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Teekay Corp (NYSE:TK)
Q1 2020 Earnings Call
May 21, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Teekay Corporation's First Quarter 2020 Earnings Results Conference Call. [Operator Instructions]

Now, for opening remarks and introduction, I would like to turn the call over to the Company. Please go ahead.

Ryan Hamilton -- Investor Relations

Before we begin, I'd like to direct all participants to our website at www.teekay.com where you'll find a copy of the first quarter 2020 earnings presentation. Kenneth and Vince will review this presentation during today's conference call.

Please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from results projected by those forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the first quarter of 2020 earnings release and earnings presentation available on our website.

I'll now turn the call over to Kenneth Hvid, Teekay Corporation's President and CEO, to begin.

Kenneth Hvid -- Director, President and Chief Executive Officer

Thank you, Ryan.

Hello, everyone, and thank you very much for joining us today for Teekay Corporation's first quarter of 2020 earnings conference call. I hope that you and your families are all safe and healthy.

On the call today, I'm joined by Vince Lok, Teekay's Group CFO.

Before we get into our results, I would like to take a moment to thank all of our seafarers and shore-based staff for their extraordinary dedication to maintain business continuity and bringing energy to the world with Teekay's spirit. While COVID-19 is having an unprecedented impact on the world and is clearly a major focus for us, we're truly proud of how our seafarers and onshore colleagues have responded to COVID-19, implementing new standards which focus on the health and well-being of everyone involved in our organization, especially our colleagues at sea, while maintaining consistently safe and efficient operations for our customers. We're also fortunate to be in a position where our operational results are strong so far in 2020 and we have had minimal impacts on our operations due to the pandemic.

Moving to our recent highlights on slide 3 of the presentation. The first quarter of 2020 marked the second consecutive quarterly adjusted profit for Teekay as we recorded consolidated adjusted net income of $25 million or $0.25 per share compared to an adjusted net loss of $13 million or $0.13 per share in the same period last year. We also generated total adjusted EBITDA of $342 million, an increase of $128 million or 59% from the same period in the prior year. As a reminder, the Q1 2019 results included the contribution from the 14% ownership stake in Altera Infrastructure, formerly Teekay Offshore, which was sold in May 2019. It is also important to note that these figures only include $11 million of the $67 million upfront payment received for the Foinaven FPSO contract we entered into in late March. I will touch on the accounting treatment for this in more detail in the presentation.

Our strong results in the first quarter can be attributed to higher earnings in our main businesses. Teekay Tankers experienced significantly stronger spot tanker rates, reaching its highest first quarter levels in over a decade, which strengthened into the second quarter while Teekay LNG have robust earnings from a complete quarter contribution from its fully delivered LNG fleet.

Teekay Parent generated positive adjusted EBITDA of $5 million, which includes EBITDA from our directly owned assets and cash distributions from our publicly traded daughter entities. However, based on US GAAP and our definition of the adjusted EBITDA, only $11 million of the $67 million upfront payment from the new Foinaven FPSO contract was included in our Q1 revenues. However, the remaining $56 million has been included in Teekay Parent's free cash flow. As a result, Teekay Parent's free cash flow increased to $53 million, a significant improvement from negative $14 million in the same period of the prior year. The increase was also a result of lower interest expense due to bond repurchases over the past year and our bond refinancing completed in May 2019; a 32% increase in Teekay LNG's quarterly cash distribution; and lower G&A expenses. For further details on our first quarter results as well as our second quarter outlook, please refer to the slides and the appendices to this presentation.

Overall, we are expecting another strong quarter in Q2, supported by our stable LNG cash flows and the strong crude spot tanker rates secured so far in the second quarter.

Since reporting back in February, we have been busy executing on our strategic priorities, which included the new bareboat contract for the Foinaven FPSO that covers the vessel all the way through to its eventual retirement and the monetization of our TGP incentive distribution rights or IDRs in exchange for 10.75 million newly issued TGP common units. I will touch on these two transactions in more detail later in the presentation.

