VOYAGE REVENUES (including $37,294 and $110,382 from related parties for the three and nine months ended September 30, 2009, respectively, and $53,271 and $145,504 for the three and nine months ended September 30, 2008, respectively — notes 10a, 10b,10c, 10k and 10o)

 

 

Voyage expenses

Vessel operating expenses (including ($200) and ($1,345) from related parties for the three and nine months ended September 30, 2008, respectively — notes 10i and 10l, note 11)

Time-charter hire expense (including $3,416 from related parties for the nine months ended September 30, 2009 — note 10n)

Depreciation and amortization

General and administrative (including $11,070 and $33,826 from related parties for the three and nine months ended September 30, 2009, respectively, and $12,718 and $42,937 for the three and nine months ended September 30, 2008, respectively — notes 10d, 10e, 10f, 10g, and note 11)

Restructuring charge (note 8)

 

 

 

 

 

OTHER ITEMS

Interest expense (including $650 from related parties for the three and nine months ended September 30, 2009, respectively — notes 6 and 10p)

Interest income

Realized and unrealized (losses) gains on non-designated derivatives (note 11)

Foreign currency exchange (loss) gain (note 11)

Other income — net (note 9)

 

 

(Loss) income before income tax expense

Income tax (expense) recovery (note 12)

 

 

Non-controlling interest in net (loss) income

Dropdown Predecessor’s interest in net (loss) income (note 1)

General partner’s interest in net (loss) income

Limited partners’ interest: (note 14)

Net (loss) income

Net (loss) income per:

- Common unit (basic and diluted)

- Subordinated unit (basic and diluted)

- Total unit (basic and diluted)

 

 

Weighted average number of units outstanding:

- Common units (basic and diluted)

- Subordinated units (basic and diluted)

- Total units (basic and diluted)

 

Cash distributions declared per unit

 

Cash and cash equivalents (note 6)

Accounts receivable, net

Net investment in direct financing leases — current

Prepaid expenses

Due from affiliate (note 10q)

Current portion of derivative instruments (note 11)

Other current assets

 

 

 

 

At cost, less accumulated depreciation of $950,732 (December 31, 2008 — $836,087)

 

Net investment in direct financing leases

Derivative instruments (note 11)

Other assets

Intangible assets — net (note 5)

Goodwill — shuttle tanker segment

 

 

 

 

Accounts payable

Accrued liabilities

Due to affiliate (note 10q)

Current portion of long-term debt (note 6)

Current portion of derivative instruments (note 11)

Due to joint venture partners

 

 

Long-term debt (including a loan due to parent of $220,000 as at September 30, 2009 — note 6)

Deferred income tax

Derivative instruments (note 11)

Other long-term liabilities

 

 

Commitments and contingencies (notes 6, 11 and 13)

 

Partners’ equity

Non-controlling interest

Dropdown predecessor equity

Accumulated other comprehensive income (loss) (note 7)

 

 

 

 

 

Cash and cash equivalents provided by (used for)

 

Net income

Non-cash items:

Unrealized (gain) loss on derivative instruments (note 11)

Depreciation and amortization

Amortization of in-process revenue contract

Income tax expense (recovery)

Foreign currency exchange loss (gain) and other — net

Change in non-cash working capital items related to operating activities

Expenditures for drydocking

 

 

 

 

Proceeds from issuance of long-term debt

Scheduled repayments of long-term debt

Prepayments of long-term debt

Net advances to affiliate

Prepayments of joint venture partner advances

Joint venture partner advances

Contribution of capital from Teekay Corporation to Dropdown Predecessor relating to Petrojarl Varg (note 10p)

Purchase of Petrojarl Varg from Teekay Corporation(note 10p)

Equity contribution from joint venture partner

Proceeds from equity offering

Expenses from equity offering

Distribution to Teekay Corporation relating to purchase of SPT Explorer L.L.C. and SPT Navigator L.L.C. (note 10k)

Excess of purchase price over the contributed basis of a 25% interest in Teekay Offshore Operating L.P. (note 10j)

Cash distributions paid by the Partnership

Cash distributions paid by subsidiaries to non-controlling interest

Other

 

 

 

 

