issue because of the outlook. The overwriting point is what we you want to return to shareholders as opposed to where can you invest it profitably and whether you do it more frequently or once a year as we have done in the last four or five years. It is something we will discuss internally. I don't have any guidance on that at the moment. I think the major issue for us is what we do with surplus capital and... at all as to dividends and share buybacks.

Jonathan Chappell - JPMorgan

Okay. And last one and then I will turn it over. Vince mentioned $0.07 a share of profit sharing that you actually generated but weren't allowed to account for in the second quarter, what's the... was it our first quarter in profit share that you accrued but didn't account and is it all going to be accounted for in the fourth quarter so we are going to see basically fourth quarter with the positive profit share all falling into that fourth quarter number?

Bjorn Moller - President and Chief Executive Officer

Yes, as it relates to the $5.8 million most of that will be recognized in the fourth quarter. Of course that carries over and it stays on the results for the full calendar year; the $5.8 million relates to the portion accruing in the second quarter. In terms of the first quarter, there was no profit share accrued in the first quarter.

Jonathan Chappell - JPMorgan

Okay. All right thank you Bjorn, Vince and Peter.

Peter Evensen - Chief Strategy Officer

Thank you.

Vincent Lok - Executive Vice President and Chief Financial Officer

Thanks.

Operator

our next question today comes form Greg Miller (sic) [Lewis] of Credit Suisse. Please go ahead.

Gregory Lewis - Credit Suisse

Yes. Good day gentlemen. I guess, Vince, just to follow-up quickly just going forward on that profit sharing, just to model it out. What sort of the splits that that those profit shares are at?

Bjorn Moller - President and Chief Executive Officer

We have there basically four Suezmaxes and I think we disclosed some of the terms relating to those. And one of them is sitting in TKL and TEEKAY Tankers, were we share 50-50 above $33,500 a day. And as you can see whereas Suezmax partners... Suez spot rates are... that's a pretty significant amount. So that's sort of the rough quantum of the terms of those shares... products.

Gregory Lewis - Credit Suisse

Okay, great. And then also just a real quick modeling question on... when did the 10 un-chartered small product tankers leave the fleet?

Bjorn Moller - President and Chief Executive Officer

Here within the Q... in July roughly I mean --

Gregory Lewis - Credit Suisse

How about this... how many operating days did the un-chartered small product tankers have in Q3?

Peter Evensen - Chief Strategy Officer

Are you referring to the Suez tankers?

Gregory Lewis - Credit Suisse

Yes.

Peter Evensen - Chief Strategy Officer

Yes, it's roughly 10 equivalent in charters, effective... effectively at July 1st.

Gregory Lewis - Credit Suisse

Okay so basically zero days?

Peter Evensen - Chief Strategy Officer

That's right.

Gregory Lewis - Credit Suisse

Okay great. And then just shifting gears a little bit. You mention that you are going to move on... move forward with the drop down of assets. I mean when you look at the daughter companies TOO and TGP at these levels and I am talking about trading levels. Does that sort of put a... put the brakes on the dropdown program going forward.

Bjorn Moller - President and Chief Executive Officer

Well we have achieved the dropdowns that we wanted in all three for this year that enables us to increase the distributions. I think, we are going to have to wait and see when the market really sees the distribution increases in Teekay LNG and Teekay Offshore. Obviously the deal is not as accretive at the stock prices. A further dropdown then what it would have been. But as Darren [ph] pointed out, we are selling at a greater discount of the Teekay than what we were before. So the whole rate on Vectra [ph] which is to use the competitively priced capital at the subsidiaries is even more so than it was last week.

Okay, so in other words it's going to be more driven by the parent company. So even... so in other words, even if the MLP market continues to be remain challenge, in potentially arising interest rate environment whether that be in '09 or whenever that happens, we should consider that the dropdown schedule... dropdowns will proceed in 2009.

Peter Evensen - Chief Strategy Officer

Yes. And I think one of the benefits is that a lot of the earmark assets already have debt financing attached to them. And the... we have three agreements from our banks to be able to convey or sell those assets to the MLPs and the debt will automatically follow. So if you will even if there's an increase in the overall debt financing rates it will not take place on the assets that are dropped down because we've already pre-arranged financing on them.

Gregory Lewis - Credit Suisse

Okay great.

Peter Evensen - Chief Strategy Officer

So that's a real benefit given the amount of debt component in, that's a part of those dropdown.

