##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 20-F
  o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring this shell company report
 For the transition period from  to .
 Commission file number 1-33198
 TEEKAY OFFSHORE PARTNERS L.P.
  
 
 th
 th
  Title of each class
    
    Name of each exchange on which registeredCommon Units
    
    New York Stock Exchange
        þ o
  o þ
  þ o
  o o
  Large Accelerated Filer o
    
    Accelerated Filer þ
    
    Non-Accelerated Filer o
  U.S. GAAP þ
    
    International Financial Reporting Standards as issued by the International Accounting Standards Board o
    
    Other o
  o o
  o þ




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P.
 INDEX TO REPORT ON FORM 20-F
 PagePART I.Item 1. Identity of Directors, Senior Management and Advisors
    
    Not applicableItem 2. Offer Statistics and Expected Timetable
    
    Not applicableItem 3. Key Information
    
    
    5Selected Financial Data
    
    
    5Risk Factors
    
    
    9Tax Risks
    
    
    20Item 4. Information on the Partnership
    
    
    21A. Overview, History and Development
    
    
    21Overview and History
    
    
    21Potential Additional Shuttle Tanker, FSO, and FPSO Projects
    
    
    22B. Business Overview
    
    
    22Shuttle Tanker Segment
    
    
    22Conventional Tanker Segment
    
    
    24FSO Segment
    
    
    25FPSO Segment
    
    
    26Business Strategies
    
    
    26Customers
    
    
    26Safety, Management of Ship Operations and Administration
    
    
    27Risk of Loss, Insurance and Risk Management
    
    
    27Classification, Audits and Inspections
    
    
    28Regulations
    
    
    28C. Organizational Structure
    
    
    31D. Properties
    
    
    31E. Taxation of the Partnership
    
    
    31Item 4A. Unresolved Staff Comments
    
    Not applicableItem 5. Operating and Financial Review and Prospects
    
    
    33Overview
    
    
    33Significant Developments
    
    
    33Potential Additional Shuttle Tanker, FSO and FPSO Projects
    
    
    34Our Contracts of Affreightment and Charters
    
    
    34Important Financial and Operational Terms and Concepts
    
    
    34Items You Should Consider When Evaluating Our Results
    
    
    36Results of Operations
    
    
    36Liquidity and Capital Resources
    
    
    47Credit Facilities
    
    
    48Contractual Obligations and Contingencies
    
    
    49Off-Balance Sheet Arrangements
    
    
    49Critical Accounting Estimates
    
    
    49Recent Accounting Pronouncements
    
    
    51Accounting Pronouncements Not Yet Adopted
    
    
    51Item 6. Directors, Senior Management and Employees
    
    
    51A. Directors and Senior Management
    
    
    51Management of Teekay Offshore Partners L.P.
    
    
    51Directors and Executive Officers of Teekay Offshore GP L.L.C
    
    
    52Directors and Executive Officers of Teekay Offshore Operating GP L.L.C
    
    
    53B. Compensation
    
    
    53Reimbursement of Expenses of Our General Partner
    
    
    53Executive Compensation
    
    
    53Compensation of Directors
    
    
    532006 Long Term Incentive Plan
    
    
    53C. Board Practices
    
    
    53D. Employees
    
    
    54E. Unit Ownership
    
    
    55
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PageItem 7. Major Unitholders and Related Party Transactions
    
    
    55A. Major Unitholders
    
    
    55B. Certain Relationships and Related Party Transactions
    
    
    56Item 8. Financial Information
    
    
    59A. Consolidated Financial Statements and Other Financial Information
    
    
    59Consolidated Financial Statements and Notes
    
    
    59Legal Proceedings
    
    
    59Cash Distribution Policy
    
    
    59B. Significant Changes
    
    
    60Item 9. The Offer and Listing
    
    
    61Item 10. Additional Information
    
    
    61Memorandum and Articles of Association
    
    
    61Material Contracts
    
    
    61Exchange Controls and Other Limitations Affecting Unitholders
    
    
    62Material U.S. Federal Income Tax Considerations
    
    
    62Non-United States Tax Consequences
    
    
    65Documents on Display
    
    
    66Item 11. Quantitative and Qualitative Disclosures About Market Risk
    
    
    66Interest Rate Risk
    
    
    66Foreign Currency Fluctuation Risk
    
    
    66Commodity Price Risk
    
    
    67Item 12. Description of Securities Other than Equity Securities
    
    Not applicablePART II.Item 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    67Item 14. Material Modifications to the Rights of Unitholders and Use of Proceeds
    
    
    Not applicableItem 15. Controls and Procedures
    
    
    67Managements Report on Internal Control over Financial Reporting
    
    
    67Item 16A. Audit Committee Financial Expert
    
    
    68Item 16B. Code of Ethics
    
    
    68Item 16C. Principal Accountant Fees and Services
    
    
    68Item 16D. Exemptions from the Listing Standards for Audit Committees
    
    Not applicableItem 16E. Purchases of Units by the Issuer and Affiliated Purchasers
    
