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 September 30, 2008

Commission file number 1-33198

TEEKAY OFFSHORE PARTNERS L.P.

(Exact name of Registrant as specified in its charter)

4^th 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 þ      Form 40-F o

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 o      No þ

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 o      No þ

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes o      No þ

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):82-                    

 

 

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES

REPORT ON FORM 6-K FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008

INDEX

		PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Unaudited Consolidated Statements of Income (Loss) for the three and nine months ended September, 2008 and 2007			3
Unaudited Consolidated Balance Sheets as at September 30, 2008 and December 31, 2007			4
Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007			5
Unaudited Consolidated Statements of Changes In Partners’ Equity for the nine months ended September 30, 2008			6
Notes to the Unaudited Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures about Market Risk			33
PART II: OTHER INFORMATION			34
SIGNATURES			36

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		$				$				$				$
						(Restated -								(Restated -
						Note 14)								Note 14)
VOYAGE REVENUES (including $54,794 and $145,505 from related parties for the three and nine months ended September 30, 2008, respectively, and $36,502 and $114,154 for the three and nine months ended September 30, 2007, respectively — notes 9a, 9b, 9c, 9k and 9p)			226,947				195,711				656,363				581,225
OPERATING EXPENSES
Voyage expenses			62,548				36,458				173,736				107,852
Vessel operating expenses (including ($200) and ($1,345) from related parties for the three and nine months ended September 30, 2008, respectively — notes 9h and 9l, note 10)			47,448				37,745				134,886				105,239
Time-charter hire expense			31,474				37,161				97,382				111,749
Depreciation and amortization			34,042				31,945				103,401				90,897
General and administrative (including $10,993 and $37,713 to related parties for the three and nine months ended September 30, 2008, respectively, and $14,846 and $42,424 for the three and nine months ended September 30, 2007, respectively — notes 9d, 9e and 9f, note 10)			14,087				16,008				45,089				48,067
Total operating expenses			189,599				159,317				554,494				463,804
Income from vessel operations			37,348				36,394				101,869				117,421
OTHER ITEMS
Interest expense (notes 6 and 10, including $1,338 from related parties for the nine months ended September 30, 2007 — note 9o)			(32,592	)			(60,418	)			(76,628	)			(69,839	)
Interest income			901				1,784				3,201				4,365
Foreign currency exchange gain (loss) (note 10)			2,179				(4,715	)			(1,394	)			(13,265	)
Other income — net (note 8)			2,352				2,965				7,292				8,266
Total other items			(27,160	)			(60,384	)			(67,529	)			(70,473	)
Income (loss) before non-controlling interest and income tax recovery (expense)			10,188				(23,990	)			34,340				46,948
Income tax recovery (expense) (note 11)			29,485				(6,119	)			36,830				(1,491	)
Income (loss) before non-controlling interest			39,673				(30,109	)			71,170				45,457
Non-controlling interest			(19,048	)			21,103				(38,069	)			(35,475	)
Net income (loss)			20,625				(9,006	)			33,101				9,982
Dropdown Predecessor’s interest in net income (note 1)			—				22				1,333				1,300
General partner’s interest in net income (loss)			3,052				(181	)			9,933				531
Limited partners’ interest: (note 12)
Net income (loss)			17,573				(8,847	)			21,835				8,151
Net income (loss) per:
- Common unit (basic and diluted)			0.58				(0.45	)			0.74				0.43
- Subordinated unit (basic and diluted)			0.58				(0.45	)			0.74				0.37
- Total unit (basic and diluted)			0.58				(0.45	)			0.74				0.40
Weighted average number of units outstanding:
- Common units (basic and diluted)			20,359,783				9,800,000				13,794,526				9,800,000
- Subordinated units (basic and diluted)			9,800,000				9,800,000				9,800,000				9,800,000
- Total units (basic and diluted)			30,159,783				19,600,000				23,594,526				19,600,000
Cash distributions declared per unit			0.40				0.35				1.20				0.75

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

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)

		As at				As at
		September 30, 2008				December 31, 2007
		$				$
ASSETS
Current
Cash and cash equivalents (note 6)			159,204				121,224
Accounts receivable, net			42,196				42,245
Net investment in direct financing leases — current			22,393				22,268
Prepaid expenses			38,533				34,219
Due from affiliate (note 9m)			11,580				18,350
Other current assets			3,784				7,644
Total current assets			277,690				245,950
Vessels and equipment (note 6)
At cost, less accumulated depreciation of $761,481 (December 31, 2007 — $692,754)			1,731,709				1,662,865
Net investment in direct financing leases			61,655				78,199
Other assets			12,005				14,423
Intangible assets — net (note 5)			47,806				55,355
Goodwill — shuttle tanker segment			127,113				127,113
Total assets			2,257,978				2,183,905
LIABILITIES AND PARTNERS’ EQUITY
Current
Accounts payable			13,514				12,076
Accrued liabilities			41,887				38,464
Due to affiliate (note 9m)			49,505				17,554
Current portion of long-term debt (note 6)			74,766				64,060
Current portion of derivative instruments (note 10)			18,616				5,277
Total current liabilities			198,288				137,431
Long-term debt (note 6)			1,535,308				1,453,407
Deferred income tax			40,677				77,306
Derivative instruments (note 10)			32,466				17,770
Other long-term liabilities			24,605				27,977
Total liabilities			1,831,344				1,713,891
Commitments and contingencies (notes 6, 9, 10 and 13)
Non-controlling interest			253,907				392,613
Partners’ equity
Partners’ equity			179,235				77,108
Accumulated other comprehensive (loss) income (note 7)			(6,508	)			293
Total partners’ equity			172,727				77,401
Total liabilities and partners’ equity			2,257,978				2,183,905

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

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)