Expenditures for vessels and equipment

Purchase of 35% of Petrojarl Varg by Teekay Corporation (note 15)

Investment in direct financing lease assets

Direct financing lease payments received

Purchase of a 25% interest in Teekay Offshore Operating L.P. (note 10j)

 

 

 

 

Cash and cash equivalents, beginning of the period

 

 

 

Balance as at December 31, 2008 (note 14)

Net income (note 14)

Unrealized net gain on qualifying cash flow hedging instruments (note 11)

Realized net loss on qualifying cash flow hedging instruments (note 11)

 

Comprehensive income

 

Contribution of capital from Teekay Corporation to Dropdown Predecessor relating to Petrojarl Varg (note 10p)

Net liabilities of Dropdown Predecessor relating to Petrojarl Varg retained by Teekay Corporation on dropdown (note 10p)

Purchase of Petrojarl Varg from Teekay Corporation (note 10p)

Proceeds from follow-on public offering, net of offering costs (note 3)

Equity contribution from joint venture partner

Cash distributions

 

 

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. Historically, the utilization of shuttle tankers in the North Sea is higher in the winter months and lower in the summer months, as generally there is higher maintenance in the oil fields during the summer months, which leads to lower oil production, and thus, lower shuttle tanker utilization during that period. Significant intercompany balances and transactions have been eliminated upon consolidation.

As required by Financial Accounting Standards Board (or FASB) ASC 805, Business Combinations, 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 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.

On September 10, 2009, the Partnership acquired from Teekay Corporation the floating production storage and offloading (or FPSO) unit, the Petrojarl Varg, together with its four-year contract with Talisman Energy. 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). These transactions were deemed to be business acquisitions between entities under common control. As a result, the Partnership’s balance sheet as at December 31, 2008, the Partnership’s statements of income (loss) for the three and nine months ended September 30, 2009 and 2008, the Partnership’s statement of cash flows for the nine months ended September 30, 2009 and 2008, and the Partnership’s statement of changes in total equity for the nine months ended September 30, 2009, 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. SPT Explorer and SPT Navigator began operations on January 7, 2008 and March 28, 2008, respectively. Teekay Corporation acquired a 65% interest in the Petrojarl Varg on October 1, 2006, and acquired the remaining 35% interest on June 30, 2008. The June 2008 acquisition resulted in increases in vessels and equipment ($75.9 million), other non-current assets ($0.5 million), goodwill ($49.2 million), deferred income tax liability ($16.5 million), owner’s equity ($134.2 million) and a decrease in non-controlling interest of $25.1 million. The acquisition was financed with debt.

For the three months and nine months ended September 30, 2009, the effect of adjusting the Partnership’s financial statements to account for these common control transfers (decreased) increased the Partnership’s net income by ($5.6) million and $11.4 million, respectively and (decreased) increased comprehensive income by ($4.8) million and $13.4 million, respectively. For the three and nine months ended September 30, 2008, the effect of adjusting the Partnership’s financial statements to account for these common control transfers increased the Partnership’s net income by $2.3 million and $4.0 million (of which $3.7 million is attributable to non-controlling interests), respectively, and increased comprehensive income by $1.7 million and $3.4 million, respectively.

Teekay Corporation uses a centralized treasury system. As a result, cash and cash equivalents attributable to the operations of the Dropdown Predecessor were in certain cases, co-mingled with cash and cash equivalents from other operations of Teekay Corporation. This cash and cash equivalents are not reflected in the balance sheet of the Dropdown Predecessor. However, any cash transactions from these bank accounts that were made on behalf of companies in the Dropdown Predecessor, which were acquired by the Partnership, are reflected as increases or decreases of advances from affiliates. Any other cash transactions from these bank accounts that were directly related to the operations of the Dropdown Predecessor are reflected as increases or decreases in owner’s equity.

