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

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

 

 

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES

REPORT ON FORM 6-K FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009

INDEX

		PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Unaudited Consolidated Statements of Income for the three and six months ended June 30, 2009 and 2008			3
Unaudited Consolidated Balance Sheets as at June 30, 2009 and December 31, 2008			4
Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008			5
Unaudited Consolidated Statements of Changes In Total Equity for the six months ended June 30, 2009			6
Notes to the Unaudited Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures about Market Risk			29
PART II: OTHER INFORMATION			30
SIGNATURES			31

ITEM 1 — FINANCIAL STATEMENTS

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

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
		$				$				$				$
VOYAGE REVENUES (including $36,994 and $73,088 from related parties for the three and six months ended June 30, 2009, respectively, and $51,149 and $92,233 for the three and six months ended June 30, 2008, respectively — notes 7a, 7b, 7c, 7k and 7o)			173,020				224,484				356,445				429,416
OPERATING EXPENSES
Voyage expenses			22,229				59,811				47,042				111,188
Vessel operating expenses (including ($749) and ($1,145) from related parties for the three and six months ended June 30, 2008, respectively — notes 7i, 7l, and note 8)			46,936				45,768				97,670				87,699
Time-charter hire expense (including $1,616 and $3,416 from related parties for the three and six months ended June 30, 2009, respectively — note 7n)			29,144				32,262				61,289				65,908
Depreciation and amortization			34,588				36,447				69,119				69,359
General and administrative (including $9,854 and $19,709 from related parties for the three and six months ended June 30, 2009, respectively, and $13,903 and $26,720 for the three and six months ended June 30, 2008, respectively — notes 7d, 7e, 7f, 7g, and note 8)			13,351				15,778				25,273				31,604
Restructuring charge (note 6)			1,481				—				3,682				—
Total operating expenses			147,729				190,066				304,075				365,758
Income from vessel operations			25,291				34,418				52,370				63,658
OTHER ITEMS
Interest expense (notes 5 and 8)			(9,089	)			(15,658	)			(19,657	)			(36,924	)
Interest income			128				1,051				954				2,300
Realized and unrealized gains (losses) on non-designated derivatives (note 8)			44,256				39,166				61,840				(6,249	)
Foreign currency exchange loss (note 8)			(1,353	)			(1,110	)			(3,601	)			(3,573	)
Other income — net (note 6)			1,910				3,030				4,991				6,372
Total other items			35,852				26,479				44,527				(38,074	)
Income before income tax expense			61,143				60,897				96,897				25,584
Income tax recovery (expense) (note 9)			3,037				6,826				(1,101	)			5,913
Net income			64,180				67,723				95,796				31,497
Non-controlling interest in net income			30,715				42,498				45,391				19,021
Dropdown Predecessor’s interest in net income (note 1)			—				848				—				1,333
General partner’s interest in net income			947				7,145				1,563				6,880
Limited partners’ interest: (note 11)
Net income			32,518				17,232				48,842				4,263
Net income per:
- Common unit (basic and diluted)			1.08				1.30				1.62				0.71
- Subordinated unit (basic and diluted)			1.08				0.96				1.62				0.36
- Total unit (basic and diluted)			1.08				1.14				1.62				0.54
Weighted average number of units outstanding:
- Common units (basic and diluted)			20,425,000				11,151,648				20,425,000				10,475,824
- Subordinated units (basic and diluted)			9,800,000				9,800,000				9,800,000				9,800,000
- Total units (basic and diluted)			30,225,000				20,951,648				30,225,000				20,275,824
Cash distributions declared per unit			0.45				0.40				0.90				0.80

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
		June 30,				December 31,
		2009				2008
		$				$
ASSETS
Current
Cash and cash equivalents (note 5)			97,290				131,488
Accounts receivable, net			34,067				39,500
Net investment in direct financing leases — current			22,227				22,941
Prepaid expenses			30,315				25,334
Due from affiliate (note 7p)			9,919				10,110
Other current assets			2,107				2,585
Total current assets			195,925				231,958
Vessels and equipment (note 5)
At cost, less accumulated depreciation of $858,511 (December 31, 2008 — $793,918)			1,658,129				1,708,006
Net investment in direct financing leases			45,224				55,710
Other assets			10,987				12,015
Intangible assets — net — shuttle tanker segment (note 4)			40,761				45,290
Goodwill — shuttle tanker segment			127,113				127,113
Total assets			2,078,139				2,180,092
LIABILITIES AND TOTAL EQUITY
Current
Accounts payable			6,865				9,901
Accrued liabilities			43,090				44,467
Due to affiliate (note 7p)			31,441				8,715
Current portion of long-term debt (note 5)			85,417				125,503
Current portion of derivative instruments (note 8)			41,168				54,937
Due to joint venture partners			20,038				21,019
Total current liabilities			228,019				264,542
Long-term debt (note 5)			1,407,103				1,440,933
Deferred income tax			15,324				12,648
Derivative instruments (note 8)			47,020				138,374
Other long-term liabilities			19,891				21,346
Total liabilities			1,717,357				1,877,843
Commitments and contingencies (notes 5, 8 and 10)
Total equity
Partners’ equity			139,694				117,910
Non-controlling interest			228,520				201,383
Accumulated other comprehensive loss			(7,432	)			(17,044	)
Total equity			360,782				302,249
Total liabilities and equity			2,078,139				2,180,092

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

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

(in thousands of U.S. dollars)

		Six Months Ended June 30,
		2009				2008
		$				$
Cash and cash equivalents provided by (used for)
OPERATING ACTIVITIES
Net income			95,796				31,497
Non-cash items:
Unrealized (gain) loss on derivative instruments (note 8)			(86,275	)			3,080
Depreciation and amortization			69,119				69,359
Income tax expense (recovery)			1,101				(5,913	)
Foreign currency exchange loss and other — net			3,210				4,351
Change in non-cash working capital items related to operating activities			21,721				16,096
Expenditures for drydocking			(11,937	)			(16,243	)
Net operating cash flow			92,735				102,227
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt			—				111,338
Scheduled repayments of long-term debt			(18,917	)			(14,298	)
Prepayments of long-term debt			(55,000	)			(41,000	)
Net advances to affiliate			—				(46,544	)
Prepayments of joint venture partner advances			(2,237	)			—
Proceeds from equity offering			—				209,184
Expenses from equity offering			(12	)			(5,431	)
Distribution to Teekay Corporation relating to purchase of SPT Explorer L.L.C. and SPT Navigator L.L.C. (note 7k)			—				(16,661	)
Excess of purchase price over the contributed basis of a 25% interest in Teekay Offshore Operating L.P. (note 7j)			—				(93,782	)
Cash distributions paid by the Partnership			(28,609	)			(16,000	)
Cash distributions paid by subsidiaries to non-controlling interest			(27,487	)			(46,788	)
Other			(644	)			(1,319	)
Net financing cash flow			(132,906	)			38,699
INVESTING ACTIVITIES
Expenditures for vessels and equipment			(5,227	)			(49,055	)
Investment in direct financing lease assets			—				(29	)
Direct financing lease payments received			11,200				11,701
Purchase of a 25% interest in Teekay Offshore Operating L.P. (note 7j)			—				(111,746	)
Net investing cash flow			5,973				(149,129	)
Decrease in cash and cash equivalents			(34,198	)			(8,203	)
Cash and cash equivalents, beginning of the period			131,488				121,224
Cash and cash equivalents, end of the period			97,290				113,021