Gregory Lewis - Credit Suisse

Okay, great. And you mentioned... I mean revenues were down in the LNG fleet in Q2 and that was related to the five dry dockings. Was that on point where all those... how many of those were planted and what was the rationale for doing all part of them in the same quarter?

Bjorn Moller - President and Chief Executive Officer

Well, we have to respond to customers and we had a... there's some customers who wanted us to move up some dry dockings particularly on some Suezmax tankers. And so that's what cause the bunching. Obviously we would have wanted to space it out but we moved for example one dry dock from the fourth quarter to the second quarter because the customer asked us to do that.

Peter Evensen - Chief Strategy Officer

Some of the tankers in Teekay offshore for example, sorry in TGP delivered in very short order back in 2003 and there after the five year survey so they come and there's some bunching going on there.

Gregory Lewis - Credit Suisse

Okay, great. And then one last thing, wanted to touch on PLO. You mentioned that having acquired Petrojarl, congratulations on that... that would enable you to accelerate the dropdowns in the FPSO... I mean were you the majority owner anyway?

Peter Evensen - Chief Strategy Officer

Yes, we were majority owner but we have to go through the same... it's easier when you are 100% rather than have to make public all of those things of that TEEKAY Petrojarl level, we were selling from one subsidiary to another, now that we own 100% of the Teekay, it's easier to affect those dropdowns.

Gregory Lewis - Credit Suisse

Okay, great. And then just to really touch on the FPSOs. I mean you mentioned there's the re-negotiations for many of the FPSOs are happening or beginning to happen. When should we sort of see those... those re-chartering of those FPSOs and at this point what sort of increases you think that you potentially could get on FPSOs on average.

Bjorn Moller - President and Chief Executive Officer

I don't think we want to get drawn down that while we are negotiating, but I think it varies to meet some of the contracts to further... out of the money than others and of course you would expect greater adjustments on those contracts. I think we've previously guided that the contracts were running through to 2009, 2010 and that we would enter the window of renewals some 18 months before.

Gregory Lewis - Credit Suisse

Okay, so guidance from I guess I think it was about a year ago is still the same guidance we should be looking at... thinking about.

Bjorn Moller - President and Chief Executive Officer

That's right, obviously where you close on... we are getting all this [indiscernible] on the way but I cant really guide you too much.

Gregory Lewis - Credit Suisse

Okay, thank you very much.

Bjorn Moller - President and Chief Executive Officer

We are optimistic.

Operator

Thank you. Our next question comes from Justine Fisher of Goldman Sachs. Please go ahead.

Justine Fisher - Goldman Sachs

Good morning.

Bjorn Moller - President and Chief Executive Officer

Hi, Justine.

Peter Evensen - Chief Strategy Officer

Good morning.

Justine Fisher - Goldman Sachs

The first question is why the vessels in China are delayed exactly; is that because of... I don't know credit issue that would otherwise [indiscernible] order being delayed?

Bjorn Moller - President and Chief Executive Officer

It's two... it's a combination of the yards general productivity and then the fact that we are holding their feet to the fire on our exacting standards. So when it comes to welding and quality of raw material being percentage for our supervision team, they will readily reject something which is not to our standards. So... and the yard is very good because I think the Teekay is a great mucky name that can help them gain international recognition for their capability. So there's an education process that we're helping them with, but we also... it's causing some delay in the construction.

Justine Fisher - Goldman Sachs

Do you think --

Bjorn Moller - President and Chief Executive Officer

Where we --

Justine Fisher - Goldman Sachs

All right go ahead.

Bjorn Moller - President and Chief Executive Officer

All, thanks.

Justine Fisher - Goldman Sachs

Do you think Teekay is in need to holding this seat to the fire and these sort of things?

Bjorn Moller - President and Chief Executive Officer

Probably not unique but I think we are... we are probably... this is a yard that has filled tankers before but not for export. So I think we have caught them at a time when they were on the learning curve and that's helpful in the sense that we build very strong relationship with yard and it's helpful to them because they can gain from our international experience. So, it's working out very well.

Justine Fisher - Goldman Sachs

And, do you think that you would order vessels again either at this yard or other yard I guess on the same point in the learning curve again in the hindsight, would you go... would you...

Bjorn Moller - President and Chief Executive Officer

With this [indiscernible] I mean this is... they are... China's going to be a big shipbuilding nation and it's important bridgehead for us to be that and so, okay at various points in their learning curve you may kind of put a little bit of an extra cost in there for extra supervision and things like that when you compare the pricing between Korea and China but it's kind of the... not at long before they will be right out there.