For periods prior to the Partnership’s acquisition of the Petrojarl Varg, the vessel was used as collateral for certain credit facilities (the Varg Credit Facilities). The Petrojarl Varg’s pro-rata share of the Varg Credit Facilities has been allocated to the Dropdown Predecessor. The pro-rata share was determined using the relative fair value of the Varg Business compared to the fair value of all net assets used as collateral for these facilities. The Varg Credit Facilities were used directly to partially finance the purchase of the vessel. Interest has been allocated to the Dropdown Predecessor based on the Petrojarl Varg’s share of these facilities. In addition, Teekay Corporation used certain of its corporate facilities to finance the remaining portion of the acquisition of the Petrojarl Varg. Interest has been allocated to the Dropdown Predecessor based on the amount drawn on these facilities at the time of the acquisition and Teekay Corporation’s weighted average borrowing cost. In addition, Teekay Corporation has entered into certain interest rate swaps. The Varg’s pro-rata share of these interest rate swaps has been allocated to the Dropdown Predecessor. The pro-rata share was determined using the relative collateral fair values of the Varg Credit Facilities,

For periods prior to the Partnership’s acquisition of the Petrojarl Varg, the operations of the vessel were generally subject to Norwegian tax. The operations of the vessel were carved out from a number of different subsidiaries of Teekay Corporation. Certain of these subsidiaries were a part of one or more Norwegian tax groups. Income tax attributable to the Petrojarl Varg has been allocated using the separate return method. Under this method, income tax is calculated as if the Petrojarl Varg had been in its own tax group and not part of the larger tax group. The income taxes attributable to the Petrojarl Varg in the Dropdown Predecessor reflect its historical tax status and do not reflect its change in tax status as a result of the Partnership’s acquisition. All net operating loss carryforwards related to the Petrojarl Varg in the Dropdown Predecessor, would be available to offset future taxable income of the Dropdown Predecessor in Norway. However, none of these loss carryforwards are available to be used by the Partnership, subsequent to its acquisition of the Petrojarl Varg. Current tax payable related to Petrojarl Varg during the Dropdown Predecessor periods, is assumed to be paid by Teekay Corporation and has been reflected as an increase in owner’s equity.

General and administrative expenses (consisting primarily of salaries, defined benefit pension plan benefits, and other employee related costs, office rent, legal and professional fees, and travel and entertainment) were allocated to the Dropdown Predecessor based on estimated use of resources. In addition, Teekay Corporation has entered into certain foreign exchange forward contracts to minimize the impact from changes in the foreign exchange rate between the Norwegian Kroner and the US Dollar on its operating expenditures. A portion of these foreign exchange forward contracts have been accounted for as hedges and were allocated to the Dropdown Predecessor based on the relative amount of Norwegian Kroner expenditures from the Petrojarl Varg compared to Teekay’s other operations that the contracts were entered into for.

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. In the preparation of these consolidated financial statements, general and administrative expenses, interest expense and realized and unrealized (losses) gains on non-designated derivative instruments were not identifiable as relating solely to each specific vessel. During the three and nine months ended September 30, 2009, $0.4 million and $3.5 million of general and administrative expenses, $1.7 million and $6.5 million of interest expense, and ($6.3) million and $6.8 million in realized and unrealized (losses) gains on non-designated derivative instruments were attributable to the Dropdown Predecessor, respectively. During the three and nine months ended September 30, 2008, $1.7 million and $5.2 million of general and administrative expenses, $4.1 million and $12.0 million of interest expense, and ($5.6) million and ($6.2) million in realized and unrealized losses on non-designated derivative instruments were attributable to the Dropdown Predecessor, respectively. Management believes these allocations reasonably present the general and administrative expenses, interest expense, and realized and unrealized (losses) gains on non-designated derivative instruments of the Dropdown Predecessor. Estimates have been made when allocating expenses from Teekay Corporation to the Dropdown Predecessor and such estimates may not be reflective of actual results.

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 February 16, 2010 (date filed).

In January 2009, the Partnership adopted an amendment to FASB ASC 805, Business Combinations. This amendment 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 amendment also requires 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, this amendment 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, be recognized separately from the business combination. The amendment 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 this amendment did not have a material impact on the Partnership’s consolidated financial statements.

In January 2009, the Partnership adopted an amendment to FASB ASC 810, Consolidation, which requires us to make certain changes to the presentation of our financial statements. This amendment requires 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. This amendment requires 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). In addition, this amendment 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. Except for the presentation and disclosure provisions of this amendment, which were adopted retrospectively to the Partnership’s consolidated financial statements, this amendment was adopted prospectively.

