Form 6-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 6-K

 

 

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2012

Commission file number 1-12874

 

 

TEEKAY CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

4th Floor, Belvedere Building

69 Pitts Bay Road

Hamilton, HM 08 Bermuda

(Address of principal executive office)

 

 

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F  x            Form 40- F  ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1).

Yes  ¨             No  x

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7).

Yes  ¨             No  x

 

 

 


Table of Contents

TEEKAY CORPORATION AND SUBSIDIARIES

REPORT ON FORM 6-K FOR THE QUARTERLY PERIOD ENDED June 30, 2012

INDEX

 

     PAGE  

PART I: FINANCIAL INFORMATION

  
Item 1. Financial Statements (Unaudited)   

Unaudited Consolidated Statements of (Loss) Income for the three and six months ended June  30, 2012 and 2011

     3   

Unaudited Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended June 30, 2012 and 2011

     4   

Unaudited Consolidated Balance Sheets as at June 30, 2012 and December 31, 2011

     5   

Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011

     6   

Unaudited Consolidated Statement of Changes in Total Equity for the six months ended June 30, 2012

     7   

Notes to the Unaudited Consolidated Financial Statements

     8   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     23   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     42   

Item 4. Changes in Internal Control over Financial Reporting

     44   

PART II: OTHER INFORMATION

     45   

SIGNATURES

     46   

 

Page 2 of 46


Table of Contents

ITEM 1 - FINANCIAL STATEMENTS

TEEKAY CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF (LOSS) INCOME

(in thousands of U. S. dollars, except share and per share amounts)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
   2012
$
    2011
$
    2012
$
    2011
$
 

REVENUES

     481,911        484,922        977,475        972,946   
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING EXPENSES

        

Voyage expenses

     39,176        51,889        77,813        97,015   

Vessel operating expenses (note 15)

     172,356        174,717        339,557        336,294   

Time-charter hire expense

     31,491        53,414        75,470        116,445   

Depreciation and amortization

     115,068        105,236        229,682        210,274   

General and administrative (notes 9 and 15)

     50,777        51,273        104,150        121,491   

Loss on sale of vessels and write-downs of vessels (note 7)

     3,269        5,812        3,072        9,405   

Restructuring charges (note 12)

     1,525        458        1,525        5,419   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     413,662        442,799        831,269        896,343   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from vessel operations

     68,249        42,123        146,206        76,603   
  

 

 

   

 

 

   

 

 

   

 

 

 

OTHER ITEMS

        

Interest expense

     (42,707     (33,516     (85,007     (66,310

Interest income

     1,645        2,457        3,691        4,922   

Realized and unrealized loss on non-designated derivative instruments (note 15)

     (94,598     (102,140     (89,783     (78,883

Equity income (loss) (note 10b)

     5,291        (6,053     22,935        341   

Foreign exchange gain (loss) (notes 8 and 15)

     17,835        (7,157     2,011        (27,497

Other income (note 13)

     89        958        2,432        1,052   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income before income taxes

     (44,196     (103,328     2,485        (89,772

Income tax recovery (expense) (note 16)

     1,849        (2,022     5,417        (2,833
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (42,347     (105,350     7,902        (92,605

Less: Net (income) loss attributable to non-controlling interests

     (4,927     8,898        (54,110     (33,504
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to stockholders of Teekay Corporation

     (47,274     (96,452     (46,208     (126,109
  

 

 

   

 

 

   

 

 

   

 

 

 

Per common share of Teekay Corporation (note 17)

        

Ÿ Basic loss attributable to stockholders of Teekay Corporation

     (0.68     (1.36     (0.67     (1.77

Ÿ Diluted loss attributable to stockholders of Teekay Corporation

     (0.68     (1.36     (0.67     (1.77

Ÿ Cash dividends declared

     0.31625        0.31625        0.6325        0.6325   

Weighted average number of common shares outstanding (note 17)

        

Ÿ Basic

     69,231,419        70,935,484        69,043,639        71,438,446   

Ÿ Diluted

     69,231,419        70,935,484        69,043,639        71,438,446   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

Page 3 of 46


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TEEKAY CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands of U.S. dollars)

 

    

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
     2012
$
    2011
$
    2012
$
    2011
$
 

Net (loss) income

     (42,347     (105,350     7,902        (92,605
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income:

        

Unrealized loss on marketable securities

     (563     (2,546     (795     (1,078

Realized loss on marketable securities

     —          —          420        —     

Pension adjustments, net of taxes

     —          —          (2,361     192   

Unrealized (loss) gain on qualifying cash flow hedging instruments

     (1,601     2,596        1,220        8,094   

Realized gain on qualifying cash flow hedging instruments

     (374     (2,144     (1,377     (3,129

Foreign exchange loss on currency translation

     (40     —          (800     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (2,578     (2,094     (3,693     4,079   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

     (44,925     (107,444     4,209        (88,526

Less: Comprehensive (income) loss attributable to non-controlling interests

     (4,432     8,719        (54,157     (34,811
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to stockholders of Teekay Corporation

     (49,357     (98,725     (49,948     (123,337
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Page 4 of 46


Table of Contents

TEEKAY CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

(in thousands of U.S. dollars, except share and per share amounts)

 

     As at
June 30, 2012

$
    As at
December 31, 2011

$
 

ASSETS

    

Current

    

Cash and cash equivalents (note 8)

     665,737        692,127   

Restricted cash

     4,659        4,370   

Accounts receivable, including non-trade of $24,635 (2011 - $38,120) and related party balance of $9,397 (2011 - $3,487)

     375,957        359,758   

Vessels held for sale

     14,961        19,000   

Net investment in direct financing leases (note 5)

     17,292        23,171   

Prepaid expenses

     77,791        82,927   

Current portion of loans to equity accounted investees

     103,000        50,000   

Current portion of derivative assets (note 15)

     20,383        24,712   

Other current assets

     456        2,672   
  

 

 

   

 

 

 

Total current assets

     1,280,236        1,258,737   
  

 

 

   

 

 

 

Restricted cash - non-current

     526,705        495,784   

Vessels and equipment (notes 7 and 8)

    

At cost, less accumulated depreciation of $2,403,707 (2011 - $2,375,604)

     6,528,607        6,678,899   

Vessels under capital leases, at cost, less accumulated amortization of $178,934 (2011 – $163,939)

     668,651        681,554   

Advances on newbuilding contracts (note 10a)

     444,173        507,908   
  

 

 

   

 

 

 

Total vessels and equipment

     7,641,431        7,868,361   
  

 

 

   

 

 

 

Net investment in direct financing leases - non-current (note 5)

     430,454        436,737   

Marketable securities

     5,925        7,782   

Loans to joint ventures and joint venture partners, bearing interest between 4.4% to 8.0%

     51,781        35,248   

Derivative assets (note 15)

     147,319        140,557   

Deferred income tax asset (note 16)

     23,476        22,316   

Equity accounted investments (notes 4 and 10b)

     436,486        252,637   

Investment in term loans

     187,347        186,844   

Other non-current assets

     128,894        119,093   

Intangible assets – net

     128,682        136,742   

Goodwill

     166,539        166,539   
  

 

 

   

 

 

 

Total assets

     11,155,275        11,127,377   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current

    

Accounts payable

     83,131        93,065   

Accrued liabilities

     298,997        394,586   

Current portion of derivative liabilities (note 15)

     118,003        117,337   

Current portion of long-term debt (note 8)

     651,218        401,376   

Current obligation under capital leases

     170,610        47,203   

Current portion of in-process revenue contracts

     67,947        73,344   
  

 

 

   

 

 

 

Total current liabilities

     1,389,906        1,126,911   
  

 

 

   

 

 

 

Long-term debt, including amounts due to joint venture partners of $13,282 (2011 - $13,282) (note 8)

     4,963,354        5,042,997   

Long-term obligation under capital leases

     471,736        599,844   

Derivative liabilities (note 15)

     610,941        569,542   

Asset retirement obligation

     22,213        21,150   

In-process revenue contracts

     204,786        235,296   

Other long-term liabilities

     197,281        199,836   
  

 

 

   

 

 

 

Total liabilities

     7,860,217        7,795,576   
  

 

 

   

 

 

 

Commitments and contingencies (notes 5, 10 and 15)

    

Redeemable non-controlling interest (note 10e)

     36,356        38,307   

Equity

    

Common stock and additional paid-in capital ($0.001 par value; 725,000,000 shares authorized; 69,266,827 shares outstanding (2011 - 68,732,341); 74,426,974 shares issued (2011 - 74,391,691)) (note 9)

     670,107        660,917   

Retained earnings

     696,831        792,682   

Non-controlling interest

     1,919,410        1,863,798   

Accumulated other comprehensive loss (note 14)

     (27,646     (23,903
  

 

 

   

 

 

 

Total equity

     3,258,702        3,293,494   
  

 

 

   

 

 

 

Total liabilities and equity

     11,155,275        11,127,377   
  

 

 

   

 

 

 

Consolidation of variable interest entities (note 4a)

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

Page 5 of 46


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TEEKAY CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands of U.S. dollars)

 

     Six Months Ended June 30,  
         2012    
$
        2011    
$
 

Cash and cash equivalents provided by (used for)

    

OPERATING ACTIVITIES

    

Net income (loss)

     7,902        (92,605

Non-cash items:

    

Depreciation and amortization

     229,682        210,274   

Amortization of in-process revenue contracts

     (35,907     (21,734

(Gain) loss on sale of vessels and equipment and other assets

     (193     311   

Loss on sale of marketable securities

     420        —     

Write-down of vessels and equipment

     1,048        9,094   

Equity income, net of dividends received

     (22,934     (341

Income tax (recovery) expense

     (5,417     2,833   

Employee stock option compensation

     4,026        13,974   

Unrealized foreign exchange (loss) gain

     (16,222     37,023   

Unrealized loss (gain) on derivative instruments

     43,104        (74,928

Other

     41,174        (7,069

Change in operating assets and liabilities

     (95,479     (47,461

Expenditures for dry docking

     (11,720     (22,172
  

 

 

   

 

 

 

Net operating cash flow

     139,484        7,199   
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Proceeds from issuance of long-term debt, net of issuance costs (note 8)

     819,955        547,253   

Scheduled repayments of long-term debt

     (154,253     (123,450

Prepayments of long-term debt

     (487,548     (341,783

Repayments of capital lease obligations

     (5,040     (2,282

(Advances) to/proceeds from loans to joint ventures and joint venture partners

     (3,659     14,500   

Repayment of loans from joint venture partner

     —          (59

Increase in restricted cash

     (31,641     (4,353

Net proceeds from issuance of Teekay LNG Partners L.P. units

     —          158,326   

Net proceeds from issuance of Teekay Tankers Ltd. shares (note 6)

     65,854        107,234   

Issuance of Common Stock upon exercise of stock options

     5,161        5,171   

Repurchase of Common Stock (note 9)

     —          (83,660

Repurchase of Teekay Tankers Ltd. Shares (note 6)

     (1,667     —     

Distribution paid from subsidiaries to non-controlling interests

     (121,109     (101,284

Cash dividends paid

     (44,956     (46,472
  

 

 

   

 

 

 

Net financing cash flow

     41,097        129,141   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Expenditures for vessels and equipment

     (205,186     (358,607

Proceeds from sale of vessels and equipment

     205,096        5,055   

Proceeds from sale of marketable securities

     1,063        —     

Investment in term loan

     —          (70,404

Investment in equity accounted investees

     (161,209     (6,544

Advances to equity accounted investees

     (58,916     (1,881

Direct financing lease payments received

     12,162        13,823   

Other investing activities

     19        19   
  

 

 

   

 

 

 

Net investing cash flow

     (206,971     (418,539
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (26,390     (282,199

Cash and cash equivalents, beginning of the period

     692,127        779,748   
  

 

 

   

 

 

 

Cash and cash equivalents, end of the period

     665,737        497,549   
  

 

 

   

 

 

 

Supplemental cash flow information (note 18)

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

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TEEKAY CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN TOTAL EQUITY

(in thousands of U.S. dollars)

 

     TOTAL EQUITY  
     Thousands
of Shares
of Common
Stock
Outstanding
#
     Common
Stock and
Additional
Paid-in
Capital
$
     Retained
Earnings
$
    Accumulated
Other
Comprehensive

Loss
$
    Non-
controlling
Interest

$
    Total
$
 

Balance as at December 31, 2011

     68,732         660,917         792,682        (23,903     1,863,798        3,293,494   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

           (46,208       53,889        7,681   

Other comprehensive income (loss)

             (3,743     50        (3,693

Dividends declared

           (44,959       (121,109     (166,068

Reinvested dividends

     1         3               3   

Exercise of stock options and other

     534         5,161               5,161   

Employee stock option compensation and other (note 9)

        4,026               4,026   

Dilution loss on public offering of Teekay Tankers (note 6)

           (14,764         (14,764

Gain on share issuance of Teekay Tankers (note 6)

           10,080            10,080   

Addition of non-controlling interest from share and unit issuances of subsidiaries and other

               122,782        122,782   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance as at June 30, 2012

     69,267         670,107         696,831        (27,646     1,919,410        3,258,702   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

Page 7 of 46


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TEEKAY CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. dollars, except share data)

 

1. Basis of Presentation

The unaudited interim consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles (or GAAP). They include the accounts of Teekay Corporation (or Teekay), which is incorporated under the laws of the Republic of the Marshall Islands, and its wholly owned or controlled subsidiaries (collectively, the Company). Certain information and footnote disclosures required by GAAP for complete annual financial statements have been omitted and, therefore, these interim financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2011, included in the Company’s Annual Report on Form 20-F. In the opinion of management, these unaudited financial statements reflect all adjustments, consisting solely of a normal recurring nature, necessary to present fairly, in all material respects, the Company’s consolidated financial position, results of operations, cash flows and changes in total equity for the interim periods presented. The results of operations for the three and six months ended June 30, 2012, are not necessarily indicative of those for a full fiscal year. Significant intercompany balances and transactions have been eliminated upon consolidation.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Given current credit markets, it is possible that the amounts recorded as derivative assets and liabilities could vary by material amounts.

Certain of the comparative figures have been reclassified to conform with the presentation adopted in the current period relating to the reclassification of prepaid expenses of $10.1 million less accounts payable of $4.0 million as at December 31, 2011 into accounts receivable in the consolidated balance sheets.

 

2. Adoption of New Accounting Policies

In January 2012, the Company adopted an amendment to Financial Accounting Standards Board (or FASB) Accounting Standards Codification (or ASC) 820, Fair Value Measurement, which clarifies or changes the application of existing fair value measurements, including: that the highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets; that a reporting entity should measure the fair value of its own equity instrument from the perspective of a market participant that holds that instrument as an asset; to permit an entity to measure the fair value of certain financial instruments on a net basis rather than based on its gross exposure when the reporting entity manages its financial instruments on the basis of such net exposure; that in the absence of a Level 1 input, a reporting entity should apply premiums and discounts when market participants would do so when pricing the asset or liability consistent with the unit of account; and that premiums and discounts related to size as a characteristic of the reporting entity’s holding are not permitted in a fair value measurement. The adoption of this amendment did not have an impact on the Company’s consolidated financial statements other than the disclosures as presented in Note 11 – Financial Instruments.

 

3. Segment Reporting

The following tables include results for the Company’s four segments for the three and six months ended June 30, 2012 and 2011.

 

Three Months ended June 30, 2012    Shuttle
Tanker and
FSO  Segment
     FPSO
Segment
     Liquefied
Gas
Segment
     Conventional
Tanker
Segment
     Total  

Revenues

     153,130         136,198         69,289         123,249         481,911   

Voyage expenses

     32,252         —           53         6,871         39,176   

Vessel operating expenses

     40,656         80,222         10,821         40,657         172,356   

Time-charter hire expense

     12,969         —           —           18,522         31,491   

Depreciation and amortization

     32,037         34,415         17,445         31,171         115,068   

General and administrative (1)

     14,960         15,481        5,541        14,795        50,777   

Loss on sale of vessels and write-downs of vessels

     1,048         —           —           2,221         3,269   

Restructuring charges

     —           —           —           1,525         1,525   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income from vessel operations

     19,208         6,080         35,429         7,532         68,249   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Segment assets as at June 30, 2012

     1,871,341         2,497,592         3,108,124         2,494,008         9,971,065   

 

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TEEKAY CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. dollars, except share data)

 

Three Months ended June 30, 2011    Shuttle
Tanker and
FSO  Segment
     FPSO
Segment
     Liquefied
Gas
Segment
     Conventional
Tanker
Segment
    Total  

Revenues

     148,647         102,658         68,002         165,615        484,922   

Voyage expenses

     26,351         —           3,778         21,760        51,889   

Vessel operating expenses

     50,558         61,509         13,145         49,505        174,717   

Time-charter hire expense

     18,751         —           —           34,663        53,414   

Depreciation and amortization

     32,125         23,215         16,196         33,700        105,236   

General and administrative (1)

     12,982         13,494         4,133         20,664        51,273   

Loss on sale of vessels and write-downs of vessels

     —           —           —           5,812        5,812   

Restructuring charges

     117         —           42         299        458   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from vessel operations

     7,763         4,440         30,708         (788     42,123   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment assets as at June 30, 2011

     1,918,171         1,321,619         2,894,240         2,807,620        8,941,650   
Six Months ended June 30, 2012    Shuttle
Tanker and
FSO Segment
     FPSO
Segment
     Liquefied
Gas
Segment
     Conventional
Tanker
Segment
    Total  

Revenues

     308,469         264,866         141,739         262,401        977,475   

Voyage expenses

     59,267         232         149         18,165        77,813   

Vessel operating expenses

     84,808         148,363         21,632         84,754        339,557   

Time-charter hire expense

     26,586         —           —           48,884        75,470   

Depreciation and amortization

     63,829         67,563         34,683         63,607        229,682   

General and administrative (1)

     29,010        32,999        11,667        30,474       104,150   

Loss on sale of vessels and write-downs of vessels

     1,048         —           —           2,024        3,072   

Restructuring charges

     —           —           —           1,525        1,525   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income from vessel operations

     43,921         15,709         73,608         12,968        146,206   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
Six Months ended June 30, 2011    Shuttle
Tanker and
FSO Segment
     FPSO
Segment
     Liquefied
Gas
Segment
     Conventional
Tanker
Segment
    Total  

Revenues

     299,859         207,276         132,635         333,176        972,946   

Voyage expenses

     45,680         —           3,827         47,508        97,015   

Vessel operating expenses

     101,392         117,011         24,222         93,669        336,294   

Time-charter hire expense

     38,378         —           —           78,067        116,445   

Depreciation and amortization

     62,744         46,946         31,052         69,532        210,274   

General and administrative (1)

     31,288         28,217         10,738         51,248        121,491   

Loss on sale of vessels and write-downs of vessels

     171         —           —           9,234        9,405   

Restructuring charges

     4,037         —           171         1,211        5,419   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from vessel operations

     16,169         15,102         62,625         (17,293     76,603   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to each segment based on estimated use of corporate resources).

 

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Table of Contents

TEEKAY CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. dollars, except share data)

 

A reconciliation of total segment assets to amounts presented in the accompanying consolidated balance sheets is as follows:

 

     June 30,
2012

$
     December  31,
2011

$
 

Total assets of all segments

     9,971,065         9,905,629   

Cash

     665,737         692,127   

Accounts receivable and other assets

     518,473         529,621   
  

 

 

    

 

 

 

Consolidated total assets

     11,155,275         11,127,377   
  

 

 

    

 

 

 

 

4. Acquisitions

a) FPSO Units and Investment in Sevan Marine ASA

On November 30, 2011, the Company acquired from Sevan Marine ASA (or Sevan) the floating, production, storage and offloading (or FPSO) unit Sevan Hummingbird (or Hummingbird Spirit) and its existing customer contract for approximately $184 million (including an adjustment for working capital) and made an investment of approximately $25 million to obtain a 40% ownership interest in a recapitalized Sevan. The Company also entered into a cooperation agreement with Sevan relating to joint marketing of offshore projects, the development of future projects, and the financing of such projects. Concurrently, the Company’s subsidiary Teekay Offshore Partners L.P. (or Teekay Offshore) acquired from Sevan the FPSO unit Sevan Piranema (or Piranema Spirit) and its existing customer contract for approximately $164 million (including an adjustment for working capital). The purchase price for the acquisitions of the Hummingbird Spirit and the Piranema Spirit and the investment in Sevan were paid in cash and financed by a combination of new debt facilities, a private placement offering of Teekay Offshore common units and existing liquidity.

On November 30, 2011, the Company also entered into an agreement to acquire the FPSO unit Sevan Voyageur (or Voyageur Spirit) and its existing customer contract from Sevan. The Company has agreed to acquire the Voyageur Spirit once the existing upgrade project is completed and the Voyageur Spirit commences operations under its customer contract, currently expected to be in the fourth quarter of 2012. Under the terms of the agreement, the Company will pay Sevan $94 million to acquire the Voyageur Spirit, will assume the Voyageur Spirit’s existing $230.0 million credit facility, which had an outstanding balance of $220.5 million on November 30, 2011, and is responsible for all remaining upgrade costs after November 30, 2011, which are estimated to be between $120 million and $140 million (see Note 10c). The Company has control over the upgrade project and has guaranteed the repayment of the existing credit facility. The Voyageur Spirit has been consolidated by the Company, as the Voyageur Spirit has been determined to be a variable interest entity (or VIE) and the Company has been determined to be the primary beneficiary. The following table summarizes the balance sheet of the Voyageur Spirit as at June 30, 2012:

 

ASSETS

  

Cash and cash equivalents

   $ 36,766   

Other current assets

     9,942   

Vessels and equipment

     374,433   

Deferred tax assets

     1,955   
  

 

 

 

Total assets

   $ 423,096   
  

 

 

 

LIABILITIES AND EQUITY

  

Accounts payable

   $ 9,788   

Accrued liabilities

     6,607   

Long-term debt (note 8)

     230,430   

Derivative liabilities

     4,669   

Other long-term liabilities

     3,390   
  

 

 

 

Total liabilities

   $ 254,884   

Total equity

   $ 168,212   
  

 

 

 

Total liabilities and total equity

   $ 423,096   
  

 

 

 

The Company’s acquisition of the Hummingbird Spirit, Piranema Spirit, and Voyageur Spirit FPSO units and its investment in Sevan were accounted for using the purchase method of accounting, based upon estimates of fair value. The estimated fair values of certain assets and liabilities have been determined with the assistance of third-party valuation specialists. Certain of these estimates of fair value, most notably vessels and equipment, investment in Sevan and in-process revenue contracts, are preliminary and are subject to further adjustment. The operating results of the Hummingbird Spirit, Piranema Spirit and Voyageur Spirit FPSO units are reflected in the Company’s consolidated financial statements from November 30, 2011, the effective date of acquisition. In September 2012, Teekay entered into an agreement to sell the Voyageur Spirit to Teekay Offshore for $540 million. Conditions to the closing of this transaction include, among others, Teekay Offshore obtaining financing and that Teekay has acquired the Voyageur Spirit and related assets pursuant to the terms of the acquisition agreement with Sevan. Please read “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations—Significant Developments in 2012—Recent Offshore Business Developments.” Pursuant to Teekay’s omnibus agreement with Teekay Offshore, Teekay LNG and others, Teekay is obligated to offer Teekay Offshore the Hummingbird Spirit FPSO unit within approximately one year following commencement of a charter contract with a firm period of greater than three years in duration.