    Not applicableItem 16F. Change in Registrants Certifying Accountant
    
    Not applicableItem 16G. Corporate Governance
    
    
    68PART III.Item 17. Financial Statements
    
    Not applicableItem 18. Financial Statements
    
    
    69Item 19. Exhibits
    
    
    69Signature
    
    
    70Exhibit 2.1Exhibit 4.9Exhibit 8.1Exhibit 12.1Exhibit 12.2Exhibit 13.1Exhibit 15.1
   3




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##### Table of Contents



PART I
  Unless otherwise indicated, references in this Annual Report to Teekay Offshore, we, us and
our and similar terms refer to Teekay Offshore Partners L.P. and/or one or more of its
subsidiaries, including Teekay Offshore Operating L.P. (or OPCO), except that those
terms, when used in this Annual Report in connection with the common units described herein, shall
mean specifically Teekay Offshore Partners L.P. References in this Annual Report to Teekay
Corporation refer to Teekay Corporation and/or any one or more of its subsidiaries.
  
    
    our ability to make cash distributions on our units or any increases in
quarterly distributions;
 
    
    our future financial condition or results of operations and future revenues
and expenses, including our expectations as to additional annual cash flows from the new
Master Agreement with Statoil and the addition of three newbuilding shuttle tankers on
time-charter under this agreement;
 
    
    growth prospects of the offshore and tanker markets;
 
    
    the recent economic downturn and financial crisis in the global market,
including disruptions in the global credit and stock markets and potential negative effects
on our customers ability to charter our vessels and pay for our services;
 
    
    oil fields adjacent to the Petrojarl Vargbecoming operational and our ability
to service these fields;
 
    
    offshore and tanker market fundamentals, including the balance of supply and
demand in the offshore and tanker markets;
 
    
    the expected lifespan of a new shuttle tanker, a floating storage and off-take
(or FSO) unit, a floating production, storage and offloading (or FPSO) unit, and a
conventional tanker;
 
    
    the expected costs of newbuildings and vessel conversions;
 
    
    estimated capital expenditures and the availability of capital resources to
fund capital expenditures;
 
    
    the expected delivery date and method of financing for the purchase of the
Peary Spirit;
 
    
    our ability to maintain long-term relationships with major crude oil
companies, including our ability to service fields until they no longer produce;
 
    
    our ability to leverage to our advantage Teekay Corporations relationships
and reputation in the shipping industry;
 
    
    our continued ability to enter into fixed-rate time charters with customers;
 
    
    obtaining offshore projects that we or Teekay Corporation bid on or that
Teekay Corporation is awarded;
 
    
    our ability to maximize the use of our vessels, including the re-deployment or
disposition of vessels no longer under long-term time charter;
 
    
    the ability of the counterparties to our derivative contracts to fulfill their
contractual obligations;
 
    
    our pursuit of strategic opportunities, including the acquisition of vessels
and expansion into new markets vessels;
 
    
    our expected financial flexibility to pursue acquisitions and other expansion
opportunities;
 
    
    anticipated funds for liquidity needs and the sufficiency of cash flows;
 
    
    the future valuation of goodwill;
 
    
    the expected cost of, and our ability to comply with, governmental regulations
and maritime self regulatory organization standards applicable to our business;
 
    
    the expected impact of heightened environmental and quality concerns of
insurance underwriters, regulators and charterers;
 
    
    anticipated taxation of our partnership and its subsidiaries and taxation of
unitholders;
 
    
    our general and administrative expenses as a public company and expenses under
service agreements with other affiliates of Teekay Corporation and for reimbursements of
fees and costs of Teekay Offshore GP L.L.C., our general partner (or the General Partner);
and
 
    
    our business strategy and other plans and objectives for future operations.
  4




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##### Table of Contents



SEC
  
 Item 1.
    
    Identity of Directors, Senior Management and Advisors
  
 Item 2.
    
    Offer Statistics and Expected Timetable
  
 Item 3.
    
    Key Information
 
 Selected Financial Data
  
    
    historical financial and operating data of Teekay Offshore Partners Predecessor (as
defined below); and
 
    
    financial and operating data of Teekay Offshore Partners L.P. and its subsidiaries since
its initial public offering on December 19, 2006.
 Norsk Teekay OPCO Teekay
Offshore Partners Predecessor Predecessor.
  
    
    the historical financial and operating data for the year ended December 31, 2006 is
derived from the audited combined consolidated financial statements of Teekay Offshore
Partners Predecessor and Teekay Offshore Partners LP; and
 
    
    the historical financial and operating data as at December 31, 2006, 2007, 2008, 2009
and 2010, and for the years ended December 31, 2007, 2008, 2009 and 2010, are derived from
our audited consolidated financial statements.
 Navion Bergen Navion
Gothenburg Dampier Spirit SPT Explorer SPT
Navigator. Petrojarl Varg, Falcon Spirit Cidade de Rio das
Ostras Rio das Ostras Amundsen Spirit
 Dropdown Predecessor Petrojarl Varg Navion Bergen Navion Gothenburg Dampier Spirit SPT Explorer), SPT Navigator , Rio das Ostras Falcon Spirit) (Amundsen Spirit
 Nansen Spirit Peary Spirit Nansen Spirit Peary Spirit Peary Spirit Nansen Spirit Nansen Spirit Nansen Spirit
  GAAP
  5