Consolidated net income attributable to the partners would have been different in the three and nine months ended September 30, 2009 had the amendment to FASB ASC 810 not been adopted. Losses attributable to the non-controlling interest that exceed the entity’s (Gothenburg L.L.C.) equity capital would have been charged against the majority interest, as there was no obligation of the non-controlling interest to cover such losses. However, if future earnings do materialize, the majority interest should have been credited to the extent of such losses previously absorbed. Pro forma consolidated net income (loss) attributed to non-controlling interest and to the partners and pro forma income (loss) per unit had the amendment to FASB ASC 810 not been adopted are as follows:

 

Net (loss) income

Pro forma non-controlling interest in net (loss) income

Pro forma net (loss) income allocated to the Dropdown Predecessor

Pro forma net (loss) income allocated to the Partnership

 

Pro forma (loss) earnings per unit:

- Common unit (basic and diluted)

- Subordinated unit (basic and diluted)

In January 2009, the Partnership adopted an amendment to FASB ASC 820 Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Non-financial assets and non-financial liabilities include all assets and liabilities other than those meeting the definition of a financial asset or financial liability. The Partnership’s adoption of this amendment did not have a material impact on the Partnership’s consolidated financial statements.

In January 2009, the Partnership adopted an amendment to FASB ASC 815 Derivatives and Hedging, which requires expanded disclosures about a company’s derivative instruments and hedging activities, including increased qualitative, and credit-risk disclosures. See Note 11 of the notes to the consolidated financial statements.

In January 2009, the Partnership adopted an amendment to FASB ASC 260, Earnings Per Share, which provides guidance on earnings-per-unit (or EPU) computations for all master limited partnerships (or MLPs) that distribute “available cash”, as defined in the respective partnership agreements, to limited partners, the general partner, and the holders of incentive distribution rights (or IDRs). MLPs will need to determine the amount of “available cash” at the end of the reporting period when calculating the period’s EPU. This amendment was applied retrospectively to all periods presented. See Note 14 of the notes to the consolidated financial statements.

In January 2009, the Partnership adopted an amendment to FASB ASC 350, Intangibles — Goodwill and Other, which 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. The adoption of the amendment did not have a material impact on the Partnership’s consolidated financial statements.

In January 2009, the Partnership adopted an amendment to FASB ASC 323, Investments-Equity Method and Joint Ventures, which provides addresses the accounting for the acquisition of equity method investments, for changes in value and changes in ownership levels. The adoption of this amendment did not have a material impact on the Partnership’s consolidated financial statements.

In April 2009, the Partnership adopted an amendment to FASB ASC 825, Financial Instruments, which requires that disclosure of the fair value of financial instruments be provided on a quarterly basis and 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 (see Note 2).

In April 2009, the Partnership adopted an amendment to FASB ASC 855, Subsequent Events, which established 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. This amendment 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. This amendment is effective for interim and annual reporting periods ending after June 15, 2009.

In June 2009, the FASB issued the FASB ASC effective for financial statements issued for interim and annual periods ending after September 15, 2009. The ASC identifies the source of 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, the ASC superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the ASC will become non-authoritative. The Partnership adopted the ASC on July 1, 2009 and incorporated it in the Partnership’s notes to the consolidated financial statements.

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 Company’s cash and cash equivalents approximates its carrying amounts reported in the 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 consolidated balance sheets.

Long-term debt — The fair values of the Partnership’s 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 and Due to parent — The fair value of the Partnership’s loans from joint venture partners and loan from parent 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.

The Partnership categorizes its fair value estimates using a fair value hierarchy based on the inputs used to measure fair value. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value as follows:

The estimated fair value of the Partnership’s financial instruments and categorization using the fair value hierarchy is as follows:

Cash and cash equivalents

Due from affiliate (note 10q)

Due to affiliate (note10q)

Long-term debt

Loan due to parent (note 6)

Due to joint venture partners

Derivative instruments⁽¹⁾ (note 11)

Interest rate swap agreements⁽²⁾

Foreign currency forward contracts

The Partnership transacts all of its derivative instruments through investment-grade rated financial institutions at the time of the transaction and requires no collateral from these institutions.