Justine Fisher - Goldman Sachs

So you guys would... would you again... a yard in the similar position, maybe not even this yard.

Bjorn Moller - President and Chief Executive Officer

Yes now I think China is a place that Teekay will build a lot of ships in the future.

Justine Fisher - Goldman Sachs

You haven't disclosed the name of the yard have you?

Bjorn Moller - President and Chief Executive Officer

It's at Bow High [ph]; I don't think it's secret.

Justine Fisher - Goldman Sachs

Okay.

Bjorn Moller - President and Chief Executive Officer

They don't yard, so it's not the progress yards. I think some of the yards are having the financial difficulties to stay on yards doing well, they are just coming up the learning curve.

Justine Fisher - Goldman Sachs

Okay. And then about the... just with respect to the debt issuance and the unit issuance with the daughter company, just so that I can clarify. So what you are saying earlier about the debt, it is attached to the assets that you may drop down, that you can drop basically the debt with the asset. So you could obviously issue units again but there's no requirement to. But it was the same as it was before, right?

Bjorn Moller - President and Chief Executive Officer

That's right.

Justine Fisher - Goldman Sachs

And then as far as the debt that was gone to finance the Petrojarl transaction, is there... are you guys going to look to repay that with cash flows or is that sort of remain outstanding. Because that can... that's just separate from any assets that are dropped down, right.

Bjorn Moller - President and Chief Executive Officer

That's right. That's we just drew on our corporate revolvers to finance that share acquisition.

Justine Fisher - Goldman Sachs

And in terms of cash flow use, I mean is that different than that leadership previously in that, a lot of debt initiatives have been secured over the last two quarters and associated with assets. So is there a notion to potentially use some cash to pay that down too?

Bjorn Moller - President and Chief Executive Officer

Yes, overtime with cash flow generated from our standalone operations as well as some dividends and subsidiaries. We manage our revolvers on a portfolio basis. So these revolvers would be paid down over in due course.

Justine Fisher - Goldman Sachs

Okay. Thanks a lot.

Bjorn Moller - President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Stephen Eriko, Local Wood Capital [ph]. Please go ahead.

Unidentified Analyst

Hi. Thank you very much. Three questions for you, number one, can you give me an idea, of the timing on when you expect to get this re-statement finished. Is this a 12-month period of time or is it something we could probably get complete in one to two months.

Bjorn Moller - President and Chief Executive Officer

No won't take that long. We are making sure that we are doing a thorough review of all of our derivatives and all the documentation. We are going through all that along with the auditors reviewing and auditing that. So we expect to be able to re-file our financial some time in September this year.

Unidentified Analyst

Okay that's great. Secondly the $76 million of operating cash flow at Teekay standalone, can you tell me how much of that was just from your GP incentives or your total GP interest?

Bjorn Moller - President and Chief Executive Officer

Well the... that number just right now is not a very significant number. On a annualized basis it's about $6 million or $7 million. However as we mentioned for Teekay offshore is expected to increase. It's third quarter distribution by 12 to 15% as a result of the recent dropdown in June, and that actually move the GP from 2% currently all the way through the 25%; we actually surpassed the $0.15 [ph]... 15% GP split. So that GP number is moving up very quickly.

Unidentified Analyst

Yes I know, in the past at one of your investment presentation your guys gave a schedule on quickly you thought that GP income grow is the something that you guys would... could update for us or put that schedule out again or specifically based on the TOO dividend increase that you just talked about and what's looking forward for the TGP dividend increase in the next quarter. What is this current $6 million to $7 million quarterly run... grow to?

Bjorn Moller - President and Chief Executive Officer

I don't have a specific figure, I think you can refer back to the table that we provided which is assuming that we increase the distributions in TGT by 10% per annum and Teekay offshore by 15% per annum. So in terms of where we are in 2008, we're reaching those targets. So we're pretty much on target in terms of those forecasts.

Unidentified Analyst

Okay, thank you very much.

Bjorn Moller - President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Alec Modizen [ph] of Cobalt Capital. Please go ahead.

Unidentified Analyst

Hi there. I just had a question about the operating cost. I just wanted... you mentioned that there were some one during the quarter in terms of repair and maintenance and dry dockings. And wanted to hopefully get some quantification about how much those one-offs were versus how much of the increase in operating cost was just general inflation?