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

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

		PARTNERS’ EQUITY
		Limited Partners
																						Accumulated
																						Other				Non-
																		General				Comprehensive				controlling
		Common								Subordinated								Partner				Loss				Interest				Total
		Units				$				Units				$				$				$				$				$
Balance as at December 31, 2008 (note 11)			20,425				246,646				9,800				(135,900	)			7,164				(17,044	)			201,383				302,249
Net income (note 11)							33,006								15,836				1,563								45,391				95,796
Unrealized net gain on qualifying cash flow hedging instruments (note 8)																							5,694				5,470				11,164
Realized net loss on qualifying cash flow hedging instruments (note 8)																							3,918				3,763				7,681
Comprehensive income																															114,641
Offering costs from follow-on public offering of limited partnership interests (note 13)							(12	)																							(12	)
Cash distributions							(18,382	)							(8,820	)			(1,407	)							(27,487	)			(56,096	)
Balance as at June 30, 2009			20,425				261,258				9,800				(128,884	)			7,320				(7,432	)			228,520				360,782

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

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES

1.

Summary of Significant Accounting Policies

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 audited consolidated financial statements for the year ended December 31, 2008, which are included on Form 20-F filed on June 29, 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 total 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 (or SFAS No. 141), the Partnership accounted 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 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 both under 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 by the Partnership are retroactively adjusted to include the results of these vessels operated during the periods under common control of Teekay Corporation.

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). The transaction was deemed to be a business acquisition between entities under common control. As a result, the Partnership’s statement of income for the six months ended June 30, 2008, and the Partnership’s statement of cash flows for the six months ended June 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 the acquired vessels were both under common control of Teekay Corporation and had begun operations. These vessels began operations on 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 $0.8 million and $1.3 million, respectively, for the three and six months ended June 30, 2008.

The consolidated financial statements reflect the combined consolidated financial position, results of operations and cash flows of the Partnership and its subsidiaries, including, as applicable, the Dropdown Predecessor.

Certain of the comparative figures have been reclassified to conform with the presentation adopted in the current period.

The Partnership evaluated events and transactions occurring after the balance sheet date and through the day the financial statements were issued. The date of issuance of the financial statements was October 1, 2009 (date filed).

Changes in Accounting Policies

In December 2007, the Financial Accounting Standards Board (or FASB) issued SFAS No. 141 (revised 2007), Business Combinations (or SFAS No. 141 (R)). SFAS No. 141 (R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date. This Statement also requires that the acquirer in a business combination achieved in stages to recognize the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full fair values of the assets and liabilities as if they had occurred on the acquisition date. In addition, SFAS No. 141 (R) requires that all acquisition related costs be expensed as incurred, rather than capitalized as part of the purchase price and those restructuring costs that an acquirer expected, but was not obligated to incur, to be recognized separately from the business combination. SFAS No. 141 (R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Partnership’s adoption of SFAS No. 141(R) prospectively from January 1, 2009 did not have a material impact on the 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)

In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (or SFAS No. 160). SFAS No. 160 amends Accounting Research Bulletin (or ARB) 51 to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. This statement provides that non-controlling interests in subsidiaries held by parties other than the partners be identified, labeled and presented in the statement of financial position within equity, but separate from the partners’ equity. SFAS No. 160 states that the amount of consolidated net income (loss) attributable to the partners and to the non-controlling interest be clearly identified on the consolidated statements of income (loss). The statement provides for consistency regarding changes in partners’ ownership including when a subsidiary is deconsolidated. Any retained non-controlling equity investment in the former subsidiary will be initially measured at fair value. On January 1, 2009, the Partnership adopted SFAS No. 160 prospectively. The Partnership has applied the presentation and disclosure provisions of SFAS No. 160 to its consolidated financial statements retrospectively. As a result of the application of SFAS No. 160, the Partnership has reclassified in the Statements of Cash Flows distributions from subsidiaries to non-controlling interests from Operating Activities to Financing Activities.

The consolidated net income attributable to the partners would be different in the three and six months ended June 30, 2009 had the previous requirements in paragraph 15 of ARB 51 continued to have been applied rather than SFAS No. 160. Under paragraph 15, losses attributable to the non-controlling interest that exceed its equity capital are charged against the majority interest, as there is no obligation of the non-controlling interest to cover such losses. However, if future earnings do materialize, the majority interest should be credited to the extent of such losses previously absorbed. Pro forma consolidated net income attributed to non-controlling interest and to the partners and pro forma earnings per unit had ARB 51 been applied are as follows:

		Three Months Ended				Six Months Ended
		June 30, 2009				June 30, 2009
		$				$
Net income			64,180				95,796
Pro forma non-controlling interest in net income			28,290				41,950
Pro forma net income allocated to the Partnership			35,890				53,846
Pro forma earnings per unit:
- Common unit (basic and diluted)			1.15				1.73
- Subordinated unit (basic and diluted)			1.15				1.73

In February 2008, the FASB issued FASB Staff Position (or FSP 157-2) which delayed the effective date of SFAS No. 157, Fair Value Measurements, for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). For purposes of applying this FSP, nonfinancial assets and nonfinancial liabilities would include all assets and liabilities other than those meeting the definition of a financial asset or financial liability as defined in paragraph 6 of SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This FSP deferred the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008, and the interim periods within those fiscal years for items within the scope of this FSP. The Partnership’s adoption of the provisions of SFAS No. 157 related to those items covered by FSP 157-2 from January 1, 2009 did not have a material impact on the Partnership’s consolidated financial statements. See Note 2 of the notes to the consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 (or SFAS No. 161), which requires expanded disclosures about a company’s derivative instruments and hedging activities, including increased qualitative, and credit-risk disclosures to enable investors to better understand how these instruments and activities are accounted for; how and why they are used; and their effects on an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption permitted. On January 1, 2009, the Partnership adopted the provisions of SFAS No. 161. See Note 8 of the notes to the consolidated financial statements.

