Teekay Offshore Partners L.P. has reported preliminary second quarter 2008 financial results.
The Partnership also announced that it plans to restate financial results from the fourth quarter of 2006 through the end of the second quarter of 2008, including preliminary and previously announced results included in this earnings release, to adjust its accounting treatment for certain derivative transactions under the Statement of Financial Accounting Standards (SFAS) 133, Accounting for Derivative Instruments and Hedging Activities, as more fully discussed below under "-Restatement of Financial Statements." None of the results included in this earnings release reflect restatement adjustments.
Summary of Preliminary Results
The Partnership reported net income of $19.2 million for the quarter ended June 30, 2008, compared to net income of $3.7 million for the same period last year. In the second quarter of 2008, net income before non-controlling interest included non-cash gains of $41.2 million relating primarily to changes in fair value of interest rate swaps not qualifying for hedge accounting and deferred income tax recoveries, net of foreign currency translation losses. In the second quarter of 2007, net income before non-controlling interest included non-cash losses totaling $6.5 million relating primarily to foreign currency translation losses and deferred income tax expenses. Net voyage revenues(1) for the second quarter of 2008 increased to $162.5 million from $152.4 million in the same quarter of the prior year.
Net income for the six months ended June 30, 2008 was $19.7 million, compared to net income of $10.5 million for the same period last year. In the six months ended June 30, 2008, net income before non-controlling interest included non-cash gains of $35.2 million relating primarily to changes in fair value of interest rate swaps not qualifying for hedge accounting and deferred income tax recoveries, net of foreign currency translation losses. In the six months ended June 30, 2007, net income before non-controlling interest included non-cash losses totaling $6.9 million relating primarily to foreign currency translation losses, net of deferred income tax recoveries.
During the three months ended June 30, 2008, the Partnership generated $10.5 million of distributable cash flow(2), up from $6.8 million for the first quarter of 2008, primarily as a result of higher shuttle tanker utilization, fewer drydockings performed during the second quarter and increased cashflow as a result of the acquisition of an additional 25 percent interest in OPCO on June 18, 2008. On August 1, 2008, the Partnership declared a cash distribution of $0.40 per unit for the second quarter of 2008. The cash distribution is payable on August 14, 2008, to all unitholders of record on August 7, 2008.
The Partnership owns two shuttle tankers, one Floating Storage and Offtake (FSO) unit, and a 51 percent interest in OPCO, which owns and operates the world's largest fleet of shuttle tankers, in addition to four FSO units, nine double-hull conventional oil tankers and two lightering vessels.
(1) Net voyage revenues represents voyage revenues less voyage expenses, which comprise all expenses relating to certain voyages, including bunker fuel expenses, port fees, canal tolls and brokerage commissions. Net voyage revenues is a non-GAAP financial measure used by certain investors to measure the financial performance of shipping companies. Please see Appendix B for a reconciliation of this non-GAAP measure to the most directly comparable financial measure under United States generally accepted accounting principles (GAAP).
(2) Distributable cash flow is a non-GAAP financial measure used by certain investors to measure the financial performance of the Partnership and other master limited partnerships. Please see Appendix A for a reconciliation of this non-GAAP measure to the most directly comparable GAAP financial measure.
On June 18, 2008, Teekay Offshore purchased an additional 25 percent interest in OPCO from Teekay for $205 million. Concurrently, OPCO acquired from Teekay two 2008-built Aframax lightering tankers, specially designed to be used in ship-to-ship oil transfer operations, for a total cost of $106 million, including the assumption of $90 million of existing debt relating to the vessels. These tankers are currently employed on 10-year, fixed-rate, bareboat charters to Teekay's 50 percent-owned joint venture company, Skaugen PetroTrans (with options exercisable by the charterer to extend up to an additional five years).
Also on July 18, 2008, Teekay Offshore completed a follow-on equity offering of its common units, generating $140.0 million in gross proceeds. On July 16, 2008, the underwriters exercised a portion of their 30-day over-allotment option, resulting in an additional $7.5 million in gross proceeds to Teekay Offshore.
Concurrently with the public offering, Teekay Offshore completed a private placement with Teekay, generating gross proceeds of $65.0 million. In total, Teekay Offshore raised gross equity proceeds of $216.8 million (including its general partner's proportionate capital contribution), which were used to finance the acquisitions noted above.
As a result of these acquisitions, management anticipates recommending to the Board of Directors of the Partnership's general partner an increase in the quarterly cash distribution rate in the range of 12 to 15 percent over the current annualized distribution of $1.60 per unit. If approved, this increase will be reflected in the third quarter's distribution, which will be paid in November 2008.