Bjorn Moller - President and Chief Executive Officer

Yes, in terms of the LNG side, in terms of timing differences, there are roughly about say $2 million of non-recurring. In terms of the shallow tanker, as you know we do a lot of the maintenance work during the summer month. So I wouldn't... that's more of a seasonal factor as apposed to non-recurring.

Unidentified Analyst

Okay. And then, I just hope you can just walk me through. I am having a little bit of trouble each quarter at previous translating the far [ph] prices... one season industry data into what you guys actually realized. I was hoping I could get some guidance on how long the time lag is between the core prices of the VLC now being realized in your results and you mentioned that that issue with the four Suezmax tankers and the lag in the profit share on the time charter. Is that all of the kind of spot sensitivity that one gets in the prime charter rate or is there anything else, that comes to --?

Bjorn Moller - President and Chief Executive Officer

Yes, it's complex question you ask, I will try and address the way I understand it. First of all I guess the publicly available information say from Clarkson's, those rates that they publicize are intentionally disclaimed by Clarkson to not necessarily be attempting to be realistic tanker rates than more... it's more about the direction of the market, it's a very good indicator of direction and you can co-relate very closely with Clarkson and tankers rates but they are not actually... absolute numbers that should be compared to what a real tanker will learn in the real wealth.

As far as when you have the volatility we have had in the last quarter, clearly you are going to be... it's a little bit of a lottery if you have ships showing after one week verses another week in a particular market, you can get quite big differences. But essentially you know it's a pretty transparent market and we track our balance against the entities and how we're doing and I guess our spot performance is generally strong. I am not sure if I answered your question.

Unidentified Analyst

Yes. I guess the other thing is do you have any deal on the... just the time lag issue that how long it takes a bit to be realized in your own results [indiscernible]?

Bjorn Moller - President and Chief Executive Officer

Yes, I think the smaller the ship the shorter the voyage and the more frequent you have re-chartering of vessels and so typically on Aframaxes if the day rates go up and you pretty much will have a 3 to 4 week lag and on larger vessels you might have a quite a bigger life.

Unidentified Analyst

Okay, great. Thank.

Operator

Thank you. [Operator Instructions]. So our next question comes from Urs Dur of Lazard capital Market. Please go ahead.

Urs Dur - Lazard Capital

Hello gentlemen, can you hear me?

Bjorn Moller - President and Chief Executive Officer

Yes, definitely we can Urs.

Urs Dur - Lazard Capital

Great. Good morning, good afternoon. I guess immediately a technical question. A lot of the standard stuff has been asked and it's good to see that the overall outlook is intact. But the question I just had mentioned by Vince in regards to the unrealized losses from the OMI, at the base, did you mention that's in this quarter?

Vincent Lok - Executive Vice President and Chief Financial Officer

That's right, there was $11.8 million of unrealized loss this quarter.

Urs Dur - Lazard Capital

Yes. And why was that not included in the semi-sales [ph] as a pullout.

Vincent Lok - Executive Vice President and Chief Financial Officer

Yes, we... this is just to be consistent with what we have done in the previous quarters.

Urs Dur - Lazard Capital

Yes.

Vincent Lok - Executive Vice President and Chief Financial Officer

We didn't include it in the previous quarters because it was not material. But this quarter it became a material amount given where spot rates are. So we were just trying to be consistent with how we treat the appendix A items. So you could choose to include or exclude it, I guess, when you do the numbers.

Urs Dur - Lazard Capital

No, no, I appreciate that in that regard. And in that it was non-material before, I mean I guess I'm commenting here but it was not material before that and I think it's great it being consistent, so all compliments. But since it's now material, I think it was interesting to find out about that and softens a little bit of the $1.05 that we see as a clean number just my opinions are for all the comments.

And other than that in regards to outlook if we could talk a little bit about where you see the taker market going in the next three months towards the end of the year a little bit again just on the pure spot tanker side, particularly Aframaxes and an outlook for next year, it's still lot of the icing on the cake of the overall cash flows; if you could comment a little bit further on the market.

Bjorn Moller - President and Chief Executive Officer

Yes, I guess we are further seeing volatility but as I pointed out when you have last... at least being flat out, it's not going to take much. Just this week we saw an explosion on the BCC pipeline which has caused a suspension of 700,000 barrels a day of exports from the Eastern Mediterranean and then that's going to give some dislocation. There are ships that were chartered to load out of there, they are now going to be diverted to find other cargo, private... by the oil companies who have them on charter. And if that goes on for about a month as we hear it might be, it's possible that oil would be diverted into Black Sea ports causing extra ton-miles and extra delays through the cost for instance. That's an example; we have the hurricane season now with a couple of disruptions we've already seen. So I think when you have full capacity utilization, disruptions in order of the trading patterns tend to very stimulative to tanker rates and in addition we have very high oil production out of Middle East. So I am not concerned about the volatility we are seeing, I just think it's still extremely good markets at today's level and has every opportunity to grow upside. We are very positive.