In March 2008, the FASB issued its final consensus on the Emerging Issues Task Force (or EITF) Issue 07-4, Application of the Two-Class Method under FASB Statement No. 128, Earnings per Share, to Master Limited Partnerships. This issue may impact a publicly traded master limited partnership (or MLP) that distributes “available cash”, as defined in the respective partnership agreements, to limited partners (or LPs), the general partner (or GP), and the holders of incentive distribution rights (or IDRs). This issue addresses earnings-per-unit (or EPU) computations for all MLPs with IDR interests. MLPs will need to determine the amount of “available cash” at the end of the reporting period when calculating the period’s EPU. This guidance in Issue 07-4 is effective for the Partnership for the fiscal year beginning January 1, 2009 and is applied retrospectively to all periods presented. On January 1, 2009, the Partnership adopted the provisions of Issue 07-4. See Note 11 of the notes to the consolidated financial statements.

In April 2008, FASB issued FASB Staff Position No. 142-3 (or FSP No. 142-3), Determination of the Useful Life of Intangible Assets. This FSP amends the factors that should be considered in developing renewal or extension of assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. This FSP is effective for the Partnership for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The adoption of FSP 142-3 did not have a material impact on the Partnership’s consolidated financial statements.

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

In November 2008, the FASB issued its final consensus on the EITF Issue 08-06 (EITF 08-06), Equity Method Investment Accounting Considerations. This Issue addresses the impact that SFAS 141 (R) and SFAS 160 might have on the accounting for equity method investments, including accounting for changes in value and changes in ownership levels. This guidance in Issue 08-6 is effective for the Partnership for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. On January 1, 2009, the Partnership adopted the provisions of Issue 08-6. The adoption of EITF 08-06 did not have a material impact on the Partnership’s consolidated financial statements.

In April 2009, the FASB issued FASB Staff Position No. 107-1 and Accounting Principles Board Opinion 28-1 (or FSP No. 107-1 and APB 28-1), which extend the requirements of SFAS No. 107, Disclosures about Fair Value of Financial Instruments (or SFAS No. 107) to interim financial statements of publicly-traded companies. Prior to FSP No. 107-1 and APB 28-1, fair values for these assets and liabilities were only disclosed once a year. FSP No. 107-1 and APB 28-1 require that disclosures provide qualitative and quantitative information on fair value estimates for all financial instruments not measured on the balance sheet at fair value, when practicable, with the exception of certain financial instruments listed in SFAS No. 107. FSP No. 107-1 and APB 28-1 are effective prospectively for interim reporting periods ending after June 15, 2009. On April 1, 2009, the Partnership adopted the provisions of FSP No. 107-1 and APB 28-1. See note 2 of the notes to the consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (or SFAS No. 165). SFAS No. 165 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for selecting that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. SFAS No. 165 is effective for interim and annual reporting periods ending after June 15, 2009. The Partnership adopted the provisions of SFAS No. 165. See Note 13 of the notes to the consolidated financial statements.

2.

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 the 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 methods and assumptions were used to estimate the fair value of each class of financial instrument:

Cash and cash equivalents — The fair value of the Partnership’s cash and cash equivalents approximates their carrying amounts reported in the accompanying consolidated balance sheets.

Due to / from affiliates — The fair value of the amounts due to and from affiliates approximates their carrying amounts reported in the accompanying consolidated balance sheets.

Long-term debt — The fair values of the Partnership’s fixed-rate and variable-rate long-term debt are either based on quoted market prices or estimated using discounted cash flow analyses, based on rates currently available for debt with similar terms and remaining maturities and the current credit worthiness of the Partnership.

Due to joint venture partners — The fair value of the Partnership’s loans from joint venture partners approximates their carrying amounts reported in the accompanying consolidated balance sheets.

Derivative instruments — The fair value of the Partnership’s derivative instruments is the estimated amount that the Partnership would receive or pay to terminate the agreements at the reporting date, taking into account current interest rates, foreign exchange rates and the current credit worthiness of both the Partnership and the derivative counterparties. The estimated amount is the present value of future cash flows. Given the current volatility in the credit markets, it is reasonably possible that the amount recorded as a derivative liability could vary by a material amount in the near term.

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 estimated fair value of the Partnership’s financial instruments is as follows:

						June 30, 2009
		Fair Value				Carrying Amount				Fair Value
		Hierarchy				Asset (Liability)				Asset (Liability)
		Level				$				$
Cash and cash equivalents			—				97,290				97,290
Due from affiliate (note 7p)			—				9,919				9,919
Due to affiliate (note 7p)			—				(31,441	)			(31,441	)
Long-term debt		Level 2					(1,492,520	)			(1,379,607	)
Due to joint venture partners			—				(20,038	)			(20,038	)
Derivative instruments(1) (note 8)
Interest rate swap agreements(2)		Level 2					(82,296	)			(82,296	)
Foreign currency forward contracts		Level 2					(11,988	)			(11,988	)

The Partnership has determined that there are no non-financial assets or non-financial liabilities carried at fair value at June 30, 2009.

3.

Segment Reporting

The Partnership is engaged in the international marine transportation of crude oil through the operation of its oil tankers and floating storage and off-take (or FSO) units. The Partnership’s revenues are earned in international markets.

The Partnership has three reportable segments: its shuttle tanker segment; its conventional tanker segment; and its 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.

The following tables include results for these segments from continuing operations for the periods presented in these consolidated financial statements.