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##### Table of Contents



Year Ended December 31,2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010(in thousands of US dollars, except per unit, unit and fleet data)Income Statement Data:Revenues
    
    $
    665,613
    
    
    $
    878,656
    
    
    $
    1,003,561
    
    
    $
    871,112
    
    
    $
    900,546Operating expenses:Voyage expenses (1)
    
    
    94,423
    
    
    
    151,637
    
    
    
    225,029
    
    
    
    111,026
    
    
    
    125,101Vessel operating expenses (2) (11)
    
    
    125,687
    
    
    
    191,363
    
    
    
    252,059
    
    
    
    260,977
    
    
    
    268,876Time-charter hire expense
    
    
    165,614
    
    
    
    150,463
    
    
    
    132,234
    
    
    
    117,202
    
    
    
    89,795Depreciation and amortization
    
    
    108,964
    
    
    
    142,029
    
    
    
    168,396
    
    
    
    181,176
    
    
    
    190,341General and administrative (11)
    
    
    63,276
    
    
    
    66,318
    
    
    
    68,506
    
    
    
    61,761
    
    
    
    63,214Goodwill impairment charge
    
    
    
    
    
    
    
    
    
    
    149,129
    
    
    
    
    
    
    
    (Gain) on sale of vessels  net of writedowns
    
    
    (4,778
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,441Restructuring charge
    
    
    832
    
    
    
    
    
    
    
    
    
    
    
    5,008
    
    
    
    119Total operating expenses
    
    
    554,018
    
    
    
    701,810
    
    
    
    995,353
    
    
    
    737,150
    
    
    
    746,887Income from vessel operations
    
    
    111,595
    
    
    
    176,846
    
    
    
    8,208
    
    
    
    133,962
    
    
    
    153,659Interest expense
    
    
    (77,701
    )
    
    
    (111,120
    )
    
    
    (93,381
    )
    
    
    (50,798
    )
    
    
    (37,411
    )Interest income
    
    
    5,559
    
    
    
    6,062
    
    
    
    4,208
    
    
    
    1,239
    
    
    
    842Equity income from joint ventures
    
    
    6,321
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Realized and unrealized gains (losses) on non-
designated derivatives
    
    
    5,683
    
    
    
    (46,542
    )
    
    
    (193,345
    )
    
    
    51,944
    
    
    
    (55,666
    )Foreign currency exchange (loss) gain (3)
    
    
    (65,723
    )
    
    
    (9,760
    )
    
    
    9,841
    
    
    
    (11,242
    )
    
    
    911Other income  net
    
    
    8,673
    
    
    
    10,398
    
    
    
    11,830
    
    
    
    9,489
    
    
    
    6,810Income tax (expense) recovery
    
    
    (6,588
    )
    
    
    (1,481
    )
    
    
    62,090
    
    
    
    (13,792
    )
    
    
    9,718Loss from discontinued operations (4)
    
    
    (10,656
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net (Loss) income
    
    $
    (22,837
    )
    
    $
    24,403
    
    
    $
    (190,549
    )
    
    $
    120,802
    
    
    $
    78,863Non-controlling interest in net income (loss)
    
    $
    8,442
    
    
    $
    37,573
    
    
    $
    10,489
    
    
    $
    57,490
    
    
    $
    37,378Dropdown Predecessors interest in net income (loss)
    
    
    762
    
    
    
    (15,828
    )
    
    
    (182,071
    )
    
    
    (419
    )
    
    
    (16,685
    )General partners interest in net income (loss)
    
    
    64
    
    
    
    733
    
    
    
    8,918
    
    
    
    2,523
    
    
    
    4,359Limited partners interest:Net (loss) income from continuing operations
    
    
    (21,449
    )
    
    
    1,925
    
    
    
    (27,885
    )
    
    
    61,208
    
    
    
    53,811Net (loss) income from continuing operations per:Common unit (basic and diluted) (5)
    
    
    (1.55
    )
    
    
    0.13
    
    
    
    (0.65
    )
    
    
    1.85
    
    
    
    1.22Subordinated unit (basic and diluted) (5)
    
    
    (1.74
    )
    
    
    0.13
    
    
    
    (0.92
    )
    
    
    1.80
    
    
    
    Total unit (basic and diluted) (5)
    
    
    (1.67
    )
    
    
    0.13
    
    
    
    (0.76
    )
    
    
    1.84
    
    
    
    1.22Limited partners interest:Net (loss) income
    
    
    (32,105
    )
    
    
    1,925
    
    
    
    (27,885
    )
    
    
    61,208
    
    
    
    53,811Net (loss) income per:Common unit (basic and diluted) (5)
    
    
    (2.33
    )
    
    
    0.13
    
    
    
    (0.65
    )
    
    
    1.85
    
    
    
    1.22Subordinated unit (basic and diluted) (5)
    
    
    (2.58
    )
    
    
    0.13
    
    
    
    (0.92
    )
    
    
    1.80
    
    
    
    Total unit (basic and diluted) (5)
    
    
    (2.50
    )
    