Urs Dur - Lazard Capital

Okay. So in this regard, we get a lot of questions from investors, just the decline in oil prices, while we had a bit of decline obviously in the west than in Europe on overall transportation demand. The global decline has been relatively small compared to going from 150 to 120 on oil. In your opinion, just more as a side comment, but in your opinion, do you feel that a low oil price could indeed enhance demand for spot Aframaxes globally?

Bjorn Moller - President and Chief Executive Officer

Yeah, well I think if pricing as it seems to be now, it's moving to contango then you could get all sorts, crude oil inventories are relatively low...

Urs Dur - Lazard Capital

Yes, and they are on a LIFO basis, right. So then incentize --

Bjorn Moller - President and Chief Executive Officer

Yet some stockers are restocking going on as soon as you flipping into contango so you could actually get quite a kick up with some activity.

Urs Dur - Lazard Capital

Okay. Well, thank you very much and thank you for the clarification. I appreciate it.

Bjorn Moller - President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Daniel Burke of Johnson Rice. Please go ahead.

Daniel Burke - Johnson & Rice

Good day, all.

Bjorn Moller - President and Chief Executive Officer

Hi Dan.

Daniel Burke - Johnson & Rice

First, a real simple one. The 8 Aframaxes you mentioned recently in-chartering, can you give us an average rate, what those vessels were taking into the fleet?

Bjorn Moller - President and Chief Executive Officer

Before I can give you kind of a talk about what the open market is doing, it just moved up in the last two weeks, but since we started I guess it started...when we started our in-charter activity, the open market was in the low to mid 30s a day and it's moved up to the high 30s and it subsequently moved in to the low 40s, but we have done well for us stocking before the great swing as high as they are now. So its... that was the three and you probably use sort of mid-30 as the guideline.

Daniel Burke - Johnson & Rice

Okay, great. That's useful. And then the second and final question I had was just looking at the Teekay Corp net debt level and the expectations that will continue to trend downwards. I'm just looking through the second half for the year, trying to understand with asset sales proceed Teekay may realize as well as and to that end, I guess you've got Swift tankers that close, potentially you could have the sale of the Suezmaxes over to Teekay tankers. It's not likely if I heard correctly earlier that the additional drop-downs will occur to the MLPs over the second half of the year. Are there any other asset sales of any materiality that we're currently aware of?

Bjorn Moller - President and Chief Executive Officer

I think, we've indicated our intention to expedite this multi-medium product tanker market, so the possibility of a one or two more ships there. We sold one older Aframax that what we saw was very affective price and we have a number of vessels in that age bracket but we are not... we are opportunistic. So we will play by... so of course enjoying very good earnings in those vessels. So that's... it's going to be... there is no large scale sale effort, but there is an opportunistic approach to ship values.

Daniel Burke - Johnson & Rice

And I guess the second piece of that question then would be just if you could refresh me what the second half for the year CapEx looks like that's going to be funded through the Teekay Corp balance sheet and cash flow?

Vincent Lok - Executive Vice President and Chief Financial Officer

Yes, if you look at our CapEx table on the earnings release, in the spot tanker segment we have about a little bit over $200 million really into the spot tanker segment. And so those would be in the Teekay Corp standalone. The LNG piece is Teekay LNG partners. That's mainly due to the tanker that I told you.

Daniel Burke - Johnson & Rice

Okay great. So just what we know now kind of balancing out all operating cash flow looks like it should flow through the bottom line of the Teekay Corp parent. I guess I can't generalize that could anticipate, that could grow, I know you can't comment on that. Okay guys. Thanks.

Bjorn Moller - President and Chief Executive Officer

Thank you Daniel.

Operator

Thank you. And there are no further questions, please continue sir.

Bjorn Moller - President and Chief Executive Officer

Okay. Well, we'd like to thank you very much for joining us today. It, certainly we have enjoyed the interaction and look forward to talking to you next quarter. Thank you very much.

Operator

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

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Source: Teekay Corp. Q2 2008 Earnings Call Transcript
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