		Three Months Ended June 30,
		2009																2008
		Shuttle				Conventional												Shuttle				Conventional
		Tanker				Tanker				FSO								Tanker				Tanker				FSO
		Segment				Segment				Segment				Total				Segment				Segment				Segment				Total
		$				$				$				$				$				$				$				$
Voyage revenues			125,792				31,128				16,100				173,020				167,266				38,769				18,449				224,484
Voyage expenses			15,932				6,085				212				22,229				45,642				13,787				382				59,811
Vessel operating expenses			34,737				5,942				6,257				46,936				32,236				6,152				7,380				45,768
Time-charter hire expense			29,144				—				—				29,144				32,262				—				—				32,262
Depreciation and amortization			23,185				5,984				5,419				34,588				23,168				5,718				7,561				36,447
General and administrative (1)			11,048				1,283				1,020				13,351				12,696				1,869				1,213				15,778
Restructuring charge			1,481				—				—				1,481				—				—				—				—
Income from vessel operations			10,265				11,834				3,192				25,291				21,262				11,243				1,913				34,418

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)

		Six Months Ended June 30,
		2009																2008
		Shuttle				Conventional												Shuttle				Conventional
		Tanker				Tanker				FSO								Tanker				Tanker				FSO
		Segment				Segment				Segment				Total				Segment				Segment				Segment				Total
		$				$				$				$				$				$				$				$
Voyage revenues			263,927				61,329				31,189				356,445				320,325				73,596				35,495				429,416
Voyage expenses			34,170				12,424				448				47,042				84,195				26,263				730				111,188
Vessel operating expenses			74,259				11,332				12,079				97,670				61,896				12,111				13,692				87,699
Time-charter hire expense			61,289				—				—				61,289				65,908				—				—				65,908
Depreciation and amortization			46,340				11,958				10,821				69,119				45,719				10,976				12,664				69,359
General and administrative (1)			21,096				2,717				1,460				25,273				25,489				4,073				2,042				31,604
Restructuring charge			3,682				—				—				3,682				—				—				—				—
Income from vessel operations			23,091				22,898				6,381				52,370				37,118				20,173				6,367				63,658

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

		June 30,				December 31,
		2009				2008
		$				$
Shuttle tanker segment			1,536,147				1,584,473
Conventional tanker segment			323,492				332,705
FSO segment			107,638				116,789
Unallocated:
Cash and cash equivalents			97,290				131,488
Other assets			13,572				14,637
Consolidated total assets			2,078,139				2,180,092

4.

Intangible Assets

As at June 30, 2009 and December 31, 2008, intangible assets consisted of:

		June 30,				December 31,
		2009				2008
		$				$
Gross carrying amount			124,250				124,250
Accumulated amortization			(83,489	)			(78,960	)
Net carrying amount			40,761				45,290

Aggregate amortization expense of intangible assets for the three and six months ended June 30, 2009 was $2.2 million and $4.5 million, respectively (2008 — $2.5 million and $5.0 million, respectively), included in depreciation and amortization on the consolidated statements of income. Amortization of intangible assets for the next five years subsequent to June 30, 2009 is expected to be $4.5 million (remainder of 2009), $8.1 million (2010), $7.0 million (2011), $6.0 million (2012), and $5.0 million (2013).

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.

Long-Term Debt

		June 30,				December 31,
		2009				2008
		$				$
U.S. Dollar-denominated Revolving Credit Facilities due through 2018			1,249,515				1,314,264
U.S. Dollar-denominated Term Loans due through 2017			243,005				252,172
			1,492,520				1,566,436
Less current portion			85,417				125,503
Total			1,407,103				1,440,933

As at June 30, 2009, the Partnership had seven long-term revolving credit facilities, which, as at such date, provided for borrowings of up to $1.39 billion, of which $145.3 million was undrawn. The total amount available under the revolving credit facilities reduces by $63.9 million (remainder of 2009), $132.8 million (2010), $140.0 million (2011), $147.6 million (2012), $169.6 million (2013) and $740.9 million (thereafter). Five of the revolving credit facilities are guaranteed by certain subsidiaries of the Partnership for all outstanding amounts and contain covenants that require Teekay Offshore Operating L.P. (or 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 at least $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 33 of the Partnership’s vessels, together with other related security.

As at June 30, 2009, five of the Partnership’s six 50%-owned subsidiaries each had an outstanding term loan, which in the aggregate totaled $243.0 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 June 30, 2009, the Partnership had guaranteed $72.3 million of these term loans, which represents its 50% share of the outstanding vessel mortgage debt of four of these 50%-owned subsidiaries. The other owner and Teekay Corporation have guaranteed the remaining $170.7 million.

Interest payments on the revolving credit facilities and the term loans are based on LIBOR plus a margin. At June 30, 2009 and December 31, 2008, the margins ranged between 0.45% and 0.95%. The weighted-average effective interest rate on the Partnership’s long-term debt as at June 30, 2009 was 1.75% (December 31, 2008 — 3.4%). This rate does not include the effect of the Partnership’s interest rate swaps (Note 8).

The aggregate annual long-term debt principal repayments required to be made subsequent to June 30, 2009 are $67.7 million (remainder of 2009), $118.6 million (2010), $169.3 million (2011), $147.1 million (2012), $155.4 million (2013), and $834.4 million (thereafter).

6.

Restructuring Charge and Other Income — Net

a)

Restructuring Charge

During the six months ended June 30, 2009, the Partnership commenced the reflagging of seven of its vessels from Norwegian flag to Bahamian flag and changing the nationality mix of its crews. Under this plan, the Partnership expects to record and pay restructuring charges consisting primarily of one-time termination benefits of approximately $4.4 million during 2009. During the three and six months ended June 30, 2009, the Partnership incurred $1.5 million and $3.7 million of restructuring costs, respectively.

b)

Other Income

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
		$				$				$				$
Volatile organic compound emissions plant lease income			1,804				2,395				3,766				4,965
Miscellaneous			106				635				1,225				1,407
Other income — net			1,910				3,030				4,991				6,372

7.

Related Party Transactions and Balances

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 seven 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 $28.6 million and $56.4 million, respectively, during the three and six months ended June 30, 2009, compared to $36.0 million and $69.6 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)

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 $3.1 million and $6.2 million, respectively, during the three and six months ended June 30, 2009, compared to $4.8 million and $8.3 million, respectively, 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 $5.6 million, respectively, during the three and six months ended June 30, 2009, compared to $2.8 million and $5.6 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 $1.5 million, respectively, during the three and six months ended June 30, 2009, compared to $0.8 million and $1.6 million, respectively, for the same periods last year.

e.

Eight of OPCO’S Aframax conventional oil tankers and two FSO units are managed by subsidiaries of Teekay Corporation. Pursuant to the associated management services agreements, the Partnership incurred general and administrative expenses of $0.7 million and $1.5 million, respectively, during the three and six months ended June 30, 2009, compared to $0.6 million and $2.0 million, respectively, for the same periods last year.

f.

