UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2011

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, 2011

INDEX

		PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Unaudited Consolidated Statements of Income for the three months ended March 31, 2011 and 2010			3
Unaudited Consolidated Balance Sheets as at March 31, 2011 and December 31, 2010			4
Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010			5
Unaudited Consolidated Statements of Changes In Total Equity for the three months ended March 31, 2011			6
Unaudited Consolidated Statements of Comprehensive Income for the three months ended March 31, 2011 and 2010			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			26
PART II: OTHER INFORMATION			27
SIGNATURES			28

ITEM 1 — FINANCIAL STATEMENTS

		Three Months Ended
		March 31,
		2011				2010
		$				$
REVENUES (note 9d)			233,771				233,579
OPERATING EXPENSES
Voyage expenses			25,465				34,954
Vessel operating expenses (note 9d, 10)			75,130				63,388
Time-charter hire expense			20,270				25,038
Depreciation and amortization			45,570				45,008
General and administrative (note 9b, 9c, 9d, 10)			18,730				16,634
Loss on sale of vessel			171				—
Write-down of vessel (note 4a, 15)			900				—
Restructuring charge (note 7)			3,924				119
Total operating expenses			190,160				185,141
Income from vessel operations			43,611				48,438
OTHER ITEMS
Interest expense (note 6, 9b, 9c, 9d)			(8,469	)			(9,880	)
Interest income			129				165
Realized and unrealized gain (loss) on non-designated derivative instruments (note 10)			10,840				(24,475	)
Foreign currency exchange (loss) gain (note 10)			(799	)			1,622
Other income — net (note 8)			1,310				2,481
Total other items			3,011				(30,087	)
Income before income tax (expense) recovery			46,622				18,351
Income tax (expense) recovery (note 11)			(2,653	)			6,911
Net income			43,969				25,262
Non-controlling interest in net income			20,593				10,849
Dropdown Predecessor’s interest in net income (note 2)			—				(467	)
General Partner’s interest in net income			2,007				1,018
Limited partners’ interest: (note 13)
Net income			21,369				13,862
Net income per common unit (basic and diluted)			0.37				0.36
Weighted-average number of common units outstanding (basic and diluted) (note 13)			57,170,219				38,206,000
Cash distributions declared per unit			0.475				0.45
Related party transactions (note 9)

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

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

		As at				As at
		March 31, 2011				December 31, 2010
		$				$
ASSETS
Current
Cash and cash equivalents (note 6)			123,422				166,483
Accounts receivable			77,744				64,993
Net investments in direct financing leases — current			20,379				21,157
Prepaid expenses			37,138				29,740
Due from affiliates (note 9e)			9,459				19,135
Current portion of derivative instruments (note 10)			10,945				6,180
Other current assets			1,281				1,288
Total current assets			280,368				308,976
Vessels and equipment (note 6)
At cost, less accumulated depreciation of $1,225,168 (December 31, 2010 — $1,200,325)			2,218,025				2,247,323
Advances on newbuilding contracts			53,670				52,184
Net investments in direct financing leases			45,347				50,413
Derivative instruments (note 10)			10,869				5,202
Other assets			19,285				22,652
Intangible assets — net			26,983				28,763
Goodwill — shuttle tanker segment			127,113				127,113
Total assets			2,781,660				2,842,626
LIABILITIES AND EQUITY
Current
Accounts payable			17,231				12,749
Accrued liabilities (note 10)			84,260				88,538
Due to affiliates (note 9e)			84,501				67,390
Current portion of long-term debt (note 6)			137,468				152,096
Current portion of derivative instruments (note 10)			46,510				45,793
Due to joint venture partners			14,500				—
Total current liabilities			384,470				366,566
Long-term debt (note 6)			1,667,768				1,565,044
Deferred income tax			511				1,605
Derivative instruments (note 10)			97,690				119,491
Other long-term liabilities			19,282				19,746
Total liabilities			2,169,721				2,072,452
Commitments and contingencies (note 6, 10, 12)
Redeemable non-controlling interest (note 12a)			40,614				41,725
Equity
Non-controlling interest			48,323				170,876
Partners’ equity			520,322				556,828
Accumulated other comprehensive income			2,680				745
Total equity			571,325				728,449
Total liabilities and total equity			2,781,660				2,842,626
Consolidation of variable interest entities (note 12c)

