UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 6-K

Commission file number 1- 33198

TEEKAY OFFSHORE PARTNERS L.P.

(Exact name of Registrant as specified in its charter)

4^th Floor, Belvedere Building, 69 Pitts Bay Road, Hamilton, HM 08, Bermuda
(Address of principal executive office)

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

Form 20-F þ Form 40-F o

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

Yes o No þ

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

Yes o No þ

 

 

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES

REPORT ON FORM 6-K FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010

INDEX

		PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Unaudited Consolidated Statements of Income for the three months ended March 31, 2010 and 2009			3
Unaudited Consolidated Balance Sheets as at March 31, 2010 and December 31, 2009			4
Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009			5
Unaudited Consolidated Statements of Changes In Total Equity for the three months ended March 31, 2010			6
Unaudited Consolidated Statements of Comprehensive Income for the three months ended March 31, 2010 and 2009			7
Notes to the Unaudited Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Disclosures about Market Risk			27
PART II: OTHER INFORMATION			28
SIGNATURES			29

ITEM 1 — FINANCIAL STATEMENTS

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

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in thousands of U.S. dollars, except unit and per unit data)

		Three Months Ended March 31,
		2010				2009
		$				$
REVENUES (including $37,780 and $36,094 for 2010 and 2009, respectively, from related parties — notes 9a, 9b, 9c and 9d)			218,797				206,837
OPERATING EXPENSES
Voyage expenses			34,954				24,813
Vessel operating expenses (including $nil for 2010 and $333 for 2009 from related parties — note 9k, note 10)			57,567				60,623
Time-charter hire expense (including $nil for 2010 and $1,800 for 2009 from related parties — note 9j)			25,038				32,145
Depreciation and amortization			41,235				40,164
General and administrative (including $10,304 and $10,665 for 2010 and 2009, respectively, from related parties — notes 9e, 9f, 9g, 9h and 9k, note 10)			14,469				12,687
Restructuring charge (note 7)			119				2,201
Total operating expenses			173,382				172,633
Income from vessel operations			45,415				34,204
OTHER ITEMS
Interest expense (including ($1,350) and ($2,823) for 2010 and 2009, respectively, from related parties — note 9k, note 6)			(7,978	)			(13,391	)
Interest income			163				828
Realized and unrealized (losses) gains on non-designated derivatives (including $ nil for 2010 and $3,434 for 2009 from related parties — note 9k, note 10)			(22,124	)			21,018
Foreign currency exchange gain (loss) (note 10)			636				(1,748	)
Other income — net (note 8)			2,354				3,078
Total other items			(26,949	)			9,785
Income before income tax recovery (expense)			18,466				43,989
Income tax recovery (expense) (note 11)			7,263				(7,841	)
Net income			25,729				36,148
Non-controlling interest in net income			10,849				14,676
Dropdown Predecessor’s interest in net income (note 1)			—				4,532
General partner’s interest in net income			1,018				616
Limited partners’ interest: (note 13)
Net income			13,862				16,324
Net income per:
- Common unit (basic and diluted)			0.36				0.54
- Subordinated unit (basic and diluted)			—				0.54
- Total unit (basic and diluted)			0.36				0.54
Weighted average number of units outstanding: (note 13)
- Common units (basic and diluted)			38,206,000				20,425,000
- Subordinated units (basic and diluted)			—				9,800,000
- Total units (basic and diluted)			38,206,000				30,225,000
Cash distributions declared per unit			0.45				0.45

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

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars)

		As at				As at
		March 31,				December 31,
		2010				2009
		$				$
ASSETS
Current
Cash and cash equivalents (note 6)			136,609				101,747
Accounts receivable			64,144				66,976
Net investment in direct financing leases — current			20,093				20,641
Prepaid expenses			33,004				33,936
Due from affiliates (note 9l)			24,144				17,673
Current portion of derivative instruments (note 10)			3,392				6,152
Other current assets			1,248				1,399
Total current assets			282,634				248,524
Vessels and equipment (note 6)
At cost, less accumulated depreciation of $1,032,531 (December 31, 2009 — $993,330)			1,913,927				1,917,248
Deposit paid in the acquisition of Falcon Spirit (note 16)			43,400				—
Net investment in direct financing leases			31,341				35,620
Derivative instruments (note 10)			582				2,195
Other assets			18,853				20,226
Intangible assets — net (note 5)			34,749				36,885
Goodwill — shuttle tanker segment			127,113				127,113
Total assets			2,452,599				2,387,811
LIABILITIES AND TOTAL EQUITY
Current
Accounts payable			11,238				13,984
Accrued liabilities			53,625				59,714
Due to affiliate (note 9l)			50,742				39,876
Current portion of long-term debt (note 6)			120,143				108,159
Current portion of derivative instruments (note 10)			32,954				31,852
Total current liabilities			268,702				253,585
Long-term debt (including a loan due to parent of $nil and $60,000 as at March 31, 2010 and December 31, 2009, respectively, — note 6)			1,558,494				1,627,455
Deferred income tax			7,685				16,481
Derivative instruments (note 10)			47,358				38,327
Other long-term liabilities			17,759				18,439
Total liabilities			1,899,998				1,954,287
Commitments and contingencies (notes 6, 10 and 12)
Redeemable non-controlling interest (note 1)			43,132				—
Total equity
Partners’ equity			302,619				213,065
Non-controlling interest			206,847				219,692
Accumulated other comprehensive income			3				767
Total equity			509,469				433,524
Total liabilities and equity			2,452,599				2,387,811