 

Page 10 of 46


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TEEKAY CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. dollars, except share data)

 

b) Teekay LNG – Marubeni Joint Venture

On February 28, 2012, a joint venture between the Company’s subsidiary Teekay LNG Partners L.P. (or Teekay LNG) and Marubeni Corporation (or Teekay LNG-Marubeni Joint Venture) acquired a 100% interest in six LNG carriers from Denmark-based A.P. Moller-Maersk A/S for approximately $1.3 billion. The Teekay LNG-Marubeni Joint Venture financed this acquisition with $1.06 billion from secured loan facilities and an aggregate of $266 million from equity contributions from Teekay LNG and Marubeni Corporation. Teekay LNG has agreed to guarantee its 52% share of the secured loan facilities of the Teekay LNG-Marubeni Joint Venture and, as a result, deposited $30 million in a restricted cash account as security for the debt within the Teekay LNG-Marubeni Joint Venture. Teekay LNG has a 52% economic interest in the Teekay LNG-Marubeni Joint Venture and, consequently, its share of the equity contribution was approximately $138 million. Teekay LNG also contributed an additional $5.8 million for its share of legal and financing costs. Teekay LNG financed this equity contribution by borrowing under its existing credit facilities.

This jointly-controlled entity is accounted for using the equity method. The excess of Teekay LNG’s investment in the Teekay LNG-Marubeni Joint Venture over the book value of net assets acquired, which amounted to approximately $303 million, has been accounted for as an increase to the carrying value of the vessels and out-of-the-money charters of the Teekay LNG-Marubeni Joint Venture, in accordance with the preliminary purchase price allocation.

 

5. Vessel Charters

Teekay LNG owns a 99% interest in Teekay Tangguh Borrower LLC (or Teekay Tangguh), which owns a 70% interest in Teekay BLT Corporation (or the Teekay Tangguh Joint Venture), giving Teekay LNG a 69% interest in Teekay Tangguh Joint Venture. The joint venture is a party to operating leases whereby it is leasing two LNG carriers (or the Tangguh LNG Carriers) to a third party, which is in turn leasing the vessels back to the joint venture. In addition to the Company’s minimum charter hire payments to be paid and received under these leases for the Tangguh LNG Carriers, which are described in Note 9 to the audited consolidated financial statements filed with the Company’s Annual Report on Form 20-F for the year ended December 31, 2011, the additional minimum estimated charter hire payments for the remainder of the year and the next four fiscal years, as at June 30, 2012, for the Company’s chartered-in and chartered-out vessels were as follows:

 

     Remainder
of 2012
     2013      2014      2015      2016  
     (in millions of U.S. dollars)  

Charters-in - operating leases

     49.6         67.3         22.9         16.0         9.1   

Charters-in - capital leases (1)

     59.4         100.4         55.7         27.6         27.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     109.0         167.7         78.6         43.6         36.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Charters-out - operating leases (2)

     614.1         1,060.8         1,059.0         1,029.1         907.2   

Charters-out - direct financing leases

     30.4         49.5         48.1         47.2         47.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     644.5         1,110.3         1,107.1         1,076.3         954.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) As at June 30, 2012 and December 31, 2011, the Company had $475.8 million and $476.1 million of restricted cash, respectively, which, including any interest earned on such amounts, is restricted to being used for charter hire payments of certain vessels chartered-in under capital leases. The Company also maintains restricted cash deposits relating to certain term loans, which totalled $50.8 million and $19.5 million as at June 30, 2012 and December 31, 2011, respectively.
(2) The minimum scheduled future operating lease revenues should not be construed to reflect total charter hire revenues for any of the years. Minimum scheduled future revenues do not include revenue generated from new contracts entered into after June 30, 2012, revenue from unexercised option periods of contracts that existed on June 30, 2012 or variable or contingent revenues. In addition, minimum scheduled future operating lease revenues presented in the table have been reduced by estimated off-hire time for any period maintenance. The amounts may vary given unscheduled future events such as vessel maintenance.

 

6. Financing Transactions

In February 2012, Teekay’s subsidiary Teekay Tankers Ltd. (or Teekay Tankers) completed a public offering of 17.3 million shares of its Class A Common Stock (including 2.3 million shares issued upon the full exercise of the underwriters’ overallotment option) at a price of $4.00 per share, for gross proceeds of approximately $69.0 million. As a result, Teekay’s ownership of Teekay Tankers was reduced to 20.4%. As a result of the offering, the Company recorded a decrease to retained earnings of $14.5 million, which represents the Company’s dilution loss from the issuance of shares in Teekay Tankers during the six months ended June 30, 2012.

In June 2012, Teekay sold to Teekay Tankers 13 of its 17 directly-owned conventional tankers and related time-charter contracts, debt facilities and other assets and rights, for an aggregate purchase price of approximately $454.2 million. As partial consideration for the sale, Teekay received $25 million of newly issued shares of Teekay Tankers’ Class A common stock, issued at a price of $5.60 per share, and the remaining amount was settled through a combination of cash payments to Teekay and the assumption by Teekay Tankers of existing debt secured by the acquired vessels. As a result, Teekay’s economic interest in Teekay Tankers increased from approximately 20.4% to approximately 25.1% and its voting interest as a result of its combined ownership of Class A and Class B shares increased from approximately 51% to approximately 53%. Teekay maintains voting control of Teekay Tankers through its ownership of shares of Teekay Tankers’ Class A and Class B common stock and continues to consolidate this subsidiary. As a result of this transaction, the Company recorded an increase to retained earnings and a reduction in non-controlling interest of $10.1 million, as the Company accounts for changes in its ownership interest in controlled subsidiaries as equity transactions. As part of this transaction, Teekay entered into a non-competition agreement with Teekay Tankers, which provides Teekay Tankers with a right of first refusal to participate in any future conventional crude oil tanker and product tanker opportunities developed by Teekay for a period of three years from the closing date of the transaction.

 

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Table of Contents

TEEKAY CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. dollars, except share data)

 

7. Vessel Sales and Write-downs

 

a) Vessel Sales

During the three months ended June 30, 2012, the Company sold a 1997-built conventional tanker that was part of the Company’s conventional tanker segment. The Company realized a loss of $2.2 million from the sale of the conventional tanker.

In March 2011, the Company sold a 1988-built floating storage and offtake (or FSO) unit. The FSO unit was part of the Company’s shuttle tanker and FSO segment. The Company realized a loss of $0.2 million from the sale of the FSO unit.

 

b) Write-downs

During the three months ended June 30, 2012, the Company decided to pursue the sale of a 1992-built shuttle tanker and thus wrote down the carrying value of the vessel to fair value, which was the estimated sales price of the vessel. The Company subsequently sold the vessel in early August 2012. The Company’s consolidated statement of (loss) income for the three and six months ended June 30, 2012 includes a $1.0 million write-down related to this vessel. The write-down is included within the Company’s shuttle tanker segment.

The Company’s consolidated statements of loss for the three and six months ended June 30, 2011, include write-downs of $5.6 million and $9.1 million, respectively, for impairment of a 1993-built Aframax tanker to its then-estimated fair value of $8.3 million, as the vessel carrying value exceeded the estimated fair value. The fair value of the tanker was based on its estimated sales price. The write-downs are included within the Company’s conventional tanker segment.

 

8. Long-Term Debt

 

     June 30, 2012
$
     December 31, 2011
$
 

Revolving Credit Facilities

     2,043,239         2,244,634   

Senior Notes (8.5%) due January 15, 2020

     446,967         446,825   

Norwegian Kroner-denominated Bonds due through May 2017

     318,862         100,417   

U.S. Dollar-denominated Term Loans due through 2021

     2,227,357         2,069,860   

U.S. Dollar-denominated Term Loan of Variable Interest Entity due October 2016

     230,453         220,450   

Euro-denominated Term Loans due through 2023

     334,312         348,905   

U.S. Dollar-denominated Unsecured Demand Loans due to Joint Venture Partners

     13,382         13,282   
  

 

 

    

 

 

 

Total

     5,614,572         5,444,373   

Less current portion

     651,218         401,376   
  

 

 

    

 

 

 

Long-term portion

     4,963,354         5,042,997   
  

 

 

    

 

 

 

As of June 30, 2012, the Company had 14 long-term revolving credit facilities (or the Revolvers) available, which, as at such date, provided for aggregate borrowings of up to $2.9 billion, of which $0.8 billion was undrawn. Interest payments are based on LIBOR plus margins; at June 30, 2012 and December 31, 2011, the margins ranged between 0.45% and 3.25%. At June 30, 2012 and December 31, 2011, the three-month LIBOR was 0.46% and 0.58%, respectively. The total amount available under the Revolvers reduces by $197.5 million (remainder of 2012), $747.5 million (2013), $780.1 million (2014), $226.4 million (2015), $146.4 million (2016) and $784.0 million (thereafter). The Revolvers are collateralized by first-priority mortgages granted on 62 of the Company’s vessels, together with other related security, and include a guarantee from Teekay or its subsidiaries for all outstanding amounts.

The Company’s 8.5% senior unsecured notes (or the 8.5% Notes) are due January 15, 2020 with a principal amount of $450 million. The 8.5% Notes were sold at a price equal to 99.181% of par and the discount is accreted through the maturity date of the notes using the effective interest rate of 8.625% per year. The Company capitalized issuance costs of $9.4 million, which is recorded in other non-current assets in the consolidated balance sheet and is amortized to interest expense over the term of the 8.5% Notes. The 8.5% Notes rank equally in right of payment with all of Teekay’s existing and future senior unsecured debt and senior to any future subordinated debt of Teekay. The 8.5% Notes are not guaranteed by any of Teekay’s subsidiaries and effectively rank behind all existing and future secured debt of Teekay and other liabilities of its subsidiaries.

The Company may redeem the 8.5% Notes in whole or in part at any time before their maturity date at a redemption price equal to the greater of (i) 100% of the principal amount of the 8.5% Notes to be redeemed and (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the 8.5% Notes to be redeemed (excluding accrued interest), discounted to the redemption date on a semi-annual basis, at the treasury yield plus 50 basis points, plus accrued and unpaid interest to the redemption date. In addition, at any time or from time to time prior to January 15, 2013, the Company may redeem up to 35% of the aggregate principal amount of the 8.5% Notes issued under the indenture with the net cash proceeds of one or more qualified equity offerings at a redemption price equal to 108.5% of the principal amount of the 8.5% Notes to be redeemed, plus accrued and unpaid interest, if any, to the redemption date, provided certain conditions are met. No such redemptions had been made as at June 30, 2012.

In November 2010, Teekay Offshore issued NOK 600 million of senior unsecured bonds that mature in November 2013 in the Norwegian bond market. As at June 30, 2012, the carrying amount of the bonds was $100.7 million. The bonds are listed on the Oslo Stock Exchange. Interest payments on the bonds are based on NIBOR plus a margin of 4.75%. Teekay Offshore entered into a cross currency rate swap, to swap all interest and principal payments into U.S. Dollars with the interest rate payments swapped from NIBOR plus a margin of 4.75% into LIBOR plus a margin of 5.04% and the transfer of the principal amount fixed at $98.5 million upon maturity in exchange for NOK 600 million. Teekay Offshore also entered into an interest rate swap to swap the interest payments from LIBOR to a fixed rate of 1.12%. The floating LIBOR rate receivable from the interest rate swap is capped at 3.5%, which effectively results in a fixed rate of 1.12% unless LIBOR exceeds 3.5%, in which case Teekay Offshore’s related interest rate effectively floats at LIBOR, but reduced by 2.38% (see Note 15).

 

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Table of Contents

TEEKAY CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. dollars, except share data)

 

In January 2012, Teekay Offshore issued NOK 600 million of senior unsecured bonds that mature in January 2017 in the Norwegian bond market. As at June 30, 2012, the carrying amount of the bonds was approximately $100 million. The bonds are listed on the Oslo Stock Exchange. The interest payments on the bonds are based on NIBOR plus a margin of 5.75%. Teekay Offshore entered into a cross currency rate swap, to swap all interest and principal payments into U.S. Dollars, with the interest payments fixed at a rate of 7.49%, and the transfer of the principal amount fixed at $101.4 million upon maturity in exchange for NOK 600 million (see Note 15).

In May 2012, Teekay LNG issued NOK 700 million of senior unsecured bonds that mature in May 2017 in the Norwegian bond market. As at June 30, 2012, the carrying amount of the bonds was $117.5 million. Teekay LNG is applying to list the bonds on the Oslo Stock Exchange. The interest payments on the bonds are based on NIBOR plus a margin of 5.25%. Teekay LNG entered into a cross currency rate swap to swap all interest and principal payments into U.S. Dollars, with the interest payments fixed at a rate of 6.88%, and the transfer of principal fixed at $125.0 million upon maturity in exchange for NOK 700 million (see Note 15).

As of June 30, 2012, the Company had 17 U.S. Dollar-denominated term loans outstanding, which totalled $2.2 billion (December 31, 2011 – $2.1 billion). Certain of the term loans with a total outstanding principal balance of $350.4 million as at June 30, 2012 (December 31, 2011 – $372.7 million) bear interest at a weighted-average fixed rate of 5.3% (December 31, 2011 – 5.3%). Interest payments on the remaining term loans are based on LIBOR plus a margin. At June 30, 2012 and December 31, 2011, the margins ranged between 0.3% and 4.0%. At June 30, 2012 and December 31, 2011, the three-month LIBOR was 0.47% and 0.58%, respectively. The term loan payments are made in quarterly or semi-annual payments commencing three or six months after delivery of each newbuilding vessel financed thereby, and 16 of the term loans have balloon or bullet repayments due at maturity. The term loans are collateralized by first-priority mortgages on 35 (December 31, 2011 – 33) of the Company’s vessels, together with certain other security. In addition, at June 30, 2012, all but $113.2 million (December 31, 2011 – $119.4 million) of the outstanding term loans were guaranteed by Teekay or its subsidiaries.

The Voyageur Spirit has been consolidated by the Company effective November 30, 2011, as the Voyageur Spirit has been determined to be a VIE and the Company has been determined to be the primary beneficiary. As a result, the Company has included the Voyageur Spirit’s existing U.S. Dollar-denominated term loan (VIE term loan) outstanding, which, as at June 30, 2012, totaled $230.5 million (December 31, 2011 – $220.5 million). Interest payments on the VIE term loan are based on LIBOR plus a margin of 2.95% and are paid quarterly. The VIE term loan is collateralized by a first-priority mortgage on the Voyageur Spirit, together with certain other security.

The Company has two Euro-denominated term loans outstanding, which, as at June 30, 2012, totalled 264.1 million Euros ($334.3 million) (December 31, 2011 – 269.2 million Euros ($348.9 million)). The Company repays the loans with funds generated by two Euro-denominated, long-term time-charter contracts. Interest payments on the loans are based on EURIBOR plus a margin. At June 30, 2012 and December 31, 2011, the margins ranged between 0.6% and 2.25% and the one-month EURIBOR at June 30, 2012 was 0.4% (December 31, 2011 – 1.02%). The Euro-denominated term loans reduce in monthly payments with varying maturities through 2023 and are collateralized by first-priority mortgages on two of the Company’s vessels, together with certain other security, and are guaranteed by a subsidiary of Teekay.

Both Euro-denominated term loans are revalued at the end of each period using the then prevailing Euro/U.S. Dollar exchange rate. Due in part to this revaluation, which is unrealized, the Company recognized a foreign exchange gain of $17.8 million (2011 – $7.2 million loss) and $2.0 million (2011 – $27.5 million loss) during the three and six months ended June 30, 2012, respectively.

The Company has one U.S. Dollar-denominated loan outstanding owing to a joint venture partner, which, as at June 30, 2012, totalled $13.3 million (2011 – $13.3 million), including accrued interest. Interest payments on the loan is based on a fixed interest rate of 4.84%. This loan is repayable on demand no earlier than February 27, 2027.

The weighted-average effective interest rate on the Company’s aggregate long-term debt as at June 30, 2012 was 2.8% (December 31, 2011 – 2.6%). This rate does not include the effect of the Company’s interest rate swap agreements (see Note 15).

Among other matters, the Company’s long-term debt agreements generally provide for maintenance of minimum consolidated financial covenants and certain loan agreements require the maintenance of market value to loan ratios. Certain loan agreements require that a minimum level of free cash be maintained and as at June 30, 2012 and December 31, 2011, this amount was $100.0 million. Most of the loan agreements also require that the Company maintain an aggregate minimum level of free liquidity and undrawn revolving credit lines with at least six months to maturity, in amounts ranging from 5% to 7.5% of total debt. As at June 30, 2012, this aggregate amount was $314.5 million (December 31, 2011 - $318.3 million).

The aggregate annual long-term debt principal repayments required to be made by the Company subsequent to June 30, 2012, are $230.5 million (remainder of 2012), $986.6 million (2013), $988.9 million (2014), $338.6 million (2015), $301.0 million (2016) and $2.8 billion (thereafter).

As at June 30, 2012, the Company was in compliance with all covenants required by its credit facilities and long-term debt.

 

9. Capital Stock

The authorized capital stock of Teekay at June 30, 2012 and December 31, 2011 was 25 million shares of Preferred Stock, with a par value of $1 per share, and 725 million shares of Common Stock, with a par value of $0.001 per share. As at June 30, 2012, Teekay had no shares of Preferred Stock issued. During the six months ended June 30, 2012, the Company issued 0.5 million shares of Common Stock upon the exercise of stock options.

 

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TEEKAY CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. dollars, except share data)

 

During 2008, Teekay announced that its Board of Directors had authorized the repurchase of up to $200 million of shares of its Common Stock in the open market. As at June 30, 2012, Teekay had repurchased approximately 5.2 million shares of Common Stock for $162.3 million pursuant to such authorization. As at June 30, 2012, the total remaining amount under the share repurchase authorization was $37.7 million.

During March 2012, the Company granted 429,983 stock options with an exercise price of $27.69 per share, 268,595 restricted stock units with a fair value of $7.4 million, 67,870 performance shares with a fair value of $2.5 million and 23,563 shares of restricted stock with a fair value of $0.7 million to certain of the Company’s employees and directors. Each stock option has a ten-year term and vests equally over three years from the grant date. Each restricted stock unit and performance share is equal in value to one share of the Company’s common stock plus reinvested dividends from the grant date to the vesting date. The restricted stock units vest equally over three years from the grant date and the performance shares vest three years from the grant date. Upon vesting, the value of the restricted stock units and performance shares are paid to each grantee in the form of shares. The number of performance share units that vest will range from zero to three times the original number granted, based on certain performance and market conditions.

The weighted-average grant-date fair value of stock options granted during March 2012 was $8.72 per option. The fair value of each stock option granted was estimated on the grant date using the Black-Scholes option pricing model. The following weighted-average assumptions were used in computing the fair value of the stock options granted: expected volatility of 54.8%; expected life of five years; dividend yield of 4.4%; risk-free interest rate of 2.1%; and estimated forfeiture rate of 12%. The expected life of the stock options granted was estimated using the historical exercise behavior of employees. The expected volatility was generally based on historical volatility as calculated using historical data during the five years prior to the grant date.

In March 2011, the Company incurred a one-time $11.0 million increase to the pension plan benefits of Bjorn Moller, who retired from his position as the Company’s President and Chief Executive Officer on March 31, 2011. The additional pension benefit was in recognition of Mr. Moller’s service to the Company. In addition, the Company recognized a compensation expense of approximately $4.7 million, which related to the portion of Mr. Moller’s outstanding stock-based compensation grants that had not yet vested on the date of his retirement. The total compensation expense related to Mr. Moller’s retirement of $15.7 million was recorded in general and administrative expense in the consolidated statements of loss for the six months ended June 30, 2011.

 

10. Commitments and Contingencies

 

a) Vessels Under Construction

As at June 30, 2012, the Company was committed to the construction of four shuttle tankers and one FPSO unit for a total cost of approximately $1.4 billion, excluding capitalized interest and other miscellaneous construction costs. The four shuttle tankers are scheduled for delivery in mid-to-late 2013 and the FPSO unit is scheduled to be delivered in late 2013. As at June 30, 2012, payments made towards these commitments totaled $432.4 million (excluding $11.8 million of capitalized interest and other miscellaneous construction costs). As at June 30, 2012, the remaining payments required to be made under these newbuilding contracts were $205.8 million (remainder of 2012), $712.2 million (2013), and $13.5 million (2014).

 

b) Joint Ventures

In October 2010, the Company signed a long-term contract with Petroleo Brasileiro SA (or Petrobras) to provide an FPSO unit for the Tiro and Sidon fields located in the Santos Basin offshore Brazil. The contract with Petrobras will be serviced by a newly converted FPSO unit named the Cidade de Itajai, which is currently under conversion from an existing Aframax tanker for a total estimated cost of approximately $385 million. The FPSO unit was scheduled to deliver from the shipyard in September 2012, but has been delayed due to fire damage sustained during pre-delivery sea trials. The extent of damage to the unit is under investigation, and any related delay in its delivery is yet to be determined. Upon delivery, the unit is expected to commence operations under a nine-year, fixed-rate time-charter contract with Petrobras with six additional one-year extension options exercisable by Petrobras. Pursuant to Teekay’s omnibus agreement with Teekay Offshore, Teekay LNG and others, Teekay is obligated to offer to Teekay Offshore its 50% interest in this FPSO project at Teekay’s fully built-up cost, within approximately one year after the commencement of the charter with Petrobras.