    
    0.13
    
    
    
    (0.76
    )
    
    
    1.84
    
    
    
    1.22Cash distributions declared per unit
    
    
    
    
    
    
    1.14
    
    
    
    1.65
    
    
    
    1.80
    
    
    
    1.88Balance Sheet Data (at end of year):Cash and marketable securities
    
    $
    124,072
    
    
    $
    128,860
    
    
    $
    138,621
    
    
    $
    109,407
    
    
    $
    166,483Vessels and equipment (6)
    
    
    1,814,707
    
    
    
    1,927,169
    
    
    
    2,244,100
    
    
    
    2,120,688
    
    
    
    2,299,507Total assets
    
    
    2,493,975
    
    
    
    2,560,360
    
    
    
    2,755,147
    
    
    
    2,651,069
    
    
    
    2,842,626Total debt
    
    
    1,506,928
    
    
    
    1,744,369
    
    
    
    2,096,105
    
    
    
    2,045,055
    
    
    
    1,717,140Non-controlling interest (12)
    
    
    443,448
    
    
    
    414,003
    
    
    
    201,383
    
    
    
    219,692
    
    
    
    212,601Dropdown Predecessors equity
    
    
    212,634
    
    
    
    93,245
    
    
    
    (33,353
    )
    
    
    (61,174
    )
    
    
    Total partners equity
    
    
    138,942
    
    
    
    77,108
    
    
    
    117,910
    
    
    
    213,065
    
    
    
    556,828Accumulated other comprehensive income (loss)
    
    
    
    
    
    
    45
    
    
    
    (22,581
    )
    
    
    (712
    )
    
    
    745Common units outstanding (5)
    
    
    3,049,315
    
    
    
    9,800,000
    
    
    
    15,461,202
    
    
    
    23,476,438
    
    
    
    44,278,158Subordinated units outstanding (5)
    
    
    9,800,000
    
    
    
    9,800,000
    
    
    
    9,800,000
    
    
    
    9,800,000
    
    
    
    Cash Flow Data:Net cash provided by (used in):Operating activities
    
    $
    159,141
    
    
    $
    149,197
    
    
    $
    198,319
    
    
    $
    162,361
    
    
    $
    286,585Financing activities
    
    
    (6,834
    )
    
    
    (129,705
    )
    
    
    123,188
    
    
    
    (200,360
    )
    
    
    (211,600
    )Investing activities
    
    
    (157,221
    )
    
    
    (14,704
    )
    
    
    (311,746
    )
    
    
    8,785
    
    
    
    (17,909
    )Other Financial Data:Net revenues (7)
    
    $
    571,190
    
    
    $
    727,019
    
    
    $
    778,532
    
    
    $
    760,086
    
    
    $
    775,445EBITDA (8)
    
    
    164,857
    
    
    
    272,971
    
    
    
    4,930
    
    
    
    365,329
    
    
    
    296,055Adjusted EBITDA (8)
    
    
    218,270
    
    
    
    321,341
    
    
    
    330,305
    
    
    
    312,141
    
    
    
    363,009Expenditures for vessels and equipment (9)
    
    
    31,079
    
    
    
    31,228
    
    
    
    73,587
    
    
    
    13,681
    
    
    
    39,759Expenditures for drydocking (9)
    
    
    31,255
    
    
    
    49,053
    
    
    
    29,075
    
    
    
    41,864
    
    
    
    23,637Fleet data:Average number of shuttle tankers (10)
    
    
    33.9
    
    
    
    36.9
    
    
    
    36.7
    
    
    
    35.9
    
    
    
    35.2Average number of conventional tankers (10)
    
    
    22.0
    
    
    
    9.3
    
    
    
    10.7
    
    
    
    11.0
    
    
    
    11.0Average number of FSO units (10)
    
    
    4.0
    
    
    
    4.7
    
    
    
    5.0
    
    
    
    5.0
    
    
    
    6.0Average number of FPSO Units (10)
    
    
    0.3
    
    
    
    1.0
    
    
    
    1.8
    
    
    
    2.0
    
    
    
    2.0
  6




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##### Table of Contents



(1)
    
    Voyage expenses are all expenses unique to a particular voyage, including any bunker fuel
expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and
commissions.(2)
    
    Vessel operating expenses include crewing, repairs and maintenance, insurance, stores, lube
oils and communication expenses.(3)
    
    Substantially all of these foreign currency exchange gains and losses were unrealized and not
settled in cash. Under U.S. accounting principles, all foreign currency-denominated monetary
assets and liabilities, such as cash and cash equivalents, accounts receivable, accounts
payable, advances from affiliates, deferred income taxes and long term debt are revalued and
reported based on the prevailing exchange rate at the end of the period. For the periods prior
to our initial public offering, our primary source of foreign currency gains and losses were
our Norwegian Kroner-denominated advances from affiliates, which were settled by the
Predecessor prior to our initial public offering on December 19, 2006. Also starting in
November 2010, foreign currency exchange gains and losses includes realized and unrealized
gains and losses on the cross currency swap.(4)
    