Turning to slide 4. I want to provide an update on our current operations across the Group during this unprecedented global pandemic. The health and safety of our crew and shore staff is paramount for the Teekay Group. We have implemented strict measures on all of our assets to protect our seafarers while the vast majority of our shore staff are working remotely from home. Crew changes on our gas and tanker fleets remain a major challenge for the industry as most countries have placed restrictions on travel, visa applications and crews disembarking from vessels. We're working with the industry and intergovernmental organizations to tackle this challenge while remaining in close continuous contact and supporting our colleagues at sea through this period.

I'm pleased to report that the team's dedication to health and safety and their professionalism during this time has resulted in no COVID cases on board our gas and tanker vessels and no negative impact on available vessel base. However, on the FPSO side, we unfortunately did experience two COVID cases on the Hummingbird FPSO. But after a deep clean and a full crew change, we were able to fully restart operations and have had uninterrupted operation since.

We were well prepared to manage potential spare parts shortages as the teams identified critical items and made advanced purchases early in the outbreak in anticipation of delivery challenges with respect to both manufacturing and logistics. In addition, the teams have also been able to obtain class and flag extensions for our vessels which were due to dry-dock in the first half of this year. Overall, our assets have performed well in the first quarter and second quarter-to-date, and we expect this to continue. So we will of course remain vigilant in ensuring that we are taking all actions and precautions in line with prevailing best practices.

Turning to slide 5. At our Investor Day in November last year, we highlighted two themes for Teekay Corporation that would not be themes at our next Investor Day. These included the elimination of TGP's IDRs and the divestment and reduction of our exposure to the offshore business to further simplify and focus the Group.

Starting with the IDRs. We eliminated the TGP IDRs in exchange for 10.75 million newly issued TGP common units, which we believe is beneficial to both parties. This important transaction creates greater alignment between Teekay Parent and the rest of TGP's unitholders, simplifies the corporate structure and we believe that it removes one of the primary uncertainties for investors in Teekay and TGP. The transaction also increases our economic interest in TGP from 34% to approximately 42%, including our GP stake, and increases Teekay Parent's free cash flows by almost $11 million per annum based on the current TGP distribution level.

On the offshore side of things, we're significantly reducing our exposure to this segment with a new Foinaven contract and the upcoming decommissioning of the Banff FPSO and eventual green recycling of this unit starting in June. In late March, we secured a new up to 10 year bareboat contract on the Foinaven FPSO that effectively covers the remaining life and the eventual green recycling of the unit. The new contract includes an upfront payment of $67 million, which was received in early April; a nominal per day fee for the contract life that effectively covers any ancillary costs; and a lump sum payment at the end of the contract term that is expected to cover any cleanup and green recycling costs of the unit. Importantly, this new contract eliminates our operational exposure to the previous loss-making contract.

Lastly, the Hummingbird FPSO continues to operate on its fixed rate contract and is currently producing between 7,500 barrels and 8,500 barrels per day. Production on the unit has increased recently following a successful drilling campaign on the field by our customer. These transactions have also further strengthened our balance sheet and improves our profitability going forward.

Over the next two slides, I'll briefly touch on the results and highlights of our daughter companies. I would encourage you to listen to their respective earnings conference calls for more details following this call.

On slide 6, we have summarized Teekay LNG's recent results and highlights. Teekay LNG Partners reported record high adjusted net income during the quarter, generating total adjusted EBITDA of $188 million and adjusted net income of $52 million or $0.58 per unit, up significantly compared to the same period of the prior year as a result of a complete quarter contribution in Q1 from its fully delivered LNG fleet. TGP has also reaffirmed its 2020 adjusted EBITDA and adjusted net income guidance, with adjusted net income expected to increase by 36% to 60% in 2020 versus 2019.

Since reporting in February, TGP has secured new time charter contracts on three 52% owned LNG carriers and is now 100% fixed in 2020 and 94% fixed in 2021, and TGP has also repaid its NOK bond this week using existing cash. TGP now has no remaining debt maturities in 2020. Additionally, TGP continues to execute on its balanced capital allocation strategy, which includes prioritizing balance sheet delevering for now, alongside a second consecutive year of over 30% increase in quarterly cash distributions with a 32% increase in May 2020. As highlighted on the graph on this slide, TGP continues to delever its balance sheet and has also opportunistically bought back approximately $44 million of stock since the program was announced in December 2018 at an average price of $12.16 per unit.