		Nine Months Ended September 30,
		2008				2007
		$				$
						(Restated - Note 14)
Cash and cash equivalents provided by (used for)
OPERATING ACTIVITIES
Net income			33,101				9,982
Non-cash items:
Unrealized loss on derivative instruments (note 10)			15,378				10,378
Depreciation and amortization			103,401				90,897
Non-controlling interest			38,069				35,475
Income tax (recovery) expense			(36,830	)			1,491
Foreign currency exchange (gain) loss and other — net			(291	)			13,293
Change in non-cash working capital items related to operating activities			47,882				(27,567	)
Distribution from subsidiaries to minority owners			(58,641	)			(44,192	)
Expenditures for drydocking			(26,083	)			(41,100	)
Net operating cash flow			115,986				48,657
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt			191,000				188,200
Scheduled repayments of long-term debt			(24,393	)			(12,151	)
Prepayments of long-term debt			(119,000	)			(115,000	)
Net advances to affiliate			(46,544	)			(42,935	)
Equity distribution from Teekay Corporation			—				1,819
Proceeds from issuance of common units			216,837				—
Expenses from issuance of common units			(6,171	)			(2,793	)
Distribution to Teekay Corporation relating to purchase of SPT Explorer L.L.C. and SPT Navigator L.L.C. (note 9k)			(16,661	)			—
Excess of purchase price over the contributed basis of a 25% interest in Teekay Offshore Operating L.P. (note 9j)			(94,882	)			—
Distribution to Teekay Corporation relating to purchase of Navion Bergen L.L.C. (note 9n)			—				(48,800	)
Excess of purchase price over the contributed basis of a 50% interest in Navion Gothenburg L.L.C. (note 9n)			—				(6,358	)
Cash distributions paid			(28,337	)			(15,000	)
Other			(1,538	)			—
Net financing cash flow			70,311				(53,018	)
INVESTING ACTIVITIES
Expenditures for vessels and equipment			(52,990	)			(13,341	)
Proceeds from sale of vessels and equipment			—				3,225
Purchase of a 25% interest in Teekay Offshore Operating L.P. (note 9j)			(111,746	)			—
Purchase of a 50% interest in Navion Gothenburg L.L.C. (note 9n)			—				(10,231	)
Investment in direct financing lease assets			(537	)			(8,332	)
Direct financing lease payments received			16,956				15,882
Net investing cash flow			(148,317	)			(12,797	)
Increase (decrease) in cash and cash equivalents			37,980				(17,158	)
Cash and cash equivalents, beginning of the period			121,224				113,986
Cash and cash equivalents, end of the period			159,204				96,828

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

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)

		Owner’s																								Accumulated
		Equity				PARTNERS’ EQUITY																				Other
		(Dropdown				Limited Partners																General				Comprehensive
		Predecessor)				Common								Subordinated								Partner				Income (Loss)				Total
		$				Units				$				Units				$				$				$				$
Balance as at December 31, 2007			—				9,800				119,844				9,800				(41,795	)			(941	)			293				77,401
Net income			1,333								14,550								7,285				9,933								33,101
Unrealized net loss on qualifying cash flow hedging instruments (notes 7 and 10)																											(8,470	)			(8,470	)
Realized net loss on qualifying cash flow hedging instruments (notes 7 and 10)																											703				703
Proceeds from follow-on public offering of limited partnership interests, net of offering costs of $6,171 (note 3)							10,625				206,329												4,337								210,666
Purchase of a 25% interest in Teekay Offshore Operating L.P. from Teekay Corporation (note 9j)											(31,101	)							(60,957	)			(3,790	)			966				(94,882	)
Purchase of SPT Explorer L.L.C. and SPT Navigator L.L.C. from Teekay Corporation (note 9k)			(1,333	)							(5,231	)							(10,253	)			(638	)							(17,455	)
Cash distributions											(16,010	)							(11,760	)			(567	)							(28,337	)
Balance as at September 30, 2008			—				20,425				288,381				9,800				(117,480	)			8,334				(6,508	)			172,727

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

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES

1.

Basis of Presentation

The unaudited interim consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (or GAAP). These financial statements include the accounts of Teekay Offshore Partners L.P., which is a limited partnership organized under the laws of the Republic of The Marshall Islands, its wholly owned or controlled subsidiaries and the Dropdown Predecessor, as described below (collectively, the Partnership). 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.

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 Partnership’s restated audited consolidated financial statements for the year ended December 31, 2007, which are included on Form 20-F/A filed on April 2, 2009. In the opinion of management of our general partner, Teekay Offshore GP L.L.C. (or the General Partner), these interim unaudited consolidated financial statements reflect all adjustments, of a normal recurring nature, necessary to present fairly, in all material respects, the Partnership’s consolidated financial position, results of operations, changes in partners’ equity and cash flows for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of those for a full fiscal year. Significant intercompany balances and transactions have been eliminated upon consolidation.

As required by Statement of Financial Accounting Standards (or SFAS) No. 141, Business Combinations, the Partnership accounts for the acquisition of interests in vessels from Teekay Corporation as a transfer of a business between entities under common control. The method of accounting prescribed by SFAS No. 141 for such transfers is similar to the pooling of interests method of accounting. Under this method, the carrying amount of net assets recognized in the balance sheets of each combining entity is carried forward to the balance sheet of the combined entity, and no other assets or liabilities are recognized as a result of the combination. The excess of the proceeds paid, if any, by the Partnership over Teekay Corporation’s historical cost is accounted for as an equity distribution to Teekay Corporation. In addition, transfers of net assets between entities under common control are accounted for as if the transfer occurred from the date that the Partnership and the acquired vessels were under the common control of Teekay Corporation and had begun operations. As a result, the Partnership’s financial statements prior to the date the interests in these vessels were actually acquired are retroactively adjusted to include the results of these vessels during the periods they operated under the common control of Teekay Corporation.