The Partnership, OPCO and certain of OPCO’s operating subsidiaries have entered into services agreements with certain subsidiaries of Teekay Corporation in connection with the Partnership’s initial public offering, pursuant to which Teekay Corporation subsidiaries provide the Partnership, OPCO and its operating subsidiaries with administrative, advisory and technical services and ship management services. Pursuant to these services agreements, the Partnership incurred $9.9 million and $19.5 million, respectively, of these costs during the three and six months ended June 30, 2009, compared to $13.9 million and $26.0 million, respectively, for the same periods last year.

g.

Pursuant to the Partnership’s partnership agreement, the Partnership reimburses the General Partner for all expenses incurred by the Partnership that are necessary or appropriate for the conduct of the Partnership’s business. Pursuant to this agreement, the Partnership reimbursed $0.1 million and $0.2 million, respectively, of these costs during the three and six months ended June 30, 2009, compared to $0.2 million and $0.3 million, respectively, for the same periods last year.

h.

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 offering on liquefied natural gas carriers, oil tankers, shuttle tankers, FSO units and floating production, storage and offloading units.

i.

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 $0.4 million of these costs during the six months ended June 30, 2008.

j.

On June 18, 2008, the Partnership acquired from Teekay Corporation an additional 25% interest in OPCO for $205.5 million, thereby increasing the Partnership’s ownership interest in OPCO to 51%. The Partnership financed the acquisition with the net proceeds from a follow-on public offering and a concurrent private placement to Teekay Corporation of common units. 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 $93.8 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 $89.3 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 $4.9 million, respectively, for the three and six months ended June 30, 2009, compared to $2.5 million and $3.7 million, respectively, for the same periods last year (including voyage revenues earned by 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.

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)

m.

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.

n.

In December 2008, OPCO entered into a bareboat charter contract to in-charter one shuttle tanker from a subsidiary of Teekay Corporation. Pursuant to the charter contract, OPCO incurred time-charter hire expenses of $1.6 million and $3.4 million, respectively, during the three and six months ended June 30, 2009.

o.

Two of OPCO’s shuttle tankers were employed on single-voyage charters with a subsidiary of Teekay Corporation. Pursuant to these charter contracts, OPCO earned voyage revenues of $5.0 million for both the three and six months ended June 30, 2008.

p.

At June 30, 2009, due from affiliates totaled $9.9 million (December 31, 2008 — $10.1 million) and due to affiliates totaled $31.4 million (December 31, 2008 — $8.7 million). Due to and from affiliate are non-interest bearing and unsecured.

8.

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.

The Partnership hedges portions of its forecasted expenditures denominated in foreign currencies with foreign currency forward contracts. These foreign currency 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 expense. The ineffective portion of these foreign currency forward contracts has also been reported in operating expenses, based on the nature of the expense.

During the three and six months ended June 30, 2009 and 2008, the Partnership recognized the following realized and unrealized gains (losses) relating to foreign currency forward contracts that are designated as cash flow hedges for accounting purposes:

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
		$				$				$				$
Gains (losses) recognized in:
Vessel operating expenses			(2,494	)			536				(6,212	)			329
General and administrative			(99	)			91				137				(140	)
Foreign currency exchange loss			—				(444	)			—				8
Accumulated other comprehensive income			8,804				219				11,164				3,400
(Gains) losses reclassified from:
Accumulated other comprehensive income			2,125				(105	)			7,681				(809	)

As at June 30, 2009, the Partnership’s accumulated other comprehensive loss included $7.4 million of unrealized losses on foreign currency forward contracts designated as cash flow hedges. As at June 30, 2009, the Partnership estimated, based on the current foreign exchange rates, that it would reclassify approximately $6.4 million of net losses on foreign currency forward contracts from accumulated other comprehensive loss to earnings during the next 12 months.

Realized and unrealized gains (losses) of foreign currency forward contracts that are not designated for accounting purposes as cash flow hedges, are recognized in earnings and reported in realized and unrealized gains (losses) on non-designated derivatives in the consolidated statements of income (loss). During the three and six months ended June 30, 2009, the Partnership recognized net realized and unrealized gains (losses) on foreign currency forward contracts of $0.5 million and ($0.1) million, respectively. During the three and six months ended June 30, 2008, the Partnership recognized net realized and unrealized gains (losses) on foreign currency forward contracts of $0.4 million and $0.9 million, respectively. Realized and unrealized gains of $0.1 million and $0.6 million, respectively, relating to foreign currency forwards contracts for the three and six months ended June 30, 2008 were reclassified from general and administrative expenses to realized and unrealized gains (losses) on non-designated derivatives for comparative purposes. Realized and unrealized gains of $0.3 million relating to foreign currency forwards contracts for the three and six months ended June 30, 2008 were reclassified from vessel operating expenses to realized and unrealized gains (losses) on non-designated derivatives for comparative purposes.

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 June 30, 2009, the Partnership was committed to the following foreign currency forward contracts:

						Fair Value / Carrying
		Contract Amount in				Amount of Liability								Average				Expected Maturity
		Foreign Currency				(thousands of U.S. Dollars)								Forward				2009				2010
		(thousands)				Hedge				Non-hedge				Rate(1)				(in thousands of U.S. Dollars)
Norwegian Kroner			888,186			$	10,725			$	835				5.95			$	53,142			$	96,068
Australian Dollar			1,431				119				—				1.13				1,270				—
British Pound			188				48				—				0.53				259				99
Euro			15,750				127				134				0.70				10,104				12,254
						$	11,019			$	969							$	64,775			$	108,421

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. Realized and unrealized gains (losses) relating to the Partnership’s interest rate swaps have been reported in realized and unrealized gains (losses) on non-designated derivatives in the consolidated statements of income. During the three and six months ended June 30, 2009, the Partnership recognized net realized and unrealized gains of $43.7 million and $61.9 million, respectively, relating to its interest rate swaps. During the three and six months ended June 30, 2008, the Partnership recognized net realized and unrealized gains (losses) of $38.8 million and ($7.1) million, respectively, relating to its interest rate swaps. The realized and unrealized gains (losses) of $38.8 million and ($7.1) million, respectively relating to interest rate swaps for the three and six months ended June 30, 2008 were reclassified from interest expense to realized and unrealized gain on non-designated derivatives for comparative purposes.

As at June 30, 2009, 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(3)				Remaining Term				Rate
		Index				$				$				(Years)				(%)(1)
U.S. Dollar-denominated interest rate swaps		LIBOR					735,000				44,628				6.5				4.8
U.S. Dollar-denominated interest rate swaps(2)		LIBOR					388,548				37,668				12.0				5.0
							1,123,548				82,296

The Partnership is potentially exposed to credit loss in the event of non-performance by the counterparties to the foreign currency 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.