In January 2012, OOG-TKP FPSO GmbH & Co KG (or KG Joint Venture), a 50/50 joint venture between the Company and Odebrecht Oil & Gas S.A. (or Odebrecht), purchased the assets related to the Tiro and Sidon FPSO project, including a partially constructed FPSO unit, and related customer contracts from the Company for approximately $179 million. The KG Joint Venture financed the purchase price 80% with borrowings under a new $300 million debt facility secured by the Cidade de Itajai FPSO unit and the balance with pro rata equity contributions by each of the joint venture partners. The facility bears interest at LIBOR plus a margin of 2.25% and requires quarterly principal repayments with a final bullet payment on maturity in October 2021. As at June 30, 2012, the remaining construction payments required to be made to complete the conversion, including Odebrecht’s 50% share, was estimated to be $66.7 million in 2012.

In September 2010, Teekay Tankers entered into a joint venture arrangement (the Joint Venture) with Wah Kwong Maritime Transport Holdings Limited (or Wah Kwong) to have a Very Large Crude Carrier (or VLCC) newbuilding constructed, managed and chartered to third parties. Teekay Tankers has a 50% economic interest in the Joint Venture, which is jointly controlled by Teekay Tankers and Wah Kwong. The VLCC has an estimated purchase price of approximately $98 million (of which Teekay Tankers’ 50% portion is $49 million), excluding capitalized interest and other miscellaneous construction costs. The vessel is expected to be delivered during the second quarter of 2013. As at June 30, 2012, the remaining payments required to be made under this newbuilding contract, including Wah Kwong’s 50% share, were $39.2 million in 2012 and $34.3 million in 2013. As of June 30, 2012, the Joint Venture had signed an agreement with a financial institution for a loan of $68.6 million. The loan is secured by a first priority statutory mortgage over the VLCC and guaranteed by both Teekay Tankers and Wah Kwong. As a result, Teekay Tankers’s exposure to this loan is limited to the 50% guarantee to the loan which is repayable with thirty-two consecutive quarterly installments of $1.4 million each commencing 3 months after the initial post-delivery drawdown date and a balloon payment of $22.6 million at its maturity. In addition, Teekay Tankers and Wah Kwong have each agreed to finance 50% of the costs to acquire the VLCC that are not financed with commercial bank financing. In March 2012, Teekay Tankers made a $0.4 million payment to the Joint Venture for financing fees. In April 2012, Teekay Tankers made a $2.6 million payment to the Joint Venture for the funding of a $4.9 million installment under the newbuilding contract, and a $0.3 million construction supervision fee.

 

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TEEKAY CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. dollars, except share data)

 

c) Purchase Obligation

As at June 30, 2012, the Company was committed to fund the remaining upgrade costs of the Voyageur Spirit in connection with the Sevan acquisition, for a total cost estimated to be between $120 million and $140 million. The upgrades on the FPSO unit are expected to be completed by the fourth quarter of 2012, at which time the Company will acquire the FPSO unit. As at June 30, 2012, payments made towards these remaining upgrade costs totalled $66.2 million and the remaining payments required to be made are estimated to be between $55 million and $75 million in 2012. In addition to the upgrade costs, the remaining payments required to be made to acquire the Voyageur Spirit total approximately $92.4 million (net of assumed debt of $230 million) in 2012. In September 2012, Teekay entered into an agreement to sell the Voyageur Spirit to Teekay Offshore for $540 million. Conditions to the closing of this transaction include, among others, Teekay Offshore obtaining financing and that Teekay has acquired the Voyageur Spirit and related assets pursuant to the terms of the acquisition agreement with Sevan. Please read “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations—Significant Developments in 2012—Recent Offshore Business Developments.”

 

d) Legal Proceedings and Claims

The Company may, from time to time, be involved in legal proceedings and claims that arise in the ordinary course of business. The Company believes that any adverse outcome of existing claims, individually or in the aggregate, would not have a material effect on its financial position, results of operations or cash flows, when taking into account its insurance coverage and indemnifications from charterers.

On November 13, 2006, Teekay Offshore’s shuttle tanker the Navion Hispania collided with the Njord Bravo, an FSO unit, while preparing to load an oil cargo from the Njord Bravo. The Njord Bravo services the Njord field, which is operated by Statoil Petroleum AS (or Statoil) and is located off the Norwegian coast. At the time of the incident, Statoil was chartering the Navion Hispania from the Company. The Navion Hispania and the Njord Bravo both incurred damages as a result of the collision. In November 2007, Navion Offshore Loading AS (or NOL), the Company’s subsidiary, and two other subsidiaries of the Company, were named as co-defendants in a legal action filed by Norwegian Hull Club (the hull and machinery insurers of the Njord Bravo) and various licensees in the Njord field (or the Plaintiffs). The claim sought damages for vessel repairs, expenses for a replacement vessel and other amounts related to production stoppage on the field, totaling NOK 213,000,000 (approximately $36 million).

The matter was heard before the Stavanger District Court in December 2011. The court found that NOL is liable for damages to the Plaintiffs, but excluded a large part of the indirect or consequential losses from the liability. The court also found that Statoil ASA is liable for the same amount of damages to NOL. The parties have appealed the decision of the court. As a result of the judgment, as at December 31, 2011, the Company recognized a liability of NOK 76,000,000 (approximately $12.8 million, which is a reduced amount in accordance with the court’s decision to exclude a large part of the indirect or consequential losses) and a corresponding receivable from Statoil recorded in other liabilities and other assets, respectively.

The Company believes the likelihood of any losses relating to the claim is remote. The Company believes that the charter contract relating to the Navion Hispania requires that Statoil be responsible and indemnify the Company for all losses relating to the damage to the Njord Bravo. The Company also maintains protection and indemnity insurance for damages to the Navion Hispania and insurance for collision-related costs and claims. The Company believes that these insurance policies will cover the costs related to this incident, including any costs not indemnified by Statoil, subject to standard deductibles. In addition, Teekay has agreed to indemnify Teekay Offshore for any losses it may incur in connection with this incident.

Teekay Nakilat Corporation (or Teekay Nakilat), a subsidiary of Teekay LNG, is the lessee under 30-year capital lease arrangements with a third party for the RasGas II LNG Carriers (or RasGas II Leases). The UK taxing authority (or HMRC) has been urging our lessor, as well as other lessors under capital lease arrangements that have tax benefits similar to the ones provided by the RasGas II Leases, to terminate such finance lease arrangements, and has in other circumstances challenged the use of similar structures. As a result, the lessor has requested that Teekay Nakilat enter into negotiations to terminate the RasGas II Leases. Teekay Nakilat has declined this request as it does not believe that HRMC would be able to successfully challenge the availability of the tax benefits of these leases to the lessor. This assessment is partially based on a January 2012 court decision regarding a similar financial lease of an LNG carrier that ruled in favor of the taxpayer. However, the HMRC is appealing that decision. If the HMRC were able to successfully challenge the RasGas II Leases, Teekay Nakilat could be subject to significant costs associated with the termination of the lease or increased lease payments to compensate the lessor for the lost tax benefits. The Company estimates its share of the potential exposure to be approximately $46 million.

On December 7, 2011, the Petrojarl Banff FPSO unit (or Banff), which operates on the Banff field in the U.K. sector of the North Sea, encountered a severe storm event and sustained damage to its moorings, turret and subsea equipment, which necessitated the shutdown of production on the unit. Due to the damage, the Company declared force majeure under the customer contract on December 8, 2011 and the Banff FPSO unit commenced a period of off-hire which is currently expected to continue until the third quarter of 2013 while repairs are assessed and completed. After the repairs are completed, the Banff FPSO unit is expected to resume production on the Banff field, where it is expected to remain under contract until the end of 2018.

The Company expects that repair costs to the Banff FPSO unit and equipment and costs associated with the emergency response to prevent loss or further damage during the December 7, 2011 storm event will be primarily reimbursed through our insurance coverage subject to a $0.75 million deductible and the other terms and conditions of the applicable policies. The Company also expects to recover certain of the costs not covered by insurance from the charterer, subject to commercial discussions. It is not determinable at this time if all repair costs will be recovered through insurance coverage or the charterer.

 

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TEEKAY CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. dollars, except share data)

 

e) Redeemable Non-Controlling Interest

During 2010, an unrelated party contributed a shuttle tanker with a value of $35.0 million to a subsidiary of Teekay Offshore for a 33% equity interest in the subsidiary. The non-controlling interest owner of Teekay Offshore’s 67% owned subsidiary holds a put option which, if exercised, would obligate Teekay Offshore to purchase the non-controlling interest owner’s 33% share in the entity for cash in accordance with a defined formula. The redeemable non-controlling interest is subject to remeasurement if the formulaic redemption amount exceeds the carrying value. No remeasurement was required as at June 30, 2012.

 

f) Other

The Company enters into indemnification agreements with certain officers and directors. In addition, the Company enters into other indemnification agreements in the ordinary course of business. The maximum potential amount of future payments required under these indemnification agreements is unlimited. However, the Company maintains what it believes is appropriate liability insurance that reduces its exposure and enables the Company to recover future amounts paid up to the maximum amount of the insurance coverage, less any deductible amounts pursuant to the terms of the respective policies, the amounts of which are not considered material.

 

11. Financial Instruments

 

a) Fair Value Measurements

For a description of how the Company estimates fair value and for a description of the fair value hierarchy levels, see Note 11 in the Company’s audited consolidated financial statements filed with its Annual Report on Form 20-F for the year ended December 31, 2011. The following table includes the estimated fair value and carrying value of those assets and liabilities that are measured at fair value on a recurring and non-recurring basis as well as the estimated fair value of the Company’s financial instruments that are not accounted for at fair value on a recurring basis.

 

           June 30, 2012     December 31, 2011  
     Fair
Value
Hierarchy
Level
    Carrying
Amount
Asset
(Liability)

$
    Fair
Value
Asset
(Liability)

$
    Carrying
Amount
Asset
(Liability)

$
    Fair
Value
Asset
(Liability)

$
 

Recurring:

          

Cash and cash equivalents, restricted cash, and marketable securities

     Level 1        1,203,026        1,203,026        1,200,063        1,200,063   

Derivative instruments (note 15)

          

Interest rate swap agreements - assets

     Level 2        166,527        166,527        159,603        159,603   

Interest rate swap agreements - liabilities

     Level 2        (736,387     (736,387     (707,437     (707,437

Cross currency swap agreement

     Level 2        (10,421     (10,421     2,677        2,677   

Foreign currency contracts

     Level 2        (2,679     (2,679     (4,362     (4,362

Foinaven embedded derivative

     Level 2        —          —          3,385        3,385   

Non-recurring:

          

Vessels and equipment(1)

     Level 2        —          —          118,682        118,682   

Vessels held for sale(2)

     Level 2        6,930        6,930        19,000        19,000   

Other:

          

Investment in term loans

     Level 3        190,164        189,812        189,666        190,939   

Loans to equity accounted investees and joint venture partners – Current

     Level 3        103,000        103,000        50,000        50,000   

Loans to equity accounted investees and joint venture partners – Long-term

     (3 )      51,781        (3 )      35,248        (3 ) 

Long-term debt (note 8)

     Level 2        (5,614,572     (5,140,902     (5,444,373     (5,072,214

 

(1) The fair value measurement used to determine the impairment of the vessels at December 31, 2011 was calculated based upon the estimated scrap value of the respective vessels. No additional impairments were identified during the six months ended June 30, 2012.
(2) The fair value measurement used to determine the impairment of the vessels as at December 31, 2011 was based upon comparable sales market data adjusted for specific characteristics of the respective vessels. During the six months ended June 30, 2012, one shuttle tanker was written down to its fair value due to the expected sale of the vessel. The fair value measure used to determine the impairment of the vessel was calculated based upon the estimated sales price of the vessel.
(3) The fair value of the Company’s loans to its equity accounted investees and joint venture partners as at June 30, 2012 and December 31, 2011 was not determinable given the repayment terms.

 

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TEEKAY CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. dollars, except share data)

 

b. Financing Receivables

The following table contains a summary of the Company’s financing receivables by type of borrower and the method by which the Company monitors the credit quality of its financing receivables on a quarterly basis.

 

Class of Financing Receivable

   Credit Quality
Indicator
   Grade    June 30,
2012
$
     December  31,
2011

$
 

Direct financing leases

   Payment activity    Performing      447,746         459,908   

Other loan receivables

           

Investment in term loans and interest receivable

   Collateral    Performing      187,347         188,616   

Loans to equity accounted investees and joint venture partners(1)

   Other internal metrics    Performing      154,781         85,248   

Long-term receivable included in other assets

   Payment activity    Performing      973         786   
        

 

 

    

 

 

 
           790,847         734,558   
        

 

 

    

 

 

 

 

(1) Teekay LNG owns a 99% interest in Teekay Tangguh, which owns a 70% interest in the Teekay Tangguh Subsidiary. During the six months ended June 30, 2012, one of Teekay LNG’s joint venture partner’s parent company, PT Berlian Laju Tanker (or BLT), suspended trading on the Jakarta Stock Exchange, and filed for bankruptcy protection in order to restructure its debts. The Company believes the loans to BLT and Teekay LNG’s joint venture partner, BLT LNG Tangguh Corporation, totaling $24.0 million as at June 30, 2012 (2011 - $19.1 million) are collectible given the expected cash flows anticipated to be generated by the Teekay Tangguh Subsidiary, which can be used to repay the loan and given the underlying collateral securing the loans to BLT.

 

12. Restructuring Charges

During the three and six months ended June 30, 2012, the Company recognized $1.5 million of restructuring charges. The restructuring charges primarily relate to reorganization of the Company’s marine operations to create greater alignment with its conventional tanker business unit and its three publicly-listed subsidiaries. The Company expects to incur approximately $10 million of restructuring charges associated with this reorganization and realize annual cost savings of approximately $10 million commencing in the fourth quarter of 2012. A majority of the reorganization will be completed in 2012; however, certain portions will not be completed until the first half of 2013.

During the three and six months ended June 30, 2011, the Company incurred $0.5 million and $5.4 million of restructuring costs, respectively. The restructuring costs primarily relate to the sale of an FSO unit, Karratha Spirit, and the termination of the time-charter for the Basker Spirit. The Company committed to terminate the employment of certain seafarers of the two vessels.

At June 30, 2012 and December 31, 2011, $1.2 million and $0.1 million, respectively, of restructuring liabilities were recorded in accrued liabilities on the consolidated balance sheets.

 

13. Other Income

 

     Three Months Ended June 30,      Six Months Ended June 30,  
         2012    
$
        2010    
$
         2011    
$
        2010    
$
 

Gain on sale of other assets

     —          —           2,217        —     

Volatile organic compound emission plant lease income

     617        769         1,045        1,672   

Loss on sale of marketable securities

     —          —           (420     —     

Miscellaneous (loss) income

     (528     189         (410     (620
  

 

 

   

 

 

    

 

 

   

 

 

 

Other income

     89        958         2,432        1,052   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

14. Accumulated Other Comprehensive Loss

As at June 30, 2012 and December 31, 2011, the Company’s accumulated other comprehensive loss consisted of the following components:

 

     June 30,     December 31,  
     2012     2011  
     $     $  

Unrealized loss on qualifying cash flow hedging instruments

     (498     (295

Pension adjustments, net of tax recoveries

     (25,317     (22,952

Unrealized loss on marketable securities

     (1,031     (656

Foreign exchange loss on currency translation

     (800     —     
  

 

 

   

 

 

 
     (27,646     (23,903
  

 

 

   

 

 

 

 

15. Derivative Instruments and Hedging Activities

The Company uses derivatives to manage certain risks in accordance with its overall risk management policies.

 

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TEEKAY CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. dollars, except share data)

 

Foreign Exchange Risk

The Company economically hedges portions of its forecasted expenditures denominated in foreign currencies with foreign currency forward contracts. Certain of these foreign currency forward contracts are designated, for accounting purposes, as cash flow hedges of forecasted foreign currency expenditures.

As at June 30, 2012, the Company was committed to the following foreign currency forward contracts:

 

                  

 

Fair Value /Carrying Amount
of Asset (Liability)

    Expected Maturity  
     Contract Amount in
Foreign Currency
     Average      Hedge     Non-hedge     2012      2013  
     (millions)      Forward Rate  (1)      (in millions of U.S. Dollars)     (in millions of U.S. Dollars)  

Norwegian Kroner

     558.0         5.97       $ 0.0      ($ 0.3   $ 59.5       $ 33.9   

Euro

     24.7         0.74       $ 0.0      ($ 2.0   $ 20.3       $ 13.0   

Canadian Dollar

     21.1         1.00       ($ 0.4   $ 0.0      $ 11.9       $ 9.2   

British Pound

     25.0         0.64       $ 0.0      $ 0.0      $ 21.7       $ 17.6   
        

 

 

   

 

 

   

 

 

    

 

 

 
         ($ 0.4   ($ 2.3   $ 113.4       $ 73.7   
        

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) Average contractual exchange rate represents the contracted amount of foreign currency one U.S. Dollar will buy.

The Company enters into cross currency swaps, and pursuant to these swaps the Company receives the principal amount in Norwegian Kroner (or NOK) on the maturity date of the swap, in exchange for payment of a fixed U.S. Dollar amount. In addition, the cross currency swaps exchange a receipt of floating interest in Norwegian Kroner based on NIBOR plus a margin for a payment of US Dollar fixed interest or US Dollar floating interest based on LIBOR plus a margin. The purpose of the cross currency swaps is to economically hedge the foreign currency exposure on the payment of interest and principal at maturity of the Company’s Norwegian Kroner Bonds due in 2013 and 2017. In addition, the cross currency swaps due in 2017 economically hedges the interest rate exposure on the Norwegian Kroner Bonds due in 2017. The Company has not designated, for accounting purposes, these cross currency swaps as cash flow hedges of its Norwegian Kroner Bonds due in 2013 and 2017. As at June 30, 2012, the Company was committed to the following cross currency swaps:

 

     Notional    Notional    Floating Rate Receivable   Floating Rate Payable          

Maturity

Date

   Amount
NOK
   Amount
USD
   Reference
Rate
   Margin   Reference
Rate
   Margin   Fixed Rate
Payable
    Fair Value

2013

   600,000    98,500    NIBOR    4.75%   LIBOR    5.04%     (1 )    2,775

2017

   600,000    101,400    NIBOR    5.75%          7.49%      (2,976)

2017

   700,000    125,000    NIBOR    5.25%          6.88%      (10,220)
                    

 

                     (10,421)
                    

 

 

(1) LIBOR subsequently fixed at 1.1%, subject to a LIBOR rate receivable cap of 3.5% (see next section).

Interest Rate Risk

The Company enters into interest rate swap agreements which exchange a receipt of floating interest for a payment of fixed interest to reduce the Company’s exposure to interest rate variability on its outstanding floating-rate debt. In addition, the Company holds interest rate swaps which exchange a payment of floating rate interest for a receipt of fixed interest in order to reduce the Company’s exposure to the variability of interest income on its restricted cash deposits. The Company has not designated its interest rate swap agreements as cash flow hedges for accounting purposes.

As at June 30, 2012, the Company was committed to the following interest rate swap agreements related to its LIBOR-based debt, restricted cash deposits and EURIBOR-based debt, whereby certain of the Company’s floating-rate debt and restricted cash deposits were swapped with fixed-rate obligations or fixed-rate deposits:

 

     Interest
Rate

Index
     Principal
Amount

$
     Fair Value /
Carrying
Amount of
Asset /
(Liability)
$
    Weighted-
Average
Remaining
Term
(years)
     Fixed Interest
Rate

(%) (1)
 

LIBOR-Based Debt:

             

U.S. Dollar-denominated interest rate lease swaps (2)

     LIBOR         417,666         (130,810     24.6         4.9   

U.S. Dollar-denominated interest rate swaps (3)

     LIBOR         3,310,574         (569,535     8.2         4.0   

U.S. Dollar-denominated interest rate swaps (4)

     LIBOR         98,500         (882     1.4         1.1   

LIBOR-Based Restricted Cash Deposit:

             

U.S. Dollar-denominated interest rate swaps (2)

     LIBOR         469,666         166,527        24.6         4.8   

EURIBOR-Based Debt:

             

Euro-denominated interest rate swaps (5) (6)

     EURIBOR         334,312         (35,160     12.0         3.1   
     

 

 

    

 

 

      
        4,630,718         (569,860     
     

 

 

    

 

 

      

 

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TEEKAY CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. dollars, except share data)

 

 

(1) Excludes the margins the Company pays on its variable-rate debt, which, as of June 30, 2012, ranged from 0.3% to 4.0%.
(2) Principal amount reduces quarterly.
(3) Principal amount of $200 million is fixed at 2.14%, unless LIBOR exceeds 6%, at which the Company pays floating rate.
(4) The floating LIBOR rate receivable is capped at 3.5%, which effectively results in a fixed rate of 1.12% unless LIBOR exceeds 3.5%, in which case the Company’s related interest rate effectively floats at LIBOR reduced by 2.38%.
(5) Principal amount reduces monthly to 70.1 million Euros ($88.8 million) by the maturity dates of the swap agreements.
(6) Principal amount is the U.S. Dollar equivalent of 264.1 million Euros.

Tabular Disclosure

The following table presents the location and fair value amounts of derivative instruments, segregated by type of contract, on the Company’s consolidated balance sheets.

 

     Current
Portion of
Derivative
Assets
     Derivative
Assets
     Accrued
Liabilities
    Current
Portion of
Derivative
Liabilities
    Derivative
Liabilities
 

As at June 30, 2012:

            

Derivatives designated as a cash flow hedge:

            

Foreign currency contracts

     894         —           —          (1,201     (55

Derivatives not designated as a cash flow hedge:

            

Foreign currency contracts

     1,296         —           —          (3,449     (165

Interest rate swap agreements

     16,156         146,071         (22,032     (113,353     (596,702

Cross currency swap agreements

     2,037         1,248         314        —          (14,019
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     20,383         147,319         (21,718     (118,003     (610,941
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

As at December 31, 2011:

            

Derivatives designated as a cash flow hedge:

            

Foreign currency contracts

     1,551         28         —          (1,192     (264

Derivatives not designated as a cash flow hedge:

            

Foreign currency contracts

     2,592         3         —          (6,248     (832

Interest rate swap agreements

     15,608         139,651         (24,750     (109,897     (568,446

Cross currency swap agreements

     1,576         875         225        —          —     

Foinaven embedded derivative

     3,385         —           —          —          —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     24,712         140,557         (24,525     (117,337     (569,542
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

For the periods indicated, the following table presents the effective portion of gains (losses) on foreign currency forward contracts designated and qualifying as cash flow hedges that were (1) recognized in other comprehensive (loss) income, (2) recorded in accumulated other comprehensive income (or AOCI) during the term of the hedging relationship and reclassified to earnings, and (3) recognized in the ineffective portion of gains (losses) on derivative instruments designated and qualifying as cash flow hedges.