In July 2007, the Partnership acquired from Teekay Corporation ownership of its 100% interest in the 2000-built shuttle tanker Navion Bergen and its 50% interest in the 2006-built shuttle tanker Navion Gothenburg, respectively. The acquisitions included the assumption of debt, related interest rate swap agreements and Teekay Corporation’s rights and obligations under 13-year, fixed-rate bareboat charters. In October 2007, the Partnership acquired from Teekay Corporation its interest in the FSO unit Dampier Spirit, along with its 7-year fixed-rate time-charter. In June 2008, the Partnership acquired from Teekay Corporation its interest in two 2008-built Aframax lightering tankers, the SPT Explorer and the SPT Navigator. The acquisition included the assumption of debt and Teekay Corporation’s rights and obligations under 10-year, fixed-rate bareboat charters (with options exercisable by the charterer to extend up to an additional five years). All of these transactions were deemed to be business acquisitions between entities under common control. As a result, the Partnership’s statement of income (loss) for the three and nine months ended September 30, 2008 and 2007, the Partnership’s statement of cash flows for the nine months ended September 30, 2008 and 2007, and the Partnership’s statement of changes in partners’ equity for the nine months ended September 30, 2008 have been retroactively adjusted to include the results of these acquired vessels (referred to herein as the Dropdown Predecessor), from the date that the Partnership and acquired vessels were both under common control of Teekay Corporation and had begun operations. These vessels began operations on April 16, 2007 (Navion Bergen), July 24, 2007 (Navion Gothenburg), March 15, 1998 (Dampier Spirit), January 7, 2008 (SPT Explorer) and March 28, 2008 (SPT Navigator). The effect of adjusting the Partnership’s financial statements to account for these common control transfers increased the Partnership’s net income by $1.3 million for both the nine months ended September 30, 2008 and 2007.

The consolidated financial statements include the financial position, results of operations and cash flows of the Dropdown Predecessor. In the preparation of these consolidated financial statements, general and administrative expenses and interest expense were not identifiable as relating solely to each specific vessel with respect to the Dropdown Predecessor. General and administrative expenses (consisting primarily of salaries and other employee-related costs, office rent, legal and professional fees, and travel and entertainment) were allocated based on the Dropdown Predecessor’s proportionate share of Teekay Corporation’s total ship-operating (calendar) days for the period presented. In addition, to the extent the Dropdown Predecessor was capitalized with non-interest bearing loans from Teekay Corporation and its subsidiaries, these intercompany loans were generally used to finance the acquisition of the vessels. Interest expense includes the allocation of interest to the Dropdown Predecessor from Teekay Corporation and its subsidiaries based upon the weighted-average outstanding balance of these intercompany loans and the weighted-average interest rate outstanding on Teekay Corporation’s loan facilities that were used to finance these intercompany loans. Management believes these allocations reasonably present the general and administrative expenses and interest expense of the Dropdown Predecessor.

Certain of the accompanying consolidated financial statements have been restated. The nature of the restatements and the effect on the consolidated financial statement line items are discussed in Note 14 of the Notes to Unaudited Interim Consolidated Financial Statements.

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)

2.

Fair Value Measurements

Effective January 1, 2008, the Partnership adopted SFAS No. 157, Fair Value Measurements. In accordance with Financial Accounting Standards Board Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, the Partnership will defer the adoption of SFAS No. 157 for its nonfinancial assets and nonfinancial liabilities, except those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until January 1, 2009. The adoption of SFAS No. 157 did not have a material impact on the Partnership’s fair value measurements.

SFAS No. 157 clarifies the definition of fair value, prescribes methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value and expands disclosure about the use of fair value measurements. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value as follows:

		Level 1.		Observable inputs such as quoted prices in active markets;
		Level 2.		Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
		Level 3.		Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The following table presents the Partnership’s assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy.

		Fair Value at
		September 30,
		2008
		Liability				Level 1				Level 2				Level 3
		$				$				$				$
Interest rate swap agreements (1), (2)			(44,003	)			—				(44,003	)			—
Foreign currency forward contracts (1)			(12,820	)			—				(12,820	)			—
			(56,823	)			—				(56,823	)			—

3.

Public Offering

On June 18, 2008, the Partnership completed a follow-on public offering (or the Follow-on Offering) of 7.0 million common units at a price of $20.00 per unit, for gross proceeds of $140.0 million. Concurrently with the public offering, Teekay Corporation, which controls the Partnership, acquired 3.25 million common units of the Partnership in a private placement at the same public offering price for a total cost of $65.0 million. On July 16, 2008, the underwriters for the public offering partially exercised their over-allotment option and purchased an additional 375,000 common units for an additional $7.5 million in gross proceeds to the Partnership.

As a result of these equity transactions, the Partnership raised gross proceeds of $216.8 million (including the General Partner’s proportionate 2% capital contribution), and Teekay Corporation’s ownership of the Partnership was reduced from 59.8% to 50.0% (including its indirect 2% general partner interest). The Partnership used the net proceeds from the equity offerings of approximately $210.7 million to fund the acquisition of an additional 25% interest in Teekay Offshore Operating L.P. (or OPCO) from Teekay Corporation and to repay a portion of advances to the Partnership from OPCO.

4.

Segment Reporting

The Partnership has three reportable segments: its shuttle tanker segment; its conventional tanker segment; and its floating storage and offtake (or FSO) segment. The Partnership’s shuttle tanker segment consists of shuttle tankers operating primarily on fixed-rate contracts of affreightment, time-charter contracts or bareboat charter contracts. The Partnership’s conventional tanker segment consists of conventional tankers operating on fixed-rate, time-charter contracts or bareboat charter contracts. The Partnership’s FSO segment consists of its FSO units subject to fixed-rate, time-charter contracts or bareboat charter contracts. Segment results are evaluated based on income from vessel operations. The accounting policies applied to the reportable segments are the same as those used in the preparation of the Partnership’s consolidated financial statements for the year ended December 31, 2007.