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

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

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars)

		Three Months Ended March 31,
		2010				2009
		$				$
Cash and cash equivalents provided by (used for)
OPERATING ACTIVITIES
Net income			25,729				36,148
Non-cash items:
Unrealized loss (gain) on derivative instruments (note 10)			13,010				(36,245	)
Depreciation and amortization			41,235				40,164
Deferred income tax (recovery) expense			(8,751	)			7,783
Foreign currency exchange (gain) loss and other			1,631				938
Change in non-cash working capital items related to operating activities			686				16,698
Expenditures for drydocking			(1,160	)			(4,571	)
Net operating cash flow			72,380				60,915
FINANCING ACTIVITIES
Proceeds from drawdown of long-term debt			62,000				—
Scheduled repayments of long-term debt			(8,814	)			(7,182	)
Prepayments of long-term debt			(110,163	)			(30,977	)
Advances to affiliates			(44,410	)			—
Contribution of capital from Teekay Corporation to Dropdown Predecessor relating to Petrojarl Varg (note 9k)			—				18,810
Proceeds from equity offering			100,581				—
Expenses from equity offering			(4,452	)			—
Cash distributions paid by the Partnership			(17,665	)			(14,447	)
Cash distributions paid by subsidiaries to non-controlling interest			(19,472	)			(13,879	)
Other			333				(68	)
Net financing cash flow			(42,062	)			(47,743	)
INVESTING ACTIVITIES
Expenditures for vessels and equipment			(283	)			(2,486	)
Investment in direct financing lease assets			(886	)			—
Direct financing lease payments received			5,713				5,529
Net investing cash flow			4,544				3,043
Increase in cash and cash equivalents			34,862				16,215
Cash and cash equivalents, beginning of the period			101,747				132,348
Cash and cash equivalents, end of the period			136,609				148,563

Supplemental cash flow disclosure (note 14)

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

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

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY
(in thousands of U.S. dollars and units)

		PARTNERS’ EQUITY
		Limited Partners
																						Accumulated
																						Other
																						Comprehensive				Non-								Redeemable
																		General				Income (Loss)				controlling				Total				Non-controlling
		Common								Subordinated								Partner				(Note 10)				Interest				Equity				Interest
		Units				$				Units				$				$				$				$				$				$
Balance as at December 31, 2009			27,900				348,071				9,800				(143,590	)			8,584				767				219,692				433,524				—
Conversion of subordinated units to common units (note 13)			9,800				(143,590	)			(9,800	)			143,590				—				—				—				—
Net income							13,862								—				1,018								11,003				25,883				(154	)
Unrealized net loss on qualifying cash flow hedging instruments (note 10)							—								—				—				(1,128	)			(1,083	)			(2,211	)
Realized net loss on qualifying cash flow hedging instruments (note 10)							—								—				—				364				349				713
Proceeds from follow-on public offering, net of offering costs (note 3)			5,060				94,117								—				2,012				—				—				96,129
Dilution loss on initiation of majority owned subsidiary (note 12a)			—				(3,714	)											(76	)							(3,642	)			(7,432	)			7,432
Equity contribution from non-controlling interest (note 12a)							—								—				—				—				—				—				35,854
Cash distributions							(16,965	)							—				(700	)			—				(19,472	)			(37,137	)
Balance as at March 31, 2010			42,760				291,781				—				—				10,838				3				206,847				509,469				43,132

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

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

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of U.S. dollars and units)

		Three Months Ended March 31,
		2010				2009
		$				$
Net income			25,729				36,148
Other comprehensive (loss) income:
Unrealized net (loss) gain on qualifying cash flow hedging instruments (net of tax of ($116) for 2009, note 10)			(2,211	)			2,659
Realized net loss on qualifying cash flow hedging instruments (net of tax of ($138) for 2009, note 10)			713				5,825
Other comprehensive (loss) income			(1,498	)			8,484
Comprehensive income			24,231				44,632
Less: Comprehensive income attributable to non-controlling interests			(10,115	)			(18,514	)
Less: Comprehensive income attributable to Dropdown Predecessor			—				(5,184	)
Comprehensive income attributable to partners			14,116				20,934

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, 2009, which are included in our Annual Report on Form 20-F. 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 operations and charter contracts with Talisman Energy. This transaction was deemed to be a business acquisition between entities under common control. As a result, the Partnership’s statement of income and the Partnership’s statement of cash flows for the three months ended March 31, 2009 have been retroactively adjusted to include the results of the acquired vessel (referred to herein as the Dropdown Predecessor), from the date that the Partnership and the acquired vessel were both under common control of Teekay Corporation and had begun operations. Teekay Corporation acquired a 65% interest in the Petrojarl Varg on October 1, 2006, and acquired the remaining 35% interest on June 30, 2008.

