Welcome to Teekay Corporation’s First Quarter 2016 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 would like to direct all participants to our website at www.teekay.com where you will find a copy of the first quarter 2016 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 first quarter 2016 earnings release and earnings presentation available on our website. I will now turn the call over to Mr. Evensen to begin.

Thank you, Cam. Hello, everyone and thank you for joining us today for Teekay Corporation’s first quarter of 2016 earnings conference call. I am joined for the Q&A session by our CFO, Vince Lok; 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. Turning to Slide 3 of the presentation, I will briefly review some recent highlights for Teekay Corporation. During the first quarter, we generated consolidated cash flow from vessel operations, or CFVO of $359 million, an increase of 12% over the same period of the prior year. The increase in cash flows was driven mainly by the delivery and acquisition of various growth projects during 2015, which more than offset the lower revenues from Teekay Offshore’s Varg FPSO as the unit begins to wind down operations after almost 18 years on the Varg field, which I will touch upon in more detail later in the presentation. Teekay Corporation reported an adjusted net loss of $6 million or $0.08 per share in the first quarter compared to an adjusted net income of $16 million or $0.22 per share in the same period of the prior year. For the first quarter of 2016, Teekay Corporation declared a cash dividend of $0.055 per share consistent with our fourth quarter of 2015 dividend. To bolster the Teekay Group’s financial position, we have completed or are nearing completion a number of financing initiatives at Teekay Offshore, which addresses their 2016 and 2017 funding requirements and at Teekay Parent, which reduces our financial leverage and increases our liquidity. I will touch on these initiatives later in the presentation. Turning to Slide 4, I will review some recent highlights from our three publicly…

Thank you. [Operator Instructions] And our first question will come from the line of Michael Webber of Wells Fargo. Please go ahead.

Hey, good morning guys. How are you?

Good. Thanks.

I wanted to first dive into some of the OPCO assets. And Vince, I know it can be bit of a complicated exercise, but if I think about the EBITDA and the cash flow. The cash flow available for distribution is delivered from the OPCO asset this quarter and sort of true that up with the EBITDA guidance around the – not the guidance, EBITDA expectations, I guess, around the existing FPSOs and the tanker assets. I am just trying to figure out what, aside from delay of costs on the LNG carriers, what drove OPCO Bcf down to the point where it was [indiscernible]. So, is there anything else baked into that cash flow line item this quarter that we wouldn’t have expected last quarter?

Yes, hi, Mike. This is Vince. I will point out maybe three things in the first quarter OPCO EBITDA that you see there. First is in the in-charter conventional tankers line, we did make a termination fee payment to Teekay Offshore for $4 million to terminate the Kilimanjaro charter. So, that’s a one-time item in the first quarter. Secondly, on the FPSO line, as you know, we have the temporary outage of the Banff in the first quarter. So, the combination of loss revenues and the repair cost was about $5 million in the first quarter. So, that’s also a one-time item. And thirdly, in the other call – on other row there, the Arctic and Polar, as you know, was idle during the first quarter and that has a negative drag of about $9 million per quarter. So, those are the three things that total about $18 million.

Right. And if I strip out the one-time cost, then I go to the guidance slide where you guys have – you have included some of the SNPC associated with TIL and some of the OpEx savings, they get to about $1.5 million bump on a cash flow basis sequentially, which implies a loss of the OPCO for Q2. Is there anything else that would need to be stripped out of or would be included in that Q2 guidance that would improve that figure?

No, I think that’s fully reflected in that Q2 guidance, Mike.

Okay. I think it’s a complicated exercise. Let me dig into it offline. But maybe a higher level and for Vince or Peter, you mentioned Vince one of the drags on the OPCO cash flow to the LNG carriers that are chartered in and either in line [indiscernible] at 50k a piece I believe. I am just curious whether what the employment prospects look like for the assets whether its public plan and I guess now expectations there changing?

Sure. Both ships have been repositioned to Asia near Singapore and we are in talks with numerous potential customers from multiyear time charters, but we don’t think they will start up till Q1 ‘17. So, we anticipate we will get a drag for ‘16. We may get some short-term charters, but that’s not our budget right now given the weak LNG market. Most of these potential charters – charterers or customers, they are targeting niche trades to China like the Shenzhen or the Guangdong import terminal. Even though not all of them are Chinese companies, but it allows these ships that can go higher up these rivers to access import terminals that a bigger LNG carrier couldn’t do. So, with these ships working niche trades, as you know, they used to be trading to Argentina up the rivers, the higher rates that we are discussing now exceed what owners might reasonably expect for standard LNG carriers given that they have unique attributes that can be used in China and Argentina. So, that’s our base operating model.