 

Three Months Ended June 30, 2012    Three Months Ended June 30, 2011
Balance
Sheet
(AOCI)
    Statement of Income (Loss)    Balance
Sheet

(AOCI)
     Statement of Income (Loss)

Effective

Portion

    Effective
Portion
     Ineffective
Portion
         Effective
Portion
     Effective
Portion
     Ineffective
Portion
     
  (1,601)        —           —        Vessel operating expenses      2,596         431         (171   Vessel operating expenses
  —          374         (306   General and administrative

expenses

     —           1,713         121      General and administrative

expenses

 

 

   

 

 

    

 

 

      

 

 

    

 

 

    

 

 

   
  (1,601     374         (306        2,596         2,144         (50  

 

 

   

 

 

    

 

 

      

 

 

    

 

 

    

 

 

   

 

Page 19 of 46


Table of Contents

TEEKAY CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. dollars, except share data)

 

Six Months Ended June 30, 2012    Six Months Ended June 30, 2011
Balance
Sheet
(AOCI)
     Statement of Income (Loss)    Balance
Sheet

(AOCI)
     Statement of Income (Loss)

Effective

Portion

     Effective
Portion
     Ineffective
Portion
         Effective
Portion
     Effective
Portion
     Ineffective
Portion
     
  1,220         —           Vessel operating expenses      8,094         583         (351   Vessel operating expenses
  —           1,377         (324  

General and administrative

expenses

     —           2,546         216     

General and administrative

expenses

 

 

    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

   
  1,220         1,377         (324        8,094         3,129         (135  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

   

Realized and unrealized (losses) gains from derivative instruments that are not designated for accounting purposes as cash flow hedges are recognized in earnings and reported in realized and unrealized (losses) gains on non-designated derivatives in the consolidated statements of income (loss). The effect of the (loss) gain on derivatives not designated as hedging instruments in the consolidated statements of income (loss) are as follows:

 

     Three Months Ended June 30,    

Six Months Ended June 30,

 
     2012
$
    2011
$
    2012
$
    2011
$
 

Realized (losses) gains relating to:

        

Interest rate swap agreements

     (29,669     (32,692     (60,085     (66,689

Interest rate swap agreement amendments

     —          —          —          (92,672

Foreign currency forward contracts

     147        3,558        1,384        4,883   

Forward freight agreements and bunker fuel swap contracts

     —          (7     —          42   

Foinaven embedded derivative

     —          —          11,452        —     
  

 

 

   

 

 

   

 

 

   

 

 

 
     (29,522     (29,141     (47,249     (154,436
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized (losses) gains relating to:

        

Interest rate swap agreements

     (58,425     (73,331     (41,290     68,527   

Foreign currency forward contracts

     (6,651     540        2,141        7,248   

Forward freight agreements and bunker fuel swap contracts

     —          7        —          —     

Foinaven embedded derivative

     —          (215     (3,385     (222
  

 

 

   

 

 

   

 

 

   

 

 

 
     (65,076     (72,999     (42,534     75,553   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total realized and unrealized losses on non-designated derivative instruments

     (94,598     (102,140     (89,783     (78,883
  

 

 

   

 

 

   

 

 

   

 

 

 

Realized and unrealized gains (losses) of the cross currency swaps are recognized in earnings and reported in foreign currency exchange gain (loss) in the consolidated statements of income (loss). The effect of the gain (loss) on cross currency swaps on the consolidated statements of income (loss) is as follows:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2012
$
    2011
$
     2012
$
    2011
$
 

Realized gains

     744        777         1,738        1,444   

Unrealized (losses) gains

     (21,046     3,135         (13,167     9,363   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total realized and unrealized (losses) gains on cross currency swaps

     (20,302     3,912         (11,429     10,807   
  

 

 

   

 

 

    

 

 

   

 

 

 

In January and February 2011, the Company paid $92.7 million to the counterparties of five interest rate swap agreements, with notional amounts totaling $665.1 million, in consideration for amending the terms of such agreements to reduce the weighted average fixed interest rate from 5.1% to 2.5%.

As at June 30, 2012, the Company’s accumulated other comprehensive loss included $0.5 million of unrealized losses on foreign currency forward contracts designated as cash flow hedges. As at June 30, 2012, the Company estimated, based on then current foreign exchange rates, that it would reclassify approximately $0.8 million of net losses on foreign currency forward contracts from accumulated other comprehensive loss to earnings during the next 12 months.

The Company is exposed to credit loss to the extent the fair value represents an asset in the event of non-performance by the counterparties to the foreign currency forward contracts, and cross currency and interest rate swap agreements; however, the Company does not anticipate non-performance by any of the counterparties. In order to minimize counterparty risk, the Company only enters into derivative transactions with counterparties that are rated A- or better by Standard & Poor’s or A3 or better by Moody’s at the time of the transaction.

 

Page 20 of 46


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TEEKAY CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. dollars, except share data)

 

16. Income Tax Recovery (Expense)

The components of the provision for income tax recovery (expense) are as follows:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  
     $     $     $     $  

Current

     2,139        273        5,973        (122

Deferred

     (290     (2,295     (556     (2,711
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax recovery (expense)

     1,849        (2,022     5,417        (2,833
  

 

 

   

 

 

   

 

 

   

 

 

 

The following is a roll-forward of the Company’s unrecognized tax benefits, recorded in other long-term liabilities, from December 31, 2011 to June 30, 2012:

 

Balance of unrecognized tax benefits as at December 31, 2011

   $ 39,804   

Decrease for positions taken in prior years

     (2,690

Increase for positions related to the current period

     2,507   

Decrease related to statute of limitations

     (8,074
  

 

 

 

Balance of unrecognized tax benefits as at June 30, 2012

   $ 31,547   
  

 

 

 

The majority of the net increase for positions for the six months ended June 30, 2012 relates to potential tax on freight income.

The Company does not presently anticipate such uncertain tax positions will significantly increase or decrease in the next 12 months; however, actual developments could differ from those currently expected.

 

17. Loss Per Share

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2011     2011     2011     2011  
     $     $     $     $  

Net loss attributable to stockholders’ of Teekay Corporation

     (47,274     (96,452     (46,208     (126,109
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common stock and common stock equivalents

     69,231,419        70,935,484        69,043,639        71,438,446   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss per common share:

        

- Basic

     (0.68     (1.36     (0.67     (1.77

- Diluted

     (0.68     (1.36     (0.67     (1.77

The anti-dilutive effect attributable to outstanding stock-based awards is excluded from the calculation of diluted loss per common share. For the three and six months ended June 30, 2012, the anti-dilutive effect attributable to outstanding stock-based awards was 5.8 million shares. For the three and six months ended June 30, 2011, the anti-dilutive effect attributable to outstanding stock-based awards was 5.8 million shares.

 

18. Supplemental Cash Flow Information

During the six months ended June 30, 2012, the KG Joint Venture purchased the assets related to the Tiro and Sidon FPSO project, including the partially constructed FPSO unit, and the customer contracts from the Company for approximately $179 million. The purchase price was financed 80% with borrowings and the balance of the purchase price was financed with equity contributions by each of the joint venture partners. The Company’s initial equity contribution was funded by contributing the partially constructed FPSO unit and the customer contracts. This initial equity contribution has been treated as a non-cash transaction in the Company’s consolidated statement of cash flows.

 

19. Change in Accounting Estimate

Effective January 1, 2012, the Company reduced the estimated useful life of six of its older shuttle tankers from 25 years to 20 years. As a result of the change in useful life, the Company increased its estimate of the residual value of these vessels to reflect the more recent average scrap prices. As a result, depreciation and amortization expense has increased by $3.7 million and $7.1 million, respectively, for the three and six months ended June 30, 2012. Net income attributable to the stockholders of Teekay has decreased by $1.2 million and $2.3 million, or $0.02 per share and $0.03 per share, respectively, for the three and six months ended June 30, 2012.

 

Page 21 of 46


Table of Contents

TEEKAY CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. dollars, except share data)

 

20. Subsequent Events

In July 2012, Teekay Offshore issued 1.7 million common units to a group of institutional investors for net proceeds, including the General Partner’s 2% proportionate capital contribution, of $45.9 million. Upon completion of the private placement, Teekay Offshore had 72.3 million common units outstanding. Teekay Offshore will use the proceeds from the issuance of common units to partially finance the shipyard instalments for the four Suezmax newbuilding shuttle tankers. As a result of this private placement, Teekay’s ownership of Teekay Offshore was reduced to 32.3% (including the Company’s 2% general partner interest). Teekay maintains control of Teekay Offshore by virtue of its control of the general partner and will continue to consolidate the subsidiary.

In September 2012, Teekay LNG completed a public offering of 4.6 million common units for net proceeds, including the General Partner’s 2% proportionate capital contribution, of approximately $173.7 million. Upon completion of the public offering, Teekay LNG had 70.9 million common units outstanding. Teekay LNG will use the proceeds from the offering for general corporate purposes, which may include funding potential future newbuilding deliveries or vessel acquisitions. Pending the use of the proceeds, Teekay LNG intends to repay a portion of its outstanding debt under two of its revolving credit facilities. As a result of this public offering, Teekay’s ownership of Teekay LNG was reduced to 37.6% (including the Company’s 2% general partner interest). Teekay maintains control of Teekay LNG by virtue of its control of the general partner and will continue to consolidate the subsidiary.

In September 2012, Teekay Offshore commenced a public offering of 7.4 million common units for net proceeds, including the General Partner’s 2% proportionate capital contribution, of $201.2 million. Upon completion of the public offering, expected in mid-September 2012, Teekay Offshore will have 79.7 million common units outstanding. In addition, Teekay Offshore granted the underwriters an option to purchase up to an additional 1.1 million common units. Teekay Offshore intends to use the proceeds from the issuance of common units to partially finance the purchase price of the Voyageur Spirit FPSO unit that Teekay Offshore has agreed to acquire from Teekay. As a result of this public offering, Teekay’s ownership of Teekay Offshore will be reduced to 29.5% (including the Company’s 2% general partner interest). Teekay maintains control of Teekay Offshore by virtue of its control of the general partner and will continue to consolidate the subsidiary.

In September 2012, Teekay entered into an agreement to sell, subject to certain conditions, the Voyageur Spirit FPSO unit to Teekay Offshore for a purchase price of $540 million following the unit’s commencement of operations under its long-term contract and the acquisition of the unit by Teekay from Sevan. Teekay Offshore intends to pay the $540 million purchase price for the Voyageur Spirit through (a) the proceeds from its September 2012 equity public offering described above, (b) the issuance by Teekay Offshore to Teekay of $40 million of its common units (priced at the same price per unit to the public as units issued in the September 2012 public offering) and (c) borrowings under new bank facilities. Teekay currently expects its sale of the Voyageur Spirit to Teekay Offshore to close in November 2012.

 

Page 22 of 46


Table of Contents

TEEKAY CORPORATION AND SUBSIDIARIES

JUNE 30, 2012

PART I – FINANCIAL INFORMATION

 

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and accompanying notes contained in “Item 1 – Financial Statements” of this Report on Form 6-K and with our audited consolidated financial statements contained in “Item 18 – Financial Statements” and Management’s Discussion and Analysis of Financial Condition and Results of Operations in “Item 5 – Operating and Financial Review and Prospects” of our Annual Report on Form 20-F for the year ended December 31, 2011.

References to Teekay mean Teekay Corporation, which is incorporated under the laws of the Republic of the Marshall Islands. References to the Company mean Teekay together with its wholly owned or controlled subsidiaries. Unless the context requires otherwise, references to “we,” “our” or “us” are references to Teekay Corporation.

SIGNIFICANT DEVELOPMENTS IN 2012

Public Offering by Teekay Tankers

In February 2012, our publicly traded subsidiary Teekay Tankers Ltd. (NYSE: TNK) (or Teekay Tankers) completed a public offering of 17.3 million shares of its Class A Common Stock (including 2.3 million shares issued upon the full exercise of the underwriters’ overallotment option) at a price of $4.00 per share, for gross proceeds of approximately $69.0 million. Net offering proceeds were used to prepay outstanding debt under a revolving credit facility and the balance for general corporate purposes. As a result of this transaction, our ownership of Teekay Tankers was reduced to 20.4%. We maintain voting control of Teekay Tankers through our ownership of shares of Class A and Class B Common Stock and will continue to consolidate this subsidiary.

Sale of Vessels to Teekay Tankers

In June 2012, we sold to Teekay Tankers a fleet of 13 double-hull conventional oil and product tankers and related time-charter contracts, debt facilities and other assets and rights, for an aggregate purchase price of approximately $454.2 million. As partial consideration for the sale, we received $25 million worth of newly issued shares of Teekay Tankers’ Class A common stock, issued at a price of $5.60 per share, and the remaining amount was settled through a combination of a cash payment to us and the assumption by Teekay Tankers of existing debt secured by the acquired vessels. As a result, our economic interest in Teekay Tankers increased from approximately 20.4% to approximately 25.1% and our voting interest as a result of our combined ownership of Class A and Class B shares increased from approximately 51% to approximately 53%. As part of this transaction, we entered into a non-competition agreement with Teekay Tankers, which provides Teekay Tankers with a right of first refusal to participate in any future conventional crude oil tanker and product tanker opportunities developed by us for a period of three years from the closing date of the transaction.

Public Offerings of Senior Unsecured Bonds

In January 2012, our publicly traded subsidiary Teekay Offshore Partners L.P. (NYSE: TOO) (or Teekay Offshore) issued in the Norwegian bond market NOK 600 million of senior unsecured bonds that mature in January 2017. The aggregate principal amount of the bonds was equivalent to approximately U.S. $100 million at June 30, 2012. The interest payments on the bonds are based on NIBOR plus a margin of 5.75%. Teekay Offshore entered into a cross currency rate swap to swap all interest and principal payments into U.S. Dollars with the interest payments fixed at a rate of 7.49%. The proceeds from the bonds were used for general corporate purposes. The bonds are listed on the Oslo Stock Exchange.

In May 2012, our publicly traded subsidiary Teekay LNG Partners (NYSE: TGP) (or Teekay LNG) issued in the Norwegian bond market NOK 700 million in senior unsecured bonds that mature in May 2017, which bear interest at 3-month NIBOR plus a margin of 5.25%. The aggregate principal amount of the bonds is equivalent to approximately U.S. $117.5 million as at June 30, 2012. Teekay LNG entered into a cross currency rate swap agreement to swap all interest and principal payments into U.S. dollars at a fixed interest rate of 6.88%.The proceeds of the bonds were used to prepay the outstanding debt under two revolving credit facilities and for general corporate purposes. Teekay LNG is applying to list the bonds on the Oslo Stock Exchange.

Acquisition of LNG carriers by Teekay LNG

In February 2012, Teekay LNG and the Marubeni Corporation (or Marubeni) acquired, through a joint venture (or the Teekay LNG-Marubeni Joint Venture), 100% ownership interests in six liquefied natural gas (or LNG) carriers (or the MALT LNG Carriers) from Denmark-based A.P. Moeller-Maersk A/S (or Maersk) for an aggregate purchase price of approximately $1.3 billion. Teekay LNG and Marubeni have 52% and 48% respective economic interests, but share control of the Teekay LNG-Marubeni Joint Venture. Four of the six MALT LNG Carriers are currently operating under long-term, fixed-rate time-charter contracts, with an average remaining firm contract period of approximately 17 years, plus extension options. The other two vessels are currently operating under medium-term, fixed-rate time-charters with an average remaining firm contract period of approximately four years. Since control of the Teekay LNG-Marubeni Joint Venture is shared jointly between Teekay LNG and Marubeni, Teekay LNG has accounted for the Teekay LNG-Marubeni Joint Venture using the equity method.

The Teekay LNG-Marubeni Joint Venture financed approximately $1.06 billion of the purchase price for the MALT LNG Carriers from secured loan facilities, and an aggregate $266 million from equity contributions from Teekay LNG and Marubeni. Teekay LNG agreed to guarantee Teekay LNG’s 52% share of the secured loan facilities of the Teekay LNG-Marubeni Joint Venture and as a result, deposited $30 million in a restricted cash account as security. Teekay LNG’s 52% share of the equity contribution was approximately $138 million. Teekay LNG financed this equity contribution by drawing on their existing credit facilities. Teekay has taken over technical management of the acquired vessels after a transition period.

Public Offering by Teekay LNG

In September 2012, Teekay LNG completed a public offering of 4.6 million common units for net proceeds, including its general partner’s 2% proportionate capital contribution, of approximately $173.7 million. Upon completion of the public offering, Teekay LNG had 70.9 million common units outstanding. Teekay LNG will use the proceeds from the offering for general corporate purposes, which may include funding potential future newbuilding deliveries or vessel acquisitions. Pending the use of the proceeds, Teekay LNG intends to repay a portion of its outstanding debt under two of its revolving credit facilities. As a result of this public offering, our ownership of Teekay LNG was reduced to 37.6% (including our 2% general partner interest). We maintain control of Teekay LNG by virtue of our control of the general partner and will continue to consolidate the subsidiary.

 

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Table of Contents

Recent Offshore Business Developments

In November 2011, we agreed to acquire from Sevan Marine ASA (Sevan) the Voyageur Spirit (formerly known as the Sevan Voyager) FPSO unit upon the completion of certain upgrades that are expected to be completed in the fourth quarter of 2012. In June 2012, we offered the Voyageur Spirit to Teekay Offshore for a purchase price of approximately $540 million. On September 11, 2012, we entered into an agreement to sell, subject to certain conditions, the Voyageur Spirit to Teekay Offshore for such price following its commencement of operations under a long-term charter contract with E.ON Ruhrgas UK E&P Limited (or E.ON). Operations will commence under the charter after the FPSO unit produces “first oil” in the North Sea’s Huntington Field. The charter contract has an initial term of five years, with up to 10 one-year extension options exercisable by E.ON., subject to certain conditions. Teekay Offshore intends to pay the $540 million purchase price for the Voyageur Spirit through (a) the proceeds from its September 2012 equity public offering described below, (b) the issuance by Teekay Offshore to us of $40 million of its common units (priced at the same price per unit to the public as units issued in the September 2012 public offering) and (c) borrowings under new bank facilities. Conditions to the closing of Teekay Offshore’s acquisition of the unit include, among others, Teekay Offshore obtaining financing and that we have acquired the Voyageur Spirit and related assets pursuant to the terms of our acquisition agreement with Sevan. We anticipate the sale to Teekay Offshore will take place in November 2012.

In January 2012, we sold the assets related to the Tiro and Sidon FPSO project, including a partially constructed FPSO unit, and the related customer contracts, to OOG-TKP FPSO GmbH & Co KG, a 50/50 joint venture between us and Odebrecht Oil & Gas S.A., for approximately $179 million. The joint venture financed the purchase price 80% with borrowings under a new $300 million debt facility secured by the Cidade de Itajai FPSO unit and the balance with pro rata equity contributions by each of the joint venture partners. The facility bears interest at LIBOR plus a margin of 2.25% and requires quarterly principal repayments with a final bullet payment on maturity in October 2021. This FPSO unit was scheduled to deliver from the shipyard in September 2012, but has been delayed due to fire damage sustained during pre-delivery sea trials. The extent of damage to the unit is under investigation, and any related delay in its delivery is yet to be determined. Upon delivery, the unit is expected to commence operations under a nine-year, fixed-rate time charter-out contract with Petroleo Brasileiro S.A. (or Petrobras), with six additional one-year extension options exercisable by Petrobras. Pursuant to our omnibus agreement with Teekay Offshore, Teekay LNG and others, we are obligated to offer to Teekay Offshore our 50% interest in this FPSO project at our fully built-up cost, within approximately one year after the commencement of the charter with Petrobras.

Private Placement by Teekay Offshore

In July 2012, Teekay Offshore issued 1.7 million common units to a group of institutional investors for net proceeds, including the General Partner’s 2% proportionate capital contribution, of $45.9 million. Upon completion of the private placement, Teekay Offshore had 72.3 million common units outstanding. Teekay Offshore will use the proceeds from the issuance of common units to partially finance the shipyard instalments for four Suezmax newbuilding shuttle tankers. As a result of this private placement, Teekay’s ownership of Teekay Offshore was reduced to 32.3% (including the Company’s 2% general partner interest). Teekay maintains control of Teekay Offshore by virtue of its control of the general partner and will continue to consolidate the subsidiary.

Public Offering by Teekay Offshore

In September 2012, Teekay Offshore commenced a public offering of 7.4 million common units for net proceeds, including its general partner’s 2% proportionate capital contribution, of $201.2 million. Upon completion of the public offering, expected in mid-September 2012, Teekay Offshore will have 79.7 million common units outstanding. Teekay Offshore intends to use the proceeds from the issuance of common units to partially finance the purchase price of the Voyageur Spirit FPSO unit as described above. As a result of this public offering, our ownership of Teekay Offshore will be reduced to 29.5% (including our 2% general partner interest). We maintain control of Teekay Offshore by virtue of our control of the general partner and will continue to consolidate the subsidiary.

OTHER SIGNIFICANT PROJECTS AND DEVELOPMENTS

Angola LNG Project

Teekay LNG has a 33% interest in a joint venture to charter four newbuilding 160,400-cubic meter LNG carriers for a period of 20 years to the Angola LNG Project. Mitsui & Co., Ltd. and NYK Bulkship (Europe) Ltd., have 34% and 33% interests in the joint venture, respectively. In February 2011, we offered to sell to Teekay LNG our 33% ownership interest in these vessels and related charter contracts, in accordance with existing agreements. Teekay LNG agreed to purchase our 33% ownership interest in these vessels and related charter contracts at a total equity purchase price of approximately $76 million (net of assumed debt of approximately $259 million). Teekay LNG acquired the ownership interests and paid a proportionate share of the purchase price as each vessel delivered. Three of the Angola LNG carriers delivered in 2011 and the remaining Angola LNG carrier delivered on January 12, 2012.