		For the three months ended March 31, 2009, the effect of adjusting the Partnership’s financial statements to account for the common control transfer increased the Partnership’s net income by $4.5 million, and increased comprehensive income by $5.2 million.
		The Partnership presents non-controlling ownership interests in subsidiaries in the consolidated financial statements within the equity section, but separate from the Partners’ equity. However, in instances in which certain redemption features that are not solely within the control of the issuer are present, classification of non-controlling interests outside of permanent equity is required. The holder of the non-controlling interest of one of OPCO’s subsidiaries holds a put option which, if exercised, would obligate OPCO to purchase the non-controlling interest (see Note 12a). As a result, the non-controlling interest that is subject to this redemption feature is not included as part of the Partnership’s equity and is presented as redeemable non-controlling interest above the equity section but below the liabilities section on the Partnership’s consolidated balance sheet.

Certain of the comparative figures have been reclassified to conform with the presentation adopted in the current period primarily related to the presentation of crew training costs in the consolidated statements of income. Crew training expenses of $0.7 million were previously recorded in general and administrative expenses in the prior year and have been reclassified to vessel operating expenses for comparative purposes in the consolidated statements of income.

Changes in Accounting Policies

In January 2009, the Partnership adopted an amendment to FASB ASC 810, Consolidations, that eliminates certain 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. This amendment 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. The elimination of the qualifying special-purpose entity concept and its consolidation exceptions means more entities will be subject to consolidation assessments and reassessments. During February 2010, the scope of the revised standard was modified to indefinitely exclude certain entities from the requirement to be assessed for consolidation. The adoption of this amendment did not have an impact on the Partnership’s consolidated financial statements.

2.

Fair Value Measurements

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 approximate their carrying amounts reported in the accompanying consolidated balance sheets.

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)

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

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.

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 the fixed interest rate in the interest rate swaps, 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. 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. 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:

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 estimated fair value of the Partnership’s financial instruments and categorization using the fair value hierarchy for these financial instruments that are measured at fair value on a recurring basis are as follows:

						March 31, 2010
		Fair Value				Carrying Amount				Fair Value
		Hierarchy				Asset (Liability)				Asset (Liability)
		Level(1)				$				$
Cash and cash equivalents							136,609				136,609
Due from affiliate (note 9l)							24,144				24,144
Due to affiliate (note 9l)							(50,742	)			(50,742	)
Long-term debt							(1,678,637	)			(1,569,948	)
Derivative instruments (note 10)
Interest rate swap agreements(2)		Level 2					(88,565	)			(88,565	)
Foreign currency forward contracts		Level 2					2,249				2,249

The Partnership has determined that there are no non-financial assets or non-financial liabilities carried at fair value at March 31, 2010.

3.

Public Offering

On March 22, 2010, the Partnership completed a public offering of 4.4 million common units at a price of $19.48 per unit, for gross proceeds of $87.5 million (including the general partner’s $1.7 million proportionate capital contribution). The underwriters concurrently exercised their overallotment option to purchase an additional 660,000 units on March 22, 2010, providing additional gross proceeds of $13.1 million (including the general partner’s $0.3 million proportionate capital contribution). The Partnership used the total net proceeds of $96.1 million from the equity offering to repay the remaining $60.0 million of the Teekay Corporation vendor financing related to the acquisition of the Petrojarl Varg (see Note 6) and to finance a portion of the acquisition of Teekay Corporation’s interest in a floating, storage and offloading (or FSO) unit, the Falcon Spirit, together with operations and time charter contract for approximately $43 million on April 1, 2010 (see Note 16).

4.

Segment Reporting

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 operations and 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.

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)

The following tables include results for these segments for the periods presented in these consolidated financial statements:

		Shuttle				Conventional
		Tanker				Tanker				FSO				FPSO
Three Months ended March 31, 2010		Segment				Segment				Segment				Segment				Total
Revenues			141,993				31,565				18,017				27,222				218,797
Voyage expenses			29,054				5,651				249				—				34,954
Vessel operating expenses			34,163				5,714				7,564				10,126				57,567
Time-charter hire expense			25,038				—				—				—				25,038
Depreciation and amortization			24,955				5,742				5,417				5,121				41,235
General and administrative (1)			11,260				1,193				670				1,346				14,469
Restructuring charge			119				—				—				—				119
Income from vessel operations			17,404				13,265				4,117				10,629				45,415

		Shuttle				Conventional
		Tanker				Tanker				FSO				FPSO
Three Months ended March 31, 2009		Segment				Segment				Segment				Segment				Total
Revenues			138,135				30,201				15,089				23,412				206,837
Voyage expenses			18,238				6,339				236				—				24,813
Vessel operating expenses			39,996				5,600				5,822				9,205				60,623
Time-charter hire expense			32,145				—				—				—				32,145
Depreciation and amortization			23,155				5,974				5,402				5,633				40,164
General and administrative (1)			9,574				1,224				440				1,449				12,687
Restructuring charge			2,201				—				—				—				2,201
Income from vessel operations			12,826				11,064				3,189				7,125				34,204

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

		March 31, 2010				December 31, 2009
		$				$
Shuttle tanker segment			1,509,838				1,516,988
Conventional tanker segment			313,935				317,690
FSO segment			100,394				103,622
FPSO segment			319,416				324,912
Unallocated:
Cash and cash equivalents			136,609				101,747
Other assets			72,407				22,852
Consolidated total assets			2,452,599				2,387,811

5.