Future Growth Opportunities
Teekay is obligated to offer Teekay Offshore shuttle tankers, FSO units, and Floating Production Storage and Offloading (FPSO) units it may acquire in the future, provided the vessels are servicing contracts of three or more years in length.
Teekay has four Aframax shuttle tanker newbuildings on order that are scheduled to deliver between the third quarter of 2010 and the third quarter of 2011. It is anticipated that these vessels will be offered to the Partnership and will be used to service either new long-term, fixed-rate contracts Teekay may be awarded prior to their delivery or OPCO's contracts-of-affreightment in the North Sea.
On July 9, 2008, Teekay completed the acquisition of the remaining 35.3 percent of Teekay Petrojarl ASA it did not previously own. Teekay Petrojarl is a leading operator of FPSO units, with four units operating in the North Sea and one unit operating in Brazil.
Based on a pre-existing agreement, Teekay is obligated to offer Teekay Offshore, within one year after having acquired 100 percent of Teekay Petrojarl, its interests in Teekay Petrojarl's existing FPSO units that operate under charter contracts with remaining terms greater than three years. Teekay is also obligated to offer Teekay Offshore its interest in future FPSO projects with charter contracts greater than three years.
Teekay's Remaining Interest in OPCO
Teekay may offer to Teekay Offshore additional limited partner interests in OPCO that Teekay owns. Teekay currently owns 49 percent of OPCO and Teekay Offshore owns the remaining 51 percent.
Cash flow from vessel operations from the Partnership's FSO segment in the second quarter of 2008 remained virtually unchanged from the previous quarter. Net voyage revenues increased primarily as a result of the reimbursement of specific crew costs as stipulated in the charter contract for one of the FSO units and foreign exchange fluctuations. Vessel operating expenses increased due to foreign exchange fluctuations and costs associated with a hose change-out on one of the FSO units in the second quarter. Depreciation and amortization increased due to a change in the estimated useful life of one of the FSO units.
As of June 30, 2008, the Partnership had total liquidity of $258.8 million, comprised of $113.0 million in cash and cash equivalents and $145.8 million in undrawn revolving credit facilities.
Restatement of Financial Statements for Accounting under SFAS 133
The Partnership plans to restate financial results from the fourth quarter of 2006 through the end of the second quarter of 2008, including preliminary and previously announced results included in this earnings release, to adjust its accounting treatment for certain derivative transactions under SFAS 133, Accounting for Derivative Instruments and Hedging Activities.
The restatements will correct the Partnership's accounting for certain of its interest rate swaps used in its hedging strategies to manage interest rate risks. To date, the Partnership has accounted for the applicable derivatives as hedging instruments in accordance with SFAS 133. The fair values of these derivatives was recorded as derivative assets and liabilities on the Partnership's consolidated balance sheet, with the fair value changes each quarter recorded in accumulated other comprehensive income (loss). The Partnership recently discovered that since the fourth quarter of 2006, certain of its derivatives did not qualify for hedge accounting treatment under SFAS 133 because aspects of the Partnership's hedge documentation did not meet the strict technical requirements of the standard. Accordingly, the Partnership will recognize the changes in the fair value of these derivatives through the statement of income rather than as a component of accumulated other comprehensive income (loss) on the Partnership's consolidated balance sheet and statement of changes in Partners' equity.
The Partnership believes that the applicable derivative transactions were consistent with its risk management policies and that its overall hedging strategy continues to be sound. The change to the accounting treatment for these transactions will not affect the economics of the derivative transactions nor the Partnership's cash flows, distributable cash flow, liquidity or total partners' equity at June 30, 2008. However, the restatements will result in greater fluctuations in reported net income (loss) for the restated periods and will affect the preliminary financial results announced today for the three- and six-month periods ended June 30, 2008. The Partnership will finalize restatement amounts for the current period and applicable previous periods as soon as practicable and will release restated results and file amendments to its previous filings with the U.S. Securities and Exchange Commission as required. Accordingly, the Partnership's previously reported financial statements for the periods from 2006 to the first quarter of 2008 should not be relied upon and the financial results included in this earnings release, which do not reflect the accounting adjustments described above, should be considered preliminary. Ernst & Young LLP, the Partnership's independent registered public accounting firm, will complete its review of the financial statements as at June 30, 2008 and for the three- and six-month periods ended June 30, 2008 and 2007 following the completion of the restatements noted above.
The Audit Committee of the Partnership's general partner has discussed the matters related to the restatement with Ernst & Young LLP.
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