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)

The following tables present results for these segments for the three and nine months ended September 30, 2008 and 2007:

		Three Months Ended September 30,
		2008																2007
		Shuttle				Conventional												Shuttle				Conventional
		Tanker				Tanker				FSO								Tanker				Tanker				FSO
		Segment				Segment				Segment				Total				Segment				Segment				Segment				Total
		$				$				$				$				$				$				$				$
																		(restated)								(restated)				(restated)
Voyage revenues			168,390				40,652				17,905				226,947				145,166				30,100				20,445				195,711
Voyage expenses			47,338				14,713				497				62,548				29,404				6,816				238				36,458
Vessel operating expenses			33,970				6,433				7,045				47,448				25,676				6,125				5,944				37,745
Time-charter hire expense			31,474				—				—				31,474				37,161				—				—				37,161
Depreciation and amortization			22,880				5,636				5,526				34,042				22,453				5,053				4,439				31,945
General and administrative (1)			10,825				2,458				804				14,087				12,908				2,070				1,030				16,008
Income from vessel operations			21,903				11,412				4,033				37,348				17,564				10,036				8,794				36,394

		Nine Months Ended September 30,
		2008																2007
		Shuttle				Conventional												Shuttle				Conventional
		Tanker				Tanker				FSO								Tanker				Tanker				FSO
		Segment				Segment				Segment				Total				Segment				Segment				Segment				Total
		$				$				$				$				$				$				$				$
																		(restated)								(restated)				(restated)
Voyage revenues			488,715				114,248				53,400				656,363				437,794				102,748				40,683				581,225
Voyage expenses			131,533				40,976				1,227				173,736				81,299				25,969				584				107,852
Vessel operating expenses			95,605				18,544				20,737				134,886				73,326				17,187				14,726				105,239
Time-charter hire expense			97,382				—				—				97,382				111,749				—				—				111,749
Depreciation and amortization			68,599				16,612				18,190				103,401				63,590				15,748				11,559				90,897
General and administrative (1)			35,712				6,531				2,846				45,089				39,385				5,928				2,754				48,067
Income from vessel operations			59,884				31,585				10,400				101,869				68,445				37,916				11,060				117,421

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

		September 30,				December 31,
		2008				2007
		$				$
Shuttle tanker segment			1,539,085				1,559,261
Conventional tanker segment			337,527				255,460
FSO segment			114,064				131,080
Unallocated:
Cash and cash equivalents			159,204				121,224
Accounts receivable, prepaid expenses and other assets			108,098				116,880
Consolidated total assets			2,257,978				2,183,905

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)

5.

Intangible Assets

As of September 30, 2008 and December 31, 2007, intangible assets consisted of contracts of affreightment with a weighted-average amortization period of 10.2 years.

The carrying amount of intangible assets as at September 30, 2008 and December 31, 2007 is as follows:

		September 30,				December 31,
		2008				2007
		$				$
Gross carrying amount			124,250				124,250
Accumulated amortization			(76,444	)			(68,895	)
Net carrying amount			47,806				55,355

Aggregate amortization expense of intangible assets for the three and nine months ended September 30, 2008 was $2.5 million ($2.8 million — 2007) and $7.5 million ($8.3 million — 2007), respectively. Amortization of intangible assets for the five years subsequent to September 30, 2008 is expected to be $2.5 million (remainder of 2008), $9.1 million (2009), $8.1 million (2010), $7.0 million (2011) and $6.0 million (2012).

6.

Long-Term Debt

		September 30,				December 31,
		2008				2007
		$				$
U.S. Dollar-denominated Revolving Credit Facilities due through 2018			1,315,587				1,205,808
U.S. Dollar-denominated Term Loans due through 2015			294,487				311,659
			1,610,074				1,517,467
Less current portion			74,766				64,060
Total			1,535,308				1,453,407

As at September 30, 2008, the Partnership had five long-term revolving credit facilities, which, as at such date, provided for borrowings of up to $1.46 billion, of which $144.8 million was undrawn. The total amount available under the revolving credit facilities reduces by $53.4 million (remainder of 2008), $118.9 million (2009), $125.6 million (2010), $132.8 million (2011), $140.4 million (2012) and $889.3 million (thereafter). Three of the revolving credit facilities are guaranteed by certain subsidiaries of the Partnership for all outstanding amounts and contain covenants that require OPCO to maintain the greater of a minimum liquidity (cash, cash equivalents and undrawn committed revolving credit lines with at least six months to maturity) of at least $75.0 million and 5.0% of OPCO’s total consolidated debt. The remaining revolving credit facilities are guaranteed by Teekay Corporation and contain covenants that require Teekay Corporation to maintain the greater of a minimum liquidity of $50.0 million and 5.0% of Teekay Corporation’s total consolidated debt, which has recourse to Teekay Corporation. The revolving credit facilities are collateralized by first-priority mortgages granted on 31 of the Partnership’s vessels, together with other related security.

As at September 30, 2008, each of the Partnership’s six 50% owned subsidiaries had an outstanding term loan, which in aggregate totaled $294.5 million. The term loans have varying maturities through 2017 and semi-annual payments that reduce over time. All term loans are collateralized by first-priority mortgages on the vessels to which the loans relate, together with other related security. As at September 30, 2008, the Partnership had guaranteed $96.1 million of these term loans, which represents its 50% share of the outstanding vessel mortgage debt of five of these 50% owned subsidiaries. The other owner and Teekay Corporation have guaranteed the remaining $198.4 million.

Interest payments on the revolving credit facilities and term loans are based on LIBOR plus a margin. At September 30, 2008 and December 31, 2007, the margins ranged between 0.45% and 0.80%. The weighted-average effective interest rate on the Partnership’s long-term debt as at September 30, 2008 was 3.7% (December 31, 2007 — 5.7%). This rate does not reflect the effect of the interest rate swaps (Note 10).

The aggregate annual long-term debt principal repayments required to be made subsequent to September 30, 2008 are $43.6 million (remainder of 2008), $125.5 million (2009), $134.7 million (2010), $169.3 million (2011), $147.1 million (2012) and $989.8 million (thereafter).

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)

7.

Comprehensive Income (Loss)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		$				$				$				$
						(restated)								(restated)
Net income (loss)			20,625				(9,006	)			33,101				9,982
Other comprehensive income (loss):
Unrealized net (loss) gain on qualifying cash flow hedging instruments			(9,458	)			205				(8,470	)			205
Realized net loss (gain) on qualifying cash flow hedging instruments			989				(49	)			703				(49	)
Comprehensive income (loss)			12,156				(8,850	)			25,334				10,138

As at September 30, 2008 and December 31, 2007, the Partnership’s accumulated other comprehensive (loss) and income of ($6.5) million and $0.3 million, respectively, consisted of net unrealized losses and gains, respectively, on derivative instruments.

