REVENUES (including $32,536 and $70,316 from related parties for the three and six months ended June 30, 2010, respectively, and $36,994 and $73,088 for the three and six months ended June 30, 2009, respectively — notes 9a, 9b, 9c and 9d)

 

 

Voyage expenses

Vessel operating expenses (including $nil from related parties for the three and six months ended June 30, 2010, respectively, and $89 and $422 and for the three and six months ended June 30, 2009, respectively — note 9k, note 10)

Time-charter hire expense (including $nil from related parties for the three and six months ended June 30, 2010, respectively, and $1,616 and $3,416 for the three and six months ended June 30, 2009, respectively — note 9j)

Depreciation and amortization

General and administrative (including $10,320 and $21,189 from related parties for the three and six months ended June 30, 2010, respectively, and $10,022 and $20,687 for the three and six months ended June 30, 2009, respectively — notes 9e, 9f, 9g, 9h, 9k and 9l, note 10)

Restructuring charge (note 7)

 

 

 

 

 

Interest expense (including $nil and $(1,705) from related parties for the three and six months ended June 30, 2010, respectively, and $(1,905) and $(4,728) for the three and six months ended June 30, 2009, respectively — note 9k and 9l, note 6)

Interest income

Realized and unrealized (losses) gains on non-designated derivatives (including $nil from related parties for the three and six months ended June 30, 2010 and $9,744 and $13,288 for the three and six months ended June 30, 2009, respectively — note 9k, note 10)

Foreign currency exchange loss (note 10)

Other income — net (note 8)

 

 

(Loss) income before income tax recovery (expense)

Income tax recovery (expense) (note 11)

 

 

Non-controlling interest in net (loss) income

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

General partner’s interest in net income

Limited partners’ interest: (note 13)

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: (note 13)

- 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 investment in direct financing leases — current

Prepaid expenses

Due from affiliates (note 9m)

Current portion of derivative instruments (note 10)

Other current assets

 

 

 

 

At cost, less accumulated depreciation of $1,074,690 (December 31, 2009 — $993,330)

 

Net investment in direct financing leases

Derivative instruments (note 10)

Deferred income tax asset

Other assets

Intangible assets — net (note 5)

Goodwill — shuttle tanker segment

 

 

 

 

Accounts payable

Accrued liabilities

Due to affiliates (note 9m)

Current portion of long-term debt (including a loan due to parent of $nil and $44,845 as at June 30, 2010 and December 31, 2009, respectively — note 6)

Current portion of derivative instruments (note 10)

 

 

Long-term debt (including a loan due to parent of $nil and $60,000 as at June 30, 2010 and December 31, 2009, respectively — note 6)

Deferred income tax

Derivative instruments (note 10)

Other long-term liabilities

 

 

Commitments and contingencies (notes 6, 10 and 12)

 

 

Dropdown Predecessor equity (note 1)

Non-controlling interest

Partners’ equity

Accumulated other comprehensive (loss) income

 

 

 

 

 

Cash and cash equivalents provided by (used for)

 

Net income

Non-cash items:

Unrealized loss (gain) on derivative instruments (note 10)

Depreciation and amortization

Deferred income tax (recovery) expense

Foreign currency exchange loss and other

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

Expenditures for drydocking

 

 

 

 

Proceeds from drawdown of long-term debt

Scheduled repayments of long-term debt (note 6)

Prepayments of long-term debt

Prepayments of joint venture partner advances

Repayment of long-term debt relating to Dropdown Predecessor relating to Falcon Spirit (note 9l)

Contribution of capital from Teekay Corporation to Dropdown Predecessor relating to Petrojarl Varg (note 9k)

Distribution to Teekay Corporation for the acquisition of Falcon Spirit (note 9l)

Equity contribution from Teekay Corporation to Dropdown Predecessor relating to Falcon Spirit (note 9l)

Equity contribution from joint venture partner (note 12a)

Proceeds from equity offering (note 3)

Expenses from equity offering

Cash distributions paid by the Partnership

Cash distributions paid by subsidiaries to non-controlling interests

Other

 

 

 

 

Expenditures for vessels and equipment

Investment in direct financing lease assets

Direct financing lease payments received

 

 

 

 

Cash and cash equivalents, beginning of the period

 

 

 

 

Conversion of subordinated units to common units (note 13)