9.

Income Tax Recovery (Expense)

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

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
		$				$				$				$
Current			(63	)			—				(121	)			—
Deferred			3,100				6,826				(980	)			5,913
Income tax recovery (expense)			3,037				6,826				(1,101	)			5,913

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)

10.

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.

11.

Partners’ Equity and Net Income Per Unit

At June 30, 2009, of the Partnership’s total limited partner units outstanding, 51.03% were held by the public and the remaining units were held by a subsidiary of Teekay Corporation. Subsequent to June 30, 2009, the Partnership completed a follow-on public offering of 7.475 million common units (Note 13).

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.

The subordination period will extend until the first day of any quarter beginning after December 31, 2009. Thereafter the subordination period will terminate automatically and the subordinated units will convert into common units on a one—for-one basis if certain tests are met.

For the purposes of the net income per unit calculation as defined below, during the quarters ended June 30, 2009 and June 30, 2008, the cash distribution exceeded the minimum quarterly distribution of $0.35 per unit and, consequently, the assumed distribution of net income did not result in an unequal distribution of net income between the subordinated unit holders and common unit holders for the purposes of the net income per unit calculation as defined below.

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	%

During the quarter ended June 30, 2009, the cash distribution 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 for the purposes of the net income per unit calculation.

During the quarter ended June 30, 2008, the cash distribution did not exceed $0.4025 per unit and, consequently, the assumed distribution of net income did not result in the use of the increasing percentages to calculate the General Partner’s interest in net income for the purposes of the net income per unit calculation.

In the event of a liquidation, all property and cash in excess of that required to discharge all liabilities will be distributed to the unitholders and the General Partner in proportion to their capital account balances, as adjusted to reflect any gain or loss upon the sale or other disposition of the Partnership’s assets in liquidation in accordance with the partnership agreement.

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)

Net Income (Loss) Per Unit

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

As required by Emerging Issues Task Force (EITF) Issue No. 03-6, Participating Securities and Two-Class Method under FASB Statement No. 128, Earnings Per Share, the interests of the General Partner, common unit holders and subordinated unitholders 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 less the amount of cash reserves established by the Partnership’s board of directors to provide for the proper conduct of the Partnerships’ business including reserves for maintenance and replacement capital expenditure and anticipated credit needs. 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).

The calculations of the basic and diluted earnings per unit, in accordance with EITF Issue No. 07-4, are presented below.

		Three Months ended June								Six Months ended June
		2009				2008				2009				2008
		$				$				$				$
Net income			64,180				67,723				95,796				31,497
Net income attributable to non-controlling interest			30,715				42,498				45,391				19,021
Net income attributable to Dropdown Predecessor			—				848				—				1,333
Net income attributable to the Partnership			33,465				24,377				50,405				11,143
Net income attributable to:
Common unit holders			21,975				14,450				33,006				7,435
Subordinated unit holders			10,543				9,439				15,836				3,485
General partner interest			947				488				1,563				223
Weighted average units outstanding (basic and diluted)
Common unit holders			20,425,000				11,151,648				20,425,000				10,475,824
Subordinated unit holders			9,800,000				9,800,000				9,800,000				9,800,000
Net income per unit (basic and diluted)
Common unit holders			1.08				1.30				1.62				0.71
Subordinated unit holders			1.08				0.96				1.62				0.36

Pursuant to the partnership agreement, allocations to partners are made on a quarterly basis.

12.

Supplemental Cash Flow Information

The Partnership’s consolidated statement of cash flows for the six months ended June 30, 2008 reflects the Dropdown Predecessor as if the Partnership had acquired the Dropdown Predecessor when each respective vessel began operations under the ownership of Teekay Corporation. If Teekay Corporation financed the construction or purchase of the vessel prior to the Dropdown Predecessor being included in the results of the Partnership, the expenditures for the vessel by Teekay Corporation have been treated as a non-cash transaction in the Partnership’s consolidated statement of cash flows. The non-cash investing activities related to the Dropdown Predecessor were $90.5 million for expenditures for vessels and equipment in the six months ended June 30, 2008.

13.

Subsequent events

a)

In July 2009, the Partnership declared a cash distribution of $0.45 per unit for the quarter ended June 30, 2009. The cash distribution was paid on August 14, 2009 to all unitholders of record on July 29, 2009.

b)

In July 2009, the Partnership entered into a $35 million term loan agreement relating to one of its 50%-owned shuttle tankers.

c)

On August 4, 2009, Teekay Offshore completed a public offering of 6.5 million common units at a price of $14.32 per unit, for gross proceeds of $95.0 million (including the general partner’s $1.9 million proportionate capital contribution). The underwriters concurrently exercised their overallotment option to purchase an additional 975,000 units on August 4, 2009, providing additional gross proceeds of $14.2 million (including the general partner’s $0.3 million proportionate capital contribution). The Partnership used the total net proceeds from the offering to reduce amounts outstanding under one of its revolving credit facilities.

d)

On September 10, 2009, the Partnership acquired from Teekay Corporation the floating production storage and offloading (or FPSO) unit, the Petrojarl Varg FPSO, together with its four-year fixed contract with Talisman Energy, for a purchase price of $320 million. The purchase was financed through vendor financing made available by Teekay Corporation of $220 million, with the remainder financed from existing debt facilities.

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)

14.

Recent Accounting Pronouncements

In June 2009, FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162 (or SFAS No. 168). SFAS No. 168 identifies the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (or SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Partnership is currently assessing the potential impacts, if any, on its consolidated financial statements.

In June 2009, FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (or SFAS No. 167). SFAS No. 167 eliminates FASB Interpretation 46(R)’s exceptions to consolidating qualifying special-purpose entities, contains new criteria for determining the primary beneficiary, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity. SFAS No. 167 also contains a new requirement that any term, transaction, or arrangement that does not have a substantive effect on an entity’s status as a variable interest entity, a company’s power over a variable interest entity, or a company’s obligation to absorb losses or its right to receive benefits of an entity must be disregarded in applying FASB Interpretation 46(R)’s provisions. The elimination of the qualifying special-purpose entity concept and its consolidation exceptions means more entities will be subject to consolidation assessments and reassessments. SFAS No. 167 is effective for fiscal years beginning after November 15, 2009, and for interim periods within that first period, with earlier adoption prohibited. The Partnership is currently assessing the potential impacts, if any, on its consolidated financial statements.