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

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

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

		Three Months Ended March 31,
		2011				2010
		$				$
Cash and cash equivalents provided by (used for)
OPERATING ACTIVITIES
Net income			43,969				25,262
Non-cash items:
Unrealized (gain) loss on derivative instruments (note 10)			(30,298	)			13,370
Depreciation and amortization			45,570				45,008
Loss on sale and write down of vessels and equipment			1,071				—
Deferred income tax expense (recovery) (note 11)			1,169				(8,686	)
Foreign currency exchange loss and other			5,965				415
Change in non-cash working capital items related to operating activities			1,044				(258	)
Expenditures for drydocking			(7,169	)			(1,160	)
Net operating cash flow			61,318				73,951
FINANCING ACTIVITIES
Proceeds from drawdown of long-term debt			177,644				62,000
Scheduled repayments of long-term debt (note 6)			(44,441	)			(11,839	)
Prepayments of long-term debt			(50,360	)			(110,163	)
Advances to affiliates			—				(44,410	)
Joint venture partner advances			14,500				4,532
Contribution by Teekay Corporation relating to acquisition of Rio das Ostras (note 9c)			1,000				—
Purchase of 49% interest in Teekay Offshore Operating L.P. (note 9a)			(160,000	)			—
Equity contribution from joint venture partner			750				—
Proceeds from issuance of common units			—				100,581
Expenses of equity offerings			—				(4,452	)
Cash distributions paid by the Partnership			(27,723	)			(17,665	)
Cash distributions paid by subsidiaries to non-controlling interests			(17,449	)			(19,472	)
Other			—				333
Net financing cash flow			(106,079	)			(40,555	)
INVESTING ACTIVITIES
Expenditures for vessels and equipment			(9,197	)			(208	)
Proceeds from sale of vessels and equipment			5,054				—
Investment in direct financing lease assets			370				(886	)
Direct financing lease payments received			5,473				6,178
Net investing cash flow			1,700				5,084
(Decrease) increase in cash and cash equivalents			(43,061	)			38,480
Cash and cash equivalents, beginning of the period			166,483				109,407
Cash and cash equivalents, end of the period			123,422				147,887
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)

		PARTNERS’ EQUITY
														Other												Redeemable
														Comprehensive				Non-								Non-
		Limited Partner								General				Income (Loss)				controlling				Total				controlling
		Common								Partner				(Note 10)				Interest				Equity				Interest
		Units				$				$				$				$				$				$
Balance as at December 31, 2010			55,238				540,355				16,473				745				170,876				728,449				41,725
Net income			—				21,369				2,007				—				20,593				43,969				—
Reclassification of redeemable non-controlling interest in net income			—				—				—				—				(1,338	)			(1,338	)			1,338
Unrealized net gain on qualifying cash flow hedging instruments (note 10)			—				—				—				1,253				730				1,983				—
Realized net gain on qualifying cash flow hedging instruments (note 10)			—				—				—				(480	)			(285	)			(765	)			—
Cash distributions			—				(26,238	)			(1,485	)			—				(15,000	)			(42,723	)			(2,449	)
Contribution of capital from joint venture partner			—				—				—				—				750				750				—
Contribution of capital from Teekay Corporation to Rio das Ostras (note 9c)			—				980				20				—				—				1,000				—
Equity offering (note 9a, 13)			7,563				221,742				4,525				—				—				226,267				—
Purchase of 49% of Teekay Offshore Operating L.P. (note 9a)			—				(254,237	)			(5,189	)			1,162				(128,003	)			(386,267	)			—
Balance as at March 31, 2011			62,801				503,971				16,351				2,680				48,323				571,325				40,614

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

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

		Three Months Ended
		March 31,
		2011				2010
		$				$
Net income			43,969				25,262
Other comprehensive income (loss):
Unrealized net gain (loss) on qualifying cash flow hedging instruments (note 10)			1,983				(2,355	)
Realized net (gain) loss on qualifying cash flow hedging instruments (note 10)			(765	)			713
Pension adjustment			—				(284	)
Other comprehensive income (loss)			1,218				(1,926	)
Comprehensive income			45,187				23,336
Non-controlling interest in comprehensive income			21,038				10,115
Dropdown Predecessor’s interest in comprehensive income (note 2)			—				(895	)
Partners’ interest in comprehensive income			24,149				14,116

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES

1.

Basis of Presentation

The unaudited interim consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (or GAAP). These financial statements include the accounts of Teekay Offshore Partners L.P., which is a limited partnership organized under the laws of the Republic of The Marshall Islands, its wholly owned or controlled subsidiaries and the Dropdown Predecessor, as described in Note 2 below and variable interest entities (or VIEs) for which Teekay Offshore Partners L.P. or its subsidiaries are the primary beneficiaries (see Note 12) (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, 2010, 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.

2.

Dropdown Predecessor

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 accounted for as a business acquisition between entities under common control. As a result, the Partnership’s consolidated statements of income, cash flows and comprehensive income for the three months ended March 31, 2010 have been retroactively adjusted to include the results of the acquired vessel (referred to herein, together with the results of the Cidade de Rio das Ostras (or Rio das Ostras), 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 and comprehensive income by $0.9 million for the three months ended March 31, 2010.

On October 1, 2010, the Partnership acquired from Teekay Corporation a floating production, storage and offloading (or FPSO) unit, the Rio das Ostras. This transaction was accounted for as a business acquisition between entities under common control. As a result, the Partnership’s consolidated statements of income, cash flows and comprehensive income for the three months ended March 31, 2010 have been retroactively adjusted to include the results of the Rio das Ostras from the date that the Partnership and the acquired vessel were both under common control of Teekay Corporation and had begun operations. Teekay Corporation had an 82% interest in the Rio das Ostras when it commenced operations on April 1, 2008. Teekay Corporation acquired the remaining 18% interest on June 30, 2008. Adjusting the Partnership’s financial statements to account for the common control transfer of the Rio das Ostras decreased the Partnership’s net income and comprehensive income by ($1.4) million and ($1.8) million, respectively, for the three months ended March 31, 2010.

3.

Adoption of New Accounting Policies

In January 2011, the Partnership adopted an amendment to Financial Accounting Standards Board (or FASB) Accounting Standards Codification (or ASC) 605, Revenue Recognition, that provides for a new methodology for establishing the fair value for a deliverable in a multiple-element arrangement. When a 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. The adoption of this standard did not have an impact on the Partnership’s consolidated financial statements.