Net income

Reclassification of redeemable non-controlling interest in net income

Unrealized net loss on qualifying cash flow hedging instruments (note 10)

Realized net loss on qualifying cash flow hedging instruments (note 10)

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

Dilution loss on initiation of majority owned subsidiary (note 12a)

Equity contribution from non-controlling interest (note 12a)

Cash distributions

Net change in Parent’s equity in Dropdown Predecessor (note 9l)

Acquisition of Falcon Spirit from Teekay Corporation (note 9l)

 

 

 

 

 

Unrealized net (loss) gain on qualifying cash flow hedging instruments (net of tax of ($190) and ($306) for the three and six months ended June 30, 2009, respectively, note 10)

Realized net loss on qualifying cash flow hedging instruments (net of tax of ($42) and ($180) for the three and six months ended June 30, 2009, respectively, note 10)

 

 

Less: Comprehensive (loss) income attributable to non-controlling interests

Less: Comprehensive (loss) income attributable to Dropdown Predecessor (note 1)

 

 

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) Accounting Standards Codification (or 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 April 1, 2010, the Partnership acquired from Teekay Corporation a floating storage and offtake (or FSO) unit, the Falcon Spirit, together with its charter contract. This transaction was deemed to be a business acquisition between entities under common control. As a result, the Partnership’s balance sheet as at December 31, 2009, the Partnership’s statement of income for the six months ended June 30, 2010 and the Partnership’s statement of cash flows for the six months ended June 30, 2010 have been retroactively adjusted to include the results of the acquired vessel (referred to herein, together with the results of the Petrojarl Varg described below, 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. The vessel began operations under the ownership of Teekay Corporation on December 15, 2009. The effect of adjusting the Partnership’s financial statements to account for the common control transfer of the Falcon Spirit increased the Partnership’s net income by $0.9 million for the six months ended June 30, 2010.

On September 10, 2009, the Partnership acquired from Teekay Corporation a 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 for the three and six months ended June 30, 2009 and the Partnership’s statement of cash flows for the six months ended June 30, 2009 have been retroactively adjusted to include the results of the Petrojarl Varg 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 and six months ended June 30, 2009, the effect of adjusting the Partnership’s financial statements to account for the common control transfer of the Petrojarl Varg increased the Partnership’s net income by $12.4 million and $16.9 million, respectively. The effect of adjusting the Partnership’s financial statements to account for the common control transfer of the Petrojarl Varg decreased comprehensive income by $13.0 million for the three months ended June 30, 2009 and increased comprehensive income by $18.2 million for the six months ended June 30, 2009.

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 the subsidiaries of Teekay Offshore Operating L.P. (or OPCO) 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 on the Partnership’s consolidated balance sheet as part of the total 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 (loss) income. For the three and six months ended June 30, 2009, crew training expenses of $1.5 million and $2.2 million, respectively, were recorded in general and administrative expenses and have been reclassified to vessel operating expenses for comparative purposes in the consolidated statements of (loss) income.

In January 2010, 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 of a variable interest entity, and increases the frequency of required reassessments to determine whether an entity is such a primary beneficiary. 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, an entity’s power over a variable interest entity, or an entity’s obligation to absorb losses or its right to receive benefits of a variable interest 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.

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.

Due to / from affiliates — The fair values 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:

Cash and cash equivalents

Due from affiliate (note 9m)

Due to affiliate (note 9m)

Long-term debt

Loan due to Parent

Derivative instruments (note 10)

Interest rate swap agreements

Foreign currency forward contracts

The Partnership has determined that there are no non-financial assets or non-financial liabilities carried at fair value at June 30, 2010.

On March 22, 2010, the Partnership completed a public offering of 5.1 million common units (including 660,000 units issued upon exercise of the underwriters’ overallotment option) at a price of $19.48 per unit, for gross proceeds of $100.6 million (including the General Partner’s $2.0 million proportionate capital contribution). The Partnership used the total net proceeds of $95.5 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 its acquisition of Teekay Corporation’s interest in the Falcon Spirit (see Note 9l).

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.