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140 (or SFAS No. 166). SFAS No. 166 eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. SFAS No. 166 will be effective for transfers of financial assets in fiscal years beginning after November 15, 2009, and in interim periods within those fiscal years with earlier adoption prohibited. The Partnership is currently assessing the potential impacts, if any, on its consolidated financial statements.

PART I — FINANCIAL INFORMATION

OVERVIEW

We are an international provider of marine transportation and storage services to the offshore oil industry. We were formed in August 2006 by Teekay Corporation, a leading provider of marine services to the global oil and natural gas industries, to further develop its operations in the offshore market. Our principal asset is a 51% controlling interest in Teekay Offshore Operating L.P. (or OPCO), which operates a substantial majority of our shuttle tankers and floating storage and offtake (or FSO) units and all of our conventional crude oil tankers. Our growth strategy focuses on expanding our fleet of shuttle tankers and FSO units under long-term, fixed-rate time charters. We intend to continue our practice of acquiring shuttle tankers and FSO units as needed for approved projects only after the long-term charters for the projects have been awarded to us, rather than ordering vessels on a speculative basis. We intend to follow this same practice in acquiring floating production, storage and offloading (or FPSO) units, which produce and process oil offshore in addition to providing storage and offloading capabilities. We seek to capitalize on opportunities emerging from the global expansion of the offshore transportation, storage and production sectors by selectively targeting long-term, fixed-rate time charters. We may enter into joint ventures and partnerships with companies that may provide increased access to these opportunities or may engage in vessel or business acquisitions. We seek to leverage the expertise, relationships and reputation of Teekay Corporation and its affiliates to pursue these growth opportunities in the offshore sectors and may consider other opportunities to which our competitive strengths are well suited. We view our conventional tanker fleet primarily as a source of stable cash flow as we seek to expand our offshore operations.

SIGNIFICANT DEVELOPMENTS

On August 4, 2009, we completed a public offering of 6.5 million common units at a price of $14.32 per unit, for gross proceeds of $95.0 million (including the general partner’s $1.9 million proportionate capital contribution). The underwriters concurrently exercised their overallotment option to purchase an additional 975,000 on August 4, 2009, providing additional gross proceeds of $14.2 million (including the general partner’s $0.3 million proportionate capital contribution). We used the total net proceeds from the offering to reduce amounts outstanding under one of our revolving credit facilities.

On September 10, 2009, we acquired from Teekay Corporation the FPSO unit, the Petrojarl Varg FPSO, together with its four-year fixed contract with Talisman Energy, for a purchase price of $320 million. The purchase was financed through $220 million of vendor financing made available by Teekay Corporation, with the remainder financed from existing debt facilities.

The $220 million vendor financing is comprised of two tranches. The first tranche is a $160 million short-term debt facility, which will be repaid upon the completion of a new $260 million revolving credit facility that is currently in syndication. The new $260 million revolving credit facility, which will be secured by the Petrojarl Varg FPSO and its contract with Talisman Energy, is currently being arranged and is expected to be completed in October 2009. The second tranche of the vendor financing is a $60 million unsecured subordinate debt facility with a maximum term of five years and bears an interest rate of 10 percent per annum. Upon completion of the $260 million revolving credit facility, our liquidity is expected to increase by approximately $100 million.

The Petrojarl Varg FPSO recently commenced a new four-year fixed-rate contract extension with Talisman Energy on the Varg oil field in the North Sea, where the FPSO has been operating for over ten years. Talisman Energy also has options to extend the new contract for up to an additional nine years. The contract is comprised of a daily base time-charter rate plus an incentive component based on the operational performance of the FPSO, a tariff component based on the volume of oil produced and an annual adjustment for cost escalations. There is potential for additional upside from the tariff component if, as expected, nearby oil fields become operational and are tied to the Petrojarl Varg. During the four-year firm contract period, the Petrojarl Varg FPSO is expected to generate significant average annual cash flow from vessel operations.

Potential Additional Shuttle Tanker, FSO and FPSO Projects

Pursuant to an omnibus agreement we entered into in connection with our initial public offering in December 2006, Teekay Corporation is obligated to offer us its interest in certain shuttle tankers, FSO units, FPSO units and joint ventures it may acquire in the future, provided the vessels are servicing contracts in excess of three years in length.

The omnibus agreement also obligated Teekay Corporation to offer to us prior to July 9, 2009, existing FPSO units of Teekay Petrojarl that were servicing contracts in excess of three years in length as of July 9, 2008, the date on which Teekay Corporation acquired 100% of Teekay Petrojarl. We have agreed to waive Teekay Corporation’s obligation to offer these FPSO units to us by July 9, 2009 in exchange for the right to acquire these units at any time until July 9, 2010. The purchase price for any such existing FPSO units of Teekay Petrojarl would be its fair market value plus any additional tax or other similar costs to Teekay Petrojarl that would be required to transfer the offshore vessels to us.

In addition, Teekay Corporation has ordered four Aframax shuttle tanker newbuildings, which are scheduled to deliver in 2010 and 2011, for a total delivered cost of approximately $460 million. We anticipate that these vessels will be offered to us and, if acquired, will be used to service either new long-term, fixed-rate contracts Teekay Corporation may be awarded prior to the vessel deliveries or OPCO’s contracts-of-affreightment in the North Sea.

We also may acquire additional limited partner interests in OPCO or other vessels that Teekay Corporation may offer us from time to time in the future.

RESULTS OF OPERATIONS

We use a variety of financial and operational terms and concepts when analyzing our results of operations, which can be found in “Item 5. Operating and Financial Review and Prospects” in our Annual Report on Form 20-F for the year ended December 31, 2008. In accordance with United States generally accepted accounting principles (or GAAP), we report gross revenues in our income statements and include voyage expenses among our operating expenses. However, shipowners base economic decisions regarding the deployment of their vessels upon anticipated time charter equivalent (or TCE) rates, and industry analysts typically measure bulk shipping freight rates in terms of TCE rates. This is because under time charters and bareboat charters the customer usually pays the voyage expenses, while under voyage charters and contracts of affreightment the shipowner usually pays the voyage expenses, which typically are added to the hire rate at an approximate cost. Accordingly, the discussion of revenue below focuses on net voyage revenues (i.e. voyage revenues less voyage expenses) and TCE rates of our three reportable segments where applicable. TCE rates represent net voyage revenues divided by revenue days. Please read Item 1 — “Financial Statements: Note 3 — Segment Reporting”.