The fair value of the Partnership’s interest rate swap agreements includes $10.7 million of accrued interest which is recorded in accrued liabilities on the consolidated balance sheet.

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

On August 4, 2009, the Partnership 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 of approximately $104.3 million from the equity offering to reduce amounts outstanding under one of its revolving credit facilities.

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 and FPSO units. The Partnership’s revenues are earned in international markets.

The Partnership has four reportable segments: its shuttle tanker segment; its conventional tanker segment; its FSO segment, and its FPSO 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. The Partnership’s FPSO segment consists of its FPSO unit subject to a fixed-rate, time-charter contract. 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.

 

Voyage revenues

Voyage expenses

Vessel operating expenses

Time-charter hire expense

Depreciation and amortization

General and administrative ⁽¹⁾

Restructuring charge

 

Income from vessel operations

 

 

Voyage revenues

Voyage expenses

Vessel operating expenses

Time-charter hire expense

Depreciation and amortization

General and administrative ⁽¹⁾

 

Income from vessel operations

 

 

Voyage revenues

Voyage expenses

Vessel operating expenses

Time-charter hire expense

Depreciation and amortization

General and administrative ⁽¹⁾

Restructuring charge

 

Income from vessel operations

 

 

Voyage revenues

Voyage expenses

Vessel operating expenses

Time-charter hire expense

Depreciation and amortization

General and administrative ⁽¹⁾

 

Income from vessel operations

 

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

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

Shuttle tanker segment

Conventional tanker segment

FSO segment

FPSO segment

Unallocated:

Cash and cash equivalents

Other assets

 

Consolidated total assets

 

As at September 30, 2009, intangible assets consisted of:

Contracts of affreightment

Time-charter contracts

Other intangible assets

 

 

 

As at December 31, 2008, intangible assets consisted of:

Contracts of affreightment

Time-charter contracts

Other intangible assets

 

 

 

Aggregate amortization expense of intangible assets for the three and nine months ended September 30, 2009 was $2.3 million and $6.9 million, respectively (2008 — $2.5 million and $7.5 million, respectively), included in depreciation and amortization on the consolidated statements of income (loss). Amortization of intangible assets for the next five years subsequent to September 30, 2009 is expected to be $2.3 million (remainder of 2009), $8.1 million (2010), $7.1 million (2011), $6.1 million (2012), and $5.1 million (2013).

 

U.S. Dollar-denominated Revolving Credit Facilities due through 2018

U.S. Dollar-denominated Term Loan Due to Parent

U.S. Dollar-denominated Debt allocated from Parent

U.S. Dollar-denominated Term Loans due through 2017

 

 

Less current portion

 

Total

 

As at September 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 $115.0 million was undrawn. The total amount available under the revolving credit facilities reduces by $60.1 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 (cash and cash equivalents) 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.

The Partnership has a U.S. Dollar-denominated term loan outstanding to Teekay Corporation, which, as at September 30, 2009, totaled $220 million. The senior tranche is a $160 million secured loan with a maximum term of fifteen months bearing interest based on LIBOR plus a margin of 3.25%. The junior tranche is a $60 million unsecured subordinated debt facility bearing interest at a fixed rate of 10.00%. The junior tranche matures at the earlier of the date the Partnership receives sufficient net proceeds from an equity offering to repay this tranche, and a term of five years. In November 2009 the senior tranche was repaid subsequent to the Partnership entering into a $260 million revolving credit facility relating to its FPSO, the Petrojarl Varg. (See Note 16).

As at December 31, 2008, the Dropdown Predecessor had $270.8 million of long-term debt, which was allocated from corporate revolving credit facilities of Teekay Corporation. (See Note 1). This long-term debt, which was allocated from Teekay Corporation, was retained by Teekay Corporation on the acquisition of the Petrojarl Varg on September 10, 2009. (See Note 10p).

As at September 30, 2009, the Partnership’s six 50%-owned subsidiaries each had an outstanding term loan, which in the aggregate totaled $275.4 million. The term loans reduce over time with quarterly and semi-annual payments and have varying maturities through 2017. 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, 2009, the Partnership had guaranteed $88.6 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 $186.8 million.