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

4.

Financial Instruments

a)

Fair Value Measurements

For a description on how the Partnership estimates fair value, see Note 2 in the Partnership’s audited consolidated financial statements filed with its Annual Report on Form 20-F for the year ended December 31, 2010. 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, 2011								December 31, 2010
				Carrying				Fair				Carrying				Fair
		Fair Value		Amount				Value				Amount				Value
		Hierarchy		Asset (Liability)				Asset (Liability)				Asset (Liability)				Asset (Liability)
		Level (1)		$				$				$				$
Cash and cash equivalents					123,422				123,422				166,483				166,483
Due from affiliates (note 9e)					9,459				9,459				19,135				19,135
Due to affiliates (note 9e)					(84,501	)			(84,501	)			(67,390	)			(67,390	)
Long-term debt (note 6)					(1,805,236	)			(1,713,398	)			(1,717,140	)			(1,620,355	)
Derivative instruments (note 10)
Interest rate swap agreements		Level 2			(154,775	)			(154,775	)			(175,784	)			(175,784	)
Cross currency swap agreement		Level 2			10,503				10,503				4,233				4,233
Foreign currency forward contracts		Level 2			11,432				11,432				6,909				6,909

The Partnership has determined that there were no non-financial assets or non-financial liabilities carried at fair value at March 31, 2011 and December 31, 2010, except for a 1992-built shuttle tanker, which was written down to an estimated fair value of $11.0 million at December 31, 2010 and a 1993-built conventional tanker, which was written down to an estimated fair value of $16.9 million at March 31, 2011. The fair value of the vessels were determined based on directly observable inputs (level 2).

b)

Financing Receivables

The Partnership employs a number of vessels on long-term time charters and assembles, installs, operates and leases equipment that reduces volatile organic compound emissions (or VOC Equipment) during loading, transportation and storage of oil and oil products. The long-term time-charters and the leasing of the VOC Equipment are accounted for as direct financing leases, with lease payments received by the Partnership being allocated between the net investment in the lease and other income using the effective interest method so as to produce a constant periodic rate of return over the lease term.

The following table contains a summary of the Partnership’s financing receivables by type of borrower and the method by which the Partnership monitors the credit quality of its financing receivables on a quarterly basis:

Credit Quality Indicator

Grade

March 31, 2011

December 31, 2010

$

$

Direct financing leases

Payment activity

Performing

65,726

71,570

5.

Segment Reporting

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

		Shuttle				Conventional
		Tanker				Tanker				FSO				FPSO
Three Months ended March 31, 2011		Segment				Segment				Segment				Segment				Total
		$				$				$				$				$
Revenues			138,232				35,763				17,491				42,285				233,771
Voyage expenses			19,028				6,146				291				—				25,465
Vessel operating expenses			40,785				5,825				9,148				19,372				75,130
Time-charter hire expense			20,270				—				—				—				20,270
Depreciation and amortization			27,432				6,045				3,181				8,912				45,570
General and administrative (1)			12,482				1,749				1,063				3,436				18,730
Loss on sale of vessel			—				—				171				—				171
Write-down of vessel			—				900				—				—				900
Restructuring charge			1,227				—				2,697				—				3,924
Income from vessel operations			17,008				15,098				940				10,565				43,611

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

		Shuttle				Conventional
		Tanker				Tanker				FSO				FPSO
Three Months ended March 31, 2010		Segment				Segment				Segment				Segment				Total
		$				$				$				$				$
Revenues			141,993				31,565				20,650				39,371				233,579
Voyage expenses			29,054				5,651				249				—				34,954
Vessel operating expenses			34,163				5,714				8,405				15,106				63,388
Time-charter hire expense			25,038				—				—				—				25,038
Depreciation and amortization			24,955				5,742				5,417				8,894				45,008
General and administrative (1)			11,260				1,193				1,010				3,171				16,634
Restructuring charge			119				—				—				—				119
Income from vessel operations			17,404				13,265				5,569				12,200				48,438

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

		March 31, 2011				December 31, 2010
		$				$
Shuttle tanker segment			1,691,459				1,711,341
Conventional tanker segment			300,841				304,655
FSO segment			112,522				119,844
FPSO segment			528,590				513,886
Unallocated:
Cash and cash equivalents			123,422				166,483
Other assets			24,826				26,417
Consolidated total assets			2,781,660				2,842,626

6.

Long-Term Debt

		March 31, 2011				December 31, 2010
		$				$
U.S. Dollar-denominated Revolving Credit Facilities due through 2018			1,188,243				1,066,909
Norwegian Kroner Bond due in 2013			108,315				103,061
U.S. Dollar-denominated Term Loans due through 2017			211,423				244,958
U.S. Dollar-denominated Term Loans due through 2023			297,255				302,212
Total			1,805,236				1,717,140
Less current portion			137,468				152,096
Long-term portion			1,667,768				1,565,044

As at March 31, 2011, the Partnership had nine long-term revolving credit facilities, which, as at such date, provided for borrowings of up to $1,446.60 million, of which $258.5 million was undrawn. The total amount available under the revolving credit facilities reduces by $163.8 million (remainder of 2011), $187.0 million (2012), $333.5 million (2013), $659.4 million (2014), $17.5 million (2015) and $85.4 million (thereafter). Six 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 35 of the Partnership’s vessels, together with other related security.