Right. And the expectation here is that trading those on a spot basis or position to trade on a spot basis to bring in even if its $25,000, $30,000, the cost associated with positioning into that it would outweigh the potential benefit payrolls of the contracts?

Yes. I will talk more about the LNG market in tomorrow’s call, but the reality is $25,000 or $30,000 that people are looking at, you have to adjust that by utilization. And there is cost to being warm and cost to being cold. So, we actually don’t actually think you will realize an incremental $30,000. But the good news is that these – the Arctic and the Polar are good for niche trades whether it’s Argentina or China up the rivers or Alaska assuming that you can get some long-term exports out of LNG, which is where – which is the trade they were built for.

Fair enough. Okay. Just wanted to talk about FPSO for a second, then I can turn it over. On the call earlier, you mentioned in the call and I think you mentioned in your prepared remarks for the parent call here. I guess two questions around it. On the call earlier, you mentioned the evaluation from a third-party broker or third party source of kind of 250 to 300, which brought our attention simply because it implies a pretty healthy multiple. So one, I guess, the question will be is that on an as-is basis and is that applicable for us, your fleet even in the parent FPSOs, which would certainly impacts the way we think about NAV? And then secondly, with that asset specifically, I know you are in conversations around getting that employed, but heading into the North Sea and the idea that it would need to go to the shipyard for any sort of upgrades, what’s the – where is the red line in terms of getting that ready to actually hit the summer window next year or 2018 rather to get employed or where you would actually be? Where is the red line to actually hit that summer window for the North Sea, for the Varg?

Okay. So what I said on the previous call and this is the Varg FPSO, which is owned by Teekay Offshore, not Teekay Corporation is that we had received charter valuations without contract as-is of 250 million to 300 million. And so that’s the basis that you use before you put into the cost of advertising upgrades in order to get the charter rate. So, that’s why while it was producing 6,000 barrels on its current contract, it can produce, as Kenneth said, well over 50,000 barrels, 57,000. It has gas export. So, it has a lot of great attributes as well as being the only FPSO available in the Norwegian sector. But you can’t read through that every FPSO is worth the same as the Varg. Each FPSO has different attributes, including its production, whether it has gas compression, what its storage is. So that isn’t something you can simply multiply.

Right. Now, I am just looking multiple of something between the line of between 6x and 7x, how applicable is that to your parent fleet?

I would say that without getting totally drawn, I would say that we would expect that the new contract that we get for the Varg to give us a higher CFVO than the current contract, which was $50 million per annum, because it is worth more to that charterer on a per barrel basis and that’s – and so that’s what we see. And the upgrade is dependent on the contract. But what I said of the previous call was that we see a startup on that in more likely to be 2019, but that would be a multi-year contract that would allow us to make any upgrades.

That’s it, that’s helpful. And I…

And that’s the discussions we are having with people. If there was an early well test, which has a lower probability, it could start in 2018. But we are not really interested in early wall test, we are interested in positioning it for a long-term, medium-term contract.

Okay, fair enough. I can follow-up online. I appreciate it. Thank you.

Thanks.

And your next question will come from the line of Gregory Lewis of Credit Suisse. Please go ahead.

Thank you and good morning and thank you for taking my questions.

Hi Greg.

So Peter, you mentioned the potential to contract the Varg and this kind of goes across the whole platform. As we think about taking delivery of assets, newbuilds that are on contract as potentially going out and upgrading existing assets, just given all the issues we have seen in the oil and gas space with counterparty risk, when these contracts are written, what types of termination clauses and I realize they can all be different, but when Teekay is in negotiations on these types of contracts, what types of termination penalties are there for the customer should they – should you be in the process of upgrading the Varg and all of a sudden, you mentioned 2019, the 2019 for whatever reason doesn’t become 2019, yet you have already started investing, how does that mechanism work?