Each of the four newbuilding LNG carriers are chartered at fixed rates, subject to inflation adjustments, to the Angola LNG Project for a period of 20 years since delivery from the shipyard, with two extension periods for five years each. The charterer has the option to terminate the charter upon 120 days’ notice and payment of an early termination fee, which would equal approximately 50% of the fully built-up cost of the applicable vessel. The charterer may also terminate the charter under other circumstances typical in our long-term charters, such as excessive off-hire during which we do not provide a replacement vessel, or certain force majeure events.

Storm Damage to Banff FPSO Unit

On December 7, 2011, the Petrojarl Banff FPSO unit (or Banff), which operates on the Banff field in the U.K. sector of the North Sea, encountered a severe storm event and sustained damage to its moorings, turret and subsea equipment, which necessitated the shutdown of production on the unit. Due to the damage, we declared force majeure under the customer contract on December 8, 2011 and the Banff FPSO unit commenced a period of off-hire which is currently expected to continue until the third quarter of 2013 while repairs are assessed and completed. We expect to incur losses of operating cash flow of approximately $35 million in 2012 and $20 million in 2013. After the repairs are completed, the Banff FPSO unit is expected to resume production on the Banff field, where it is expected to remain under contract until the end of 2018.

We expect that repair costs to the Banff FPSO unit and equipment and costs associated with the emergency response to prevent loss or further damage during the December 7, 2011 storm event will be primarily reimbursed through our insurance coverage subject to a $0.8 million deductible and the other terms and conditions of the applicable policies. We also expect to recover certain of the costs not covered by insurance from the charterer, excluding lost operating cash flow, subject to commercial discussions. It is not determinable at this time if all repair costs will be recovered through insurance coverage or the charterer.

 

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RESULTS OF OPERATIONS

We use a variety of financial and operational terms and concepts when analyzing our results of operations. In addition, you should consider certain factors when evaluating our historical financial performance and assessing our future prospects. These items can be found in Item 5 - “Operating and Financial Review and Prospects” in our Annual Report on Form 20-F for the year ended December 31, 2011.

In accordance with generally accepted accounting principles in the United States (or GAAP), we report gross revenues in our income statements and include voyage expenses among our operating expenses. However, ship-owners base economic decisions regarding the deployment of their vessels upon anticipated time-charter equivalent (or TCE) rates and industry analysts typically measure shipping freight rates in terms of TCE rates. This is because under time-charter contracts and FPSO service contracts the customer usually pays the voyage expenses, while under voyage charters and contracts of affreightment the ship-owner usually pays the voyage expenses, which typically are added to the hire rate at an approximate cost. Accordingly, the discussion of revenue below focuses on net revenues and TCE rates of our four reportable segments where applicable.

We manage our business and analyze and report our results of operations on the basis of four reportable segments: the shuttle tanker and FSO segment, the FPSO segment, the liquefied gas segment, and the conventional tanker segment. In order to provide investors with additional information about our conventional tanker segment, we have divided the conventional tanker segment into the fixed-rate tanker sub-segment and the spot tanker sub-segment. Please read “Item 1 – Financial Statements: Note 3 – Segment Reporting.”

Shuttle Tanker and FSO Segment

Our shuttle tanker and floating storage and offtake (or FSO) segment (which includes our Teekay Shuttle and Offshore business unit) includes our shuttle tankers and FSO units. As at June 30, 2012, our shuttle tanker fleet consisted of 36 vessels that operate under fixed-rate contracts of affreightment, time charters and bareboat charters. Of the 36 shuttle tankers, six were owned through 50% owned subsidiaries, three through a 67% owned subsidiary and four were chartered-in, with the remainder owned 100% by us. Our FSO fleet consists of five vessels that operate under fixed-rate time charters or fixed-rate bareboat charters. We have 100% ownership interests in these units. We also have four newbuilding shuttle tankers on order which are scheduled to deliver in mid to late 2013. Please read “Item 1 – Financial Statements: Note 10(a) – Commitments and Contingencies – Vessels Under Construction.” We use these vessels to provide transportation and storage services to oil companies operating offshore oil field installations, primarily in the North Sea and Brazil. Our shuttle tankers in this segment service the conventional spot market from time to time.

The following table presents our shuttle tanker and FSO segment’s operating results and compares its net revenues (which is a non-GAAP financial measure) to revenues, the most directly comparable GAAP financial measure. The following table also provides a summary of the changes in calendar-ship-days by owned and chartered-in vessels for our shuttle tanker and FSO segment:

 

(in thousands of U.S. dollars, except calendar-ship-days and percentages)    Three Months Ended            Six Months Ended         
   June 30,            June 30,         
   2012      2011      % Change     2012      2011      % Change  

Revenues

     153,130         148,647         3.0        308,469         299,859         2.9   

Voyage expenses

     32,252         26,351         22.4        59,267         45,680         29.7   
  

 

 

    

 

 

      

 

 

    

 

 

    

Net revenues

     120,878         122,296         (1.2     249,202         254,179         (2.0

Vessel operating expenses

     40,656         50,558         (19.6     84,808         101,392         (16.4

Time-charter hire expense

     12,969         18,751         (30.8     26,586         38,378         (30.7

Depreciation and amortization

     32,037         32,125         (0.3     63,829         62,744         1.7   

General and administrative (1)

     14,960         12,982         15.2        29,010         31,288         (7.3

Loss on sale of vessels and write-downs of vessels

     1,048         —           100.0        1,048         171         512.7   

Restructuring charges

     —           117         (100.0     —           4,037         (100.0
  

 

 

    

 

 

      

 

 

    

 

 

    

Income from vessel operations

     19,208         7,763         147.4        43,921         16,169         171.6   
  

 

 

    

 

 

      

 

 

    

 

 

    

Calendar-Ship-Days

                

Owned Vessels

     3,097         3,227         (4.0     6,194         6,114         1.3   

Chartered-in Vessels

     332         493         (32.7     680         1,034         (34.2
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

     3,429         3,720         (7.8     6,874         7,148         (3.8
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) Includes direct general and administrative expenses and indirect general and administrative expenses allocated to the shuttle tanker and FSO segment based on estimated use of corporate resources. For further discussion, please read “Other Operating Results – General and Administrative Expenses.”

The average size of our shuttle tanker and FSO segment fleet decreased for the three and six months ended June 30, 2012 compared to the same periods last year. The decrease was primarily due to the redelivery of one bareboat chartered-in vessel to its owner in October 2011, a decreased number of spot chartered-in vessels, more off-hire days in our shuttle fleet and the sale of the Karratha Spirit FSO unit in March 2011, partially offset by the delivery of two newbuilding shuttle tankers, the Peary Spirit and the Scott Spirit, in August 2011 and October 2011, respectively (or the 2011 Newbuilding Shuttle Tanker Acquisitions). Included in calendar-ship-days are two owned shuttle tankers which have been in lay-up since July 2011 and May 2012, respectively, following their redelivery to us upon termination of their time-charter-out contracts in March 2011 and April 2012.

 

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Net Revenues. Net revenues decreased for the three and six months ended June 30, 2012, compared to the same periods last year, primarily due to:

 

   

decreases of $2.2 million and $4.4 million, respectively, for the three and six months ended June 30, 2012, due to the lay-up of two vessels since July 2011 and May 2012 following their redeliveries in March 2011 and April 2012, respectively, following completion of their time-charter agreements; and

 

   

decreases of $2.2 million for the six months ended June 30, 2012, due to lower revenues related to the sale of the Karratha Spirit; and

partially offset by

 

   

net increases of $0.9 million and $2.9 million, respectively, for the three and six months ended June 30, 2012, due to increases in our time-chartered-out fleet revenues from entering into a new contract and an increase in rates as provided in certain time-charter-out contracts, partially offset by fewer revenue days from the redelivery of three vessels in July 2011, February 2012, and March 2012 as they completed their time-charter agreements; and

 

   

an increase of $0.9 million for the three months ended June 30, 2012 due to more opportunities compared to the same period last year to trade excess capacity in the conventional spot tanker market as a result of increased demand for conventional crude transportation.

Vessel Operating Expenses. Vessel operating expenses decreased for the three and six months ended June 30, 2012, compared to the same periods last year, primarily due to:

 

   

decreases of $4.7 million and $6.1 million, respectively, for the three and six months ended June 30, 2012, due to decrease in costs related to services and spares and the number of vessels dry docked;

 

   

decreases of $2.5 million and $3.9 million, respectively, for the three and six months ended June 30, 2012, relating to the lay-up of two of our shuttle tankers since July 2011 and May 2012, respectively, and the reduction of costs due to the anticipated lay-up of one of our shuttle tankers in the third quarter of 2012;

 

   

decreases of $2.3 million and $3.8 million, respectively, for the three and six months ended June 30, 2012 in crew and manning costs as compared to the same periods last year primarily from a change in crew composition and reduced helicopter usage;

 

   

decreases of $1.4 million and $3.0 million, respectively, for the three and six months ended June 30, 2012, relating to the redelivery of one of our bareboat-in vessels to its owner in October 2011;

 

   

a decrease of $2.2 million for the six months ended June 30, 2012, due to the sale of the Karratha Spirit in March 2011; and

 

   

decreases of $0.7 million and $1.4 million, respectively, for the three and six months ended June 30, 2012, due to decreases in the consumption and use of consumables, lube oil and freight compared to the same periods last year;

partially offset by

 

   

increases of $2.7 million and $4.2 million, respectively, for the three and six months ended June 30, 2012, due to the 2011 Newbuilding Shuttle Tanker Acquisitions;

 

   

increases of $0.1 million and $0.4 million, respectively, for the three and six months ended June 30, 2012, due to an increase in wages relating to the Dampier Spirit compared to the same periods last year; and

 

   

an increase of $0.8 million for the six months ended June 30, 2012 relating to the net realized and unrealized changes in fair value of our foreign currency forward contracts that are or have been designated as hedges for accounting purposes.

Time-Charter Hire Expense. Time-charter hire expense decreased for the three and six months ended June 30, 2012, compared to the same periods last year, primarily due to:

 

   

decreases of $2.2 million and $4.5 million, respectively, for the three and six months ended June 30, 2012, due to the redelivery of one bareboat-in vessel to its owner in October 2011;

 

   

decreases of $1.9 million and $4.4 million, respectively, for the three and six months ended June 30, 2012, due to decreased spot in-chartering of vessels and utilizing capacity of our owned fleet; and

 

   

decreases of $1.1 million and $2.8 million, respectively, for the three and six months ended June 30, 2012 due to more off-hire days in the in-chartered fleet.

Depreciation and Amortization Expense. Depreciation and amortization expense increased for the six months ended June 30, 2012, compared to the same period last year, primarily related to accelerated depreciation related to a change in the estimated useful life on six older shuttle tankers and the 2011 Newbuilding Shuttle Tanker Acquisitions, partially offset by less depreciation relating to the impairment and write-down of three older shuttle tankers in 2011 to fair value and the write-down of the carrying value of the FSO unit Navion Saga to its fair value in December 2011.

 

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Loss on Sale of Vessels and Write-downs of Vessels. Write-down of vessels increased for the three and six months ended June 30, 2012. In the second quarter of 2012, we decided to pursue the sale of one older shuttle tanker. The carrying value of this vessel was written down to fair value, which is its sales price. The vessel was subsequently sold in early August 2012.

Restructuring Charges. Restructuring charges decreased for the six months ended June 30, 2012, compared to the same period last year, primarily due to the termination of the charter contract of one of our vessels and employment costs related to the termination of certain crew members that relate to the sale of the Karratha Spirit.

FPSO Segment

Our floating, production, storage and offloading (or FPSO) segment (which includes our Teekay Petrojarl business unit) includes the FPSO units and other vessels used to service our FPSO contracts. As at June 30, 2012, in addition to the seven 100% owned FPSO units, FPSO segment had one FPSO unit under construction, scheduled to deliver in late 2013, a 50% interest in one FPSO unit under conversion and accounted for one FPSO unit to be acquired later in 2012 as a variable interest entity (or VIE). We use these units and vessels to provide transportation, production, processing and storage services to oil companies operating offshore oil field installations. These services are typically provided under long-term fixed-rate time-charter contracts or FPSO service contracts. Historically, the utilization of FPSO units and other vessels in the North Sea is higher in the winter months, as favorable weather conditions in the summer months provide opportunities for repairs and maintenance to our offshore oil platforms, which generally reduce oil production.

The following table presents our FPSO segment’s operating results for the three and six months ended June 30, 2012 and 2011 and also provides a summary of the calendar-ship-days for our FPSO segment:

The following table presents our FPSO segment’s operating results:

 

(in thousands of U.S. dollars, except calendar-ship-days and percentages)    Three Months Ended             Six Months Ended         
   June 30,             June 30,         
   2012      2011      % Change      2012      2011      % Change  

Revenues

     136,198         102,658         32.7         264,866         207,276         27.8   

Voyage expenses

     —           —           0.0         232         —           100.0   

Vessel operating expenses

     80,222         61,509         30.4         148,363         117,011         26.8   

Depreciation and amortization

     34,415         23,215         48.2         67,563         46,946         43.9   

General and administrative (1)

     15,481         13,494         14.7         32,999         28,217         16.9   
  

 

 

    

 

 

       

 

 

    

 

 

    

Income from vessel operations

     6,080         4,440         36.9         15,709         15,102         4.0   
  

 

 

    

 

 

       

 

 

    

 

 

    

Calendar-Ship-Days Owned Vessels

     910         728         25.0         1,820         1,448         25.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes direct general and administrative expenses and indirect general and administrative expenses allocated to the FPSO segment based on estimated use of corporate resources. For further discussion, please read “Other Operating Results – General and Administrative Expenses.”

The number of our FPSO units for the three and six months ended June 30, 2012 increased compared to the same period last year, due to our acquisition of the Hummingbird Spirit FPSO unit, the acquisition of Piranema Spirit FPSO unit by Teekay Offshore, and our agreement to acquire the Voyageur Spirit upon completion of certain upgrades (expected during the fourth quarter of 2012) from Sevan during the fourth quarter of 2011 (or the Sevan Acquisitions). The Voyageur Spirit has been accounted for as a VIE since the fourth quarter of 2011.

Revenues. Revenues increased for the three and six months ended June 30, 2012 compared to the same periods last year, primarily due to:

 

   

increases of $44.0 million and $82.5 million, respectively, for the three and six months ended June 30, 2012, due to the Sevan Acquisitions;

 

   

increases of $3.7 million and $1.4 million, respectively, for the three and six months ended June 30, 2012, due to higher supplemental efficiency and tariff payments received on the Petrojarl Foinaven FPSO contract;

 

   

an increase of $1.3 million for the six months ended June 30, 2012, due to increased rates on the Petrojarl Varg FPSO unit in accordance with the annual escalation adjustments of the charter contract; and

 

   

increases of $0.4 million and $1.4 million, respectively, for the three and six months ended June 30, 2012, due to increased rates on the Rio das Ostras FPSO unit in accordance with the annual escalation adjustments of the charter contract;

partially offset by

 

   

decreases of $13.7 million and $27.2 million, respectively, for the three and six months ended June 30, 2012, due the weather-related incident with the Petrojarl Banff FPSO unit;

 

   

decreases of $0.4 million and $3.5 million, respectively, for the three and six months ended June 30, 2012, relating to payments during 2011 to us for services previously rendered to the charterer of the Rio das Ostras FPSO unit; and

 

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decreases of $1.3 million and $1.5 million, respectively, for the three and six months ended June 30, 2012, due to decreased incentive payments and lower production on the Petrojarl Varg FPSO unit, partly due to a planned maintenance shutdown in the second quarter of 2012.

 

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Vessel Operating Expenses. Vessel operating expenses increased during the three and six months ended June 30, 2012, compared to the same periods last year, primarily due to:

 

   

increases of $28.4 million and $47.0 million, respectively, for the three and six months ended June 30, 2012, due to the Sevan Acquisitions;

partially offset by

 

   

decreases of $5.7 million and $7.8 million, respectively, for the three and six months ended June 30, 2012 due the weather-related incident with the Petrojarl Banff FPSO unit;

 

   

decreases of $0.8 million and $3.7 million, respectively, for the three and six months ended June 30, 2012, due to repairs on the Rio das Ostras FPSO unit while on yard stay and higher consumables and spares during the first quarter of 2011 and deployment to the field during the second quarter of 2011;

 

   

decreases of $2.2 million and $3.0 million, respectively, for the three and six months ended June 30, 2012, due to lower repair and maintenance costs on the Petrojarl Foinaven FPSO unit and Petrojarl I FPSO unit;

 

   

decreases of $1.5 million and $2.0 million, respectively, for the three and six months ended June 30, 2012, due to the strengthening of the U.S. Dollar against the Norwegian Kroner compared to the same periods last year; and

 

   

a decrease of $0.8 million for the three and six months ended June 30, 2012, due to lower crew and manning costs relating to the Rio das Ostras FPSO unit due to the deployment to the field during the second quarter of 2011.

Depreciation and Amortization Expense. Depreciation and amortization expense increased for the three and six months ended June 30, 2012 from the same periods last year, primarily due to the Sevan Acquisitions.

Liquefied Gas Segment

Our liquefied gas segment (which includes our Teekay Gas Services business unit) consists of liquefied natural gas (or LNG) and liquefied petroleum gas (or LPG) carriers subject to long-term, fixed-rate time-charter contracts. The following table presents our liquefied gas segment’s operating results and compares its net revenues (which is a non-GAAP financial measure) to revenues, the most directly comparable GAAP financial measure.

 

(in thousands of U.S. dollars, except calendar-ship-days and percentages)    Three Months Ended            Six Months Ended         
   June 30,            June 30,         
   2012      2011      % Change     2012      2011      % Change  

Revenues

     69,289         68,002         1.9        141,739         132,635         6.9   

Voyage expenses

     53         3,778         (98.6     149         3,827         (96.1
  

 

 

    

 

 

      

 

 

    

 

 

    

Net revenues

     69,237         64,224         7.8        141,591         128,808         9.9   

Vessel operating expenses

     10,821         13,145         (17.7     21,632         24,222         (10.7

Depreciation and amortization

     17,445         16,196         7.7        34,683         31,052         11.7   

General and administrative (1)

     5,541         4,133         34.1        11,667         10,738         8.7   

Restructuring charges

     —           42         (100.0     —           171         (100.0
  

 

 

    

 

 

      

 

 

    

 

 

    

Income from vessel operations

     35,429         30,708         15.4        73,608         62,625         17.5   
  

 

 

    

 

 

      

 

 

    

 

 

    

Calendar-Ship-Days

                

Owned Vessels and Vessels under Direct Financing Lease

     1,456         1,198         21.5        2,912         2,368         23.0   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) Includes direct general and administrative expenses and indirect general and administrative expenses allocated to the liquefied gas segment based on estimated use of corporate resources. For further discussion, please read “Operating Results – General and Administrative Expenses.”

As at June 30, 2012, our liquefied gas segment fleet (in which our interests ranged from 33% to 100%) included 27 LNG carriers and five LPG/multigas carriers. Our partial interests in LNG carriers include our 33% interest in the four Angola LNG carriers, our 40% interest in Teekay Nakilat (III) Corporation, which owns four LNG carriers (or the RasGas 3 LNG Carriers), our 50% interest in our joint ventures with Exmar NV (the Excalibur and Excelsior Joint Ventures), which own two LNG carriers (the Excalibur and Excelsior LNG Carriers), our 52% interest in the Teekay LNG – Marubeni Joint Venture, which owns six LNG carriers (or the MALT LNG Carriers), our 70% interest in the Teekay Tangguh Joint Venture, which owns the Tangguh Hiri and the Tangguh Sago (or the Tangguh LNG Carriers), and our 70% interest in Teekay Nakilat Corporation (or Teekay Nakilat), which is the lessee under 30-year capital lease arrangements relating to three LNG carriers (or the RasGas II LNG Carriers). All of our LNG and LPG carriers operate under medium or long-term, fixed-rate charters.

During the three and six months ended June 30, 2012, our liquefied gas segment’s operating results included 11 LNG carriers (excluding the six MALT LNG Carriers, the four Angola LNG carriers, the four RasGas 3 LNG Carriers and the Excalibur and Excelsior Carriers that are all accounted for under the equity method) and five LPG carriers. Our total calendar-ship-days increased by 21.5% and 23.0%, respectively, for the three and six months ended June 30, 2012, compared to the same periods last year, primarily as a result of the delivery of two multigas carriers, the Norgas Unikum, on June 15, 2011, and the Norgas Vision, on October 17, 2011, and the delivery of an LPG carrier, the Norgas Camilla, on September 15, 2011 (collectively, the 2011 Gas Carrier Deliveries).

 

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Net Revenues. Net revenues increased for the three and six months ended June 30, 2012, compared to the same periods last year, primarily due to:

 

   

increases of $3.5 million and $7.3 million, respectively, for the three and six months ended June 30, 2012, due to the 2011 Gas Carrier Deliveries;

 

   

increases of $2.7 million and $6.4 million, respectively, for the three and six months ended June 30, 2012 due to the Arctic Spirit and Polar Spirit being off-hire in the second quarter of 2011 and the increase in hire rates under the new charter contracts signed in April 2011;

 

   

an increase of $0.7 million for the six months ended June 30, 2012 due to one additional calendar day during 2012; and

 

   

increases of $0.1 million and $0.9 million, respectively, for the three and six months ended June 30, 2012, due to operating expense recovery adjustments and increase in the charter-hire rates for the Tangguh Hiri and Tangguh Sago;

partially offset by

 

   

a decrease of $1.4 million for the three and six months ended June 30, 2012 due to the Hispania Spirit being off-hire for 21 days in the second quarter of 2012 for scheduled dry docking; and

 

   

a decrease of $0.9 million for the three and six months ended June 30, 2012 due to a one-time payment made to the charterer of the Galicia Spirit for delaying the scheduled dry docking.