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

On November 30, 2010, the Partnership issued NOK 600 million in senior unsecured bonds that mature in November 2013 in the Norwegian bond market. The Partnership capitalized issuance costs of $1.3 million, which is recorded in other non-current assets in the consolidated balance sheet and is amortized over the term of the senior unsecured bonds. The bonds have been listed on the Oslo Stock Exchange. Interest payments on the senior unsecured bonds are based on NIBOR plus a margin of 4.75%. The Partnership entered into a cross currency swap to swap the interest payments from NIBOR into LIBOR and principal from Norwegian Kroner to US dollars. (See Note 10).

As at March 31, 2011, five of the Partnership’s 50% owned subsidiaries each had an outstanding term loan, which in the aggregate totaled $211.4 million. The term loans reduce over time with quarterly and semi-annual payments and have varying maturities through 2017. These term loans are collateralized by first-priority mortgages on the five vessels to which the loans relate, together with other related security. As at March 31, 2011, the Partnership had guaranteed $59.7 million of these term loans, which represents its 50% share of the outstanding vessel mortgage debt of four of these 50% owned subsidiaries. The other owner and Teekay Corporation have guaranteed $105.7 million and $46.0 million, respectively.

As at March 31, 2011, the Partnership had term loans outstanding for the shuttle tankers the Amundsen Spirit and the Nansen Spirit, which in the aggregate totaled $184.7 million. For each of these loans, one tranche reduces in semi-annual payments while the other tranche correspondingly is drawn up every six months with a final $29.1 million bullet payment per vessel due 12 years and three months from each vessel delivery date. These term loans are collateralized by first-priority mortgages on the vessels to which the loans relate, together with other related security and are guaranteed by Teekay Corporation.

As at March 31, 2011, the Partnership had term loans outstanding for the Rio das Ostras FPSO unit and the shuttle tanker the Peary Spirit, which in the aggregate totaled $112.6 million and are guaranteed by Teekay Corporation. The term loans reduce over time with quarterly and semi-annual payments and have varying maturities through 2023. These term loans are collateralized by first-priority mortgages on the vessels to which the loans relate, together with other related security.

Interest payments on the revolving credit facilities and the term loans are based on LIBOR plus a margin. At March 31, 2011, the margins ranged between 0.30% and 3.25%. The weighted-average effective interest rate on the Partnership’s variable rate long-term debt as at March 31, 2011 was 1.5%. 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, 2011 are $122.0 million (remainder of 2011), $201.5 million (2012), $350.3 million (2013), $799.1 million (2014), $53.7 million (2015), and $278.6 million (thereafter).

As at March 31, 2011, the Partnership and Teekay Corporation were in compliance with all covenants related to the credit facilities and long-term debt.

7.

Restructuring Charge

During the three months ended March 31, 2011, the Partnership sold the FSO unit, Karratha Spirit, and the time-charter contract for the Basker Spirit was terminated. The Partnership committed to plans for termination of the employment of certain seafarers of the two vessels. Under the plans, the Partnership recorded restructuring charges of approximately $3.9 million during the three months ended March 31, 2011. At March 31, 2011, restructuring liabilities of $3.8 million were recorded in accrued liabilities.

During the year ended December 31, 2010, the Partnership completed the remaining reflagging of two of its vessels from Norwegian flag to Bahamian flag and changed 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, the Partnership incurred $0.1 million in restructuring costs.

8.

Other Income — Net

		Three Months Ended March 31,
		2011				2010
		$				$
Volatile organic compound emissions plant lease income			961				1,510
Miscellaneous			349				971
Other income — net			1,310				2,481

9.

Related Party Transactions and Balances

a)

On March 8, 2011, the Partnership acquired Teekay Corporation’s 49% interest in Teekay Offshore Operating L.P. (or OPCO) for a combination of $175 million in cash (less $15 million in distributions made by OPCO to Teekay Corporation between December 31, 2010 and the date of acquisition) and the issuance of 7.6 million of the Partnership’s common units to Teekay Corporation and a 2% proportionate interest to the General Partner in a private placement (see Note 13). The acquisition increased the Partnership’s ownership of OPCO to 100%. The excess of the proceeds paid by the Partnership over Teekay Corporation’s historical book value of $128.0 million for the 49% interest in OPCO was accounted for as an equity distribution to Teekay Corporation of $258.3 million.

b)

On April 1, 2010, the Partnership acquired Teekay Corporation’s 100% 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. The Falcon Spirit is chartered to 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 acquisition consisted of the Partnership acquiring Teekay Corporation’s equity interest in Teekay Al Raayan LLC for $11.3 million and Teekay Corporation’s interest in amounts due to Teekay Corporation from Teekay Al Raayan LLC for $32.8 million.

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

For the three months ended March 31, 2010, $0.3 million of general and administrative expenses (consisting primarily of vessel management fees and legal and professional fees) and $0.4 million of interest expense from credit facilities that were used to finance the acquisition 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.

c)

On October 1, 2010, the Partnership acquired from Teekay Corporation the Rio das Ostras FPSO unit, which is on a long-term charter to Petroleo Brasileiro SA (or Petrobras), for a purchase price of $157.7 million, plus working capital of $12.4 million. The purchase agreement provides that Teekay Corporation shall reimburse the Partnership for upgrade costs in excess of the upgrade estimate as of the closing date. During the three months ended March 31, 2011, Teekay Corporation reimbursed the Partnership for $1.0 million of such upgrade costs, which is reflected as a capital contribution.