We take a long-term view on TGP's business and prospects. With a strengthening financial foundation and deleveraging that is expected to provide financial flexibility, market-leading positions and a very compelling valuation at a 4 times PE ratio based on the midpoint of its 2020 financial guidance, we believe TGP has significant long-term value potential which benefits Teekay, given our full alignment of interest and position as the largest common unitholder. For every $1 per unit increase in TGP's unit price, Teekay's equity interest would increase by $0.37 per share or 12% based on yesterday's closing price of $3.11 per share.

Turning to slide 7. Teekay Tankers reported the highest quarterly adjusted profit, generating total adjusted EBITDA of $155 million, up from $63 million in the same period of the prior year, and adjusted net income of $110 million or $3.27 per share in the first quarter, an improvement from $15 million or $0.44 per share in the same period of the prior year. TNK's results were driven by stronger spot tanker rates, with rates reaching the highest Q1 levels in the past decade. We also expect TNK's Q2 results to be strong based on the spot rates secured so far in Q2, with 69% of Q2 Suezmax days fixed that $52,100 per day and 62% of our Q2 Aframax size vessels fixed at $33,600 per day compared to $49,100 per day and $34,500 per day in the first quarter, respectively.

During the quarter, TNK continued to bolster its balance sheet from its strong operating cash flows and proceeds from asset sales. TNK reduced its net debt by approximately $200 million or over 20% since the beginning of the year, and increased its total liquidity to $368 million and have subsequently continued to make meaningful progress on both fronts. TNK also took advantage of the market strength and fixed up another nine vessels on fixed rate contracts ranging between six months and two years, but most of which are for one year, at very attractive rates. In total, TNK has now fixed up 13 vessels on fixed rate contracts totaling approximately $170 million of forward fixed rate revenues. These new contracts also reduce TNK's free cash flow breakeven to approximately $10,500 per day, which is expected to enable TNK to create shareholder value in almost any tanker market.

Looking ahead, while Teekay has lowered its breakeven through his time charter coverage, it continues to maintain meaningful operating leverage as highlighted in the graph on the bottom right-hand side of the slide. We also take a long-term view on TNK's business and prospects TNK has significantly grown its net asset value, earning over $240 million of free cash flow in just two quarters, which is compelling relative to its market cap of $540 million and its net debt balance of $730 million, and it has an industry-leading 20% EPS yield in Q1 2020 based on its closing share price yesterday or 80% on an annualized basis. For every $1 per unit increase in TNK's unit price, Teekay's equity interest would increase by $0.10 per share or 3% based on yesterday's closing price of $3.11 per share.

In summary, for every $1 increase in TGP and TNK's share prices, Teekay's equity interest would increase by $0.47 per share or 15% based on yesterday's closing price of $3.11 per share.

I'll now turn the call over to Vince.

Vincent Lok -- Executive Vice President and Chief Financial Officer

Thanks, Kenneth.

Turning to slide 8. Over the past several years, we have focused on derisking our businesses and strengthening our foundation across the Group. This included divesting and reducing our offshore exposure with the sale of our remaining interest in Teekay Offshore last year and the new bareboat contract structure for the Foinaven FPSO which Kenneth touched on earlier and completing key financings, including Teekay Parent's bond last year and, more recently, Teekay LNG's unsecured revolver and a majority of Teekay Tankers' debt facilities at attractive all-in pricing.

Looking at the graph on the slide, Teekay Corporation has reduced its pro forma consolidated net debt by $830 [Phonetic] million or 19% since the beginning of 2019 and reduced its pro forma net debt to EBITDA from a peak of 9 times to 4.5 times, while increasing our pro forma consolidated liquidity to over $900 million. We have also reduced Teekay Parent's pro forma net debt by approximately $100 million or 25% since the beginning of 2019 and reduced our daughter debt guarantees to under $90 million as of March 31, which we expect will be completely eliminated by the end of 2020, while also holding a healthy pro forma liquidity position of $150 million.

In short, we have made great progress in reducing our debt, eliminating near-term maturities, reducing remaining exposure to the offshore segment and significantly improving our financial position all around.

With that, I will now turn the call back to Kenneth for his closing remarks.

Kenneth Hvid -- Director, President and Chief Executive Officer

Thanks, Vince.