    On July 1, 2006, the Predecessor sold Navion Shipping Ltd. to a subsidiary of Teekay
Corporation for $53.7 million. At the time of the sale, all of the Predecessors chartered-in
conventional tankers were chartered-in by Navion Shipping Ltd. and subsequently time chartered
to a subsidiary of Teekay Corporation at charter rates that provided a fixed 1.25% profit
margin. These chartered-in conventional tankers were operated in the spot market by the
subsidiary of Teekay Corporation.(5)
    
    Net (loss) income per unit is determined by dividing net (loss) income, after deducting the
amount of net (loss) 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.(6)
    
    Vessels and equipment consists of (a) vessels, at cost less accumulated depreciation and (b)
advances on newbuildings.(7)
    
    Consistent with general practice in the shipping industry, we use net revenues (defined as
revenues less voyage expenses) as a measure of equating revenues generated from voyage
charters to revenues generated from time charters, which assists us in making operating
decisions about the deployment of vessels and their performance. Under time charters and
bareboat charters, the charterer typically pays the voyage expenses, which are all expenses
unique to a particular voyage, including any bunker fuel expenses, port fees, cargo loading
and unloading expenses, canal tolls and agency fees and commissions, whereas under voyage
charter contracts and contracts of affreightment the shipowner typically pays the voyage
expenses. Some voyage expenses are fixed, and the remainder can be estimated. If we or OPCO,
as the shipowner, pay the voyage expenses, we or OPCO typically pass the approximate amount of
these expenses on to the customers by charging higher rates under the contract or billing the
expenses to them. As a result, although revenues from different types of contracts may vary,
the net revenues are comparable across the different types of contracts. We principally use
net revenues, a non-GAAP financial measure, because it provides more meaningful information to
us than revenues, the most directly comparable GAAP financial measure. Net revenues are also
widely used by investors and analysts in the shipping industry for comparing financial
performance between companies in the shipping industry to industry averages. The following
table reconciles net revenues with revenues. Year Ended December 31,2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010(in thousands of US dollars)Revenues
    
    
    665,613
    
    
    
    878,656
    
    
    
    1,003,561
    
    
    
    871,112
    
    
    
    900,546Voyage expenses
    
    
    94,423
    
    
    
    151,637
    
    
    
    225,029
    
    
    
    111,026
    
    
    
    125,101Net revenues
    
    
    571,190
    
    
    
    727,019
    
    
    
    778,532
    
    
    
    760,086
    
    
    
    775,445
 (8)
    
    EBITDA represents earnings before interest, taxes, depreciation and amortization. Adjusted
EBITDA represents EBITDA before restructuring charges, foreign exchange (gain) loss, gain on
sale of vessels and equipment  net of writedowns, goodwill impairment charge, amortization
of in-process revenue contracts, unrealized gains (losses) on derivative instruments and
realized (gains) losses on interest rate swaps and the cross currency swap. EBITDA and
Adjusted EBITDA are used as supplemental financial measures by management and by external
users of our financial statements, such as investors, as discussed below. 
    
    Financial and operating performance. EBITDA and Adjusted EBITDA assist our management
and investors by increasing the comparability of the fundamental performance of us from
period to period and against the fundamental performance of other companies in our
industry that provide EBITDA or Adjusted EBITDA-based information. This increased
comparability is achieved by excluding the potentially disparate effects between periods
or companies of interest expense, taxes, depreciation or amortization, which items are
affected by various and possibly changing financing methods, capital structure and
historical cost basis and which items may significantly affect net income between periods.
We believe that including EBITDA and Adjusted EBITDA as a financial and operating measure
benefits investors in (a) selecting between investing in us and other investment
alternatives and (b) monitoring our ongoing financial and operational strength and health
in assessing whether to continue to hold our common units.
 
    
    Liquidity. EBITDA and Adjusted EBITDA allow us to assess the ability of assets to
generate cash sufficient to service debt, make distributions and undertake capital
expenditures. By eliminating the cash flow effect resulting from the existing
capitalization of us and OPCO and other items such as drydocking expenditures, working
capital changes and foreign currency exchange gains and losses (which may vary
significantly from period to period), EBITDA and Adjusted EBITDA provide a consistent
measure of our ability to generate cash over the long term. Management uses this
information as a significant factor in determining (a) our and OPCOs proper
capitalization (including assessing how much debt to incur and whether changes to the
capitalization should be made) and (b) whether to undertake material capital expenditures
and how to finance them, all in light of existing cash distribution commitments to
unitholders. Use of EBITDA and Adjusted EBITDA as liquidity measures also permits
investors to assess the fundamental ability of OPCO and us to generate cash sufficient to
meet cash needs, including distributions on our common units.
  7




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Neither EBITDA nor Adjusted EBITDA, which are non-GAAP measures, should be considered as an
alternative to net income, operating income, cash flow from operating activities or any other
measure of financial performance or liquidity presented in accordance with GAAP. EBITDA and
Adjusted EBITDA exclude some, but not all, items that affect net income and operating income,
and these measures may vary among other companies. Therefore, EBITDA and Adjusted EBITDA as
presented in this Report may not be comparable to similarly titled measures of other companies.
 The following table reconciles our historical consolidated EBITDA and Adjusted EBITDA to net
income, and our historical consolidated Adjusted EBITDA to net operating cash flow.
 Year Ended December 31,2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010(in thousands of US dollars)Reconciliation of EBITDA and AdjustedEBITDA to Net IncomeNet (loss) income
    