For the three months ended March 31, 2010, the following costs attributable to the operations of the Rio das Ostras 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 $1.8 million.

•

Interest expense from credit facilities that were used to finance the acquisition of the Rio das Ostras of $0.5 million.

•

Loss from changes in the foreign exchange rate on the foreign exchange forward contracts of ($0.1) million is reflected in other comprehensive income.

d)

During the three months ended March 31, 2011, nine conventional tankers, two shuttle tankers and two FSO units of the Partnership were employed on long-term charter contracts with subsidiaries of Teekay Corporation, and two conventional tankers of the Partnership were employed on long-term charter contracts with a joint venture in which Teekay Corporation has a 50% interest. Teekay Corporation and its wholly owned subsidiaries provide substantially all of the Partnership’s commercial, technical, crew training, strategic and administrative services needs. In addition, 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. Revenues (expenses) from such related party transactions were as follows:

		Three Months Ended March 31,
		2011				2010
		$				$
Revenues(1)			42,288				37,780
Vessel operating expenses(2)			(1,256	)			(1,066	)
General and administrative(3)(4)(5)			(14,688	)			(12,262	)
Interest expense(6)			—				(2,240	)

e)

At March 31, 2011, due from affiliates totaled $9.5 million (December 31, 2010 — $19.1 million) and due to affiliates totaled $84.5 million (December 31, 2010 — $67.4 million). Due to and from affiliates are non-interest bearing and unsecured and are expected to be settled within the next fiscal year in the normal course of operations.

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
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)

As at March 31, 2011, the Partnership was committed to the following foreign currency forward contracts:

		Contract Amount				Fair Value / Carrying
		in Foreign				Amount of Asset/(Liability)								Average				Expected Maturity
		Currency				(in thousands of U.S. Dollars)								Forward				2011				2012
		(thousands)				Hedge				Non-hedge				Rate (1)				(in thousands of U.S. Dollars)
Norwegian Kroner			515,000				3,441				6,742				6.33				43,812				37,585
British Pound			3,840				—				308				0.66				3,907				1,919
Euro			14,323				—				941				0.74				13,058				6,176
							3,441				7,991								60,777				45,680

The Partnership incurs interest expense on its Norwegian Kroner-denominated bonds. The Partnership entered into a cross currency swap to economically hedge the foreign exchange risk on the principal and interest. As at March 31, 2011, the Partnership was committed to one cross currency swap with the notional amounts of NOK 600 million and $98.5 million, which exchanges a receipt of floating interest based on NIBOR plus a margin 4.75% with a payment of floating interest based on LIBOR plus a margin of 5.04%. In addition, the cross currency swap locks in the transfer of principal to $98.5 million upon maturity in exchange for NOK 600 million. The fair value of the swap as at March 31, 2011 was $10.5 million.

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 U.S. Dollar LIBOR-denominated borrowings.

As at March 31, 2011, the Partnership was committed to the following interest rate swap agreements:

										Fair Value /
										Carrying				Weighted-
										Amount of				Average				Fixed
		Interest				Principal				Assets				Remaining				Interest
		Rate				Amount				(Liability)				Term				Rate
		Index				$				$				(years)				(%)(1)
U.S. Dollar-denominated interest rate swaps		LIBOR					800,000				(96,974	)			12.4				4.6
U.S. Dollar-denominated interest rate swaps (2)		LIBOR					730,271				(57,801	)			5.9				3.9
							1,530,271				(154,775	)

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 of												portion of
		derivative				Derivative				Accrued				derivative				Derivative
		assets				assets				liabilities				liabilities				liabilities
As at March 31, 2011
Foreign currency contracts — cash flow hedges			2,406				1,035				—				—				—
Foreign currency contracts — not designated as hedges			5,843				2,267				—				(119	)			—
Cross currency swap — not designated as hedges			2,696				7,567				240				—				—
Interest rate swaps — not designated as hedges			—				—				(10,694	)			(46,391	)			(97,690	)
			10,945				10,869				(10,454	)			(46,510	)			(97,690	)
As at December 31, 2010
Foreign currency contracts — cash flow hedges			1,606				718				—				(47	)			—
Foreign currency contracts — not designated as hedges			2,543				2,481				—				(361	)			(31	)
Cross currency swap — not designated as hedges			2,031				2,003				199				—				—
Interest rate swaps — not designated as hedges			—				—				(10,939	)			(45,385	)			(119,460	)
			6,180				5,202				(10,740	)			(45,793	)			(119,491	)

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(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 were (1) recognized in other comprehensive income, (2) recorded in accumulated other comprehensive income (or AOCI) during the term of the hedging relationship and reclassified to earnings, and (3) recognized in the ineffective portion of gains (losses) on derivative instruments designated and qualifying as cash flow hedges.