As you have heard, it was a very busy quarter, with record TGP and TNK earnings and executing on our strategic priorities, which included completing various asset sales securing new charter contracts across the Group and eliminating TGP IDRs in exchange for new TGP common units.

In addition, in mid-April, we also published our 2019 Sustainability Report, which is our 10th consecutive annual Sustainability Report. As a leading oil and gas transportation company, Teekay cannot separate ourselves from the longer-term challenges that the world is facing. We have built our Company on a deep commitment to responsible safety and environmental practices. Over the past decade, we have worked with industry to pioneer and invest in increasingly more energy efficient vessels. For instance, our latest LNG carrier newbuildings produce about 50% less CO2 emissions per cubic meter of LNG transported.

As our industry has set itself the challenge of progressively becoming carbon-neutral by 2050, we have an enormous task ahead of us. We are embarking on new industry partnerships to drive necessary technological developments and we will, in 2020, reassess our reporting framework so that we have the best possible foundation for the important work ahead of us.

In closing, with our balance sheet continuing to strengthen, total pro forma liquidity of over $900 million for the Teekay Group, extensive contracted revenue from Teekay LNG and higher contracted revenue and strong spot rates to date at Teekay Tankers and with no committed growth capex or significant upcoming debt maturities, we believe that the Teekay Group is financially well-positioned for both any potential market volatility in the near term and the longer-term future of marine energy transportation.

With that, operator, we are now available to take questions.

Questions and Answers:

Operator

[Operator Instructions] We will now take our first question from Michael Webber of Webber Research. Please go ahead.

Michael Webber -- Webber Research & Advisory -- Managing Partner

Hey, good morning, guys. How are you?

Kenneth Hvid -- Director, President and Chief Executive Officer

Good morning, Mike. Good. How are you doing?

Michael Webber -- Webber Research & Advisory -- Managing Partner

Good, good. I would love to touch base on the IDR takeout. Just curious, maybe out of the gate, can you give us some color on how you came up with the valuation? Considering that they were so far out of the money, just curious what kind of methodology you guys have used to come up with the valuation and whether you're able to find a comp of a similar MLP that had their IDRs taken out when they were that far under their MQD and any of the peers.

Kenneth Hvid -- Director, President and Chief Executive Officer

Yeah. Just for everybody's benefit who hasn't been following this transaction as closely as you have, I'd say, the perspective we came in was that over the past several years, as we all know, there's been a lot of investor focus and push to address IDRs across the MLP space, and we had many of our investors relate to us that TGP was basically uninvestable until the IDRs were removed. And we talked about that at our Investor Day, as you know, that one of our strategic priorities was to consider an IDR elimination and remove what we received feedback from investors was the biggest overhang impacting Teekay LNG's unit price.

So the valuation was determined by or through a thorough and robust process where we followed the TGP conflicts committee, a process which is comprised of independent Board members. They reviewed and negotiated the transaction on behalf of TGP. The TGP conflicts committee appointed their own independent financial and legal advisors to assist them with the process, and that was a process that took several months. And we were not part of that process from Teekay management's side. The Teekay Board did have a special committee to review the transaction, but that was pretty much the extent of the work that was done on the financials there.

Vince, do you want to add anything on the valuation?

Michael Webber -- Webber Research & Advisory -- Managing Partner

Well, I mean, I know that the conflicts committee was involved, right? So I'm less curious about the procedural process and more curious around how you arrived at that kind of a number for effectively an option that's still that far out of the money, right? I understand the fact that it was on the conflicts committee and everyone has I guess distanced from it. But ultimately there is a transition of $123 million from the MLP to the GP. Just how did you arrive at that? Or whoever came up with that number, how did they arrive at it?

Vincent Lok -- Executive Vice President and Chief Financial Officer

Yeah, Mike, obviously, in TGP's case, it's unique in that we weren't currently in the high splits. But TGP...

Michael Webber -- Webber Research & Advisory -- Managing Partner

But you weren't in any of the splits. You're still below the MQD, right, so there wasn't any split...

Vincent Lok -- Executive Vice President and Chief Financial Officer

Right, so we weren't in the split at the moment. So it is unique in that situation. However, TGP's cash flows are very predictable given its long-term cash flows. So that's I think one of the factors that enabled the two advisors and the special committees to look at the valuation of the IDRs. They clearly have value there given the stability of the cash flows and the fact that TGP has continued to delever its balance sheet and increase its distribution capacity over time. So, like that's pretty much all we can really share with you in terms of the details of the valuation.