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

 

Revenues

Voyage expenses

Vessel operating expenses

Time-charter hire expense

Depreciation and amortization

General and administrative ⁽¹⁾

Restructuring charge

 

Income from vessel operations

 

 

Revenues

Voyage expenses

Vessel operating expenses

Time-charter hire expense

Depreciation and amortization

General and administrative ⁽¹⁾

Restructuring charge

 

Income from vessel operations

 

 

Revenues

Voyage expenses

Vessel operating expenses

Time-charter hire expense

Depreciation and amortization

General and administrative ⁽¹⁾

Restructuring charge

 

Income from vessel operations

 

 

Revenues

Voyage expenses

Vessel operating expenses

Time-charter hire expense

Depreciation and amortization

General and administrative ⁽¹⁾

Restructuring charge

 

Income from vessel operations

 

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 June 30, 2010, intangible assets consisted of:

Contracts of affreightment (shuttle tanker segment)

Time-charter contracts (FPSO segment)

Other intangible assets (FPSO segment)

 

 

 

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

Contracts of affreightment (shuttle tanker segment)

Time-charter contracts (FPSO segment)

Other intangible assets (FPSO segment)

 

 

 

Aggregate amortization expense of intangible assets for the three and six months ended June 30, 2010 was $1.9 million and $4.1 million, respectively (2009 — $2.2 million and $4.5 million, respectively), included in depreciation and amortization on the consolidated statements of (loss) income. Amortization of intangible assets for the next five years subsequent to June 30, 2010 is expected to be $4.1 million (remainder of 2010), $7.1 million (2011), $6.1 million (2012), $5.1 million (2013), and $4.0 million (2014).

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

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

U.S. Dollar-denominated Loan Due to Parent by Dropdown Predecessor

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

 

Total

Less current portion

 

Long term portion

 

As at June 30, 2010, the Partnership had eight long-term revolving credit facilities, which, as at such date, provided for borrowings of up to $1.51 billion, of which $144.1 million was undrawn. The total amount available under the revolving credit facilities reduces by $83.2 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 the Partnership and certain of its subsidiaries for all outstanding amounts and contain 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 Partnership also has a revolving credit facility of which Teekay Corporation guarantees $65.0 million of the final repayment. In addition to the Partnership covenants described above, Teekay Corporation is also required 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 $50.0 million and 5.0% of Teekay Corporation’s total consolidated debt which has recourse to Teekay Corporation. The remaining two 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 first quarter using proceeds from the March 22, 2010 public offering (see Note 3).

As at December 31, 2009, the Dropdown Predecessor relating to the Falcon Spirit had $44.8 million in amounts due to Teekay Corporation. Immediately prior to the Partnership acquiring the Dropdown Predecessor from Teekay Corporation, $11.2 million of the loan due to Teekay Corporation was converted to equity. The Partnership repaid the remaining $33.6 million during the six months ended June 30, 2010 (see Note 9l).

As at June 30, 2010, the Partnership’s six 50% owned subsidiaries each had an outstanding term loan, which in the aggregate totaled $256.8 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 six vessels to which the loans relate, together with other related security. As at June 30, 2010, the Partnership had guaranteed $81.3 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 $128.4 million and $47.1 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 June 30, 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 June 30, 2010 was 1.4%. 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 June 30, 2010 are $55.4 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 June 30, 2010, the Partnership and Teekay Corporation were in compliance with all covenants related to the credit facilities and long-term debt.

During the six months ended June 30, 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 and six months ended June 30, 2010, the Partnership incurred $nil and $0.1 million (2009 — $1.5 million and $3.7 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 June 30, 2010 and December 31, 2009, restructuring liabilities of $0.1 million and $1.2 million, respectively, were recorded in accrued liabilities.

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 time-charter contracts, OPCO earned revenues of $23.9 million and $53.0 million, respectively, during the three and six months ended June 30, 2010, compared to $28.6 million and $56.4 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 revenues of $3.8 million and $7.2 million, respectively, during the three and six months ended June 30, 2010, compared to $3.1 million and $6.2 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 revenues of $2.3 million and $5.1 million, respectively, during the three and six months ended June 30, 2010, compared to $2.8 million and $5.6 million, respectively, for the same periods last year.

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 $2.5 million and $4.9 million, respectively, during the three and six months ended June 30, 2010, compared to $2.5 million and $4.9 million, respectively, for the same periods last year.

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 $1.8 million, respectively, during the three and six months ended June 30, 2010, compared to $0.8 million and $1.5 million, respectively, for the same periods last year.