Three Months Ended March 31, 2011														Three Months Ended March 31, 2010
Balance														Balance
Sheet														Sheet
(AOCI)				Statement of Income										(AOCI)				Statement of Income
Effective				Effective				Ineffective						Effective				Effective				Ineffective
Portion				Portion				Portion						Portion				Portion				Portion
	1,983				607				(184	)		Vessel operating expenses			(2,355	)			(48	)			(1,125	)		Vessel operating expenses
					158				130			General and administrative expenses							(665	)			(712	)		General and administrative expenses
	1,983				765				(54	)					(2,355	)			(713	)			(1,837	)

As at March 31, 2011, the Partnership’s accumulated other comprehensive income consisted of unrealized gains on foreign currency forward contracts designated as cash flow hedges. As at March 31, 2011, the Partnership estimated, based on the current foreign exchange rates, that it would reclassify approximately $7.1 million of net gains on foreign currency forward contracts from accumulated other comprehensive income to earnings during the next 12 months.

Realized and unrealized (losses) gains 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 (losses) gains on non-designated derivatives in the consolidated statements of income. The effect of the (loss) gain on derivatives not designated as hedging instruments on the consolidated statements of income is as follows:

		Three Months Ended March 31,
		2011				2010
		$				$
Realized (losses) gains relating to:
Interest rate swaps			(13,702	)			(12,787	)
Foreign currency forward contracts			418				(155	)
			(13,284	)			(12,942	)
Unrealized gains (losses) relating to:
Interest rate swaps			20,765				(10,949	)
Foreign currency forward contracts			3,359				(584	)
			24,124				(11,533	)
Total realized and unrealized gains (losses) on non-designated derivative instruments			10,840				(24,475	)

Realized and unrealized gains of the cross currency swap are recognized in earnings and reported in foreign exchange (loss) gain in the consolidated statements of income. For the three months ended March 31, 2011, an unrealized gain of $6.2 million (2010 — $nil) and a realized gain of $0.7 million (2010 — $nil) were recognized in earnings.

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.

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

11.

Income Tax (Expense) Recovery

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

		Three Months Ended March 31,
		2011				2010
		$				$
Current			(1,484	)			(1,775	)
Deferred			(1,169	)			8,686
Income tax (expense) recovery			(2,653	)			6,911

12.

Commitments and Contingencies

a)

During 2010, an unrelated party contributed a shuttle tanker with a value of $35.0 million to a subsidiary of OPCO for a 33% equity interest in the subsidiary. The equity issuance resulted in a dilution loss of $7.4 million. The non-controlling interest owner in the 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 effect on its financial position, results of operations or cash flows, when taking into account its insurance coverage and indemnifications from charterers or Teekay Corporation.

c)

The Partnership consolidates certain VIEs. In general, a VIE is a corporation, partnership, limited-liability company, trust or any other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations. A party that is a variable interest holder is required to consolidate a VIE if it has both (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

On October 1, 2010, OPCO agreed to acquire all of Teekay Corporation’s interests in the Peary Spirit LLC, which owns the newbuilding shuttle tanker, Peary Spirit. On that date the Peary Spirit LLC became a VIE and the Partnership became its primary beneficiary. The Partnership consolidates the Peary Spirit LLC in its consolidated financial statements effective October 1, 2010. The purchase of the Peary Spirit LLC is expected to coincide with the commencement of the time-charter contract for the Peary Spirit in July 2011.

The following table summarizes the balance sheets of the Peary Spirit LLC as at March 31, 2011 and December 31, 2010:

		As at				As at
		March 31, 2011				December 31, 2010
		$				$
ASSETS
Vessels and equipment
Advances on newbuilding contracts			53,680				52,195
Other assets			1,486				1,486
Total assets			55,166				53,681
LIABILITIES AND DEFICIT
Accrued liabilities			60				56
Current portion of long-term debt			1,037				1,037
Advances from affiliates			30,241				28,760
Long-term debt			23,843				23,843
Total liabilities			55,181				53,696
Total deficit			(15	)			(15	)
Total liabilities and total deficit			55,166				53,681

The assets and liabilities of Peary Spirit LLC are reflected in the Partnership’s consolidated financial statements at historical cost as the Partnership and the VIE are under common control. The Partnership’s maximum exposure to loss as of March 31, 2011, as a result of its commitment to purchase Teekay Corporation’s interests in the Peary Spirit LLC, is limited to the purchase price of its interest in the Peary Spirit, which is expected to be approximately $133 million. The assets of the Peary Spirit LLC cannot be used by the Partnership and the creditors of the Peary Spirit LLC have no recourse to the general credit of the Partnership.

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

13.

Partners’ Equity and Net Income Per Unit

Private Placement

On March 8, 2011, the Partnership issued 7.6 million common units to Teekay Corporation and a 2% proportionate interest to the General Partner as part of the consideration for the Partnership’s acquisition of the remaining interests in OPCO (see Note 9a). As a result of the transaction, Teekay Corporation’s ownership of the Partnership was increased from 28.26% to 36.90%, including the 2% General Partner interest.

Net Income Per Unit

Net income per unit is determined by dividing net income, after deducting the amount of net income attributable to the Dropdown Predecessor, 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 and common unit holders’ 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.

During the three months ended March 31, 2011 and 2010, cash distributions exceeded $0.4025 per unit and, consequently, the assumed distributions 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, 2010 reflects the Dropdown Predecessor as if the Partnership had acquired the Dropdown Predecessor when the vessels began operations under the ownership of Teekay Corporation. For non-cash changes related to the Dropdown Predecessor, see Note 9.

