Voyage expenses

Vessel operating expenses (note 9d, 10)

Time-charter hire expense

Depreciation and amortization

General and administrative (note 9b, 9c, 9d, 10)

Loss on sale of vessel

Write-down of vessel (note 4a, 15)

Restructuring charge (note 7)

 

 

 

Interest expense (note 6, 9b, 9c, 9d)

Interest income

Realized and unrealized loss on non-designated derivative instruments (note 10)

Foreign currency exchange gain (loss) (note 10)

Other income — net (note 8)

 

 

Income (loss) before income tax (expense) recovery

Income tax (expense) recovery (note 11)

 

 

Non-controlling interest in net (loss) income

Dropdown Predecessor’s interest in net (loss) income (note 2)

General Partner’s interest in net (loss) income

Limited partners’ interest: (note 13)

Net (loss) income

Net (loss) income per common unit (basic and diluted)

 

Weighted-average number of units outstanding:

- Common units (basic and diluted) (note 13)

 

 

Cash and cash equivalents

Accounts receivable

Vessels held for sale (note 4a)

Net investments in direct financing leases — current

Prepaid expenses

Due from affiliates (note 9e)

Current portion of derivative instruments (note 10)

Other current assets

 

 

 

At cost, less accumulated depreciation of $1,252,536 (December 31, 2010 - $1,200,325)

Advances on newbuilding contracts

Net investments in direct financing leases

Derivative instruments (note 10)

Other assets

Intangible assets — net

Goodwill — shuttle tanker segment

 

 

 

Accounts payable

Accrued liabilities (note 10)

Due to affiliates (note 9e)

Current portion of long-term debt (note 6)

Current portion of derivative instruments (note 10)

Due to joint venture partners

 

 

 

Long-term debt (note 6)

Deferred income tax

Derivative instruments (note 10)

Other long-term liabilities

 

 

Commitments and contingencies (note 6, 10, 12)

 

 

Non-controlling interest

Partners’ equity

Accumulated other comprehensive income

 

 

 

Cash and cash equivalents provided by (used for)

 

Net income

Non-cash items:

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

Depreciation and amortization

Loss on sale and write down of vessels and equipment

Deferred income tax expense (recovery) (note 11)

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

Advance from joint venture partner

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

Contribution by Teekay Corporation relating to acquisition of Rio das Ostras (note 9c)

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

Equity contribution from Teekay Corporation

Purchase of 49% interest in Teekay Offshore Operating L.P. (note 9a)

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

Equity contribution from joint venture partner

Proceeds from issuance of common units

Expenses of equity offerings

Cash distributions paid by the Partnership

Cash distributions paid by subsidiaries to non-controlling interests

Other

 

 

 

 

Expenditures for vessels and equipment

Proceeds from sale of vessels and equipment

Investment in direct financing lease assets

Direct financing lease payments received

 

 

 

 

Cash and cash equivalents, beginning of the period

 

 

 

 

Net income

Reclassification of redeemable non-controlling interest in net income

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

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

Cash distributions

Contribution of capital from joint venture partner

Contribution of capital from Teekay Corporation to Rio das Ostras (note 9c)

Equity offering (note 9a, 13)

Purchase of 49% of Teekay Offshore Operating L.P. (note 9a)

Other

 

 

 

 

 

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

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

Pension adjustment

 

 

 

 

Non-controlling interest in comprehensive (loss) income

Dropdown Predecessor’s interest in comprehensive (loss) income (note 2)

Partners’ interest in comprehensive (loss) income

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; 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 the Partnership’s 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.

On April 1, 2010, the Partnership acquired from Teekay Corporation a floating storage and offtake (or FSO) unit, the Falcon Spirit, together with its time-charter-out 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 six months ended June 30, 2010 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 six months ended June 30, 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 (loss) income and comprehensive (loss) income for the three and six months ended June 30, 2010 and the Partnership’s statement of cash flow for the six months ended June 30, 2010 have been retroactively adjusted to include the results of the Rio das Ostras FPSO unit 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 FPSO unit 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 FPSO unit decreased the Partnership’s net loss and increased the Partnership’s comprehensive loss by $0.7 million and $0.3 million, respectively, for the three months ended June 30, 2010 and decreased the Partnership’s net income and comprehensive income by $0.7 million and $2.1 million, respectively, for the six months ended June 30, 2010.

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.

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:

Cash and cash equivalents

Due from affiliates (note 9e)

Due to affiliates (note 9e)

Long-term debt (note 6)

Due to joint venture partner ⁽²⁾

Derivative instruments (note 10)

Interest rate swap agreements

Cross currency swap agreement

Foreign currency forward contracts

The Partnership has determined that there were no non-financial assets or non-financial liabilities carried at fair value at June 30, 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 $8.3 million at June 30, 2011. The fair value of the vessels were determined based on directly observable inputs (level 2).

Financing Receivables

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:

Direct financing leases

The following tables include results for the Partnership’s 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⁾

Write-down of vessel

 

Income from vessel operations

 

 

Revenues

Voyage expenses

 

Vessel operating expenses

Time-charter hire expense

Depreciation and amortization

General and administrative ⁽¹⁾

Loss on sale of vessel

Write-down of vessel

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

 

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

Norwegian Kroner Bond due in 2013

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

U.S. Dollar-denominated Term Loans due through 2023

 

Total

Less current portion

 

Long-term portion

 

As at June 30, 2011, the Partnership had nine long-term revolving credit facilities, which, as at such date, provided for borrowings of up to $1,372.4 million, of which $135.4 million was undrawn. The total amount available under the revolving credit facilities reduces by $89.6 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.