Eight of OPCO’S Aframax conventional oil tankers, three 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 $1.7 million and $4.1 million, respectively, during the three and six months ended June 30, 2010, compared to $0.6 million and $1.2 million, respectively, for the same periods last year.

The Partnership, OPCO and certain of OPCO’s operating subsidiaries have entered into services agreements with certain subsidiaries of Teekay Corporation in connection with the Partnership’s initial public offering, pursuant to which Teekay Corporation subsidiaries provide the Partnership, OPCO and its operating subsidiaries with administrative, advisory and technical services and ship management services. Pursuant to these services agreements, the Partnership incurred $9.4 million and $18.3 million, respectively, during the three and six months ended June 30, 2010, compared to $8.5 million and $17.7 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 $0.1 million and $0.3 million, respectively, of these costs during the three and six months ended June 30, 2010, compared to $0.1 million and $0.2 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 FPSO units.

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 $1.6 million and $3.4 million, respectively, during the three and six months ended June 30, 2009.

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 credit 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 and six months ended June 30, 2010, the Partnership incurred interest expense of $nil and $1.4 million, respectively, in relation to the junior tranche of the $220 million vendor financing from Teekay Corporation. (See Note 6).

When the Partnership acquired the Petrojarl Varg, 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 $1.7 million and $3.2 million for the three and six months ended June 30, 2009, respectively.

Interest expense incurred by Teekay Corporation on its credit facilities that were used to finance its acquisition of the Petrojarl Varg of $1.9 million and $4.7 million for the three and six months ended June 30, 2009, respectively.

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 its acquisition of the Petrojarl Varg. The realized and unrealized gains on these interest rate swaps allocated to the Partnership were $9.6 million and $12.7 million for the three and six months ended June 30, 2009, respectively. The amount is reflected in the realized and unrealized (losses) gains on non-designated derivative instruments.

Teekay Corporation entered into foreign exchange forward contracts 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 and six months ended June 30, 2009, the amount of the gain allocated to the Partnership was $0.7 million and $1.6 million, respectively, of which ($0.1) million and ($0.4) million, respectively, is reflected in vessel operating expenses, $0.1 million and $0.2 million, respectively, in general and administrative expenses, $0.2 million and $0.5 million, respectively, in realized and unrealized gains on non-designated derivative instruments and $0.5 million and $1.2 million, respectively, 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 $119.3 million for the period from January 1, 2009 to June 30, 2009.

On April 1, 2010, the Partnership acquired Teekay Corporation’s interest in an FSO unit, the Falcon Spirit, together with its charter contract, for a purchase price of $44.1 million. The purchase was partially financed through proceeds from a public offering of common units (see Note 3). 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 Raayan oil field off the coast of Qatar in December 2009.

The acquisition consisted of the Partnership acquiring Teekay Corporation’s equity interest in Teekay Al Raayan LLC for $10.5 million and Teekay Corporation’s interest in amounts due to Teekay Corporation from Teekay Al Raayan LLC for $33.6 million. Immediately prior to the acquisition, $11.2 million of amounts due to Teekay Corporation was converted to equity and is treated as a non-cash transaction in the Partnership’s statement of cash flow. The portion of the purchase price for the acquisition of the equity interest in Teekay Al Raayan LLC ($10.5 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 portion of the purchase price for the acquisition of the intercorporate loan ($33.6 million) was accounted for as repayment of debt.

The following costs attributable to the operations of the Falcon Spirit 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 vessel management fees and legal and professional fees) of $0.3 million for the six months ended June 30, 2010.

Interest expense incurred by Teekay Corporation on its credit facilities that were used to finance the acquisition of the Falcon Spirit of $0.4 million for the six months ended June 30, 2010.

At June 30, 2010, due from affiliates totaled $12.4 million (December 31, 2009 — $17.7 million) and due to affiliates totaled $46.3 million (December 31, 2009 — $40.2 million). Amounts due to and from affiliates are non-interest bearing and unsecured.

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

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.

As at June 30, 2010, the Partnership was committed to the following foreign currency forward contracts:

Norwegian Kroner

British Pound

Euro

 

 

 

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 U.S. Dollar LIBOR-denominated borrowings.

As at June 30, 2010, 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⁾

 

 

 

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

Foreign currency contracts — cash flow hedges

Foreign currency contracts — not designated as hedges

Interest rate swaps — not designated as hedges