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 consolidated statement of cash flows.

15.

Write-down of Vessel

The Partnership’s consolidated statement of income for three months ended March 31, 2011 includes a total write-down of $0.9 million for impairment on a 1993-built conventional tanker, as the conventional tanker’s carrying value exceeded its estimated fair value. The fair value of the conventional tanker was calculated based on the value of its estimated discounted cash flows which primarily includes an estimated sales price of the vessel. The write-down is included within the Partnership’s conventional tanker segment.

TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
MARCH 31, 2011

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

OVERVIEW

We are an international provider of marine transportation, oil production and storage services to the offshore oil industry. We operate shuttle tankers, floating storage and offtake (or FSO) units, floating production, storage and offloading (or FPSO) units and conventional crude oil tankers.

SIGNIFICANT DEVELOPMENTS

On March 8, 2011, we acquired the remaining 49% interest in Teekay Offshore Operating L.P. (or OPCO) from Teekay Corporation for a combination of $175 million in cash (less $15 million in distributions made by OPCO to Teekay Corporation between December 31, 2010 and the date of acquisition) and 7.6 million of common units (and associated General Partner interest) to Teekay Corporation.

On October 1, 2010, we agreed to acquire from Teekay Corporation a newbuilding shuttle tanker, the Peary Spirit, for approximately $133 million, concurrent with the commencement of its time-charter contract in July 2011. Teekay Corporation is obligated to offer the Partnership an additional shuttle tanker newbuilding (the Scott Spirit) within 365 days after its delivery, provided the vessel is servicing a charter contract in excess of three years in length.

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 to 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 with remaining durations of three years or greater. We also may acquire other vessels that Teekay Corporation may offer us from time to time in the future.

Pursuant to the omnibus agreement and a subsequent agreement, Teekay Corporation is obligated to offer to sell to us the Petrojarl Foinaven FPSO, an existing FPSO unit of Teekay Petrojarl AS (or Teekay Petrojarl), a wholly owned subsidiary of Teekay Corporation, prior to July 9, 2012. The purchase price for the Petrojarl Foinaven FPSO would be its fair market value plus any additional tax or other similar costs to Teekay Petrojarl that would be required to transfer the FPSO unit to us.

On October 19, 2010, Teekay Corporation announced that it had signed a contract with Petroleo Brasileiro SA (or Petrobras) to provide a FPSO unit for the Tiro and Sidon fields located in the Santos Basin offshore Brazil. The contract with Petrobras will be serviced by a newly converted FPSO unit, to be named the Petrojarl Cidade de Itajai, which is currently under conversion from an existing Aframax tanker at Sembcorp Marine’s Jurong Shipyard in Singapore, for a total estimated cost of approximately $370 million. This new FPSO is scheduled to deliver in the second quarter of 2012 when it will commence operations under a nine-year, fixed-rate time-charter contract with Petrobras with six additional one-year extension options. Pursuant to the omnibus agreement, Teekay Corporation is obligated to offer to us its interest in this FPSO unit at Teekay Corporation’s fully built-up cost within 365 days after the commencement of the charter to Petrobras.

Teekay Corporation recently entered into a joint venture agreement with Odebrecht Oil & Gas S.A. (a member of the Odebrecht group) to jointly pursue FPSO projects in Brazil. Teekay Corporation and Odebrecht are 50% partners in the Tiro Sidon FPSO project and are currently working on potential FPSO project opportunities which, pursuant to the omnibus agreement, may result in the future sale of new FPSO units to us.

Teekay Corporation recently signed a Letter of Intent with a major oil and gas company to provide a new harsh weather FPSO which will operate in the North Sea. Teekay Corporation has been involved in the front-end engineering and design study for this project over the past several months, and is currently working towards finalizing a contract with the customer. In connection with this project, Teekay Corporation recently signed a conditional contract with Samsung Heavy Industries to construct a newbuilding FPSO unit. If Teekay Corporation is awarded an operating contract that is three years or greater in duration, pursuant to the omnibus agreement, Teekay Corporation would be obligated to offer to us its interest in this FPSO project at Teekay Corporation’s fully built-up cost within 365 days after the commencement of the charter.

RESULTS OF OPERATIONS

There are a number of factors that should be considered when evaluating our historical financial performance and assessing our future prospects and we use a variety of financial and operational terms and concepts when analyzing our results of operations. These 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, 2010. 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 5 — Segment Reporting.

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, each of which are discussed below.