Michael Webber -- Webber Research & Advisory -- Managing Partner

I mean, I guess, around the stability of the cash flows, right, this cash flows have been there for quite a while. Yet you're still below the MQD and below the distribution, right? Which if I go back to people that remember the 2015 time frame, right, same business, same cash flows, they haven't gone back to that level. The stability of the cash flows, I guess, maybe kind of coming at this a different way, what kind of guidance has TGP given you in terms of the distribution that makes the foregone conclusion that they would get back into the high splits? Because I don't believe they've given any public guidance to suggest that that's like an inevitability.

Kenneth Hvid -- Director, President and Chief Executive Officer

You've followed the Company for a long time and have covered us, of course. And so you know exactly why the distribution was reduced back in 2015. That was because we had $3.5 billion ahead of us in terms of newbuildings and MLP market that wasn't working. So we did what was prudent at the time. We reduced our distribution to retain the cash flows so that we could fund the newbuilding program without issuing dilutive equity. That's point number one.

If you look at the cash flows we have today, you're absolutely right. The DCF in MLP terms is very strong at TGP. We have about $0.97 or $3.88 annualized in TGP, which of course is well above the split that we are talking about. And if you look at the coverage, we have about 4 times coverage of the distribution that we are paying out. So, clearly there is a lot of cash flows that's coming as Vince pointed out.

Michael Webber -- Webber Research & Advisory -- Managing Partner

No, I understand. But again, like the -- I think the reference to 2015, 2016 is that there is a variability to that, right? I don't think anyone at that time frame would have predicted that the distribution will be cut in the first place and then you'll spend several years well below the MQD. So, I guess, it kind of goes back to the valuation and looking at it as an inevitability or forward [Indecipherable] annuity as opposed to looking at it as I guess an option.

And kind of the question as to how -- if we're not getting that kind of forward visibility out of TGP from a common unitholder perspective to then use it as a -- think about it as an inevitability when taking out the IDRs, there is a bit of disconnect there. So I'm just curious as to how, again, from a methodology perspective, how did you arrive at the $123 million.

Kenneth Hvid -- Director, President and Chief Executive Officer

Yeah. As you correctly pointed out, I mean -- we have, as analyst and as management, there are ways to be surprised by major events in the world in the same way that nobody foresaw the -- could see the oil price collapse we saw end of 2014 and the prudent changes we needed to make back then.

But again, as we look at what we have been diligently executing on at TGP in the last couple of years, we now have a business where all our assets deliver their cash flow. They are generating strong cash flows. We are giving out guidance in terms of what those cash flows will be. We also have a clear path on deleveraging the balance sheet. So we think that visibility was clearly taken into account by the financial advisors that the conflicts committee used. But that, as Vince said, is really all we know. We are not privy to that work that they did. But they clearly got comfortable with the valuation that the transaction was conducted at.

Michael Webber -- Webber Research & Advisory -- Managing Partner

So they didn't need to share the valuation methodology with you at all? You've literally got no idea of what they did?

Vincent Lok -- Executive Vice President and Chief Financial Officer

Well, the conflicts committee hired their own advisors and they did their own work, and so...

Michael Webber -- Webber Research & Advisory -- Managing Partner

Was there a presentation or an email or any, given that you have no idea what valuation underpinned it?

Vincent Lok -- Executive Vice President and Chief Financial Officer

No, it's an independent process, so to protect the independence of that, that's not shared with management. It's only shared with the conflicts committee.

Michael Webber -- Webber Research & Advisory -- Managing Partner

So, no idea whatsoever? So there is no -- they don't share with the Board, there is no -- they could have picked it out of thin air, but you wouldn't know because it was on the conflicts committee, theoretically?

Kenneth Hvid -- Director, President and Chief Executive Officer

I mean, as you will understand, they clearly look at the outlook for the business and the cash flows and what this business can do, and that's obviously what goes into their evaluation. But, as we have said a couple of times now, the conflicts committee does not share their work with management.

Michael Webber -- Webber Research & Advisory -- Managing Partner

Okay.