    $
    (22,837
    )
    
    $
    24,403
    
    
    $
    (190,549
    )
    
    $
    120,802
    
    
    $
    78,863Depreciation and amortization
    
    
    108,964
    
    
    
    142,029
    
    
    
    168,396
    
    
    
    181,176
    
    
    
    190,341Interest expense, net
    
    
    72,142
    
    
    
    105,058
    
    
    
    89,173
    
    
    
    49,559
    
    
    
    36,569Income taxes expense (recovery)
    
    
    6,588
    
    
    
    1,481
    
    
    
    (62,090
    )
    
    
    13,792
    
    
    
    (9,718
    )EBITDA
    
    $
    164,857
    
    
    $
    272,971
    
    
    $
    4,930
    
    
    $
    365,329
    
    
    $
    296,055Unrealized (gains) losses on derivative instruments
    
    
    (4,173
    )
    
    
    55,446
    
    
    
    175,456
    
    
    
    (113,570
    )
    
    
    5,618Realized (gains) losses on interest rate swaps
    
    
    (1,722
    )
    
    
    (6,379
    )
    
    
    21,470
    
    
    
    51,084
    
    
    
    49,224Restructuring charges
    
    
    832
    
    
    
    
    
    
    
    
    
    
    
    5,008
    
    
    
    119Foreign exchange loss (gain)(i)
    
    
    65,723
    
    
    
    9,760
    
    
    
    (9,841
    )
    
    
    11,242
    
    
    
    3,123(Gain) loss on sale of vessels  net of writedowns
    
    
    (4,778
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,441Goodwill impairment charge
    
    
    
    
    
    
    
    
    
    
    149,129
    
    
    
    
    
    
    
    Amortization of in-process revenue contracts
    
    
    (2,469
    )
    
    
    (10,457
    )
    
    
    (10,839
    )
    
    
    (6,952
    )
    
    
    (571
    )Adjusted EBITDA
    
    $
    218,270
    
    
    $
    321,341
    
    
    $
    330,305
    
    
    $
    312,141
    
    
    $
    363,009Reconciliation of Adjusted EBITDA to Net operating
cash flowNet operating cash flow
    
    $
    159,141
    
    
    $
    149,197
    
    
    $
    198,319
    
    
    $
    162,361
    
    
    $
    286,585Expenditures for drydocking
    
    
    31,255
    
    
    
    49,053
    
    
    
    29,075
    
    
    
    41,864
    
    
    
    23,637Interest expense, net of interest income
    
    
    72,142
    
    
    
    105,058
    
    
    
    89,173
    
    
    
    49,559
    
    
    
    36,569Current income taxes
    
    
    4,129
    
    
    
    
    
    
    
    1,006
    
    
    
    5,583
    
    
    
    6,038Realized (gains) losses on interest rate swaps
    
    
    (1,722
    )
    
    
    (6,379
    )
    
    
    21,470
    
    
    
    51,084
    
    
    
    49,224Equity income
    
    
    319
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in working capital
    
    
    (41,456
    )
    
    
    24,871
    
    
    
    (6,987
    )
    
    
    (8,931
    )
    
    
    (34,464
    )Restructuring charges
    
    
    832
    
    
    
    
    
    
    
    
    
    
    
    5,008
    
    
    
    119Other, net
    
    
    (6,370
    )
    
    
    (459
    )
    
    
    (1,751
    )
    
    
    5,613
    
    
    
    (4,699
    )Adjusted EBITDA
    
    $
    218,270
    
    
    $
    321,341
    
    
    $
    330,305
    
    
    $
    312,141
    
    
    $
    363,009
 (i)
    
    Foreign exchange loss (gain) excludes the unrealized gain of $4.0 million on the
cross currency swap, which is incorporated in unrealized (gains) losses on derivative
instruments in the table. (9)
    
    Expenditures for drydocking is disclosed on a cash basis. Expenditures for vessels and
equipment excludes non-cash investing activities. Please read Item 18  Financial
Statements: Note 15  Supplemental Cash Flow Information.(10)
    
    Average number of vessels consists of the average number of owned and chartered-in vessels
(including those in discontinued operations) that were in our possession during a period,
including the Dropdown Predecessor.(11)
    
    Vessel operating expenses and general and administrative expenses include unrealized gains
(losses) on derivative instruments. Please read Item 18  Financial Statements: Note 12 
Derivative Instruments and Hedging Activities.(12)
    
    Non-controlling interest includes redeemable non-controlling interest. Please read Item 18 
Financial Statements: Note 14 (a)  Commitments and Contingencies.  8




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##### Table of Contents



Risk Factors
 Our cash flow depends substantially on the ability of our subsidiaries to make distributions to us.
  