Vessel Operating Expenses. Vessel operating expenses decreased for the three and six months ended June 30, 2011, compared to the same periods last year, primarily due to:

 

   

a decrease of $1.2 million for the three and six months ended June 30, 2012 primarily due to the effect on our Euro-denominated crew manning expenses from the weakening of the Euro against the U.S. Dollar during 2012 compared to 2011 (a portion of our vessel operating expenses are denominated in Euros, which is primarily due to the nationality of our crew) and lower manning levels due to timing of scheduled crew changes;

 

   

decreases of $0.6 million and $0.8 million, respectively, for the three and six months ended June 30, 2012, due to the cancellation of loss of hire insurance on Tangguh Hiri and Tangguh Sago in the third quarter of 2011 and lower insurance premiums on certain LNG carriers; and

 

   

decreases of $0.6 million and $0.8 million, respectively, for the three and six months ended June 30, 2012, due to maintenance on the Tangguh Hiri during the second quarter of 2011 relating to a scheduled dry docking.

Depreciation and Amortization. Depreciation and amortization increased for the three and six months ended June 30, 2012, from the same periods last year, primarily as a result of:

 

   

an increase of $1.0 million and $2.2 million, respectively, for the three and six months ended June 30, 2012, due to the 2011 Gas Carrier Deliveries; and

 

   

an increase of $0.3 million and $1.1 million, respectively, for the three and six months ended June 30, 2012, as a result of amortization of dry-dock expenditures incurred in 2011 and the first quarter of 2012.

Conventional Tanker Segment

Our conventional tanker segment consists of conventional crude oil and product tankers that (i) are subject to long-term, fixed-rate time-charter contracts (which have an original term of one year or more), (ii) operate in the spot tanker market, or (iii) are subject to time-charters or contracts of affreightment that are priced on a spot market basis or are short-term, fixed-rate contracts (which have an original term of less than one year).

a) Fixed-Rate Tanker Sub-Segment

Our fixed-rate tanker sub-segment, a subset of our conventional tanker segment (which includes our Teekay Tankers Services business unit), includes conventional crude oil and product tankers on fixed-rate time charters with an original duration of more than one year. In addition, we have a 50% interest in a VLCC under construction that is scheduled for delivery in 2013, which will be accounted for under the equity basis. Upon delivery, this vessel will commence operation under a time-charter for a term of five years. Please read “Item 1 – Financial Statements: Note 10(b) – Commitments and Contingencies – Joint Ventures.”

The following table presents our fixed-rate tanker sub-segment’s operating results and compares its net revenues (which is a non-GAAP financial measure) to revenues, the most directly comparable GAAP financial measure.

 

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(in thousands of U.S. dollars, except calendar-ship-days and percentages)    Three Months Ended           Six Months Ended         
   June 30,           June 30,         
   2012      2011     % Change     2012      2011      % Change  

Revenues

     76,481         90,523        (15.5     161,445         178,510         (9.6

Voyage expenses

     1,917         835        129.5        3,235         1,996         62.1   
  

 

 

    

 

 

     

 

 

    

 

 

    

Net revenues

     74,564         89,688        (16.9     158,210         176,514         (10.4

Vessel operating expenses

     24,717         29,344        (15.8     53,830         55,187         (2.5

Time-charter hire expense

     7,324         9,214        (20.5     13,960         16,609         (16.0

Depreciation and amortization

     17,989         19,428        (7.4     37,994         41,337         (8.1

General and administrative (1)

     7,230         10,383        (30.4     14,658         26,009         (43.6

Gain on sale of vessels and write- downs of vessels

     —           (133     (100.0     —           —           —     

Restructuring charges

     —           (19     (100.0     —           1,060         (100.0
  

 

 

    

 

 

     

 

 

    

 

 

    

Income from vessel operations

     17,304         21,471        (19.4     37,768         36,312         4.0   
  

 

 

    

 

 

     

 

 

    

 

 

    

Calendar-Ship-Days

               

Owned Vessels

     2,870         2,913        (1.5     5,873         5,852         0.4   

Chartered-in Vessels

     335         497        (32.6     699         902         (22.5
  

 

 

    

 

 

     

 

 

    

 

 

    

Total

     3,205         3,410        (6.0     6,572         6,754         (2.7
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) Includes direct general and administrative expenses and indirect general and administrative expenses allocated to the fixed-rate tanker sub-segment based on estimated use of corporate resources. For further discussion, please read “Other Operating Results – General and Administrative Expenses.”

The average fleet size of our fixed-rate tanker sub-segment (including vessels chartered-in), as measured by calendar-ship-days, decreased for the three and six months ended June 30, 2012 compared with the same periods last year due to:

 

   

the transfer of six Aframax tankers and two Suezmax tankers to the spot-rate tanker sub-segment; and

 

   

the redeliveries to the owners upon termination of charter-in contracts of one Suezmax tanker and one Very-Large Crude Carrier (VLCC);

partially offset by

 

   

the transfer of three Aframax tankers to the fixed-rate tanker sub-segment;

The collective impact from the above noted fleet changes are referred to below as the Net Fleet Reductions.

Net Revenues. Net revenues decreased for the three and six months ended June 30, 2012 compared to the same periods last year, primarily due to:

 

   

decreases of $15.2 million and $18.8 million, respectively, for the three and six months ended June 30, 2012, due to the Net Fleet Reductions;

partially offset by

 

   

increases of $0.1 million and $0.5 million, respectively, for the three and six months ended June 30, 2012, due to adjustments to the daily charter rates based on inflation and an increase in interest rates in accordance with the time-charter contracts for five Suezmax tankers.

Vessel Operating Expenses. Vessel operating expenses decreased for the three and six months ended June 30, 2012 from the same periods last year, primarily due to:

 

   

decreases of $3.4 million and $0.2 million, respectively, for the three and six months ended June 30, 2012, due to the Net Fleet Reductions; and

 

   

a decrease of $1.2 million for the three and six months ended June 30, 2012, relating to the effect on our Euro-denominated crew manning expenses from the weakening of the Euro against the U.S. Dollar during 2012 compared to 2011 (a portion of our vessel operating expenses are denominated in Euros, which is primarily due to the nationality of our crew) and lower manning levels due to timing of scheduled crew changes.

Time-Charter Hire Expense. Time-charter hire expense decreased for the three and six months ended June 30, 2012, compared to the same periods last year, primarily due to a net decrease in the number of in-chartered vessel days as vessels were redelivered to their owners upon expiration of in-chartered contracts.

Depreciation and Amortization. Depreciation and amortization expense decreased for the three and six months ended June 30, 2012, compared to the same period last year, primarily due to lower net book values for certain vessels in the fixed tanker sub-segment as a result of write-downs taken in 2011.

 

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b) Spot Tanker Sub-Segment

Our spot tanker sub-segment, a subset of our conventional tanker segment (which includes our Teekay Tankers Services business unit), consists of conventional crude oil tankers and product carriers operating on the spot tanker market or subject to time-charters or contracts of affreightment that are priced on a spot-market basis or are short-term, fixed-rate contracts. We consider contracts that have an original term of less than one year in duration to be short-term. Our conventional Aframax, Suezmax, and large and medium product tankers are among the vessels included in the spot tanker sub-segment.

Our spot tanker market operations contribute to the volatility of our revenues, cash flow from operations and net income (loss). Historically, the tanker industry has been cyclical, experiencing volatility in profitability and asset values resulting from changes in the supply of, and demand for, vessel capacity. In addition, spot tanker markets historically have exhibited seasonal variations in charter rates. Spot tanker markets are typically stronger in the winter months as a result of increased oil consumption in the Northern Hemisphere and unpredictable weather patterns that tend to disrupt vessel scheduling.

The following table presents our spot tanker sub-segment’s operating results and compares its net revenues (which is a non-GAAP financial measure) to revenues, the most directly comparable GAAP financial measure:

 

(in thousands of U.S. dollars, except calendar-ship-days and percentages)    Three Months Ended           Six Months Ended        
   June 30,           June 30,        
   2012     2011     % Change     2012     2011     % Change  

Revenues

     46,813        75,092        (37.7     100,956        154,666        (34.7

Voyage expenses

     4,954        20,925        (76.3     14,930        45,512        (67.2
  

 

 

   

 

 

     

 

 

   

 

 

   

Net revenues

     41,859        54,167        (22.7     86,026        109,154        (21.2

Vessel operating expenses

     15,940        20,161        (20.9     30,924        38,482        (19.6

Time-charter hire expense

     11,198        25,449        (56.0     34,924        61,458        (40.0

Depreciation and amortization

     13,182        14,272        (7.6     25,613        28,195        (9.2

General and administrative (1)

     7,565        10,281        (26.4     15,816        25,239        (37.3

Loss on sale of vessels and write - downs of vessels

     2,221        5,945        (62.6     2,024        9,234        (78.1

Restructuring charges

     1,525        318        379.6        1,525        151        909.9   
  

 

 

   

 

 

     

 

 

   

 

 

   

Loss from vessel operations

     (9,772     (22,259     (56.1     (24,800     (53,605     (53.7
  

 

 

   

 

 

     

 

 

   

 

 

   

Calendar-Ship-Days

            

Owned Vessels

     1,936        2,001        (3.2     3,756        3,922        (4.2

Chartered-in Vessels

     777        1,436        (45.9     2,060        3,081        (33.1
  

 

 

   

 

 

     

 

 

   

 

 

   

Total

     2,713        3,437        (21.1     5,816        7,003        (16.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes direct general and administrative expenses and indirect general and administrative expenses allocated to the spot tanker sub-segment based on estimated use of corporate resources. For further discussion, please read “Other Operating Results – General and Administrative Expenses.”

The average size of our spot tanker fleet (including vessels chartered-in), as measured by calendar-ship-days, decreased for the three and six months ended June 30, 2012, compared to the same period last year, primarily due to:

 

   

the sale of one Aframax tanker in 2011;

 

   

the redeliveries, on a net basis, of three Aframax tankers and four Suezmax tankers;

 

   

the redelivery of two in-chartered Long Range 2 (LR2) product tankers and one in-chartered Very Large Crude Carrier (VLCC); and

 

   

the transfer of three Aframax tankers to the fixed-rate tanker sub-segment;

partially offset by

 

   

the transfer of six Aframax tankers and two Suezmax tankers, on a net basis, to the spot-rate tanker sub-segment.

The collective impact from the above noted fleet changes are referred to below as the Net Spot Fleet Reductions.

Tanker Market and TCE Rates

Crude tanker rates softened during the second quarter of 2012 due to a combination of tanker supply growth, reduced tanker demand and seasonal factors. According to the International Energy Agency (IEA), global oil demand declined by 0.6 million barrels per day (mb/d) during the second quarter of 2012 due to refinery turnarounds in both the Atlantic and Pacific basins. A decline in non-Organization for Economic Co-operation and Development (or OECD) oil stockpiling following heavy build-ups during the first quarter of 2012 also reduced demand for crude tankers. The onset of oilfield maintenance in the North Sea and a strike by Norwegian oil workers also negatively impacted crude tanker rates during the second quarter of 2012.

Long Range 2 (LR2) product tanker rates strengthened considerably during the second quarter of 2012 and as of July 2012 had risen to their highest level since the third quarter of 2010. The recovery in LR2 rates was driven by an increase in Asian naphtha imports from the Middle East and Europe coupled with reduced competition from uncoated Aframax newbuildings for gasoil cargoes loading in the Far East.

 

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The global tanker fleet grew by a net 11.0 million deadweight (mdwt), or 2.3%, through the first half of 2012 compared to fleet growth of 15.6 mdwt, or 3.5%, for the same period of 2011. Fleet growth accelerated during the second quarter of 2012 due to an increase in vessel deliveries and a decrease in scrapping compared to the first quarter of 2012. The decline in scrapping partially reflects the reduction in scrap prices, which as of end-of-July 2012 averaged $380 per lightweight tonne (lwt) compared to $480 per lwt at the beginning of 2012.

The outlook for the global economy has weakened in July and August 2012 due to ongoing stress in the Euro zone and slower growth in the United States and China. The International Monetary Fund (IMF) downgraded its outlook for global economic growth in 2012 and 2013 to 3.5% and 3.9%, respectively (from 3.6% and 4.1% in their previous forecast). As a result, the Energy Information Administration downgraded its global oil demand growth forecast for 2013 to 0.7 mb/d from 1.5 mb/d forecasted at the start of 2012. This is expected to translate into slower tanker demand growth during 2013 than was previously expected, although a simultaneous slowdown in tanker supply growth could help offset this weaker demand outlook.

The following table outlines the time-charter equivalent (or TCE) rates earned by the vessels in our spot tanker sub-segment for the three and six months ended June 30, 2012 and 2011, and excludes the realized results of synthetic time-charters (or STCs) and forward freight agreements (or FFAs), which we enter into at times as hedges against a portion of our exposure to spot tanker market rates.

 

     Three Months Ended  
     June 30, 2012      June 30, 2011  

Vessel Type

   Net
Revenues
($000’s)
     Revenue
Days
     TCE
Rate

$
     Net
Revenues
($000’s)
    Revenue
Days
     TCE
Rate

$
 

Spot Fleet (1)

                

Suezmax Tankers

     24,093         991         24,312         20,526        1,182         17,363   

Aframax Tankers

     13,159         1,138         11,564         26,688        1,710         15,608   

Large/Medium Product Tankers/VLCC

     4,607         320         14,396         7,287        494         14,758   

Other (2)

              (334     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Totals

     41,859         2,449         17,092         54,167        3,386         15,997   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
     Six Months Ended  
     June 30, 2012      June 30, 2011  

Vessel Type

   Net
Revenues
($000’s)
     Revenue
Days
     TCE
Rate

$
     Net
Revenues
($000’s)
    Revenue
Days
     TCE
Rate

$
 

Spot Fleet (1)

                

Suezmax Tankers

     48,124         1,990         24,183         43,083        2,397         17,972   

Aframax Tankers

     29,057         2,565         11,328         51,072        3,537         14,440   

Large/Medium Product Tankers/VLCC

     8,846         775         11,414         14,839        993         14,947   

Other (2)

              160        
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Totals

     86,027         5,330         16,140         109,154        6,927         15,758   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Spot fleet includes short-term time-charters and fixed-rate contracts of affreightment less than one year.
(2) Includes the cost of spot in-charter vessels servicing fixed-rate contract of affreightment cargoes, the write-off of doubtful debts and the cost of fuel while offhire.

Average spot tanker TCE rates decreased for the three and six months ended June 30, 2012 compared to the same period last year. The TCE rates for the three and six months ended June 30, 2012 generally reflect continued weak global oil demand caused by the global economic slowdown. Partially in response to this global economic slowdown, we reduced our exposure to the spot tanker market by selling certain vessels that were trading on the spot market, entering into fixed-rate time charters for certain tankers that were previously trading in the spot market, and re-delivering in-chartered vessels. This shift away from our spot tanker employment to fixed-rate employment provided increased cash flow stability during a volatile spot tanker market.

Net Revenues. Net revenues decreased for the three and six months ended June 30, 2012 compared to the same periods last year primarily due to:

 

   

decreases of $9.4 million and $22.2 million for the three and six months ended June 30, 2012, respectively, relating to the Net Spot Fleet Reductions; and

 

   

decreases of $2.9 million and $0.9 million for the three and six months ended June 30, 2012, respectively, from decreases in our average spot tanker TCE rates due to the relative weakening of the spot tanker market.

Vessel Operating Expenses. Vessel operating expenses decreased for the three and six months ended June 30, 2012, compared to the same periods last year, primarily due to the Net Spot Fleet Reductions, and decreases of $2.0 million and $0.3 million¸ respectively, for the three and six months ended June 30, 2012 related to the timing of repairs and maintenance.

Time-Charter Hire Expense. Time-charter hire expense decreased for the three and six months ended June 30, 2012, compared to the same periods last year, primarily due to a decrease in the in-charter contract hire rates and redeliveries of in-chartered vessels that reached the end of their contract term.

 

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Depreciation and Amortization. Depreciation and amortization expense decreased for the three and six months ended June 30, 2012, compared to the same periods last year, primarily due to the sale of three Aframax tankers and lower net book values for certain vessels in the spot tankers sub-segment as a result of write-downs taken in 2011.

Loss on Sale of Vessels and Write-downs of Vessels. Loss on sale of vessels and equipment for the three and six months ended June 30, 2012, relates primarily to a loss on sale of a 1997-built conventional tanker. Please read “Item 1 – Financial Statements: Note 7 (a) Vessel Sales.”

Restructuring Charges. Restructuring charges for the three and six months ended June 30, 2012 primarily relate to costs incurred in association with the reorganization of our marine operations. Please read “Item 1 – Financial Statements: Note 12 Restructuring Charges.”

Other Operating Results

The following table compares our other operating results for the three and six months ended June 30, 2012 and 2011:

 

(in thousands of U.S. dollars, except percentages)

   Three Months Ended           Six Months Ended        
   June 30,           June 30,        
   2012     2011     % Change     2012     2011     % Change  

General and administrative

     (50,777     (51,273     (1.0     (104,150     (121,491     (14.3

Interest expense

     (42,707     (33,516     27.4        (85,007     (66,310     28.2   

Interest income

     1,645        2,457        (33.0     3,691        4,922        (25.0

Realized and unrealized losses on non-designated derivative instruments

     (94,598     (102,140     (7.4     (89,783     (78,883     13.8   

Equity income (loss)

     5,291        (6,053     (187.4     22,936        341        6,626.1   

Foreign exchange gain (loss)

     17,835        (7,157     (349.2     2,011        (27,497     (107.3

Other income

     89        958        (90.7     2,432        1,052        131.1   

Income tax recovery (expense)

     1,849        (2,022     (191.4     5,417        (2,833     (291.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General and Administrative. General and administrative expenses decreased to $50.8 million and $104.2 million, respectively, for the three and six months ended June 30, 2012, from $51.3 million and $121.5 million, respectively, for the same periods last year. General and administrative expenses for the six months ended June 30, 2012 decreased compared to the same period last year primarily due to the following changes:

 

   

a decrease of $11.5 million in salaries and benefits, primarily due to a one-time pension expense in the six months ended June 30, 2011 related to the retirement of our former President and Chief Executive Officer;

 

   

a decrease of $8.0 million in equity-based compensation for management, primarily due to the accelerated timing of accounting recognition of certain stock awards as a result of certain management employees meeting retirement eligibility criteria for the six months ended June 30, 2011;

 

   

a decrease of $2.5 million in travel and entertainment costs in the six months ended June 30, 2012;

partially offset by

 

   

an increase of $2.6 million as a result of the Sevan Acquisitions; and

 

   

an increase of $2.3 million from our short-term incentive program for employees and management.

In May 2012, we commenced the reorganization of our marine operations to create greater alignment with our business units and our three publicly-listed subsidiaries. We expect to incur approximately $10 million of restructuring charges associated with this reorganization and realize annual cost savings of approximately $10 million commencing in the fourth quarter of 2012. Please read “Item 1 – Financial Statements: Note 12 Restructuring Charges.”

Interest Expense. Interest expense increased to $42.7 million and $85.0 million, respectively, for the three and six months ended June 30, 2012 from $33.5 million and $66.3 million, respectively, for the same periods last year, primarily due to:

 

   

increases of $2.3 million and $5.0 million, respectively, for the three and six months ended June 30, 2012 due to the acquisition of the Hummingbird Spirit FPSO unit and Piranema Spirit FPSO unit in November 2011;

 

   

increases of $1.9 million and $3.5 million, respectively, for the three and six months ended June 30, 2012 from the issuance of the NOK 600 million senior unsecured bonds in January 2012;

 

   

increases of $1.1 million and $1.9 million, respectively, for the three and six months ended June 30, 2012 related to the new $130 million debt facility secured by the Piranema Spirit FPSO unit in February 2012;

 

   

an increase of $1.5 million for the three and six months ended June 30, 2012 as a result of the NOK bond issuance by Teekay LNG in May 2012;

 

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increases of $0.8 million and $1.6 million, respectively, for the three and six months ended June 30, 2012, due to an increase in our borrowings upon our acquisitions of three LPG/multigas vessels during the second, third and fourth quarters of 2011;

 

   

increases of $0.2 million and $0.6 million, respectively, for the three and six months ended June 30, 2012 due to the acquisition of the Scott Spirit and Peary Spirit shuttle tankers;

 

   

increases of $2.1 million and $6.1 million, respectively, for the three and six months ended June 30, 2012 due to increased LIBOR rates and higher average debt balances in the first and second quarters of 2012; and

 

   

increases of $0.5 million and $1.1 million, respectively, for the three and six months ended June 30, 2012 as a result of higher margins on the refinancing of a debt facility;

partially offset by

 

   

a decrease of $1.3 million and $2.6 million, respectively, for the three and six months ended June 30, 2012, due to the termination of the Madrid Spirit LNG carrier capital lease in the fourth quarter of 2011. The Madrid Spirit was financed pursuant to a Spanish tax lease arrangement, under which we borrowed under a term loan and deposited the proceeds into a restricted cash account and entered into a capital lease for the vessel; as a result, this decrease in interest expense from the capital lease is offset by a corresponding decrease in the interest income from restricted cash.

Interest Income. Interest income decreased by $0.8 million and $1.2 million, respectively, for the three months and six months ended June 30, 2012, compared to the same periods last year, primarily due to the termination of the capital lease on one LNG carrier, the Madrid Spirit, during the fourth quarter of 2011, which was funded from restricted cash, partially offset by an increase in interest rates earned in other restricted cash deposits in the first and second quarters of 2012, compared to the same periods last year.

Realized and unrealized losses on non-designated derivative instruments. Realized and unrealized losses related to derivative instruments that are not designated as hedges for accounting purposes are included as a separate line item in the consolidated statements of income (loss). Net realized and unrealized losses on non-designated derivatives were $94.6 million and $89.8 million, respectively, for the three and six months ended June 30, 2012, compared to $102.1 million and $78.9 million, respectively, for the three and six months ended June 30, 2011, as detailed in the table below:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(in thousands of U.S. Dollars)

   2012     2011     2012     2011  

Realized (losses) gains relating to:

        

Interest rate swap agreements

     (29,669     (32,692     (60,085     (66,689

Interest rate swap agreement amendments

     —          —          —          (92,672

Foreign currency forward contracts

     147        3,558        1,384        4,883   

Forward freight agreements and bunker fuel swap contracts

     —          (7     —          42   

Foinaven embedded derivative

     —          —          11,452        —     
  

 

 

   

 

 

   

 

 

   

 

 

 
     (29,552     (29,141     (47,249     (154,436
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized (losses) gains relating to:

        

Interest rate swap agreements

     (58,425     (73,331     (41,290     68,527   

Foreign currency forward contracts

     (6,651     540        2,141        7,248   

Forward freight agreements, bunker fuel swap contracts and other

     —          7        —          —     

Foinaven embedded derivative

     —          (215     (3,385     (222
  

 

 

   

 

 

   

 

 

   

 

 

 
     (65,076     (72,999     (42,534     75,553   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total realized and unrealized losses on non-designated derivative instruments

     (94,598     (102,140     (89,783     (78,883
  

 

 

   

 

 

   

 

 

   

 

 

 

The realized losses relate to amounts we actually realized or paid to settle such derivative instruments and interest rate swap agreement amendments. The unrealized losses on interest rate swaps for the three months and six months ended June 30, 2012 and 2011 were primarily due to changes in the forward interest swap rates.