8.

Other Income — Net

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		$				$				$				$
Volatile organic compound emissions plant lease income			2,677				2,792				7,642				8,280
Miscellaneous			(325	)			173				(350	)			(14	)
Other income — net			2,352				2,965				7,292				8,266

9.

Related Party Transactions

a.

Nine of OPCO’s conventional tankers are employed on long-term time-charter contracts with a subsidiary of Teekay Corporation. Under the terms of eight of these nine time-charter contracts, OPCO is responsible for the bunker fuel expenses; however, OPCO adds the approximate amounts of these expenses to the daily hire rate plus a 4.5% margin. Pursuant to these charter contracts, OPCO earned voyage revenues of $38.3 million and $108.0 million, respectively, during the three and nine months ended September 30, 2008, compared to $30.1 million and $95.2 million, respectively, for the same periods last year.

b.

Two of OPCO’s shuttle tankers are employed on long-term bareboat charters with a subsidiary of Teekay Corporation. Pursuant to these charter contracts, OPCO earned voyage revenues of $4.8 million and $11.5 million, respectively, during the three and nine months ended September 30, 2008, compared to $3.6 million and $10.6 million for the same periods last year.

c.

Two of OPCO’s FSO units are employed on long-term bareboat charters with a subsidiary of Teekay Corporation. Pursuant to these charter contracts, OPCO earned voyage revenues of $2.8 million and $8.4 million, respectively, during the three and nine months ended September 30, 2008, compared to $2.8 million and $8.4 million, respectively, for the same periods last year.

d.

A subsidiary of Teekay Corporation has entered into a services agreement with a subsidiary of OPCO, pursuant to which the subsidiary of OPCO provides the Teekay Corporation subsidiary with ship management services. Pursuant to this agreement, OPCO earned management fees of $0.8 million and $2.4 million, respectively, during the three and nine months ended September 30, 2008, compared to $0.7 million and $1.9 million, respectively, for the same periods last year.

e.

The Partnership, OPCO and certain of the Partnership’s and OPCO’s operating subsidiaries have entered into services agreements with certain subsidiaries of Teekay Corporation, pursuant to which Teekay Corporation subsidiaries provide the Partnership, OPCO and their respective operating subsidiaries with administrative, advisory, technical and ship management services. Pursuant to these services agreements, the Partnership incurred $11.6 million and $39.6 million, respectively, of these costs during the three and nine months ended September 30, 2008, compared to $15.2 million and $43.2 million, respectively, for the same periods last year. During the three and nine months ended September 30, 2007, $0.1 million and $0.4 million, respectively, of general and administrative expenses attributable to the operations of vessels the Partnership acquired from Teekay Corporation were incurred by Teekay Corporation, but also allocated to the Partnership as part of the results of the Dropdown Predecessor. See note 1.

f.

Pursuant to the Partnership’s partnership agreement, the Partnership reimburses the General Partner for all expenses incurred by the General Partner or its affiliates that are necessary or appropriate for the conduct of the Partnership’s business. Pursuant to this agreement, the Partnership reimbursed $0.1 million and $0.4 million, respectively, of these costs during the three and nine months ended September 30, 2008, compared to $0.2 million and $0.7 million, respectively, for the same periods last year.

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)

g.

The Partnership has entered into an omnibus agreement with Teekay Corporation, Teekay LNG Partners L.P., the General Partner and others governing, among other things, when the Partnership, Teekay Corporation and Teekay LNG Partners L.P. may compete with each other and certain rights of first offer on certain liquefied natural gas carriers, oil tankers, shuttle tankers, FSO units and floating production, storage and offloading units.

h.

In March 2008, Teekay Corporation agreed to reimburse the Partnership for repair costs relating to one of the Partnership’s shuttle tankers. The vessel was purchased from Teekay Corporation in July 2007 and had, as of the date of acquisition, an inherent minor defect that required repairs. Pursuant to this agreement, Teekay Corporation reimbursed $0.2 million and $0.6 million, respectively, of these costs during the three and nine months ended September 30, 2008.

i.

In March 2008, a subsidiary of OPCO sold certain vessel equipment to a subsidiary of Teekay Corporation for proceeds equal to its net book value of $1.4 million.

j.

Concurrently with the closing of the Partnership’s Follow-on Offering, the Partnership acquired from Teekay Corporation an additional 25% interest in OPCO for $205.0 million, thereby increasing the Partnership’s ownership interest in OPCO to 51%. The Partnership financed the acquisition with the net proceeds from the Follow-on Offering and a concurrent private placement of common units to Teekay Corporation. See Note 3. The excess of the proceeds paid by the Partnership over Teekay Corporation’s historical book value for the 25% interest in OPCO was accounted for as an equity distribution to Teekay Corporation of $94.9 million.

k.

On June 18, 2008, OPCO acquired from Teekay Corporation two ship owning subsidiaries (SPT Explorer L.L.C. and the SPT Navigator L.L.C.) for a total cost of approximately $106.0 million, including the assumption of third-party debt of approximately $90.0 million and the non-cash settlement of related party working capital of $1.2 million. The acquired subsidiaries own two 2008-built Aframax lightering tankers (the SPT Explorer and the SPT Navigator) and their related 10-year, fixed-rate bareboat charters (with options exercisable by the charterer to extend up to an additional five years) entered into with Skaugen PetroTrans, a joint venture in which Teekay Corporation owns a 50% interest. These two lightering tankers are specially designed to be used in ship-to-ship oil transfer operations. This purchase was financed with the assumption of debt, together with cash balances. The excess of the proceeds paid by the Partnership over Teekay Corporation’s historical book value was accounted for as an equity distribution to Teekay Corporation of $16.2 million. Pursuant to the bareboat charters for the vessels, OPCO earned voyage revenues of $2.5 million and $6.2 million, respectively, for the three and nine months ended September 30, 2008 (including voyage revenues earned as part of the Dropdown Predecessor prior to OPCO’s acquisition of the vessels — see Note 1).

l.