Items You Should Consider When Evaluating Our Results of Operations

You should consider the following factors when evaluating our historical financial performance and assessing our future prospects:

•

Our financial results reflect the results of the interests in vessels acquired from Teekay Corporation for all periods the vessels were under common control. In June 2008, we acquired from Teekay Corporation its interests in two 2008-built Aframax tankers, the SPT Explorer and the SPT Navigator. This acquisition included the assumption of debt and Teekay Corporation’s rights and obligations under the 10-year, fixed-rate bareboat charters (with options exercisable by the charterer to extend up to an additional five years). This transaction was deemed to be a business acquisition between entities under common control. Accordingly, we have accounted for this transaction in a manner similar to the pooling of interest method. Under this method of accounting, our financial statements prior to the date the interests in these vessels were actually acquired by us are retroactively adjusted to include the results of the acquired vessels. The periods retroactively adjusted include all periods that we and the acquired vessel were both under common control of Teekay Corporation and had begun operations. As a result, our statement of income for the three and six months ended June 30, 2008 reflect the vessels, referred to herein as the Dropdown Predecessor, as if we had acquired them when the vessels began operations under the ownership of Teekay Corporation. These vessels began operations on January 7, 2008 (SPT Explorer) and March 28, 2008 (SPT Navigator).

•

The size of our fleet continues to change. Our results of operations reflect changes in the size and composition of our fleet due to certain vessel deliveries and vessel dispositions. For instance, the average number of owned vessels in our conventional tanker segment increased from 10 in 2008 to 11 in 2009. Please read “— Results of Operations” below for further details about vessel dispositions and deliveries. Due to the nature of our business, we expect our fleet to continue to fluctuate in size and composition.

•

Our vessel operating costs are facing industry-wide cost pressures. The shipping industry is experiencing a global manpower shortage due to significant growth in the world fleet. This shortage has resulted in crewing wage increases during 2007 and 2008. We expect the trend of increasing crew compensation to continue during 2009, though, to a lesser extent than has been experienced in recent years. However, as a result of our reflagging initiatives, our crew wage costs are expected to decrease during latter half of 2009.

•

Our financial results of operations are affected by fluctuations in currency exchange rates. Under GAAP, all foreign currency-denominated monetary assets and liabilities, such as cash and cash equivalents, accounts receivable, accounts payable, advances from affiliates and deferred income taxes are revalued and reported based on the prevailing exchange rate at the end of the period. OPCO has entered into services agreements with subsidiaries of Teekay Corporation whereby the subsidiaries operate and crew the vessels. Beginning in 2009, payments under the service agreements have been adjusted to reflect any change in Teekay Corporation’s cost of providing services based on fluctuations in the value of the Norwegian Kroner relative to the U.S. Dollar, which may result in increased payments under the services agreements if the strength of the U.S. Dollar declines relative to the Norwegian Kroner.

•

Our net income is affected by fluctuations in the fair value of our derivatives. Our interest rate swaps and some of our foreign currency forward contracts are not designated as hedges for accounting purposes. Although we believe these derivative instruments are economic hedges, the changes in their fair value are included in our statements of income as unrealized gains or losses on non-designated derivatives. The changes in fair value do not affect our cash flows, liquidity or cash distributions to partners.

•

Our operations are seasonal. Historically, the utilization of shuttle tankers in the North Sea is higher in the winter months, as favorable weather conditions in the warmer months provide opportunities for repairs and maintenance to our vessels and to the offshore oil platforms. Downtime for repairs and maintenance generally reduces oil production and, thus, transportation requirements. As of September 1, 2009, five of our vessels have completed their scheduled drydockings for 2009. Three of the vessels completed their drydocking in the second quarter of 2009 and the additional two vessels completed their drydockings during the third quarter of 2009. Seven additional vessels are scheduled to complete their drydockings during the remainder of 2009.

We manage our business and analyze and report our results of operations on the basis of three business segments: the shuttle tanker segment, the conventional tanker segment and the FSO segment.

Shuttle Tanker Segment

Our shuttle tanker fleet consists of 35 vessels that operate under fixed-rate contracts of affreightment, time charters and bareboat charters. Of the 35 shuttle tankers, 25 are owned by OPCO (including 5 through 50% owned subsidiaries), 8 are chartered-in by OPCO and 2 are owned by us (including one through a 50% owned subsidiary). All of these shuttle tankers provide transportation services to energy companies, primarily in the North Sea and Brazil. Our shuttle tankers service the conventional spot market from time to time. Spot rates during 2009 have experienced significant declines compared to 2008 as a result of the contraction in the global economy.

The following table presents our shuttle tanker segment’s operating results for the three and six months ended June 30, 2009 and 2008, and compares its net voyage revenues (which is a non-GAAP financial measure) for the three and six months ended June 30, 2009 and 2008 to voyage revenues, the most directly comparable GAAP financial measure, for the same periods. The following table also provides a summary of the changes in calendar-ship-days by owned and chartered-in vessels for our shuttle tanker segment:

(in thousands of U.S. dollars, except		Three Months Ended June 30,
calendar-ship-days and percentages)		2009				2008				% Change
Voyage revenues			125,792				167,266				(24.8	)
Voyage expenses			15,932				45,642				(65.1	)
Net voyage revenues			109,860				121,624				(9.7	)
Vessel operating expenses			34,737				32,236				7.8
Time-charter hire expense			29,144				32,262				(9.7	)
Depreciation and amortization			23,185				23,168				0.1
General and administrative (1)			11,048				12,696				(13.0	)
Restructuring costs			1,481				—				100.0
Income from vessel operations			10,265				21,262				(51.7	)
Calendar-Ship-Days
Owned Vessels			2,457				2,457				—
Chartered-in Vessels			825				898				(8.1	)
Total			3,282				3,355				(2.2	)

(in thousands of U.S. dollars, except		Six Months Ended June 30,
calendar-ship-days and percentages)		2009				2008				% Change
Voyage revenues			263,927				320,325				(17.6	)
Voyage expenses			34,170				84,195				(59.4	)
Net voyage revenues			229,757				236,130				(2.7	)
Vessel operating expenses			74,259				61,896				20.0
Time-charter hire expense			61,289				65,908				(7.0	)
Depreciation and amortization			46,340				45,719				1.4
General and administrative (1)			21,096				25,489				(17.2	)
Restructuring costs			3,682				—				100.0
Income from vessel operations			23,091				37,118				(37.8	)
Calendar-Ship-Days
Owned Vessels			4,887				4,830				1.2
Chartered-in Vessels			1,734				1,850				(6.3	)
Total			6,621				6,680				(0.9	)