Kenneth Hvid -- Director, President and Chief Executive Officer

And I think that's [Speech Overlap]

Michael Webber -- Webber Research & Advisory -- Managing Partner

No. Look, I guess the best analogy I can come up with is, say, you have a golfer, right, and he is standing on the 18th tee. Canadian guy, light's enough, normal golfer, [Indecipherable] goes through the first round, lots of par -- the front line, lots of pars, gets to the back nine, the wheel start falling off, right, so double bogey, triple bogey, triple bogey, really kind of scrambling. And then the last, 15 and 16, 17, he kind of pulls it together. He's kind of still all over the place, but somehow he is saving the par. He gets to the 18th tee box, and he thinks, well, if I actually -- if I hold this out, I can actually get to the number I need to get to, I can win. And then he decided to take a gimme on the tee box. So he doesn't never actually put up the distribution growth, it's actually needed to get to the score -- just kind of assumes he's going to get it and they get a big check, because the parent takes and throws in his car and kind of drives away.

I guess the question is, why not actually deliver on the distribution growth if it's that inevitable before taking out the IDRs? I know that there's been this amorphous survey of the investors who said this is the biggest overhang or what have you. And I guess the overhang is really the will there or won't be, it's not an actual issue, they're so far out of the money.

Maybe coming at it a different way, if I look at the -- if I look at your deck, and I look at the rationale as to -- three data points. There's nothing that's -- there's no quantitative data in there. There's nothing that kind of points to an accretion or a quantitative benefit at the daughter level from this. And I think the first point is that it helps alignment between the parent and the LP. So, how does it actually do that? Because the only implication I can think of is that the GP would have forced the LP to do something that wasn't in its best interest to get to put the IDRs in the money because otherwise I don't know how this actually helps to see alignment. So maybe just the first data point of rationale on the IDR [Indecipherable] take out. So, if you can just expand on how it actually helps the alignment between the two and common unitholders.

Kenneth Hvid -- Director, President and Chief Executive Officer

Well, first of all, as you know, this team has been focused on putting this business on an even and strong TU as we said. And the outlook for TGP is very strong. So, clearly, there is a lot of dividend capacity in the company, and that's obviously the starting point for any company. So the outlook here is very strong. And then it becomes a debate, which you're on, and it's about whether it's distributed or whether its distributable cash flow, and that can lead to a discussion. But the starting point in any of these companies is obviously whether we have the underlying cash flows or not, and that's essentially what this management team has been focused on and they've been focusing on strengthening the underlying business and de-risking the Company so that we have that cash flow certainty. And that's clearly what's gone into the valuation of the conflicts committee here.

In terms of the alignment, we've made a couple of changes since we started out in TGP. We've become a 1099 filer, as you know. And this recent alignment in removing the IDRs, we firmly believe that that allows TGP to fully explore how they can create the most shareholder value to all parties without having an IDR consideration sitting in the mix of their capital allocation decisions. And fundamentally, I believe that TGP and TK think that that is the most flexible way that we can allocate capital as we move this Company forward.

Michael Webber -- Webber Research & Advisory -- Managing Partner

Well, I guess the question is because that's so far out of the mix, right, in terms of being an actual quantitative player within any kind of decision, I guess how does it actually help that alignment? I understand that you think it does, but how?

Kenneth Hvid -- Director, President and Chief Executive Officer

Well, I don't know where you have the disconnect. We talked about the cash flows, which are clearly there, to ramp up the distribution. So obviously, that's gone into the consideration. If we had a business which was failing and that wasn't delevering and that weren't increasing their cash flows and the distribution capacity, then clearly, your points are relevant. But you have to agree that this is a business that has one of the strongest outlooks in our space, in the LNG space.

Michael Webber -- Webber Research & Advisory -- Managing Partner

I guess it's a separate topic. But maybe kind of coming at it from a different angle. What aspect of the alignment was insufficient before? What aspect of the alignment did this solve for?

Kenneth Hvid -- Director, President and Chief Executive Officer

Well, I think you should maybe continue your questions, which I assume you're going to be on the next call as well and you can get the remarks and start a perspective on it as well. But we believe, and a number of our investors believe, that this drives alignment. And we accept that obviously you have the right to have a different view. But...