    
    the rates they obtain from their charters and contracts of affreightment (whereby our
subsidiaries carry an agreed quantity of cargo for a customer over a specified trade route
within a given period of time);
 
    
    the price and level of production of, and demand for, crude oil, particularly the level
of production at the offshore oil fields our subsidiaries service under contracts of
affreightment;
 
    
    the level of their operating costs, such as the cost of crews and insurance;
 
    
    the number of off-hire days for their vessels and the timing of, and number of days
required for, drydocking of vessels;
 
    
    the rates, if any, at which our subsidiaries may be able to redeploy shuttle tankers in
the spot market as conventional oil tankers during any periods of reduced or terminated oil
production at fields serviced by contracts of affreightment;
 
    
    delays in the delivery of any newbuildings or vessels undergoing conversion and the
beginning of payments under charters relating to those vessels;
 
    
    prevailing global and regional economic and political conditions;
 
    
    currency exchange rate fluctuations; and
 
    
    the effect of governmental regulations and maritime self-regulatory organization
standards on the conduct of business.
  
    
    the level of their capital expenditures, including for maintaining vessels or converting
existing vessels for other uses and complying with regulations;
 
    
    their debt service requirements and restrictions on distributions contained in their debt
instruments;
 
    
    fluctuations in their working capital needs;
 
    
    their ability to make working capital borrowings; and
 
    
    the amount of any cash reserves, including reserves for future maintenance capital
expenditures, working capital and other matters, established by the Board of Directors of
our General Partner at their discretion.
  We may not have sufficient cash from operations to enable us to pay the current level of
distribution on our common units or to maintain or increase distributions.
   
    
    interest expense and principal payments on any indebtedness we incur;
 
    
    restrictions on distributions contained in any of our current or future debt agreements;
 
    
    fees and expenses of us, our general partner, its affiliates or third parties we are
required to reimburse or pay, including expenses we incur as a result of being a public
company; and
 
    
    reserves our general partner believes are prudent for us to maintain for the proper
conduct of our business or to provide for future distributions.
   9




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##### Table of Contents



Our ability to grow may be adversely affected by our cash distribution policy. Our ability to meet
our financial needs and grow may be adversely affected by our cash distribution policy.
   We must make substantial capital expenditures to maintain the operating capacity of our fleet,
which reduces cash available for distribution. In addition, each quarter our general partner is
required to deduct estimated maintenance capital expenditures from operating surplus, which may
result in less cash available to unitholders than if actual maintenance capital expenditures were
deducted.
  
    
    the cost of labor and materials;
 
    
    customer requirements;
 
    
    increases in fleet size or the cost of replacement vessels;
 
    
    governmental regulations and maritime self-regulatory organization standards relating to
safety, security or the environment; and
 
    
    competitive standards.
   We require substantial capital expenditures to expand the size of our fleet. We generally are
required to make significant installment payments for acquisitions of newbuilding vessels or for
the conversion of existing vessels prior to their delivery and generation of revenue. Depending on
whether we finance our expenditures through cash from operations or by issuing debt or equity
securities, our ability to make cash distributions may be diminished or our financial leverage may
increase or our unitholders may be diluted.
  Teekay Petrojarl
   10




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##### Table of Contents



Our substantial debt levels may limit our flexibility in obtaining additional financing, pursuing
other business opportunities and paying distributions to you.
  
    
    our ability to obtain additional financing, if necessary, for working capital, capital
expenditures, acquisitions or other purposes may be impaired or such financing may not be
available on favorable terms;
 
    
    we will need a substantial portion of our cash flow to make principal and interest
payments on our debt, reducing the funds that would otherwise be available for operations,
future business opportunities and distributions to unitholders;
 
    
    our debt level may make us more vulnerable than our competitors with less debt to
competitive pressures or a downturn in our industry or the economy generally; and
 
    
    our debt level may limit our flexibility in responding to changing business and economic
conditions.
  Financing agreements containing operating and financial restrictions may restrict our business and
financing activities.
  
    
    incur or guarantee indebtedness;
 
    
    change ownership or structure, including mergers, consolidations, liquidations and
dissolutions;
 
    
    make dividends or distributions;
 
    
    make certain negative pledges and grant certain liens;
 
    
    sell, transfer, assign or convey assets;
 
    
    make certain investments; and
 
    
    enter into a new line of business.
   11




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##### Table of Contents



Restrictions in our debt agreements may prevent us or our subsidiaries from paying distributions.
  
    
    failure to pay any principal, interest, fees, expenses or other amounts when due;
 
    
    failure to notify the lenders of any material oil spill or discharge of hazardous
material, or of any action or claim related thereto;
 
    
    breach or lapse of any insurance with respect to vessels securing the facilities;
 
    
    breach of certain financial covenants;
 
    
    failure to observe any other agreement, security instrument, obligation or covenant
beyond specified cure periods in certain cases;
 
    
    default under other indebtedness;
 
    
    bankruptcy or insolvency events;
 
    
    failure of any representation or warranty to be materially correct;
 
    
    a change of control, as defined in the applicable agreement; and
 
    
    a material adverse effect, as defined in the applicable agreement.
 We derive a substantial majority of our revenues from a limited number of customers, and the loss
of any such customers could result in a significant loss of revenues and cash flow.
    We depend on Teekay Corporation to assist us in operating our businesses and competing in our
markets.
   