Intangible Assets

As at March 31, 2010, intangible assets consisted of:

		Gross Carrying				Accumulated				Net Carrying
		Amount				Amortization				Amount
		$				$				$
Contracts of affreightment (shuttle tanker segment)			124,250				(90,136	)			34,114
Time-charter contracts (FPSO segment)			353				(108	)			245
Other intangible assets (FPSO segment)			390				—				390
			124,993				(90,244	)			34,749

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)

As at December 31, 2009, intangible assets consisted of:

		Gross Carrying				Accumulated				Net Carrying
		Amount				Amortization				Amount
		$				$				$
Contracts of affreightment (shuttle tanker segment)			124,250				(88,016	)			36,234
Time-charter contracts (FPSO segment)			353				(92	)			261
Other intangible assets (FPSO segment)			390				—				390
			124,993				(88,108	)			36,885

Aggregate amortization expense of intangible assets for the three months ended March 31, 2010 was $2.1 million (2009 — $2.3 million), included in depreciation and amortization on the consolidated statements of income. Amortization of intangible assets for the next five years subsequent to March 31, 2010 is expected to be $6.0 million (remainder of 2010), $7.1 million (2011), $6.1 million (2012), $5.1 million (2013), and $4.0 million (2014).

6.

Long-Term Debt

		March 31, 2010				December 31, 2009
		$				$
U.S. Dollar-denominated Revolving Credit Facilities due through 2018			1,414,963				1,406,974
U.S. Dollar-denominated Term Loan Due to Parent			—				60,000
U.S. Dollar-denominated Term Loans due through 2017			263,674				268,640
Total			1,678,637				1,735,614
Less current portion			120,143				108,159
Long term portion			1,558,494				1,627,455

As at March 31, 2010, the Partnership had eight long-term revolving credit facilities, which, as at such date, provided for borrowings of up to $1.58 billion, of which $164.5 million was undrawn. The total amount available under the revolving credit facilities reduces by $152.6 million (remainder of 2010), $173.3 million (2011), $183.0 million (2012), $329.5 million (2013), $638.0 million (2014) and $102.9 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. One of the revolving credit facilities is guaranteed by the Partnership for all outstanding amounts and contains covenants that require the Partnership 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 the Partnership’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 34 of the Partnership’s vessels, together with other related security.

The Partnership had a U.S. Dollar-denominated term loan outstanding from Teekay Corporation, which, as at December 31, 2009, totaled $60 million. This amount was repaid during the quarter using proceeds from the March 22, 2010 public offering (see Note 3).

As at March 31, 2010, the Partnership’s six 50% owned subsidiaries each had an outstanding term loan, which in the aggregate totaled $263.7 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 March 31, 2010, the Partnership had guaranteed $83.7 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 $131.9 million and $48.1 million, respectively.

Interest payments on the revolving credit facilities and the term loans (excluding the term loan due to parent) are based on LIBOR plus a margin. At March 31, 2010, the margins ranged between 0.45% and 3.25%. The weighted-average effective interest rate on the Partnership’s variable rate long-term debt as at March 31, 2010 was 1.3%. This rate does not include the effect of the Partnership’s interest rate swaps (see Note 10).

The aggregate annual long-term debt principal repayments required to be made subsequent to March 31, 2010 are $111.2 million (remainder of 2010), $183.8 million (2011), $160.8 million (2012), $328.9 million (2013), $705.6 million (2014), and $188.3 million (thereafter).

As at March 31, 2010, the Partnership, OPCO and Teekay Corporation were in compliance with all covenants related to the credit facilities and long-term debt.

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)

7.

Restructuring Charge

During the three months ended March 31, 2010, the Partnership completed the remaining reflagging of two of its vessels from Norwegian flag to Bahamian flag and changing the nationality mix of its crews. The Partnership commenced the reflagging of a total of seven vessels in March 2009. During the three months ended March 31, 2010 and 2009, the Partnership incurred $0.1 million and $2.2 million, respectively, of restructuring costs. Under this plan, the Partnership recorded restructuring charges of approximately $4.9 million in total since the plan began in 2009. At March 31, 2010 and December 31, 2009, restructuring liabilities of $0.6 million and $1.2 million, respectively, were recorded in accrued liabilities.

8.

Other Income — net

		Three Months Ended March 31,
		2010				2009
		$				$
Volatile organic compound emissions plant lease income			1,510				1,962
Miscellaneous			844				1,116
Other income — net			2,354				3,078

9.