Michael Webber -- Webber Research & Advisory -- Managing Partner

I would just love to hear how. I mean, it's in the deck. I mean, I believe that you guys believe that, but I just want to know how actually. But I can ask TGP if they know how.

Vincent Lok -- Executive Vice President and Chief Financial Officer

Well, I mean, naturally, when you have the GP IDRs and then the LPs, they're two different classes of securities there. So now, we've converted that into LP units. We have 42% in the LP and we're aligned with the rest of the LP units to maximize the value of those LP units going forward as opposed to the two different sets of securities.

Michael Webber -- Webber Research & Advisory -- Managing Partner

And so, I guess the implication is that otherwise you'd be looking to maximize the value of the IDRs as opposed to the LP units?

Vincent Lok -- Executive Vice President and Chief Financial Officer

Well, when the IDRs were in place, there are different scenarios where the IDRs would create value and would have been a cost to the LP unitholders. Now, that's been eliminated.

Michael Webber -- Webber Research & Advisory -- Managing Partner

Right. But 160% from now, right? So like -- back at the $0.70 per quarter distribution level, not where you guys are now. Okay, I'll hop off. I'll get on the TGP call and see if I can get some more color on that call. But I appreciate the time, guys. Thanks.

Kenneth Hvid -- Director, President and Chief Executive Officer

Thank you.

Operator

Thank you. We'll move to our next question from J. Mintzmyer from Value Investor's Edge. Please go ahead.

J. Mintzmyer -- Value Investor's Edge -- Analyst

Hi, good morning, gentlemen.

Kenneth Hvid -- Director, President and Chief Executive Officer

Good morning, J.

J. Mintzmyer -- Value Investor's Edge -- Analyst

So, I'll stay out of the GP IDR mess. I think that was well litigated. Well, let's see how the TGP call goes. A little bit of housekeeping for you, guys. Looking at the Banff FPSO, right, we know we have some green recycling coming up that's going to be quite the bill. What sort of liability should we be guiding for on that? I know, previously, it was mentioned that it might be more in excess of the current reserve. Is that still the case? And is there some sort of benchmark for that?

Vincent Lok -- Executive Vice President and Chief Financial Officer

Hi J. Yes. As you might know, the Banff contract is quite unique from other FPSO contracts, where we are responsible for some of the abandonment costs associated with parts of the subsea infrastructure. So that's very unique. So this is something we've been accruing for during the life of the contract. We have increased what's called the ARO, asset retirement obligation, accrual, which is now just under $40 million net based on most recent estimates.

So these costs will be -- roughly half of that will be incurred during this year, which is phase one, and the remaining amount will be incurred next year, which is phase two. So this $40 million that's been accrued, these are costs that won't hit our P&L going forward, obviously, since they're accrued, other than some additional operating expenses that will be incurred during the decommissioning period later this year. So that's the status on that.

J. Mintzmyer -- Value Investor's Edge -- Analyst

All right. Thank you. Is that $40 million, is that estimated to be about enough? Or is there a risk that it could be higher than that?

Vincent Lok -- Executive Vice President and Chief Financial Officer

I think we have a pretty good handle on the phase one because it's starting this June. The phase two costs, I think, are within fairly conservative in our accrual and estimates here, but that's subject to further evaluation later this year. But we feel we've been fairly conservative.

J. Mintzmyer -- Value Investor's Edge -- Analyst

All right, fair enough. Looking at the rest of the FPSOs, look, the Foinaven deal was good. I'm glad you got that one out of the way. It looks like the Banff is out the door. It could be expensive, but you've reserved for that. Let's talk about the Hummingbird. Is that considered non-core? Is that still up for sale? Or is that going to be a core asset going forward?

Kenneth Hvid -- Director, President and Chief Executive Officer

Yeah. It's clearly no longer a core asset. So, as we say, it's available to be purchased. And that said, there is, of course, contract value. So there's obviously a price where we would be sellers, and there's a price where it makes more sense to keep the unit.

So, I'd say with the oil price collapse in the last couple of months, obviously, there hasn't been a lot of activity in this space. And let's see what we can get. We look at it in terms of the cash flows. The contract is, as you know, fixed out for a couple of years and we are currently producing around 8,000 barrels per day. So, I think a lot of the future of the unit is probably hinging on oil price going forward and the appetite for people to come in to look at the asset. It's 13 years old, so it still has a lot of life left in it. So if you look at the depreciated replacement cost, that's obviously quite significant. But you still need a buyer in order to be able to offload it.