Interest payments on the revolving credit facilities and the term loans are based on LIBOR plus a margin. At September 30, 2009, the margins ranged between 0.45% and 3.25%. The weighted-average effective interest rate on the Partnership’s variable long-term debt as at September 30, 2009 was 1.7%. This rate does not include the effect of the Partnership’s interest rate swaps (Note 11).

The aggregate annual long-term debt principal repayments required to be made subsequent to September 30, 2009 are $10.8 million (remainder of 2009), $293.2 million (2010), $183.8 million (2011), $160.7 million (2012), $169.0 million (2013), and $953.9 million (thereafter).

As at September 30, 2009 and December 31, 2008, the Partnership’s accumulated other comprehensive income (loss) consisted of the following components:

Unrealized gain (loss) on derivative instruments

Pension adjustments

 

 

 

During the nine months ended September 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 $4.7 million during 2009. During the three and nine months ended September 30, 2009, the Partnership incurred $0.4 million and $4.1 million of restructuring costs, respectively.

Volatile organic compound emissions plant lease income

Miscellaneous

 

Other income — net

 

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 $28.9 million and $85.3 million, respectively, during the three and nine months ended September 30, 2009, compared to $38.3 million and $108.0 million, respectively, for the same periods last year.

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 $9.3 million, respectively, during the three and nine months ended September 30, 2009, compared to $3.3 million and $11.6 million, respectively, for the same periods last year.

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 both the three and nine months ended September 30, 2009, and 2008.

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 $0.7 million and $2.3 million, respectively, during the three and nine months ended September 30, 2009, compared to $0.8 million and $2.4 million, respectively, for the same periods last year.

Eight of OPCO’S Aframax conventional oil tankers, two FSO units and the FPSO unit are managed by subsidiaries of Teekay Corporation. Pursuant to the associated management services agreements, the Partnership incurred general and administrative expenses of $1.0 million and $2.5 million, respectively, during the three and nine months ended September 30, 2009, compared to $1.0 million and $3.0 million, respectively, for the same periods last year. During the three months ended September 30, 2009 and 2008, $0.4 million and $1.7 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. During the nine months ended September 30, 2009 and 2008, $3.5 million and $5.2 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).

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 $10.1 million and $29.6 million, respectively, of these costs during the three and nine months ended September 30, 2009, compared to $10.7 million and $36.7 million, respectively, for the same periods last year.

Pursuant to the Partnership’s partnership agreement, the Partnership reimburses the General Partner for all expenses incurred by the General Partner that are necessary or appropriate for the conduct of the Partnership’s business. Pursuant to this agreement, the Partnership reimbursed $0.3 million and $0.5 million, respectively, of these costs during the three and nine months ended September 30, 2009, compared to $0.1 million and $0.4 million, respectively, for the same periods last year.

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.

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.

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.

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 $7.4 million, respectively, for the three and nine months ended September 30, 2009 compared to $2.5 million and $6.2 million, for the same periods last year, respectively (including voyage revenues earned by the Dropdown Predecessor prior to OPCO’s acquisition of the vessels — see Note 1).

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.

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.

From December 2008 to June 2009, 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 $3.4 million during the nine months ended September 30, 2009.

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.

On September 10, 2009, the Partnership acquired from Teekay Corporation the Petrojarl Varg, together with its four-year fixed rate contract with Talisman Energy, for a purchase price of $320 million. The purchase price of $320 million is accounted for as an equity distribution to Teekay Corporation. To the extent the purchase price is greater than the corresponding book value, the excess is reflected as a reduction in Partners’ Equity and the remainder is shown as a reduction in Dropdown Predecessor Equity. The purchase was financed through vendor financing made available by Teekay Corporation of $220 million. The remaining $100 million was paid in cash and financed from existing debt facilities. The $220 million vendor financing from Teekay Corporation is comprised of two tranches. The senior tranche is a $160 million short-term debt facility bearing interest at LIBOR plus a margin of 3.25%. (This senior tranche was repaid in November 2009 — see Note 16). The junior tranche of the vendor financing is a $60 million unsecured subordinated debt facility bearing interest at 10% per annum. For both the three and nine months ended September 30, 2009, the Partnership incurred interest expense of $0.6 million in relation to the $220 million vendor financing from Teekay Corporation. (See Notes 1 and 6).