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 time-charter contracts, OPCO earned revenues of $29.1 million and $27.8 million during the three months ended March 31, 2010 and 2009, respectively.
	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 revenues of $3.4 million and $3.1 million during the three months ended March 31, 2010 and 2009, respectively.
	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 revenues of $2.8 million during both the three months ended March 31, 2010 and 2009.
	d.		Two of OPCO’s conventional tankers are employed on long-term bareboat charters with a joint venture in which Teekay Corporation has a 50% interest. Pursuant to these charter contracts, OPCO earned revenues of $2.4 million during both the three months ended March 31, 2010 and 2009.
	e.		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 $0.9 million and $0.8 million during the three months ended March 31, 2010 and 2009, respectively.
	f.		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 $2.1 million and $0.7 million during the three months ended March 31, 2010 and 2009, respectively.
	g.		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 $8.9 million and $9.2 million during the three months ended March 31, 2010 and 2009, respectively.
	h.		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 $0.2 million and $0.1 million of these costs during the three months ended March 31, 2010 and 2009, respectively.
	i.		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.

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)

j.

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 $1.8 million during the three months ended March 31, 2009.

k.

On September 10, 2009, the Partnership acquired from Teekay Corporation the Petrojarl Varg, together with its operations and charter contracts with Talisman Energy, for a purchase price of $320 million. The purchase price of $320 million was accounted for as an equity distribution to Teekay Corporation. To the extent the purchase price was 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 was comprised of two tranches. The senior tranche was a $160 million short-term debt facility bearing interest at LIBOR plus a margin of 3.25% and was repaid in November 2009. The junior tranche of the vendor financing was a $60 million unsecured subordinated debt facility bearing interest at 10% per annum. The junior tranche was repaid on March 22, 2010 using proceeds from a public offering (see Note 3). For the three months ended March 31, 2010, the Partnership incurred interest expense of $1.4 million in relation to the junior tranche of the $220 million vendor financing from Teekay Corporation. (See Note 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 liabilities retained by Teekay Corporation totalled $175.0 million and were accounted for as a non-cash equity contribution from Teekay Corporation.

The following costs attributable to the operations of the Petrojarl Varg were incurred by Teekay Corporation, and have been allocated to the Partnership as part of the results of the Dropdown Predecessor.

	•		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) of $1.5 million for the three months ended March 31, 2009, has been allocated to the Partnership.
	•		Interest expense incurred by Teekay Corporation on its credit facilities that were used to finance the acquisition of the Petrojarl Varg of $2.8 million for the three months ended March 31, 2009, has been allocated to the Partnership.
	•		Teekay Corporation entered into interest rate swaps to offset increases or decreases in the variable-rate interest payments of the credit facilities that were used to finance the acquisition of the Petrojarl Varg. The realized and unrealized gain on these interest rate swaps allocated to the Partnership was $3.1 million for the three months ended March 31, 2009. The amount is reflected in the realized and unrealized (losses) gains on non-designated derivative instruments.
	•		Teekay Corporation entered into foreign exchange forward contracts into to minimize the impact from changes in the foreign exchange rate between the Norwegian Kroner and the US Dollar on operating expenses of the Petrojarl Varg. These foreign exchange forward contracts have been allocated to the Partnership. For the three months ended March 31, 2009, the amount of the gain allocated to the Partnership was $0.8 million, of which ($0.3) million is reflected in vessel operating expenses, $0.1 million in general and administrative expenses, $0.3 million in realized and unrealized gains on non-designated derivative instruments and $0.7 million in other comprehensive income.
	•		Teekay Corporation 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 $18.8 million for the period from January 1, 2009 to March 31, 2009.

l.

At March 31, 2010, due from affiliates totaled $24.1 million (December 31, 2009 — $17.7 million) and due to affiliates totaled $50.7 million (December 31, 2009 — $39.9 million). Due to and from affiliate are non-interest bearing and unsecured.

10.

Derivative Instruments and Hedging Activities

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

Foreign Exchange Risk

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

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 March 31, 2010, the Partnership was committed to the following foreign currency forward contracts:

		Contract Amount				Fair Value / Carrying
		in				Amount of Asset/(Liability)								Average				Expected Maturity
		Foreign Currency				(thousands of U.S. Dollars)								Forward				2010				2011				2012
		(thousands)				Hedge				Non-hedge				Rate(1)				(in thousands of U.S. Dollars)
Norwegian Kroner			699,504			$	3,221			$	(56	)			6.18			$	70,173			$	29,685			$	13,338
British Pound			4,700				—				29				0.66				1,386				4,963				748
Euro			22,865				(25	)			(920	)			0.72				17,643				11,497				2,711
						$	3,196			$	(947	)						$	89,202			$	46,145			$	16,797

Interest Rate Risk

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.