During the three and six months ended June 30, 2012 and 2011, we had interest rate swap agreements with aggregate average net outstanding notional amounts of approximately $4.6 billion and $4.8 billion for the respective periods, with average fixed rates of approximately 3.8% and 4.2%, respectively. Short-term variable benchmark interest rates during these periods were generally less than 1.0% and, as such, we incurred realized losses of $29.6 million and $60.1 million, during the three and six months ended June 30, 2012 compared to $32.7 million and $66.7 million, for the respective periods in the prior year under the interest rate swap agreements. We also incurred realized losses $92.7 million during the six months ended June 30, 2011 for amending the terms of five interest rate swaps to reduce the weighted-average fixed interest rate from 5.1% to 2.5%.

Primarily as a result of significant changes in long-term benchmark interest rates during the three and six months ended June 30, 2012, we recognized unrealized losses of $65.1 million and $42.5 million, respectively, and in the three and six months ended June 30, 2011 we recognized an unrealized loss of $73.0 million and an unrealized gain of $75.6 million. Please read “Financial Statements: Note 15 - Derivative Instruments and Hedging Activities.”

 

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Equity Income (Loss). Our equity income was $5.3 million and $22.9 million, respectively, for the three and six months ended June 30, 2012, compared to an equity loss of $6.1 million and an equity income of $0.3 million, respectively, for the same periods last year. Equity income was primarily comprised of our share of the Angola LNG Project, and from the Exmar and RasGas 3 joint ventures. The acquisition of a 52% ownership interest in the six MALT LNG carriers in February 2012 accounted for $2.8 million and $13.4 million, respectively, of the equity income in the three and six months ended June 30, 2012. For the three and six months ended June 30, 2012, equity income includes $(10.4) million and $3.5 million, respectively, which relates to our share of unrealized (losses) gains on interest rate swaps, compared to unrealized gains on interest rate swaps of $12.4 million and $8.2 million, respectively, included in equity income for the same periods last year.

Foreign Exchange Gain (Loss). Foreign currency exchange gains were $17.8 million and $2.0 million, respectively, for the three and six months ended June 30, 2012, compared to losses of ($7.2) million and ($27.5) million, respectively, for the same periods last year. Our foreign currency exchange gains (losses), substantially all of which are unrealized, are due primarily to the relevant period-end revaluation of our Norwegian Kroner-denominated debt and our Euro-denominated term loans, capital leases and restricted cash for financial reporting purposes and the realized and unrealized gains (losses) on our cross currency swaps. Gains on Norwegian Kroner-denominated and Euro-denominated monetary liabilities reflect a stronger U.S. Dollar against the Norwegian Kroner and Euro on the date of revaluation or settlement compared to the rate in effect at the beginning of the period. Losses on Norwegian Kroner-denominated and Euro-denominated monetary liabilities reflect a weaker U.S. Dollar against the Norwegian Kroner and Euro on the date of revaluation or settlement compared to the rate in effect at the beginning of the period.

Income Tax Recovery (Expense). Income tax recovery was $1.8 million and $5.4 million, for the three and six months ended June 30, 2012, compared to income tax expense of $2.0 million and $2.8 million, for the same periods last year. The increase to income tax recovery was primarily due to (i) having no deferred tax expense relating to our Norwegian entities in the current period, as we have taken a full valuation allowance against the deferred tax asset relating to Norwegian tax losses since the third quarter of 2011, (ii) a reversal of uncertain tax positions accrual in the second quarter of 2012 and (iii) the settlement of an uncertain tax position in Spain in the first quarter of 2012.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Cash Needs

Our primary sources of liquidity are cash and cash equivalents, cash flows provided by our operations, our undrawn credit facilities, proceeds from the sale of vessels, and capital raised through financing transactions by us or our subsidiaries. Our short-term liquidity requirements are for the payment of operating expenses, debt servicing costs, dividends, scheduled repayments of long-term debt, as well as funding our working capital requirements. As at June 30, 2012, our total cash and cash equivalents totaled $665.7 million, compared to $692.1 million as at December 31, 2011. As at June 30, 2012 and December 31, 2011, our total liquidity, including cash and undrawn credit facilities, was $1.5 billion.

Our spot tanker market operations contribute to the volatility of our net operating cash flow. Historically, the tanker industry has been cyclical, experiencing volatility in profitability and asset values resulting from changes in the supply of, and demand for, vessel capacity. In addition, spot tanker markets historically have exhibited seasonal variations in charter rates. Spot tanker markets are typically stronger in the winter months as a result of increased oil consumption in the Northern Hemisphere and unpredictable weather patterns that tend to disrupt vessel scheduling.

As at June 30, 2012, we had $651.2 million of scheduled debt repayments coming due within the next twelve months. In addition, as at June 30, 2012, we had $170.6 million of capital lease obligations for five Suezmax tankers coming due within the next twelve months. We are obligated to purchase one of the tankers after the end of its respective lease term which ends during 2012 and we may be obligated to purchase the other four tankers, as the lessor has the option to sell these vessels to us any time after 2012. While this is unlikely to occur in the next twelve months, as we do not expect the lessor to exercise its right to terminate the leases, such exercise would require us to satisfy the purchase price either by assuming the existing vessel financing, if the lender consents, or by financing the purchase using existing liquidity or by obtaining new debt or equity financing. We believe that our existing cash and cash equivalents and undrawn long-term borrowings, in addition to other sources of cash such as cash from operations and other debt and equity financings, will be sufficient to meet our existing liquidity needs for at least the next twelve months. Our operations are capital intensive. We finance the purchase of our vessels primarily through a combination of borrowings from commercial banks or our joint venture partners, the issuance of equity securities and publicly traded debt instruments and cash generated from operations. In addition, we may use sale and lease-back arrangements as a source of long-term liquidity. Occasionally, we use our revolving credit facilities to temporarily finance capital expenditures until longer-term financing is obtained, at which time we typically use all or a portion of the proceeds from the longer-term financings to prepay outstanding amounts under revolving credit facilities. We have pre-arranged financing of approximately $589 million, which mostly relates to our remaining 2012 capital expenditure commitments. We are currently in the process of obtaining additional debt financing for our remaining capital commitments relating to our portion of newbuildings on order as at June 30, 2012.

Our pre-arranged newbuilding debt facilities are in addition to our undrawn credit facilities. We continue to consider strategic opportunities, including the acquisition of additional vessels and expansion into new markets. We may choose to pursue such opportunities through internal growth, joint ventures or business acquisitions. We intend to finance any future acquisitions through various sources of capital, including internally generated cash flow, existing credit facilities, additional debt borrowings, or the issuance of additional debt or equity securities or any combination thereof.

As at June 30, 2012, our revolving credit facilities provided for borrowings of up to $2.9 billion, of which $0.8 billion was undrawn. The amount available under these revolving credit facilities reduces by $197.5 million (remainder of 2012), $747.5 million (2013), $780.1 million (2014), $226.4 million (2015), $146.4 million (2016) and $784.0 million (thereafter). The revolving credit facilities are collateralized by first-priority mortgages granted on 62 of our vessels, together with other related security, and are guaranteed by us or our subsidiaries.

Our outstanding term loans reduce in monthly, quarterly or semi-annual payments with varying maturities through 2023. Some of the term loans also have bullet or balloon repayments at maturity and are collateralized by first-priority mortgages granted on 38 of our vessels, together with other related security, and are generally guaranteed by us or our subsidiaries.

Among other matters, our long-term debt agreements generally provide for maintenance of minimum consolidated financial covenants and certain loan agreements require the maintenance of market value to loan ratios. Certain loan agreements require that a minimum level of free cash be maintained and as at June 30, 2012, this amount was $100.0 million. Most of the loan agreements also require that we maintain an aggregate level of free liquidity and undrawn revolving credit lines with at least six months to maturity, of 5% to 7.5% of total debt. As at June 30, 2012, this amount was $314.5 million. We were in compliance with all of our loan covenants at June 30, 2012.

We conduct our funding and treasury activities within corporate policies designed to minimize borrowing costs and maximize investment returns while maintaining the safety of the funds and appropriate levels of liquidity for our purposes. We hold cash and cash equivalents primarily in U.S. Dollars, with some balances held in Australian Dollars, British Pounds, Canadian Dollars, Euros, Japanese Yen, Norwegian Kroner and Singapore Dollars.

 

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We are exposed to market risk from foreign currency fluctuations and changes in interest rates, spot tanker market rates for vessels and bunker fuel prices. We use forward foreign currency contracts, cross currency and interest rate swaps, forward freight agreements and bunker fuel swap contracts to manage currency, interest rate, spot tanker rates and bunker fuel price risks. Please read “Item 3 – Quantitative and Qualitative Disclosures About Market Risk. “

Cash Flows

The following table summarizes our cash and cash equivalents provided by (used for) operating, financing and investing activities for the periods presented:

 

     Six Months ended June 30,  

(in thousands of U.S. Dollars)

   2012     2011  

Net operating cash flows

     139,484        7,199   

Net financing cash flows

     41,097        129,141   

Net investing cash flows

     (206,971     (418,539

Operating Cash Flows

Our net cash flow from operating activities fluctuates primarily as a result of changes in tanker utilization and TCE rates, changes in interest rates, fluctuations in working capital balances, the timing and amount of drydocking expenditures, repairs and maintenance activities, vessel additions and dispositions, and foreign currency rates. Our exposure to the spot tanker market has contributed significantly to fluctuations in operating cash flows historically as a result of highly cyclical spot tanker rates and more recently as a result of an increase in tanker supply and the reduction in global oil demand that was caused by a slow-down in global economic activity that began in late 2008.

Net cash flow from operating activities increased to $139.5 million for the six months ended June 30, 2012, from $7.2 million for the six months ended June 30, 2011. This increase was primarily due to an $82.7 million net increase in operating earnings before depreciation, amortization, gains/losses from asset disposals and write-downs of our four reportable segments. In addition, there was a $87.3 million decrease in interest expense (including interest income and realized losses on interest rate swaps) in the six months ended June 30, 2012 compared to the same period in 2011. Of the $87.3 million decrease in interest expense, $92.7 million was paid in the six months ended June 30, 2011 to the counterparties of five interest rate swap agreements with notional amounts totaling $665.1 million in consideration for amending the terms of such agreements to reduce the weighted average fixed interest rate from 5.1% to 2.5%. There was a decrease of $10.1 million on expenditures for dry docking for the six months ended June 30, 2012 compared to the corresponding period in the prior year, which also contributed to the increase in cash flows from operating activities. Partially offsetting these increases was a $48.0 million decrease in the change in operating assets and liabilities in the six months ended June 30, 2012 compared to the same period in 2011.

For further discussion of our four reportable segments, please read “Results of Operations.”

Financing Cash Flows

We have three publicly-traded subsidiaries, Teekay LNG, Teekay Offshore and Teekay Tankers (collectively, the Daughter Companies), in which we have less than 100% ownership interests. It is our intention that the Daughter Companies hold most of our liquefied gas transportation assets (Teekay LNG), our offshore assets, including shuttle tankers, FPSO units and FSO units (Teekay Offshore), and our conventional tanker assets (Teekay Tankers). From and including the respective initial public offerings of these subsidiaries, Teekay has been selling assets that are a part of these lines of businesses to the Daughter Companies. The Daughter Companies distribute operating cash flows to their owners in the form of distributions or dividends. The Daughter Companies typically finance acquisitions, including acquisitions of assets from Teekay Corporation, with a combination of debt and new equity from public or private investors or the assumption of debt related to acquired vessels. The Daughter Companies raised net proceeds from issuances of new equity to the public and to third-party investors of $65.9 million in the six months ended June 30, 2012, compared to $265.6 million in the same period last year. As the size of the Daughter Companies have grown through acquisitions, whether from Teekay or otherwise, the amount of the operating cash flows generally have increased, which has resulted in larger aggregate distributions. Consequently, distributions from the Daughter Companies to non-controlling interests have increased to $121.1 million in the six months ended June 30, 2012, from $101.3 million in the same period last year.

We use our revolving credit facilities to finance capital expenditures. Occasionally, we will do this until longer-term financing is obtained, at which time we typically use all or a portion of the proceeds from the longer-term financings to prepay outstanding amounts under the revolving credit facilities. Our proceeds from the issuance of long-term debt, net of debt issuance costs and prepayments of long-term debt, increased to $332.4 million in the six months ended June 30, 2012, from $205.5 million in the same period last year. The net proceeds from the issuance of long-term debt increased as a result of capital expenditures incurred on our newbuilding projects and our acquisition of FPSO units from Sevan and the acquisition of our 52% interest in the six MALT LNG Carriers through the Teekay LNG – Marubeni Joint Venture.

We actively manage the maturity profile of our outstanding financing arrangements. Our scheduled repayments of long-term debt were $154.3 million in the six months ended June 30, 2012, compared to $123.5 million in the same period last year.

In October 2010, Teekay announced a $200 million share repurchase program. We repurchased $nil and $83.7 million of common stock during the six months ended June 30, 2012 and 2011, respectively. As at June 30, 2012, the total remaining amount under the share repurchase authorization was $37.7 million.

Dividends paid during the six months ended June 30, 2012 were $45.0 million, compared to $46.5 million for the six months ended June 30, 2011, or $0.6325 per share. Subject to financial results and declaration by the Board of Directors, we currently intend to continue to declare and pay a regular quarterly dividend on our common stock. We have paid a quarterly dividend since 1995.

 

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In January 2012, Teekay Offshore issued in the Norwegian bond market NOK 600 million in senior unsecured bonds that mature in January 2017. The aggregate principal amount of the bonds was equivalent to approximately $100 million at June 30, 2012. The interest payments on the bonds are based on NIBOR plus a margin of 5.75%. In connection with the bond issuance, Teekay Offshore entered into a cross currency rate swap to swap all interest and principal payments into U.S. Dollars, with the interest payments fixed at a rate of 7.49%, and the transfer of the principal amount fixed at $101.4 million upon maturity in exchange for NOK 600 million. The proceeds of the bonds were used for general corporate purposes.

In February 2012, Teekay Tankers completed a follow-on public offering of 17.3 million shares of Class A common stock at $4.00 per share. Please read “Item 1 - Financial Statements: Note 6 – Financing Transactions.”

In May 2012, Teekay LNG issued in the Norwegian bond market NOK 700 million in senior unsecured bonds that mature in May 2017. The interest payments on the bonds are based on the NIBOR plus a margin of 5.25%. The aggregate principal amount of the bonds is equivalent to approximately $117.5 million at June 30, 2012. Teekay LNG entered into a cross currency rate swap to swap all interest and principal payments into U.S. Dollars, with the interest payments fixed at a rate of 6.88%, and the transfer of principal fixed at $125.0 million upon maturity in exchange for NOK 700 million. The proceeds of the bonds were used to prepay the outstanding debt under two credit facilities and for general corporate purposes. Please read “Item 1 - Financial Statements: Note 8 – Long-Term Debt.”

In July 2012, Teekay Offshore issued 1.7 million common units to a group of institutional investors for net proceeds, including its general partner’s 2% proportionate capital contribution, of $45.9 million. Upon completion of the private placement, Teekay Offshore had 72.3 million common units outstanding. Teekay Offshore used the proceeds from the issuance of common units to partially finance the shipyard instalments for four Suezmax newbuilding shuttle tankers. Please read “Item 1 - Financial Statements: Note 20 – Subsequent Events.”

In September 2012, Teekay LNG completed a public offering of 4.6 million common units for net proceeds, including its general partner’s 2% proportionate capital contribution, of approximately $173.7 million. Upon completion of the public offering, Teekay LNG had 70.9 million common units outstanding. Teekay LNG will use the proceeds from the offering for general corporate purposes, which may include funding potential future newbuilding deliveries or vessel acquisitions. Pending the use of the proceeds, Teekay LNG intends to repay a portion of its outstanding debt under two of its revolving credit facilities. Please read “Item 1 - Financial Statements: Note 20 – Subsequent Events.”

In September 2012, Teekay Offshore commenced a public offering of 7.4 million common units for net proceeds, including its general partner’s 2% proportionate capital contribution, of $201.2 million. Upon completion of the public offering, expected in mid-September 2012, Teekay Offshore will have 79.7 million common units outstanding. Teekay Offshore intends to use the proceeds from the issuance of common units to partially finance the purchase price of the Voyageur Spirit FPSO unit that Teekay Offshore has agreed to acquire from Teekay. Please read “Item 1 - Financial Statements: Note 20 – Subsequent Events.”

Investing Cash Flows

During 2012, we incurred capital expenditures for vessels and equipment for the six months ended June 30, 2012 of $205.2 million, primarily for capitalized vessel modifications and shipyard construction installment payments on our newbuilding shuttle tankers and the installment payments and conversion costs of our FPSO units under construction or conversion. We received net proceeds of $192.0 million from the sale of the Tiro and Sidon FPSO project to the 50% joint venture with Odebrecht and $9.8 million from the sale of a 1997-built conventional tanker. In addition, we invested $161.2 million in our equity accounted investees, mainly related to the Teekay LNG-Marubeni Joint Venture (including working capital contribution and acquisition costs), and advanced $58.9 million to our equity accounted investees.

During 2011, we incurred capital expenditures for vessels and equipment of $358.6 million, primarily for capitalized vessel modifications and shipyard construction installment payments on our newbuilding shuttle tankers and the conversion costs of an FPSO unit. In addition, we invested $70.4 million in a term loan that bears interest at an interest rate of 9% per annum and has a fixed term of three years, repayable in full on maturity and which is collateralized by a first priority mortgage on a 2011-built VLCC. We also received net proceeds of $5.1 million in March 2011 from the sale of a 1988-built FSO unit.

CONTRACTUAL OBLIGATIONS AND CONTINGENCIES

The following table summarizes our long-term contractual obligations as at June 30, 2012:

 

In millions if U.S. Dollars

   Total      Remainder of
2012
     2013 and
2014
     2015 and
2016
     Beyond
2016
 

U.S. Dollar-Denominated Obligations

              

Long-term debt (1)

     4,961.3         223.8         1,845.4         605.9         2,286.2   

Chartered-in vessels (operating leases)

     174.3         49.6         90.2         25.1         9.4   

Commitments under capital leases (2)

     189.6         47.4         108.2         7.1         26.9   

Commitments under capital leases (3)

     989.1         12.0         48.0         48.0         881.1   

Commitments under operating leases (4)

     418.9         12.5         50.0         50.0         306.4   

Newbuilding installments/conversions (5) (6)

     1,001.6         258.8         742.8         —           —     

Purchase obligation (7)

     170.2         170.2            

Asset retirement obligation

     22.2                  22.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. Dollar-Denominated Obligations

     7,927.2         774.3         2,884.6         736.1         3,532.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Euro-Denominated Obligations (8)

              

Long-term debt (9)

     334.3         6.7         29.4         33.8         264.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Euro-Denominated Obligations

     334.3         6.7         29.4         33.8         264.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Norwegian Kroner-Denominated Obligations (8)

              

Long-term debt (10)

     318.9         —           100.7         —           218.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Norwegian Kroner-Denominated Obligations

     318.9         —           100.7         —           218.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     8,580.4         781.0         3,014.7         769.9         4,014.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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(1) Excludes expected interest payments of $104.2 million (remainder of 2012), $245.0 million (2013 and 2014), $188.2 million (2015 and 2016) and $208.1 million (beyond 2016). Expected interest payments are based on the existing interest rates (fixed-rate loans) and LIBOR at June 30, 2012, plus margins on debt that has been drawn that ranges up to 4.00% (variable-rate loans). The expected interest payments do not reflect the effect of related interest rate swaps that we have used as an economic hedge on certain of our floating-rate debt. In November 2011, we agreed to acquire the Voyageur Spirit upon completion of its upgrade. The Voyageur Spirit has been determined to be a VIE and we have been determined to be the primary beneficiary. As a result, we have consolidated the Voyaguer Spirit, including its existing U.S. Dollar-denominated term loan outstanding, which totalled $230.5 million as at June 30, 2012.
(2) Includes, in addition to lease payments, amounts we are required to pay to purchase certain leased vessels at the end of the lease terms. The lessor has the option to sell these vessels to us at any time during the remaining lease term after 2012; however, in this table we have assumed the lessor will not exercise its right to sell the vessels to us until after the lease terms expire, which is during the years 2012 to 2017. The purchase price will be based on the unamortized portion of the vessel construction financing costs for the vessels, which are included in the table above. We expect to satisfy the purchase price by assuming the existing vessel financing, although we may be required to obtain separate debt or equity financing to complete the purchases if the lenders do not consent to our assuming the financing obligations.
(3) Existing restricted cash deposits of $475.8 million, together with the interest earned on these deposits, are expected to be sufficient to repay the remaining amounts we currently owe under the lease arrangements.
(4) We have corresponding leases whereby we are the lessor. We expect to receive approximately $375.8 million for these leases from 2012 to 2029.
(5) Represents remaining construction costs (excluding capitalized interest and miscellaneous construction costs for four shuttle tankers and one FPSO unit as of June 30, 2012). Please read “Financial Statements: Note 10 (a) – Commitments and Contingencies – Vessels Under Construction.”
(6) We have a 50% interest in a joint venture that has entered into an agreement for the conversion of one FPSO unit and a 50% interest in a joint venture that has entered into an agreement for the construction of a VLCC. As at June 30, 2012, the remaining commitments on these vessels, excluding capitalized interest and other miscellaneous construction costs, totalled $140.2 million, of which our share is $70.1 million. Please read “Financial Statements: Note 10 (b) – Commitments and Contingencies – Joint Ventures.”
(7) Represents remaining cost to upgrade and acquire the Voyageur Spirit (net of assumed debt of $230 million) as of June 30, 2012. Please read “Financial Statements: Note 10 (c) – Commitments and Contingencies – Purchase Obligation.”
(8) Euro-denominated and Norwegian-denominated obligations are presented in U.S. Dollars and have been converted using the prevailing exchange rate as of June 30, 2012.
(9) Excludes expected interest payments of $3.1 million (remainder of 2012), $11.9 million (2013 and 2014), $10.8 million (2015 and 2016) and $10.9 million (beyond 2016). Expected interest payments are based on EURIBOR at June 30, 2012, plus margins that range up to 2.25%, as well as the prevailing U.S. Dollar/Euro exchange rate as of June 30, 2012. The expected interest payments do not reflect the effect of related interest rate swaps that we have used as an economic hedge of certain of our variable-rate debt. We also maintain restricted cash deposits relating to certain of our term loans, which cash totaled $11.4 million Euros ($14.4 million) as at June 30, 2012.
(10) Excludes expected interest payments of $12.1 million (remainder of 2012), $40.5 million (2013 and 2014), $34.0 million (2015 and 2016) and $5.1 million (beyond 2016). Expected interest payments are based on NIBOR at June 30, 2012, plus a margin between 4.75% to 5.75%, as well as the prevailing U.S. Dollar/Norwegian Kroner exchange rate as of June 30, 2012. The expected interest payments and principal repayments do not reflect the effect of the related cross currency swap that we have used as an economic hedge of our foreign exchange and interest rate exposure associated with our Norwegian Kroner-denominated long-term debt.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. The details of our equity accounted investments are shown in “Item 18 – Financial Statements: Note 23 – Equity Accounted Investments” of our Annual Report on Form 20-F for the year ended December 31, 2011.