In June 2008, Teekay Corporation agreed to reimburse OPCO for certain costs relating to events which occurred prior to the Partnership’s initial public offering in December 2006, totalling $0.7 million, primarily relating to the settlement of repair costs not covered by insurance providers for work performed in early 2006 on two of OPCO’s shuttle tankers.

m.

At September 30, 2008, due from affiliates totaled $11.6 million (December 31, 2007 — $18.4 million) and due to affiliates totaled $49.5 million (December 31, 2007 — $17.6 million). Due to and from affiliate are non-interest bearing and unsecured.

n.

In July 2007, the Partnership acquired interests in two double-hull shuttle tankers from Teekay Corporation for a total cost of $159.1 million, including assumption of debt. The Partnership acquired Teekay Corporation’s 100% interest in the 2000-built Navion Bergen and Teekay Corporation’s 50% interest in the 2006-built Navion Gothenburg, together with their respective 13-year, fixed-rate bareboat charters to Petroleo Brasileiro S.A. The purchases were financed with one of the Partnership’s existing revolving credit facilities and the assumption of debt. The excess of the proceeds paid by the Partnership over Teekay Corporation’s historical cost was accounted for as an equity distribution to Teekay Corporation of $25.4 million.

o.

During the nine months ended September 30, 2007, $1.3 million of interest expense attributable to the operations of the Navion Bergen was incurred by Teekay Corporation and has been allocated to the Partnership as part of the results of the Dropdown Predecessor.

p.

Two of OPCO’s in-chartered shuttle tankers were employed on single-voyage charters with a subsidiary of Teekay Corporation. Pursuant to these charter contracts, OPCO earned voyage revenues of $6.4 million and $11.3 million for the three and nine months ended September 30, 2008.

10.

Derivative Instruments and Hedging Activities

The Partnership uses derivatives in accordance with its overall risk management policies. The following summarizes the Partnership’s risk strategies with respect to market risk from foreign currency fluctuations and changes in interest rates.

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)

The Partnership hedges portions of its forecasted expenditures denominated in foreign currencies with foreign exchange forward contracts. These foreign exchange forward contracts are generally designated, for accounting purposes, as cash flow hedges of forecasted foreign currency expenditures. Where such instruments are designated and qualify as cash flow hedges, the effective portion of the changes in their fair value is recorded in accumulated other comprehensive income (loss), until the hedged item is recognized in earnings. At such time, the respective amount in accumulated other comprehensive income (loss) is released to earnings and is recorded within operating expenses, based on the nature of the related expense. The ineffective portion of these foreign exchange forward contracts has also been reported in operating expenses, based on the nature of the expense being economically hedged. During the three and nine months ended September 30, 2008 and 2007, the Partnership recognized the following unrealized gains (losses) in vessel operating expenses, general and administrative and foreign currency exchange gain (loss) relating to the ineffective portion of its foreign currency forward contracts:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		$				$				$				$
Vessel operating expenses			1,386				—				1,187				—
General and administrative			743				—				603				—
Foreign currency exchange loss			—				(8	)			(17	)			(8	)
Total			2,129				(8	)			1,773				(8	)

Changes in fair value of foreign exchange forward contracts that are not designated for accounting purposes as cash flow hedges are recognized in earnings and are reported in operating expenses, based on the nature of the expense being hedged. During the three and nine months ended September 30, 2008 and 2007, the Partnership recognized the following unrealized gains (losses) in vessel operating expenses, general and administrative and foreign currency exchange gain (loss) relating to foreign exchange forward contracts that are not designated as cash flow hedges:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		$				$				$				$
Vessel operating expenses			(1,504	)			(144	)			(1,287	)			(166	)
General and administrative			(1,208	)			—				(607	)			—
Foreign currency exchange gain			—				—				22				—
Total			(2,712	)			(144	)			(1,872	)			(166	)

As at September 30, 2008, the Partnership was committed to the following foreign exchange contracts for the forward purchase of foreign currency:

		Contract				Fair Value
		Amount in				/ Carrying
		Foreign				Amount of				Average				Expected Maturity
		Currency				Liability				Forward Rate(1)				2008				2009				2010
		(millions)				(millions)								(in millions of U.S. Dollars)
Norwegian Kroner			810.8				($10.2	)			5.57				—			$	114.7			$	30.9
Australian Dollar			3.3				($0.4	)			1.12				—			$	3.0				—
British Pound			0.7				($0.1	)			0.52			$	0.4			$	0.8			$	0.1
Euro			20.6				($2.1	)			0.66			$	7.5			$	23.7				—
							($12.8	)

The Partnership enters into interest rate swaps, which exchange a receipt of floating interest for a payment of fixed interest to reduce the Partnership’s exposure to interest rate variability on its outstanding floating-rate debt. The Partnership has not designated, for accounting purposes, its interest rate swaps as cash flow hedges of its USD LIBOR denominated borrowings. Unrealized gains or losses relating to the change in fair value of the Partnership’s interest rate swaps have been reported in interest expense in the consolidated statements of income (loss). During the three and nine months ended September 30, 2008, the Partnership recognized unrealized losses of $11.8 million and $15.3 million, respectively, compared to unrealized losses of $39.0 million and $10.4 million, respectively, for the same periods in the previous year, relating to the changes in fair value of its interest rate swaps. The Partnership recorded a material unrealized loss during the fourth quarter of 2008 as a result of decreases in the fair value of its interest rate swap agreements.

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)

As at September 30, 2008, the Partnership was committed to the following interest rate swap agreements:

										Fair Value /
										Carrying								Fixed
		Interest				Principal				Amount of				Weighted-Average				Interest
		Rate				Amount				Liability				Remaining Term				Rate
		Index				$				$				(Years)				(%)(1)
U.S. Dollar-denominated interest rate swaps		LIBOR					935,000				(23,599	)			5.7				4.7
U.S. Dollar-denominated interest rate swaps(2)		LIBOR					404,873				(20,404	)			12.6				5.0
							1,339,873				(44,003	)

The Partnership is exposed to credit loss in the event of non-performance by the counter-parties to the foreign exchange forward contracts and the interest rate swap agreements. In order to minimize counterparty risk, the Partnership only enters into derivative transactions with counterparties that are rated A or better by Standard & Poor’s or Aa3 or better by Moody’s at the time of the transactions. In addition, to the extent possible and practical, interest rate swaps are entered into with different counterparties to reduce concentration risk.