On November 30, 2010, the Partnership issued NOK 600 million ($111.4 million) of 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 are listed on the Oslo Stock Exchange. Interest payments on the bonds are based on NIBOR plus a margin of 4.75%. The Partnership entered into a cross currency swap and an interest rate swap to swap the interest payments from NIBOR to a fixed rate of 1.12% and principal from Norwegian Kroner to US dollars. The LIBOR rate receivable from the interest rate swap is capped at 3.5% (see Note 10).

As at June 30, 2011, five of the Partnership’s 50% owned subsidiaries each had an outstanding term loan, which in the aggregate totaled $204.5 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 June 30, 2011, the Partnership had guaranteed $57.3 million of these term loans, which represents its 50% share of the outstanding vessel mortgage debt of four of these 50% owned subsidiaries. The other owner and Teekay Corporation have guaranteed $102.2 million and $44.9 million, respectively.

As at June 30, 2011, the Partnership had term loans outstanding for the shuttle tankers the Amundsen Spirit, the Nansen Spirit, the Peary Spirit, and the Rio das Ostras FPSO unit which in aggregate totaled $364.2 million. The Partnership has consolidated the Peary Spirit LLC as a variable interest entity in its consolidated financial statements since October 1, 2010 (see Note 12(c)). For the term loans for the Amundsen Spirit and the Nansen Spirit, 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 due 2022 and 2023, respectively. The term loans for the Peary Spirit and the Rio das Ostras reduce over time with quarterly and semi-annual payments. These four term loans have varying maturities through 2023 and 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.

Interest payments on the revolving credit facilities and the term loans are based on LIBOR plus a margin. At June 30, 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 June 30, 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 June 30, 2011 are $100.0 million (remainder of 2011), $207.5 million (2012), $419.4 million (2013), $805.1 million (2014), $59.7 million (2015), and $325.4 million (thereafter).

As at June 30, 2011, the Partnership and Teekay Corporation were in compliance with all covenants related to the credit facilities and long-term debt.

During the three months ended March 31, 2011, the Partnership sold the FSO unit, Karratha Spirit, and the time-charter-out 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 $3.9 million in the six months ended June 30, 2011.

Volatile organic compound emissions plant lease income

Miscellaneous

 

Other income — net

 

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.

On April 1, 2010, the Partnership acquired Teekay Corporation’s 100% interest in a FSO unit, the Falcon Spirit, together with its time-charter-out 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-out 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.

For the six months ended June 30, 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.

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 and six months ended June 30, 2011, Teekay Corporation reimbursed the Partnership for $1.0 million and $2.0 million, respectively, of such upgrade costs, which is reflected as a capital contribution.

For the three and six months ended June 30, 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 $1.5 million and $3.3 million, respectively.

Interest expense from credit facilities that were used to finance the acquisition of the Rio das Ostras of $0.8 million and $1.3 million, respectively.

Loss from changes in the foreign exchange rate on the foreign exchange forward contracts of ($0.6) million and ($0.8) million, respectively, is reflected in other comprehensive (loss) income.

During the three and six months ended June 30, 2011, nine conventional tankers, two shuttle tankers and two FSO units of the Partnership were employed on long-term time-charter-out contracts with subsidiaries of Teekay Corporation, and two conventional tankers of the Partnership were employed on long-term time-charter-out contracts with a joint venture in which Teekay Corporation has a 50% interest. In addition, during the three and six months ended June 30, 2011, two shuttle tankers of the Partnership were employed on short-term contracts with subsidiaries of Teekay Corporation. 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 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:

Revenues⁽¹⁾

Vessel operating expenses⁽²⁾

General and administrative^(3)(4)(5)

Interest expense⁽⁶⁾

At June 30, 2011, due from affiliates totaled $24.7 million (December 31, 2010 — $19.1 million) and due to affiliates totaled $121.0 million (December 31, 2010 — $67.4 million). Due to and from affiliates are non-interest bearing and unsecured obligations, and are expected to be settled within the next fiscal year in the normal course of operations.

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, 2011, the Partnership was committed to the following foreign currency forward contracts:

Norwegian Kroner

British Pound

Euro

 

 

 

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 June 30, 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 of 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 positive fair value of the cross currency swap as at June 30, 2011 was $13.7 million. The Partnership has not designated, for accounting purposes, the cross currency swap as a hedge.

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, 2011, the Partnership was committed to the following interest rate swap agreements:

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

U.S. Dollar-denominated interest rate swaps ⁽³⁾

U.S. Dollar-denominated interest rate swap ⁽²⁾⁽⁴⁾

 

 

 

 

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

Cross currency swap — not designated as hedges

Interest rate swaps — not designated as hedges

 

 

 

 

Foreign currency contracts — cash flow hedges

Foreign currency contracts — not designated as hedges

Cross currency swap — not designated as hedges

Interest rate swaps — not designated as hedges

 

 

 

 

1,029