Well, I think let me clear up some misconceptions. So if you are in the exploration side of things, you are not as time sensitive. In other words, if you want to cut short a drilling program and you decide you don’t want to drill it, that’s fine. You just terminate those. But when you are in a field development like for example, what the Libra is going through or the Petrojarl 1, there isn’t – there is much more money being committed by the customer than just taking our unit on contract. They are laying sub-sea lines. They are putting in place risers and so they have already committed well over double what they are going to pay us. So it isn’t a question for them abdicating, they are already committed. And so it’s only a question of when they start up that field. So that’s why even though you could see various plants like Chevron going over budget on Corgan, they are going to complete it. And the same thing is true with these multi-year oilfields. If you are Gina Krog or any of these other ones, they are going to complete them. And, by the way, they want our units. So the big issue is they need our units and that’s what gets into the contract. Now once the contract is up and operating, then people can come to you and say, can we work on efficiencies and obviously in the current market, every oil company is reaching out to their suppliers and saying is there a way to cut costs, can you cut. And by the way, as part of our $30 million cost savings, we are reaching out to our own suppliers. And that’s why we call the continual cost deflation coming in. But the…

Yes. Absolutely, I mean but we have seen some issues on – with some other FPSOs outside of Teekay as well. That’s kind of why I was getting at that. And then my other question was, so just as I think about the equity issuance, I mean that seems like the absolute right move and then the preferred issuance at TOO, are the – these are pending – is the Teekay equity a pending transaction or is this something that has already occurred?

Hi Greg, the Teekay common equity is all committed foreign priced. It’s just conditional upon the completion at the TOO $200 million preferred offering, which we expect to complete sometime in June. But everything else is locked down, the pricing and the commitments and the allocations.

Okay. And then just as I look at this, I mean you guys have been doing a lot of a work here with the refinancing and all these. As you sort of – when you sort of like lay this down and the fact that now you are talking about potentially it seem like there was a noticeable shift change or you are actually talking about distribution increases again, just – as I mean – and I realize this is a very volatile market out here, but as you go ahead and look forward, I mean it seems you kind of view this as kind of all our solvency issues are kind of behind us with these capital raises?

Well, as Peter said on Slide 9, it is a phased approach here. It isn’t – it’s a multi-year plan to create long-term shareholder value. And the big – the initial step, the first step here is really to fortify the balance sheets of the group here. And the completion of these financing initiatives will do that and alleviate any concerns over the near-term and medium-term above liquidity. It gives us a clear runway and a lot of financial flexibility moving into the other phases as we detailed on the slide here.

Okay, great. Thank you very much for the time.

Thank you.

Your next question is coming from Fotis Giannakoulis of Morgan Stanley. Please go ahead.

Yes. Hi guys and thank you again. I want to ask about how do you view the repayment of the debt of the parent, are there any thoughts of potentially selling any shares of the daughter companies, I am trying to understand what is the cash flow of the parent and I see that the EBITDA in this quarter, excluding the dividends was around $4 million. And it seems that with the Hummingbird Spirit coming off contract a year from now, basically that might be turning negative, can you explain what am I missing here?

Hi, Fotis. Obviously, with the equity offering we are doing here, that’s one step towards the de-levering. Going forward, obviously, with the distribution cuts in TGP and TOO, that is reducing our free cash flow at the parent temporarily. But as Peter indicated, we have the capacity down the road to increase those distributions, what obviously will have a significant impact on our free cash flow at the parent, particularly given the IDRs of the GP. So, that’s from a free cash flow perspective. And in terms of the remaining assets at the parent company, we have the VLCC, the Shoshone Spirit. That is still on a short-term charter that runs to the end of this year. It’s generating good cash flow. But our intention is to sell that asset and that will be another source of de-levering. In terms of the remaining FPSOs, our intention over the long-term still is to sell those assets to TOO once it has more balance sheet capacity and that will be another major source of de-levering. So, our plan to de-lever the parent towards net debt free hasn’t changed. It’s just going to take a little bit longer than originally anticipated.

We are confident we will reemploy the Arctic and the Polar, which is generating significant negative CFVO right now, and we are in – and we are talking with Centrica, which charters the Hummingbird FPSO. And we hope to extend the term of the Hummingbird FPSO contract beyond its current expiry of March 31 of next year. So, we will provide further details if and when a contract extension is signed.

Peter, can you give us a little bit more color on the particular field at what level it’s operating right now?

No. We are in discussions to extend that Hummingbird FPSO contract. So, that’s pretty much tells you the physical side of that field. It has more oil in it.

Thank you. One last question, on the other segment that you are reporting, would you be able to remind us which are the assets that you have and what is the impact of the Yemeni vessels that they are right now not operating and if there is any update on these vessels? I understand that the parent is providing some cash flow to TGP on these vessels.