11.

Income Taxes

The components of the provision for (recovery of) income taxes is as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2007				2008				2007
		$				$				$				$
						(restated)								(restated)
Current			—				(157	)			—				(522	)
Deferred			29,485				(5,962	)			36,830				(969	)
Income tax recovery			29,485				(6,119	)			36,830				(1,491	)

12.

Partners’ Capital and Net Income Per Unit

Partners’ Capital

At September 30, 2008, of our total units outstanding, 50.01% were held by the public and the remaining units were held by a subsidiary of Teekay Corporation.

Limited Partners’ Rights

Significant rights of the limited partners include the following:

•

Right to receive distribution of available cash within approximately 45 days after the end of each quarter.

•

No limited partner shall have any management power over the Partnership’s business and affairs; the general partner shall conduct, direct and manage our activities.

•

The General Partner may be removed if such removal is approved by unitholders holding at least 66 2/3% of the outstanding units voting as a single class, including units held by the General Partner and its affiliates.

Subordinated Units

All of the Partnership’s subordinated units are held by a subsidiary of Teekay Corporation. Under the partnership agreement, during the subordination period applicable to the Partnership’s subordinated units, the common units will have the right to receive distributions of available cash from operating surplus in an amount equal to the minimum quarterly distribution of $0.35 per quarter, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. Distribution arrearages do not accrue on the subordinated units. The purpose of the subordinated units is to increase the likelihood that during the subordination period there will be available cash to be distributed on the common units.

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)

For the purpose of the net income per unit calculation (as defined below), during the quarter ended September 30, 2008, net income exceeded the minimum quarterly distribution of $0.35 per unit and, consequently, the assumed distribution of net income resulted in an equal distribution of net income between the subordinated unit holders and common unit holders. During the quarter ended September 30, 2007, the Partnership incurred net losses and, consequently, the assumed distributions of net losses resulted in equal distributions of net losses between the subordinated unit holders and common unit holders.

Incentive Distribution Rights

The General Partner is entitled to incentive distributions if the amount the Partnership distributes to unitholders with respect to any quarter exceeds specified target levels shown below:

Quarterly Distribution Target Amount (per unit)		Unitholders				General Partner
Minimum quarterly distribution of $0.35			98	%			2	%
Up to $0.4025			98	%			2	%
Above $0.4025 up to $0.4375			85	%			15	%
Above $0.4375 up to $0.525			75	%			25	%
Above $0.525			50	%			50	%

For the purpose of the net income per unit calculation, during the quarter ended September 30, 2008, net income exceeded $0.4025 per unit and, consequently, the assumed distribution of net income resulted in the use of the increasing percentages to calculate the General Partner’s interest in net income. During the quarter ended September 30, 2007, the Partnership incurred net losses and, consequently, the assumed distributions of net losses did not result in the use of the increasing percentages to calculate the General Partner’s interest in net losses.

Net Income Per Unit

Net income per unit is determined by dividing net income, after deducting the amount of net income attributable to the Dropdown Predecessor and the amount of net income allocated to the General Partner’s interest, by the weighted-average number of units outstanding during the applicable period.

As required by Emerging Issues Task Force Issue No. 03-6, Participating Securities and Two-Class Method under FASB Statement No. 128, Earnings Per Share, the General Partner’s, common unit holders’ and subordinated unitholder’s interests in net income are calculated as if all net income was distributed according to the terms of the Partnership’s partnership agreement, regardless of whether those earnings would or could be distributed. The partnership agreement does not provide for the distribution of net income; rather, it provides for the distribution of available cash, which is a contractually defined term that generally means all cash on hand at the end of each quarter after establishment of cash reserves. Unlike available cash, net income is affected by non-cash items such as depreciation and amortization, unrealized gains and losses on derivative instruments and foreign currency translation gains (losses).

Pursuant to the partnership agreement, income allocations are made on a quarterly basis; therefore, earnings per limited partner unit for the nine months ended September 30, 2008 and 2007 is calculated as the sum of the quarterly earnings per limited partner unit for each of the first three quarters of the year.

13.

Commitments and Contingencies

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

14.

Restatement of Previously Issued Financial Statements

(a) Derivative Instruments and Hedging Activities

In August 2008, the Partnership commenced a review of its application of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. Based on its review the Partnership concluded that certain of its interest rate swap agreements and foreign currency forward contracts did not qualify for hedge accounting treatment under SFAS No. 133 for the three and nine months ended September 30, 2007. The Partnership’s findings were as follows:

•

One of the requirements of SFAS No. 133 is that hedge accounting is appropriate only for those hedging relationships that a company expects will be highly effective in achieving offsetting changes in fair value or cash flows attributable to the risk being hedged. To determine whether transactions satisfy this requirement, entities must periodically assess the effectiveness of hedging relationships both prospectively and retrospectively. Based on the Partnership’s review, the Partnership concluded that the prospective hedge effectiveness assessment that was conducted for certain of the Partnership interest rate swap agreements on the date of designation was not sufficient to conclude that the interest rate swaps would be highly effective in accordance with the strict technical requirements of SFAS No. 133, in achieving offsetting changes in cash flows attributable to the risk being hedged.

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)

•

To conclude that hedge accounting is appropriate, another requirement of SFAS No. 133 is that the applicable hedge documentation specifies the method that will be used to assess, retrospectively and prospectively, the hedging instrument’s effectiveness, and the method that will be used to measure hedge ineffectiveness. Certain of the Partnership’s interest rate swap agreements did not clearly specify the method to be used to measure hedge ineffectiveness.

•

Certain of the Partnership’s derivative instruments were designated as hedges when the derivative instruments had a non-zero fair value. However, this designation was not appropriate as the Partnership used certain methods of measuring ineffectiveness that are prohibited in the case of non-zero fair value derivatives.