As at March 31, 2010, the Partnership was committed to the following interest rate swap agreements:

		Interest				Principal				Fair Value / Carrying				Weighted-Average				Fixed Interest
		Rate				Amount				Amount of Liability				Remaining Term				Rate
		Index				$				$				(Years)				(%)(1)
U.S. Dollar-denominated interest rate swaps		LIBOR					500,000				39,281				9.2				4.2
U.S. Dollar-denominated interest rate swaps(2)		LIBOR					713,679				49,284				6.9				3.7
							1,213,679				88,565

Tabular disclosure

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

		Current												Current
		portion												portion
		of												of
		derivative				Derivative				Accrued				derivative				Derivative
		assets				assets				liabilities				liabilities				liabilities
As at March 31, 2010
Foreign currency contracts — cash flow hedges			3,392				—				—				(25	)			(171	)
Foreign currency contracts — not designated as hedges			—				—				—				(714	)			(233	)
Interest rate swaps — not designated as hedges			—				582				(9,978	)			(32,215	)			(46,954	)
			3,392				582				(9,978	)			(32,954	)			(47,358	)
As at December 31, 2009
Foreign currency contracts — cash flow hedges			6,152				417				—				(15	)			—
Foreign currency contracts — not designated as hedges			—				—				—				(265	)			(97	)
Interest rate swaps — not designated as hedges			—				1,778				(8,048	)			(31,572	)			(38,230	)
			6,152				2,195				(8,048	)			(31,852	)			(38,327	)

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

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

Three Months Ended March 31, 2010												Three Months Ended March 31, 2009
Balance Sheet												Balance Sheet
(AOCI)		Statement of Income (Loss)										(AOCI)				Statement of Income (Loss)
Effective		Effective				Ineffective						Effective				Effective				Ineffective
Portion		Portion				Portion						Portion				Portion				Portion
(2,211	)		(48	)			(1,125	)		Vessel operating expenses			2,775				(5,399	)			770			Vessel operating expenses
			(665	)			(735	)		General and administrative expenses							(564	)			1,346			General and administrative expenses
(2,211	)		(713	)			(1,860	)					2,775				(5,963	)			2,116

As at March 31, 2010, the Partnership’s accumulated other comprehensive income consisted of unrealized losses on foreign currency forward contracts designated as cash flow hedges. As at March 31, 2010, 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 interest rate swaps and 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. The effect of the gain on derivatives not designated as hedging instruments on the statement of income is as follows:

		Three months ended March 31,
		2010				2009
		$				$
Realized losses relating to:
Interest rate swaps			(10,819	)			(9,963	)
Foreign currency forward contract			(155	)			(3,148	)
			(10,974	)			(13,111	)
Unrealized (losses) gains relating to:
Interest rate swaps			(10,566	)			31,235
Foreign currency forward contracts			(584	)			2,894
			(11,150	)			34,129
Total realized and unrealized (losses) gains on non-designated derivative instruments			(22,124	)			21,018

The Partnership is exposed to credit loss in the event of non-performance by the counter-parties 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.

11.

Income Tax Recovery (Expense)

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

		Three Months Ended March 31,
		2010				2009
		$				$
Current			(1,488	)			(58	)
Deferred			8,751				(7,783	)
Income tax recovery (expense)			7,263				(7,841	)

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)

12.

Commitments and Contingencies

a)

During the three months ended March 31, 2010, an unrelated party contributed a shuttle tanker with a value of $35.0 million to a subsidiary for a 33% equity interest of the subsidiary. The equity issuance resulted in a dilution loss of ($7.4) million. The non-controlling interest owner of OPCO’s 67% owned subsidiary holds a put option which, if exercised, would obligate OPCO to purchase the non-controlling interest owner’s 33% share in the entity for cash in accordance with a defined formula. The redeemable non-controlling interest is subject to remeasurement if the formulaic redemption amount exceeds the carrying value.

b)

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.

13.

Partners’ Equity and Net Income Per Unit

At March 31, 2010, of the Partnership’s total limited partner units outstanding, 65.39% were held by the public and the remaining units were held by a subsidiary of Teekay Corporation.

On January 1, 2010, all of the Partnership’s subordinated units (9.8 million units) were converted into an equal number of common units as provided for in the partnership agreement.

Net Income Per Unit

Net income per unit is determined by dividing net income (loss), after deducting the amount of net income 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.

The General Partner’s, common unit holders’ and subordinated unitholders’ interests in net income are calculated as if all net income was distributed according to the terms of the Partnership’s partnership agreement, regardless of whether those earnings would or could be distributed. The partnership agreement does not provide for the distribution of net income; rather, it provides for the distribution of available cash, which is a contractually defined term that generally means all cash on hand at the end of each quarter 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.

For the purposes of the net income per unit calculation for the quarter ended March 31, 2009, 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.

During the quarters ended March 31, 2010 and 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.

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

14.

Supplemental Cash Flow Information

a)

The Partnership’s consolidated statement of cash flows for the three months ended March 31, 2009 reflects the Dropdown Predecessor as if the Partnership had acquired the Dropdown Predecessor when the vessel began operations under the ownership of Teekay Corporation. For non-cash changes related to the Dropdown Predecessor, see Note 9k.

b)

The contribution from the non-controlling interest owner described in note 12a has been treated as a non-cash transaction in the Partnership’s statement of cash flows.