CRITICAL ACCOUNTING ESTIMATES

We prepare our consolidated financial statements in accordance with GAAP, which require us to make estimates in the application of our accounting policies based on our best assumptions, judgments and opinions. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could materially differ from our assumptions and estimates. Accounting estimates and assumptions that we consider to be the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties, are discussed in this section and “Item 5 - Operating and Financial Review and Prospects” in our Annual Report on Form 20-F for the year ended December 31, 2011. There were no significant changes in accounting estimates and assumptions from those discussed in the Form 20-F, except for the decrease in the estimated useful life of six older shuttle tankers. Please read “Item 1 – Financial Statements: Note 19 – Change in Accounting Estimate.”

Goodwill

At June 30, 2012, the shuttle tanker segment and liquefied gas segment had goodwill attributable to it. Based on conditions that existed at June 30, 2012, we do not believe that there is a reasonable possibility that the goodwill attributable to these reporting units might be impaired for the remainder of the year. However, certain factors that impact this assessment are inherently difficult to forecast and, as such, we cannot provide any assurance that an impairment will or will not occur in the future. An assessment for impairment involves a number of assumptions and estimates that are based on factors that are beyond our control. These are discussed in more detail in the following section entitled “Forward-Looking Statements.”

 

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FORWARD-LOOKING STATEMENTS

This Report on Form 6-K for the three and six months ended June 30, 2012 contains certain forward-looking statements (as such term is defined in Section 21E of the Securities Exchange Act of 1934, as amended) concerning future events and our operations, performance and financial condition, including, in particular, statements regarding:

 

   

our future financial condition or results of operations and future revenue and expenses;

 

   

tanker market conditions and fundamentals, including the balance of supply and demand in these markets and spot tanker charter rates and oil production;

 

   

offshore, LNG and LPG market conditions and fundamentals, including the balance of supply and demand in these markets;

 

   

our future growth prospects;

 

   

future capital expenditure commitments and the financing requirements for such commitments;

 

   

delivery dates of and financing for newbuildings and conversions, and the commencement of service of newbuildings and conversions under long-term time-charter contracts;

 

   

our acquisition of the Voyageur Spirit from Sevan and the estimated remaining time and cost to complete its upgrade;

 

   

Teekay Offshore’s acquisition from us, of the Voyageur Spirit, including the purchase price, timing, and closing; of the transaction, which is conditioned upon, among other things, Teekay Offshore obtaining new financing;

 

   

the impact on the operating income of the Petrojarl Banff FPSO unit resulting from the storm damage to the unit which occurred in December 2011, and related expected recoveries from insurers and the charterer;

 

   

damage to the Cidade de Itajai FPSO unit;

 

   

the impact on Teekay and Teekay Tankers as a result of the acquisition by Teekay Tankers from Teekay of 13 conventional tankers, including effects on debt balances, liquidity and spot tanker market exposure;

 

   

potential newbuilding order cancellations;

 

   

the expected timing and costs of upgrades to any vessels;

 

   

the future valuation of goodwill;

 

   

our expectations as to any impairment of our vessels;

 

   

the adequacy of restricted cash deposits to fund capital lease obligations;

 

   

our ability to fulfill our debt obligations;

 

   

compliance with financing agreements and the expected effect of restrictive covenants in such agreements;

 

   

declining market vessel values and the effect on our liquidity;

 

   

operating expenses, availability of crew and crewing costs, number of off-hire days, dry-docking requirements and durations and the adequacy and cost of insurance;

 

   

our estimated restructuring charges and the amount and timing of expected cost savings associated with reorganization of our marine operations;

 

   

the effectiveness of our risk management policies and procedures and the ability of the counterparties to our derivative contracts to fulfill their contractual obligations;

 

   

our ability to maximize the use of our vessels, including the re-deployment or disposition of vessels no longer under long-term contracts;

 

   

the cost of, and our ability to comply with, governmental regulations and maritime self-regulatory organization standards applicable to our business;

 

   

our expectations regarding the cost and outcome of litigation involving Navion Offshore Loading AS;

 

   

taxation of our company and of distributions to our stockholders;

 

   

the expected lifespans of our vessels;

 

   

anticipated funds for liquidity needs and the sufficiency of cash flows;

 

   

our hedging activities relating to foreign currency exchange and interest rate risks;

 

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the condition of financial and economic markets, including interest rate volatility and the availability and cost of capital;

 

   

the growth of global oil demand;

 

   

our exemption from tax on our U.S. source international transportation income;

 

   

our expectation regarding uncertain tax positions;

 

   

the expected return on our investment in first-priority ship mortgage loans;

 

   

our ability to competitively pursue new FPSO projects;

 

   

our competitive positions in our markets;

 

   

our business strategy and other plans and objectives for future operations; and

 

   

our ability to pay dividends on our common stock.

Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “believe”, “anticipate”, “expect”, “estimate”, “project”, “will be”, “will continue”, “will likely result”, or words or phrases of similar meanings. These statements involve known and unknown risks and are based upon a number of assumptions and estimates that are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from those expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially include, but are not limited to: tanker market fundamentals, including the balance of supply and demand in the tanker market and the impact of seasonal factors on spot tanker charter rates; the estimated cost and timing of delivery of FPSO and shuttle tanker newbuildings/conversions in progress and the effect on our future cash flows and profitability; the estimated timing of commencement of new charter contracts upon delivery of FPSO and shuttle tanker newbuildings/conversions in progress; the cost and timing of the Voyageur Spirit unit conversion; the satisfaction of closing conditions for our acquisition from Sevan of the Voyageur Spirit FPSO unit and of Teekay Offshore’s subsequent acquisition from us of such unit; the impact on our cash flows from our general partner and limited partner ownership interests in Teekay LNG and Teekay Offshore resulting from acquisitions and delivery of assets by Teekay LNG and Teekay Offshore; the estimated timing for the completion of the our takeover of technical management of the MALT LNG Carriers; the expected timing of the commencement of the new charter contract for the Magellan Spirit LNG carrier; expected timing of redeliveries of vessels chartered-in by us; expected timing for commencement of cost savings related to our ship management joint venture with Anglo-Eastern; our future capital expenditure commitments and the debt financings that we expect to obtain for our remaining unfinanced capital expenditure commitments; and fundamentals of the offshore and LNG industries and our ability to complete future growth projects and acquisitions. The following factors are among those that could cause actual results to differ materially from the forward-looking statements, which involve risks and uncertainties, and that should be considered in evaluating any such statement: changes in production of or demand for oil, petroleum products, LNG and LPG, either generally or in particular regions; greater or less than anticipated levels of tanker newbuilding orders or greater or less than anticipated rates of tanker scrapping; changes in trading patterns significantly affecting overall vessel tonnage requirements; changes in applicable industry laws and regulations and the timing of implementation of new laws and regulations; changes in the typical seasonal variations in tanker charter rates; changes in the offshore production of oil or demand for shuttle tankers, FSOs and FPSOs; decreases in oil production by or increased operating expenses for FPSO units; trends in prevailing charter rates for shuttle tanker and FPSO contract renewals; the potential for early termination of long-term contracts and inability of us to renew or replace long-term contracts or complete existing contract negotiations; changes affecting the offshore tanker market; shipyard production delays and cost overruns; changes in our expenses; our future capital expenditure requirements and the inability to secure financing for such requirements; the inability of us to complete vessel sale transactions to our public company subsidiaries or to third parties; factors impeding the expected transfer of technical management of the MALT LNG Carriers; factors impeding or preventing the establishment of our ship management joint venture with Anglo-Eastern; conditions in the United States capital markets; and other factors discussed in our filings from time to time with the SEC, including our Report on Form 20-F for the fiscal year ended December 31, 2011. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with respect thereto or any change in events, conditions or circumstances on which any such statement is based.

 

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TEEKAY CORPORATION AND SUBSIDIARIES

JUNE 30, 2012

PART I – FINANCIAL INFORMATION

 

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from foreign currency fluctuations and changes in interest rates, bunker fuel prices and spot tanker market rates for vessels. We use foreign currency forward contracts, cross currency and interest rate swaps, bunker fuel swap contracts and forward freight agreements to manage currency, interest rate, bunker fuel price and spot tanker market rate risks but we do not use these financial instruments for trading or speculative purposes. Please read “Item 1 – Financial Statements: Note 15 – Derivative Instruments and Hedging Activities.”

Foreign Currency Fluctuation Risk

Our primary economic environment is the international shipping market. Transactions in this market generally utilize the U.S. Dollar. Consequently, a substantial majority of our revenues and most of our operating costs are in U.S. Dollars. We incur certain voyage expenses, vessel operating expenses, drydocking and overhead costs in foreign currencies, the most significant of which are the Australian Dollar, British Pound, Canadian Dollar, Euro, Norwegian Kroner and Singapore Dollar. There is a risk that currency fluctuations will have a negative effect on the value of cash flows.

We reduce our exposure by entering into foreign currency forward contracts. In most cases, we hedge a substantial majority of our net foreign currency exposure for the following 12 months. We generally do not hedge our net foreign currency exposure beyond three years forward.

As at June 30, 2012, we had the following foreign currency forward contracts:

 

     Expected Maturity Date         
     2012      2013      Total  
     Contract
amount
     Contract
amount
     Contract
amount
     Fair  value(1)  

Norwegian Kroner:

   $ 59.5       $ 33.9       $ 93.4       ($ 0.3

Average contractual exchange rate(2)

     6.00         5.93         5.97      

Euro:

   $ 20.3       $ 13.0       $ 33.3       ($ 2.0

Average contractual exchange rate(2)

     0.73         0.76         0.74      

Canadian Dollar:

   $ 11.9       $ 9.2       $ 21.1       ($ 0.4

Average contractual exchange rate(2)

     0.99         1.01         1.00      

British Pound:

   $ 21.7       $ 17.6       $ 39.3       $ 0.0   

Average contractual exchange rate(2)

     0.63         0.64         0.64      

 

(1) Contract amounts and fair value amounts in millions of U.S. Dollars.
(2) Average contractual exchange rate represents the contractual amount of foreign currency one U.S. Dollar will buy.

Although the majority of our transactions, assets and liabilities are denominated in U.S. Dollars, certain of our subsidiaries have foreign currency-denominated liabilities. There is a risk that currency fluctuations will have a negative effect on the value of our cash flows. As at June 30, 2012, we had Euro-denominated term loans of 264.1 million Euros ($334.3 million). We receive Euro-denominated revenue from certain of our time-charters. These Euro cash receipts generally are sufficient to pay the principal and interest payments on our Euro-denominated term loans. Consequently, we have not entered into any foreign currency forward contracts with respect to our Euro-denominated term loans, although there is no assurance that our net exposure to fluctuations in the Euro will not increase in the future.

We enter into cross currency swaps and pursuant to these swaps we receive the principal amount in Norwegian Kroner (or NOK) on the maturity date of the swap, in exchange for payment of a fixed U.S. Dollar amount. In addition, the cross currency swaps exchange a receipt of floating interest in Norwegian Kroner based on NIBOR plus a margin for a payment of US Dollar fixed interest or US Dollar floating interest based on LIBOR plus a margin. The purpose of the cross currency swaps is to economically hedge the foreign currency exposure on the payment of interest and principal of our Norwegian Kroner Bonds due in 2013 and 2017. In addition, the cross currency swaps due in 2017 economically hedges the interest rate exposure on the Norwegian Kroner Bonds due in 2017. We have not designated, for accounting purposes, these cross currency swaps as cash flow hedges of its Norwegian Kroner Bonds due in 2013 and 2017. As at June 30, 2012, we were committed to the following cross currency swaps:

 

    

Notional

Amount
NOK

  

Notional

Amount
USD

   Floating Rate Receivable   Floating Rate Payable  

Fixed Rate
Payable

   

Fair Value

   

Weighted-
Average

Remaining
Term
(years)

Maturity

Date

         Reference
Rate
   Margin   Reference
Rate
   Margin      
2013    600,000    98,500    NIBOR    4.75%   LIBOR    5.04%     (1 )      2,775     1.3
2017    600,000    101,400    NIBOR    5.75%          7.49%        (2,976   4.5
2017    700,000    125,000    NIBOR    5.25%          6.88%        (10,220   4.8
                    

 

 

   
                       (10,421  
                    

 

 

   

 

(1) LIBOR subsequently fixed at 1.1%, subject to a LIBOR rate receivable cap of 3.5%. Please read “Item 1 – Financial statements: Note 15 – Derivative Instruments and Hedging Activities.”

 

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Interest Rate Risk

We are exposed to the impact of interest rate changes primarily through our borrowings that require us to make interest payments based on LIBOR or EURIBOR. Significant increases in interest rates could adversely affect our operating margins, results of operations and our ability to repay our debt. We use interest rate swaps to reduce our exposure to market risk from changes in interest rates. Generally our approach is to hedge a substantial majority of floating-rate debt associated with our vessels that are operating on long-term fixed-rate contracts. We manage the rest of our debt based on our outlook for interest rates and other factors.

In order to minimize counterparty risk, we only enter into derivative transactions with counterparties that are rated A- or better by Standard & Poor’s or A3 or better by Moody’s at the time of the transaction. In addition, to the extent possible and practical, interest rate swaps are entered into with different counterparties to reduce concentration risk.

The table below provides information about our financial instruments at June 30, 2012, which are sensitive to changes in interest rates, including our debt and capital lease obligations and interest rate swaps. For long-term debt and capital lease obligations, the table presents principal cash flows and related weighted-average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted-average interest rates by expected contractual maturity dates.

Expected Maturity Date

 

     Balance of
2012
    2013     2014     2015     2016     Thereafter     Total     Fair Value
Asset /
(Liability)
    Rate(1)  
                  

Long-Term Debt:

                  

Variable Rate ($U.S.) (2)

     201.6        827.4        929.4        278.1        239.3        1,674.9        4,150.7        (3,496.9     1.8

Variable Rate (Euro) (3) (4)

     6.7        14.2        15.2        16.3        17.5        264.4        334.3        (300.4     1.9

Variable Rate (NOK) (4) (5)

     —          100.7        —          —          —          218.2        318.9        (318.9     7.6

Fixed-Rate Debt ($U.S.)

     22.2        44.3        44.3        44.3        44.3        611.2        810.6        (1,024.7     7.1

Average Interest Rate

     5.2     5.2     5.2     5.2     5.2     7.6     7.1    

Capital Lease Obligations (6)

                  

Fixed-Rate ($U.S.) (7)

     42.2        68.2        29.6        2.3        2.3        26.0        170.6        (170.6     7.4

Average Interest Rate (8)

     6.6     9.1     7.8     4.4     4.4     4.4     7.4    

Interest Rate Swaps:

                  

Contract Amount ($U.S.) (6) (9) (10)

     140.3        385.0        201.8        327.5        748.6        1,605.9        3,409.1        (570.4     3.9

Average Fixed Pay Rate (2) 

     2.1     2.2     3.8     4.0     2.8     5.0     3.9    

Contract Amount (Euro) (4)

     6.7        14.2        15.2        16.3        17.5        264.4        334.3        (35.2     3.1

Average Fixed Pay Rate (3) 

     3.1     3.1     3.1     3.1     3.1     3.1     3.1    

 

(1) Rate refers to the weighted-average effective interest rate for our long-term debt and capital lease obligations, including the margin we pay on our floating-rate, which, as of June 30, 2012, ranged from 0.3% to 4.0%. The average interest rate for our capital lease obligations is the weighted-average interest rate implicit in our lease obligations at the inception of the leases.
(2) Interest payments on U.S. Dollar-denominated debt and interest rate swaps are based on LIBOR. The average fixed pay rate for our interest rate swaps excludes the margin we pay on our floating-rate debt.
(3) Interest payments on Euro-denominated debt and interest rate swaps are based on 1-month EURIBOR.
(4) Euro-denominated and Norwegian Kroner-denominated amounts have been converted to U.S. Dollars using the prevailing exchange rate as of June 30, 2012.
(5) Interest payments on our NOK-denominated debt and on our cross currency swaps are based on NIBOR. Our NOK-denominated debt has been economically hedged with three cross currency swaps, to swap all interest and principal payments at maturity into U.S. Dollars, with the interest payments fixed at a rate of 7.49%, 6.88% and interest rate payments swapped from NIBOR plus a margin of 4.75% into LIBOR plus a margin of 5.04%, and the transfer of principal fixed at $101.4 million, $125.0 million and $98.5 million upon maturity in exchange for NOK 600 million, NOK 700 million and NOK 600 million, respectively.
(6) Under the terms of the capital leases for three LNG carriers (or the RasGas II LNG Carriers), (see “Item 18 – Financial Statements: Note 10 – Capital Lease Obligations and Restricted Cash” of our Annual Report on Form 20-F for the year ended December 31, 2011), we are required to have on deposit, subject to a variable rate of interest, an amount of cash that, together with interest earned on the deposit, will equal the remaining amounts owing under the variable-rate leases. The deposits, which as at June 30, 2012 totaled $475.8 million, and the lease obligations, which as at June 30, 2012 totaled $471.7 million, have been swapped for fixed-rate deposits and fixed-rate obligations. Consequently, we are not subject to interest rate risk from these obligations and deposits and, therefore, the lease obligations, cash deposits and related interest rate swaps have been excluded from the table above. As at June 30, 2012, the contract amount, fair value and fixed interest rates of these interest rate swaps related to the RasGas II LNG Carriers capital lease obligations and restricted cash deposits were $417.7 million and $469.7 million, ($130.8) million and $166.5 million, and 4.9% and 4.8%, respectively.
(7) The amount of capital lease obligations represents the present value of minimum lease payments together with our purchase obligation, as applicable.
(8) The average interest rate is the weighted-average interest rate implicit in the capital lease obligations at the inception of the leases.
(9) The average variable receive rate for our interest rate swaps is set quarterly at the 3-month LIBOR or semi-annually at the 6-month LIBOR.
(10) Includes an interest rate swap where the LIBOR rate receivable is capped at 3.5% on a notional amount of $98.5 million maturing in 2013.

 

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ITEM 4 - CONTROLS AND PROCEDURES

(a) Changes in Internal Control Over Financial Reporting.

During the quarter ended June 30, 2012, we implemented a new accounting system designed to improve the effectiveness and efficiency of our accounting and financial reporting processes. Although this implementation changed certain specific activities within the accounting function, it did not significantly affect the overall controls and procedures followed by the Company in establishing internal controls over financial reporting. Other than this accounting system implementation, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the first two quarters of 2012 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

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TEEKAY CORPORATION AND SUBSIDIARIES

JUNE 30, 2012

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

None

Item 1A – Risk Factors

In addition to the other information set forth in this Report on Form 6-K, you should carefully consider the risk factors discussed in Part I, “Item 3. Key Information–Risk Factors” in our Annual Report on Form 20-F for the year ended December 31, 2011, which could materially affect our business, financial condition or results of operations.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3 – Defaults Upon Senior Securities

None

Item 4 – Mine Safety Disclosures

None

Item 5 – Other Information

The Company’s 2012 Annual Meeting of Shareholders was held on June 6, 2012. The following persons were elected directors for a term of three years by the votes set forth opposite their names:

 

Terms Expiring in 2015

 

Votes For

 

Votes Against or
Withheld

 

Shares which

Abstained

 

Broker

Non-Votes

   

Dr. Ian D. Blackburne

  48,834,033   7,711,940   N/A   N/A  

William B. Berry

  56,362,266   183,707   N/A   N/A  

C. Sean Day

  48,718,555   7,827,418   N/A   N/A  

The terms of Directors Thomas Kuo-Yuen Hsu, Axel Karlshoej, Bjorn Moller, Peter Evensen, Peter S. Janson, Eileen A. Mercier and Tore I. Sandvold continued after the meeting.

Item 6 – Exhibits

None

THIS REPORT ON FORM 6-K IS HEREBY INCORPORATED BY REFERENCE INTO THE FOLLOWING REGISTRATION STATEMENTS OF THE COMPANY.

 

   

REGISTRATION STATEMENT ON FORM F-3 (FILE NO. 33-97746) FILED WITH THE SEC ON OCTOBER 4, 1995;

 

   

REGISTRATION STATEMENT ON FORM S-8 (FILE NO. 333-42434) FILED WITH THE SEC ON JULY 28, 2000;

 

   

REGISTRATION STATEMENT ON FORM S-8 (FILE NO. 333-119564) FILED WITH THE SEC ON OCTOBER 6, 2004;

 

   

REGISTRATION STATEMENT ON FORM S-8 (FILE NO. 333-147683) FILED WITH THE SEC ON NOVEMBER 28, 2007; AND

 

   

REGISTRATION STATEMENT ON FORM S-8 (FILE NO. 333-166523) FILED WITH THE SEC ON MAY 5, 2010.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    TEEKAY CORPORATION
Date:   September 17, 2012   By:  

/s/ Vincent Lok

    Vincent Lok
    Executive Vice President and Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

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