For accounting purposes the Partnership should have reflected changes in fair value of these derivative instruments as increases or decreases to the Partnership’s net income (loss) on its consolidated statements of income (loss), instead of being reflected as increases or decreases to accumulated other comprehensive income (loss), a component of partners’ equity on the consolidated balance sheets and statements of changes in partners’ equity.

The change in accounting for these transactions does not affect the Partnership’s cash flows, liquidity or cash distributions to partners.

(b) Vessels Acquired from Teekay Corporation

In connection with the Partnership assessing the potential impact of SFAS No. 141(R), which replaces SFAS No. 141, Business Combinations, and is effective for fiscal years beginning after December 15, 2008, the Partnership re-assessed its accounting treatment of interests in vessels it purchased from Teekay Corporation subsequent to the Partnership’s initial public offering in December 2006. The Partnership has historically treated the acquisition of interests in these vessels as asset acquisitions, not business acquisitions. If the acquisitions were deemed to be business acquisitions, the acquisitions would have been accounted for in a manner similar to the pooling of interest method whereby the Partnership’s consolidated financial statements prior to the date the interests in these vessels were acquired by it would be retroactively adjusted to include the results of these acquired vessels, or the Dropdown Predecessor from the date that the Partnership and the acquired vessels were both under common control of Teekay Corporation and had begun operations. The Partnership now has determined that the acquisitions should have been accounted for as business acquisitions under GAAP.

The impact of the retroactive Dropdown Predecessor adjustments does not affect the limited partners’ interest in net income, earnings per unit, or cash distributions to partners. However, the impact of the retroactive Dropdown Predecessor adjustments has resulted in a decrease in previously reported net income for the three and nine months ended September 30, 2007.

In July 2007, the Partnership acquired from Teekay Corporation ownership of its 100% interest in the 2000-built shuttle tanker Navion Bergen and its 50% interest in the 2006-built shuttle tanker Navion Gothenburg, respectively. The acquisitions included the assumption of debt, related interest rate swap agreements and Teekay Corporation’s rights and obligations under 13-year, fixed-rate bareboat charters. In October 2007, the Partnership acquired from Teekay Corporation its interest in the FSO unit Dampier Spirit, along with its 7-year fixed-rate time-charter. These transactions were deemed to be business acquisitions between entities under common control. As a result, the Partnership’s statements of income (loss) for the three and nine months ended September 30, 2007 and its statement of cash flows for the nine months ended September 30, 2007 reflect these vessels as if the Partnership had acquired them when each respective vessel began operations under the ownership of Teekay Corporation. These vessels began operations on April 16, 2007 (Navion Bergen), July 24, 2007 (Navion Gothenburg) and March 15, 1998 (Dampier Spirit).

As a result of the conclusions described above in this Note 14, the Partnership is restating herein its statements of income (loss) for the three and nine months ended September 30, 2007 and its statement of cash flows for the nine months ended September 30, 2007.

The following table sets forth a reconciliation of the Partnership’s previously reported and its restated net income (loss) for the periods shown (in thousands of U.S. dollars):

		Net Income (Loss)
		Three Months Ended				Nine Months Ended				Partner’s Equity
		September 30,				September 30,				At December 31,
		2007				2007				2006
		$				$				$
As previously reported			2,114				12,660				138,942
Adjustments:
Derivative instruments, net of non-controlling interest			(11,142	)			(3,978	)			—
Dropdown Predecessor (1)			22				1,300				51,792
As restated			(9,006	)			9,982				190,734

	•		Dampier Spirit (FSO unit) for March 15, 1998 to September 30, 2007;
	•		Navion Bergen (shuttle tanker) for April 16, 2007 to June 30, 2007; and
	•		Navion Gothenburg (shuttle tanker) began operations concurrently with the Partnership’s acquisition of it on July 24, 2007.

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)

The following table presents the effect of the restatement on the Partnership’s unaudited consolidated statement of loss for the three months ended September 30, 2007 (in thousands of U.S. dollars, except unit and per unit amounts):

		Three Months Ended September 30, 2007
						Adjustments
		As				Derivative				Dropdown				As
		Reported				Instruments				Predecessor				Restated
		$				$				$				$
VOYAGE REVENUES			192,050				—				3,661				195,711
OPERATING EXPENSES
Voyage expenses			36,458				—				—				36,458
Vessel operating expenses			35,247				144				2,354				37,745
Time-charter hire expense			37,161				—				—				37,161
Depreciation and amortization			31,318				—				627				31,945
General and administrative			15,731				—				277				16,008
Total operating expenses			155,915				144				3,258				159,317
Income from vessel operations			36,135				(144	)			403				36,394
OTHER ITEMS
Interest expense			(21,578	)			(38,840	)			—				(60,418	)
Interest income			1,784				—				—				1,784
Foreign currency exchange loss			(4,372	)			(24	)			(319	)			(4,715	)
Income tax expense			(6,057	)			—				(62	)			(6,119	)
Other income — net			2,965				—				—				2,965
Total other items			(27,258	)			(38,864	)			(381	)			(66,503	)
Income (loss) before non-controlling interest			8,877				(39,008	)			22				(30,109	)
Non-controlling interest			(6,763	)			27,866				—				21,103
Net income (loss)			2,114				(11,142	)			22				(9,006	)
Dropdown predecessor’s interest in net income			—												22
General partner’s interest in net income (loss)			42												(181	)
Limited partners’ interest:
Net income (loss)			2,072												(8,847	)
Net income (loss) per:
- Common unit (basic and diluted)			0.21												(0.45	)
- Subordinated unit (basic and diluted)			0.00												(0.45	)
- Total unit (basic and diluted)			0.11												(0.45	)
Weighted average number of units outstanding:
- Common units (basic and diluted)			9,800,000												9,800,000
- Subordinated units (basic and diluted)			9,800,000												9,800,000
- Total units (basic and diluted)			19,600,000												19,600,000
Cash distributions declared per unit			0.35												0.35