15.

Accounting Pronouncements Not Yet Adopted

In September 2009, the FASB issued an amendment to FASB ASC 605, Revenue Recognition, that provides for a new methodology for establishing the fair value for a deliverable in a multiple-element arrangement. When vendor specific objective or third-party evidence for deliverables in a multiple-element arrangement cannot be determined, the Partnership will be required to develop a best estimate of the selling price of separate deliverables and to allocate the arrangement consideration using the relative selling price method. This amendment will be effective for the Partnership on January 1, 2011, although earlier adoption is allowed. The Partnership is currently assessing the potential impacts, if any, on its consolidated financial statements.

16.

Subsequent Events

On April 1, 2010, the Partnership acquired from Teekay Corporation its interest in a FSO unit, the Falcon Spirit, together with its operations and time charter contract, for a purchase price of approximately $43 million.

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
MARCH 31, 2010

PART I — FINANCIAL INFORMATION

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

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. In addition, we have direct ownership interests in two shuttle tankers, one FSO unit and one floating production, storage and offloading (or FPSO) unit. 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 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.

SIGNIFICANT DEVELOPMENTS

On March 22, 2010, we completed a public offering of 4.4 million common units at a price of $19.48 per unit, for gross proceeds of $87.5 million (including the general partner’s $1.7 million proportionate capital contribution). The underwriters concurrently exercised their overallotment option to purchase an additional 660,000 units on March 22, 2010, providing additional gross proceeds of $13.1 million (including the general partner’s $0.3 million proportionate capital contribution). We used the total net proceeds from the offering to repay the remaining $60.0 million of the Teekay Corporation vendor financing from the acquisition of the Petrojarl Varg and to finance a portion of the acquisition of Teekay Corporation’s interest in a FSO unit, the Falcon Spirit, together with its operations and time charter contract, for approximately $43 million on April 1, 2010. The Falcon Spirit is chartered to Occidental Qatar Energy Company LLC, a subsidiary of Occidental Petroleum of Qatar Ltd., on a fixed-rate time charter contract for 7.5 years (beginning December 2009) with an option for the charterer to extend the contract for an additional 1.5 years. The Falcon Spirit is a conversion of a double-hull shuttle tanker built in 1986 and it began servicing the Al Rayyan oil field off the coast of Qatar in December 2009.

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. 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.

Teekay Corporation was also obligated 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 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 $480 million. Pursuant to the omnibus agreement, Teekay Corporation is obligated to offer to us its interest in these vessels within 365 days of their delivery, provided the vessels are servicing long-term time charter contracts or contracts of affreightment.

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, 2009. 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 revenues (i.e. revenues less voyage expenses) and TCE rates of our four reportable segments where applicable. TCE rates represent net revenues divided by revenue days. Please read Item 1 — “Financial Statements: Note 4 — 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 September 2009, we acquired the Petrojarl Varg FPSO unit, together with its operations and charter contracts. 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 interest in the vessel was actually acquired by us are retroactively adjusted to include the results of this acquired vessel. 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 applicable consolidated financial statements reflect the vessel and its results of operations, referred to herein as the Dropdown Predecessor, as if we had acquired it when the vessel began operations under the ownership of Teekay Corporation on October 1, 2006. Please read Item 1 — “Financial Statements: Note 1 — Basis of Presentation”.

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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. 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.

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Our vessel operating costs are facing industry-wide cost pressures. The oil shipping industry is experiencing a global manpower shortage due to growth in the world fleet. This shortage resulted in significant crew wage increases during 2007, 2008, and to a lesser degree in 2009. We expect the trend of significant crew compensation increases to abate in the short term. However, this could change if market conditions adjust. In addition, factors such as pressure on raw material prices and changes in regulatory requirements could also increase operating expenditures. We took various measures throughout 2009 in an effort to reduce costs, improve operational efficiencies, and mitigate the impact of inflation and price increases and have continued this effort during 2010.

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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.

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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.

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Our operations are seasonal and our financial results vary as a consequence of drydockings. 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. In addition, we generally do not earn revenue when our vessels are in scheduled and unscheduled drydocking. No vessels were drydocked during the first quarter of 2010. Eleven vessels are scheduled for drydocking in remainder of 2010. From time to time, unscheduled drydockings may cause additional fluctuations in our financial results.

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

Shuttle Tanker Segment

As at March 31, 2010, our shuttle tanker fleet consisted of 34 vessels that operate under fixed-rate contracts of affreightment, time charters and bareboat charters. Of the 34 shuttle tankers, 26 were owned by OPCO (including five through 50% owned subsidiaries and three through a majority owned subsidiary), six were chartered-in by OPCO and two were directly 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.