No, the Yemen LNG is subject to the Teekay LNG and I will be glad to answer that question tomorrow on the Teekay LNG earnings call.

And would you be able to remind us the assets on the other segment that you have?

You are referring to the free cash flow statements, Fotis, in the other segment in OPCO?

Correct, yes.

Yes, that’s mainly in-charters. And the most significant drag there, as I mentioned earlier, is the Arctic and Polar Spirit, which is in-charter from TGP. Maybe that’s what you are referring to instead of Yemen. And as we said, that currently has a negative drag of about $9 million a quarter. But as Peter said, we are looking at a number of charter opportunities that would commence in early 2017. So, that’s the most significant drag there. The other income would include things like fees that we would generate from our management of TIL and Bill and a few other miscellaneous items. Those are the most significant.

Thank you.

And your next question will come from the line of Amit Mehrotra from Deutsche Bank. Please go ahead.

Yes, thanks so much. Good morning, guys. I just had a quick question on the common equity offering. $100 million is, I guess, a nice round number. Just wondering how you got there. And I know it lowers net debt to, I guess, the 41% level. I am wondering if you ever thought about actually raising more than that and how you got to that number given the organic de-leveraging plans sort of in place at the parent level? Thanks.

Well, there is always a balance between financial strength and stability and dilution. And this is the first time Teekay Corp. has issued equity in gosh, really since we did the mandatory convertible preferred, I think in ‘03. So, it isn’t a common occurrence. It was not our preferred. We just felt that issuing a $100 million, we could – that would really having a strong sponsor will benefit our daughters and it will very much assist in our discussions with the rating agencies. So, we wanted to take some risk off the table in today’s uncertain markets. And the financial strength is important when we are negotiating long-term contracts. And it will also help us complete all the financial initiatives we have talked about today. There are a lot of financial initiatives. A lot of banks have given us a lot of new money. So, they want to know that the parent as well as the daughters are in good shape. And so that helps us complete the financing not – I have spent a lot of time talking about Teekay Offshore, but we are also completing the financing at Teekay LNG. So, this $100 million will give a lot of confidence, a lot of different ways. And I also said, as the number two part on Slide 9, I think it will help us optimize the asset portfolio and the balance sheet. And so we have rising cash flow. And so while it hurts a little bit on a diluted basis, I think we will more than make up for that with the increases in the LPs and ultimately the GP value.

Yes, okay. Now that makes sense. And one more for Vince on the two LNG tankers, did you say it was $9 million a quarter and then basically expect to get that re-charted in the first quarter of the year, so should we think of that as sort of $36 million headwind perspectively through the course of the year?

Yes, it’s a $9 million quarter, so I give the worst case, which is that we don’t get a multiyear contract since Q1 ‘17. So, that doesn’t mean we are not out trying to get short-term charters for it. And I am just trying to give a realistic view of when we think we will get a multiyear contract. We have lots of people coming in and asking for it, but we are kind of being choosy in trying to lock it up on its multiyear charter. We had it done, first it was in Alaska for a long time and Kenai looks like it might start to have export volumes. We had it done in Argentina. And now there is a lot of potential in China where it’s been on short-term charters before. So, we see increased imports of LNG into China, and we know those import terminals need to take our kind of vessel with shallow draft. So, it’s a little choosy, but I would rather get the multiyear contract.

Yes, sorry to interrupt there. Just maybe I don’t know if you can offer any color in terms of what the maybe near-term opportunity cost associated with sort of being a little choosy. I understand that $30,000 a day is fully appreciated that it’s based on some probably gross utilization levels or full utilization levels. Is there any indication in terms of what kind of money you guys are leaving on the table in the near term to maybe get in that longer term cash flow?

Well, it all depends. Because in order to be ready to take a cargo, you have to cool it down and it costs several million dollars to cool down a ship. So, what’s happening is it can cost you a lot of money to be in a ready to pick up a cargo state. So, we have let it warm up. And so that’s why that kind of vessel is better off to move it out where it can be utilized and then wait for a multi-year contract.

Okay, got it. Okay, guys. Thanks so much. Appreciate it.

Thank you.

It appears that there are no further questions at this time. Mr. Evensen, I would like to turn the conference back to you for any additional or closing remarks.

Okay, thank you all. As you see, I am very proud of the team for having accomplished a lot especially on the financial side and we look forward to reporting back to you next quarter as well as incremental views as we complete the rest of these financial initiatives. Thank you very much for listening.

This concludes today’s call. Thank you for your participation. You may now disconnect.