J. Mintzmyer -- Value Investor's Edge -- Analyst

It certainly makes sense. So, with the Hummingbird not being really a core asset, just holding on to that waiting to sell it, it looks like Teekay only has really two main assets, right? You have the Teekay units that you have now into 40% range of TGP. You have the high ownership of TNK, Teekay Tankers, and you have kind of a management structure. So, I guess a two part question.

Part one, just for modeling purposes and valuation purposes, what is the expected run rate annualized G&A expense going forward? Like it's just the corporate overhead that's not getting reimbursed, right? Because I understand that Teekay Tankers and the TGP LNG will reimburse some of that. So what's the non-reimbursable part of G&A so we can model that?

And in part two, what is the future of Teekay here? Does Teekay have a future? Is it just a holding company? Are you in project development? What sort of vision does Teekay have?

Vincent Lok -- Executive Vice President and Chief Financial Officer

J, first of all, to answer your question on the parent G&A, if you look at our free cash flow statement in appendix D of the release, in the first quarter, our net G&A actually was zero when you take into account some of the fees and other income that we generate from managing other businesses. So the G&A was about $2 million and the income was about $2 million net.

So the second quarter will have some little bit of lumpy costs, so the G&A will go up a little bit because some of the fees we incurred on the IDR transaction as well as the timing of the recognition of equity comp, but that's sort of not a run rate figure for the second quarter. But going forward, I think we're going to try to look at that almost on a run rate basis, to be a very fairly small net G&A figure going forward on a run rate basis.

Kenneth Hvid -- Director, President and Chief Executive Officer

And to the second part, I think we talked about this at our Investor Day, but just to share a bit more on the perspective that we have. As you know, Teekay was founded actually last month we founded 47 years ago, and we've always run this Group in an integrated manner, and we believe that that serves our long-term shareholders best and that includes our largest shareholder, which, of course, is the TK Foundation. So over time, our structure may change to reflect the public and financial markets that's facing us. But we see that actually has been quite separate from our business strategy and capital allocation decisions.

So over the past few years, we have, as a group, been very focused on streamlining our business around our core tanker and gas segments and selling off our Offshore segment as well as execution of a very large order book, and we've been strengthening the financial foundation of the Group. This work has put, I think, now the Group on a very positive value creation path, and we talked about that in November also. And we think it represents a turning point. And as we've said all along, the prerequisite for having strategic discussions is that we have the financial flexibility to do so. We're building that rapidly now, and we're excited about starting that strategic discussion for the Group and to look at how we, as a group, allocate capital and where we want to invest in next. But in terms of how the Group is run, we continue to run it on a very integrated basis and look at all our businesses.

J. Mintzmyer -- Value Investor's Edge -- Analyst

Yeah. Thanks for addressing the question. It sounds like the G&A is pretty negligible going forward, which is good to hear. We'll have to circle back later on the kind of future of Teekay. I think that's probably a whole another can of worms, so we'll have to bust open [Indecipherable] IDR ruminate a little bit first. Thanks for taking my questions, and I'll hop on the other calls.

Kenneth Hvid -- Director, President and Chief Executive Officer

Thanks for your time.

Operator

Thank you. It appears there are no further questions at this time. Mr. Kenneth Hvid, I'd like to turn the conference back to you for any additional or closing remarks.

J. Mintzmyer -- Value Investor's Edge -- Analyst

Well, as we mentioned earlier, we have two more Teekay earnings calls coming over the next two hours, so please stay tuned for that. Furthermore, we look forward to reporting back to you next quarter, and meanwhile, we hope that you and your families will continue to stay safe. Thank you for listening in today.

Operator

[Operator Closing Remarks]

Duration: 46 minutes

Call participants:

Ryan Hamilton -- Investor Relations

Kenneth Hvid -- Director, President and Chief Executive Officer

Vincent Lok -- Executive Vice President and Chief Financial Officer

Michael Webber -- Webber Research & Advisory -- Managing Partner

J. Mintzmyer -- Value Investor's Edge -- Analyst

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