On the dropdown, all assets and liabilities of the Petrojarl Varg operations, except for the vessel and the contract with Talisman Energy, were retained by Teekay Corporation. These net assets (net liabilities) retained by Teekay Corporation totalled $(175.0) million and are accounted for as a non-cash equity contribution from Teekay Corporation.

Teekay uses a centralized treasury system. As a result, cash and cash equivalents attributable to the operations of the Petrojarl Varg, prior to the acquisition of the vessel by the Partnership, were in certain cases, co-mingled with cash and cash equivalents from other operations of Teekay Corporation. Cash and cash equivalents in co-mingled bank accounts are not reflected in the balance sheet of the Dropdown Predecessor. However, any cash transactions from these bank accounts that were made on behalf of the Dropdown Predecessor are reflected in these financial statements as increases or decreases in Dropdown Predecessor Equity. The net amount of these equity contributions were $110.4 million for the period from January 1, 2009 to September 9, 2009 and $72.2 million for the nine months ended September 30, 2008.

At September 30, 2009, due from affiliates totaled $13.2 million (December 31, 2008 - $10.1 million) and due to affiliates totaled $37.6 million (December 31, 2008 — $8.7 million). Due to and from affiliate are non-interest bearing and unsecured.

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 nine months ended September 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:

Gains (losses) recognized in:

Vessel operating expenses

General and administrative

Foreign currency exchange loss

Accumulated other comprehensive income (loss)

Losses reclassified from:

Accumulated other comprehensive income

As at September 30, 2009, the Partnership’s accumulated other comprehensive income included $0.2 million of unrealized gains on foreign currency forward contracts designated as cash flow hedges. As at September 30, 2009, the Partnership estimated, based on the current foreign exchange rates, that it would reclassify approximately $0.2 million of net gains on foreign currency forward contracts from accumulated other comprehensive gain 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 nine months ended September 30, 2009, the Partnership recognized net realized and unrealized gains on foreign currency forward contracts of $0.4 million and $0.8 million, respectively. During the three and nine months ended September 30, 2008, the Partnership recognized net realized and unrealized losses on foreign currency forward contracts of ($4.2) million and ($1.9) million, respectively. Realized and unrealized gains (losses) of ($1.2) million and ($0.6) million, respectively, relating to foreign currency forwards contracts for the three and nine months ended September 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 (losses) of ($1.5) million and ($1.2) million, respectively, relating to foreign currency forwards contracts for the three and nine months ended September 30, 2008 were reclassified from vessel operating expenses to realized and unrealized gains (losses) on non-designated derivatives for comparative purposes.

As at September 30, 2009, the Partnership was committed to the following foreign currency forward contracts:

Norwegian Kroner

Australian Dollar

British Pound

Euro

Singaporean Dollar

 

 

 

Average forward rate represents the contracted amount of foreign currency one U.S. Dollar will buy.

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 nine months ended September 30, 2009, the Partnership recognized net realized and unrealized (losses) gains of ($37.7) million and $36.9 million, respectively, relating to its interest rate swaps. During the three and nine months ended September 30, 2008, the Partnership recognized net realized and unrealized losses of ($21.9) million and ($31.1) million, respectively, relating to its interest rate swaps. The realized and unrealized losses of ($17.8) million and ($24.9) million, respectively relating to interest rate swaps for the three and nine months ended September 30, 2008 were reclassified from interest expense to realized and unrealized gain on non-designated derivatives for comparative purposes.

As at September 30, 2009, the Partnership was committed to the following interest rate swap agreements:

U.S. Dollar-denominated interest rate swaps

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

 

 

 

Excludes the margin the Partnership pays on its variable-rate debt, which as at September 30, 2009 ranged from 0.45% and 3.25%.

Principal amount reduces quarterly or semi-annually.

The fair value of the Partnership’s interest rate swap agreements includes $10.7 million of accrued interest which is recorded in accrued liabilities on the balance sheet.

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 A3 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.

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