The following table presents our shuttle tanker segment’s operating results for the three months ended March 31, 2010 and 2009, and compares its net revenues (which is a non-GAAP financial measure) for the three months ended March 31, 2010 and 2009 to 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 March 31,
calendar-ship-days and percentages)		2010				2009				% Change
Revenues			141,993				138,135				2.8
Voyage expenses			29,054				18,238				59.3
Net revenues			112,939				119,897				(5.8	)
Vessel operating expenses			34,163				39,996				(14.6	)
Time-charter hire expense			25,038				32,145				(22.1	)
Depreciation and amortization			24,955				23,155				7.8
General and administrative (1)			11,260				9,574				17.6
Restructuring costs			119				2,201				(94.6	)
Income from vessel operations			17,404				12,826				35.7
Calendar-Ship-Days
Owned Vessels			2,465				2,430				1.4
Chartered-in Vessels			676				909				(25.7	)
Total			3,141				3,339				(5.9	)

The average size of our owned shuttle tanker fleet for the three months ended March 31, 2010 increased slightly compared to the same period last year due to the acquisition of one previously in-chartered vessel in February 2010 by OPCO’s majority owned subsidiary (or the 2010 Shuttle Tanker Acquisition).

The average size of our chartered-in shuttle tanker fleet decreased in for the three months ended March 31, 2010 compared to the same period last year, primarily due to:

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the redelivery of three chartered-in vessels to their owners in June 2009, November 2009 and February 2010, respectively; and

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the 2010 Shuttle Tanker Acquisition.

Net Revenues. Net revenues decreased for the three months ended March 31, 2010 from the same period last year, primarily due to:

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a decrease of $4.8 million due to fewer revenue days from shuttle tankers servicing contracts of affreightment and fewer project days, as well as lower spot rates earned in the conventional spot market, compared to the same period last year;

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a decrease of $3.3 million due to the completion of a time-charter in June 2009; and

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a decrease of $2.3 million due to declining oil production at mature oil fields in the North Sea that are serviced by certain shuttle tankers on contracts of affreightment;

partially offset by

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an increase of $2.6 million due to increased rates on certain contracts of affreightment and bareboat and time-charter contracts; and

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an increase of $0.8 million for the three months ended March 31, 2010, due to a decline in non-reimbursable bunker costs as compared to the same period last year.

Vessel Operating Expenses. Vessel operating expenses decreased for the three months ended March 31, 2010, from the same period last year, primarily due to:

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a decrease of $3.5 million relating to the net realized and unrealized changes in fair value of our foreign currency forward contracts that are or have been designated as hedges for accounting purposes;

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a decrease of $2.3 million due to a decrease in costs related to services, spares and consumables during the three months ended March 31, 2010 compared to the same period last year;

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a decrease of $0.8 million due to the redelivery of one in-chartered vessel in June 2009 as it completed its time-charter agreement; and

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a decrease of $0.6 million in crew and manning costs resulting primarily from cost saving initiatives that began in 2009;

partially offset by

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an increase of $0.9 million due to the 2010 Shuttle Tanker Acquisition; and

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an increase of $0.7 million in crew training costs during the three months ended March 31, 2010 compared to the same period last year.

Time-Charter Hire Expense. Time-charter hire expense decreased for the three months ended March 31, 2010 from the same period last year, primarily due to:

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a decrease of $7.3 million resulting from the redelivery of three in-chartered vessels to their owners in June 2009, November 2009 and February 2010, respectively; and

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a decrease of $1.4 million due to the 2010 Shuttle Tanker Acquisition;

partially offset by

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an increase of $1.7 million due to increased spot in-chartered for the three months ended March 31, 2010 compared to the same period last year.

Depreciation and Amortization Expense. Depreciation and amortization expense increased slightly for the three months ended March 31, 2010, from the same periods last year, primarily due to increased drydockings in the latter half of 2009 and the 2010 Shuttle Tanker Acquisition.

Restructuring Charges. Restructuring charges was $0.1 million for the three months ended March 31, 2010, resulting from the completion of the reflagging of seven of our vessels from Norwegian flag to Bahamian flag and a change in the nationality mix of our crews. Under this plan, we recorded restructuring charges of approximately $4.9 million in total since the plan began in 2009. We expect the restructuring will result in a reduction in future crewing costs for these vessels.

Conventional Tanker Segment

OPCO owns 11 Aframax conventional crude oil tankers, nine of which operate under fixed-rate time charters with Teekay Corporation. The remaining two vessels, which have additional equipment for lightering, operate under fixed-rate bareboat charters with Skaugen PetroTrans, Teekay Corporation’s 50% owned joint venture.

The following table presents our conventional tanker segment’s operating results for the three months ended March 31, 2010 and 2009, and compares its net revenues (which is a non-GAAP financial measure) for the three months ended March 31, 2010 and 2009 to 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 vessels for our conventional tanker segment:

(in thousands of U.S. dollars, except		Three Months Ended March 31,
calendar-ship-days and percentages)		2010				2009				% Change
Revenues			31,565				30,201				4.5
Voyage expenses			5,651				6,339				(10.9	)
Net revenues			25,914				23,862				8.6
Vessel operating expenses			5,714				5,600				2.0
Depreciation and amortization			5,742				5,974				(3.9	)
General and administrative (1)			1,193				1,224				(2.5	)
Income from vessel operations			13,265				11,064				19.9
Calendar-Ship-Days
Owned Vessels			990				990				—