Shuttle Tanker Segment

As at March 31, 2011, our shuttle tanker fleet consisted of 35 vessels that operate under fixed-rate contracts of affreightment, time charters and bareboat charters. Of the 35 shuttle tankers, six were owned through 50% owned subsidiaries, three through a 67% owned subsidiary and five were chartered-in. 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, 2011 and 2010, and compares its net revenues (which is a non-GAAP financial measure) for the three months ended March 31, 2011 and 2010 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)		2011				2010				% Change
Revenues			138,232				141,993				(2.6	)
Voyage expenses			19,028				29,054				(34.5	)
Net revenues			119,204				112,939				5.5
Vessel operating expenses			40,785				34,163				19.4
Time-charter hire expense			20,270				25,038				(19.0	)
Depreciation and amortization			27,432				24,955				9.9
General and administrative (1)			12,482				11,260				10.9
Restructuring charge			1,227				119				931.1
Income from vessel operations			17,008				17,404				(2.3	)
Calendar-Ship-Days
Owned Vessels			2,700				2,465				9.5
Chartered-in Vessels			541				676				(20.0	)
Total			3,241				3,141				3.2

The average size of our owned shuttle tanker fleet for the three months ended March 31, 2011 increased compared to the same period last year, primarily due to:

•

the purchase from Teekay Corporation of two newbuilding shuttle tankers, the Amundsen Spirit and the Nansen Spirit, in October 2010 and December 2010, respectively (or the 2010 Newbuilding Shuttle Tanker Acquisitions); and

•

the acquisition of one previously chartered-in vessel in February 2010 by our majority owned subsidiary (or the 2010 Shuttle Tanker Acquisition).

The average size of our chartered-in shuttle tanker fleet decreased for the three months ended March 31, 2011, compared to the same period last year, primarily due to:

•

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

•

the 2010 Shuttle Tanker Acquisition.

Net Revenues. Net revenues increased for the three months ended March 31, 2011 from the same period last year, primarily due to:

•

an increase of $10.5 million for the three months ended March 31, 2011 due to the 2010 Newbuilding Shuttle Tanker Acquisitions;

•

an increase of $8.7 million for the three months ended March 31, 2011 due to a net increase in rates as provided in certain contracts of affreightment, bareboat and time-charter contracts as well as from entering into new contracts during 2010; and

•

an increase of $1.8 million for the three months ended March 31, 2011 due to an increase in reimbursable bunker costs as provided for in new contracts during 2010;

partially offset by

•

a decrease of $11.9 million for the three months ended March 31, 2011 due to fewer revenue days from our shuttle tankers due to declining oil production at mature oil fields in the North Sea and a decrease in revenue days in the conventional spot market from decreased demand for conventional crude transportation;

•

a net decrease of $1.6 million for the three months ended March 31, 2011 compared to the same period last year due to an increase in the number of offhire days resulting from more scheduled drydockings in the time-chartered fleet and higher unexpected repair offhire days;

•

a decrease of $0.9 million for the three months ended March 31, 2011 due to the redelivery of one vessel in March 2011 as it completed its time-charter agreement; and

•

a decrease of $0.5 million for the three months ended March 31, 2011 due to higher bunker prices as compared to the same period last year.

Vessel Operating Expenses. Vessel operating expenses increased for the three months ended March 31, 2011 from the same period last year, primarily due to:

•

an increase of $3.5 million for the three months ended March 31, 2011 due to the 2010 Newbuilding Shuttle Tanker Acquisitions;

•

an increase of $3.3 million for the three months ended March 31, 2011 due to an increase in the number of vessels drydocked, and costs related to services and spares. Certain repair and maintenance items are more efficient to complete while a vessel is in drydock. Consequently, repair and maintenance costs will typically increase in periods when there is an increase in the number of vessels drydocked; and

•

an increase of $1.1 million for the three months ended March 31, 2011 in crew and manning costs as compared to the same period last year resulting primarily from a planned increase in wages;

partially offset by

•

a decrease of $0.8 million for the three months ended March 31, 2011 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; and

•

a decrease of $0.8 million for the three months ended March 31, 2011 relating to the settlement of a claim from a customer in 2010.

Time-Charter Hire Expense. Time-charter hire expense decreased for the three months ended March 31, 2011 from the same period last year, primarily due to:

•

a decrease of $5.3 million for the three months ended March 31, 2011 due to the redelivery of two chartered-in vessels to their owners in February 2010 and November 2010; and

•

a decrease of $2.3 million for the three months ended March 31, 2011 due to the 2010 Shuttle Tanker Acquisition;

partially offset by

•

an increase of $2.2 million for the three months ended March 31, 2011 due to increased spot in-chartering of vessels;

•

an increase of $0.5 million for the three months ended March 31, 2011 due to less off-hire in the in-chartered fleet; and

•

an increase of $0.4 million for the three months ended March 31, 2011 due to an increase in rates on certain contracts in the in-chartered fleet.

Depreciation and Amortization Expense. Depreciation and amortization expense increased for the three months ended March 31, 2011 from the same period last year, primarily due to the 2010 Newbuilding Shuttle Tanker Acquisitions and the 2010 Shuttle Tanker Acquisition.

Restructuring Charges. Restructuring charges were $1.2 million for the three months ended March 31, 2011 resulting from the termination of the charter contract of one of our vessels. Restructuring charges were $0.1 million for the three months ended March 31, 2010, relating to 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.

Conventional Tanker Segment

We have a fleet of 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, 2011 and 2010, and compares its net revenues (which is a non-GAAP financial measure) for the three months ended March 31, 2011 and 2010 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)		2011				2010				% Change
Revenues			35,763				31,565				13.3
Voyage expenses			6,146				5,651				8.8
Net revenues			29,617				25,914				14.3
Vessel operating expenses			5,825				5,714				1.9
Depreciation and amortization			6,045				5,742				5.3
General and administrative (1)			1,749				1,193				46.6
Write-down of vessel			900				—				100.0
Income from vessel operations			15,098				13,265				13.8
Calendar-Ship-Days
Owned Vessels			990				990				—