    
    renew existing charters and contracts of affreightment upon their expiration;
 
    
    obtain new charters and contracts of affreightment;
 
    
    successfully interact with shipyards during periods of shipyard construction constraints;
 
    
    obtain financing on commercially acceptable terms; or
 
    
    maintain satisfactory relationships with suppliers and other third parties.
    12




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##### Table of Contents



Our growth depends on continued growth in demand for offshore oil transportation, processing and
storage services.
  
    
    decreases in the actual or projected price of oil, which could lead to a reduction in or
termination of production of oil at certain fields we service or a reduction in exploration
for or development of new offshore oil fields;
 
    
    increases in the production of oil in areas linked by pipelines to consuming areas, the
extension of existing, or the development of new, pipeline systems in markets we may serve,
or the conversion of existing non-oil pipelines to oil pipelines in those markets;
 
    
    decreases in the consumption of oil due to increases in its price relative to other
energy sources, other factors making consumption of oil less attractive or energy
conservation measures;
 
    
    availability of new, alternative energy sources; and
 
    
    negative global or regional economic or political conditions, particularly in oil
consuming regions, which could reduce energy consumption or its growth.
  Because payments under our contracts of affreightment are based on the volume of oil transported
and a portion of the payments under our FPSO units operations contracts are based on the volume of
oil produced, utilization of our shuttle tanker fleet, the success of our shuttle tanker business
and the revenue from our FPSO units depends upon continued production from existing or new oil
fields, which is beyond our control and generally declines naturally over time.
 Petrojarl Varg
 Petrojarl Varg Talisman Energy Petrojarl Varg Petrojarl Varg
 The duration of many of our shuttle tanker, FSO and FPSO contracts is the life of the relevant oil
field or is subject to extension by the field operator or vessel charterer. If the oil field no
longer produces oil or is abandoned or the contract term is not extended, we will no longer
generate revenue under the related contract and will need to seek to redeploy affected vessels.
  Future adverse economic conditions, including disruptions in the global credit markets, could
adversely affect our results of operations.
   13




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##### Table of Contents



Future adverse economic conditions may affect our customers ability to charter our vessels and pay
for our services and may adversely affect our business and results of operations.
  The results of our shuttle tanker operations in the North Sea are subject to seasonal fluctuations.
  Our growth depends on our ability to expand relationships with existing customers and obtain new
customers, for which we will face substantial competition.
  
    
    industry relationships and reputation for customer service and safety;
 
    
    experience and quality of ship operations;
 
    
    quality, experience and technical capability of the crew;
 
    
    relationships with shipyards and the ability to get suitable berths;
 
    
    construction management experience, including the ability to obtain on-time delivery of
new vessels according to customer specifications;
 
    
    willingness to accept operational risks pursuant to the charter, such as allowing
termination of the charter for force majeure events; and
 
    
    competitiveness of the bid in terms of overall price.
  Delays in deliveries of newbuilding vessels or of conversions of existing vessels could harm our
operating results.
   
    
    quality or engineering problems, the risk of which may be increased with FPSO units due
to their technical complexity;
 
    
    changes in governmental regulations or maritime self-regulatory organization standards;
 
    
    work stoppages or other labor disturbances at the shipyard;
 
    
    bankruptcy or other financial crisis of the shipbuilder;
 
    
    a backlog of orders at the shipyard;
 
    
    political or economic disturbances;
  14




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##### Table of Contents




    
    weather interference or catastrophic event, such as a major earthquake or fire;
 
    
    requests for changes to the original vessel specifications;
 
    
    shortages of or delays in the receipt of necessary construction materials, such as steel;
 
    
    inability to finance the construction or conversion of the vessels; or
 
    
    inability to obtain requisite permits or approvals.
  Charter rates for conventional oil tankers may fluctuate substantially over time and may be lower
when we are attempting to recharter conventional oil tankers, which could adversely affect
operating results. Any changes in charter rates for shuttle tankers or FSO or FPSO units could also
adversely affect redeployment opportunities for those vessels.
  Over time, the value of our vessels may decline, which could adversely affect our operating
results.
  
    
    prevailing economic conditions in oil and energy markets;
 
    
    a substantial or extended decline in demand for oil;
 
    
    increases in the supply of vessel capacity;
 
    
    the cost of retrofitting or modifying existing vessels, as a result of
technological advances in vessel design or equipment, changes in applicable environmental or
other regulations or standards, or otherwise; and
 
    
    a decrease in oil reserves in the fields and other fields in which our FPSO
units might otherwise be deployed.
  Climate change and greenhouse gas restrictions may adversely impact our operations and markets.
   We may be unable to make or realize expected benefits from acquisitions, and implementing our
growth strategy through acquisitions may harm our business, financial condition and operating
results.
   15




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##### Table of Contents




    
    fail to realize anticipated benefits, such as new customer relationships, cost-savings or
cash flow enhancements;
 
    
    be unable to hire, train or retain qualified shore and seafaring personnel to manage and
operate our growing business and fleet;
 
    
    decrease our liquidity by using a significant portion of available cash or borrowing
capacity to finance acquisitions;
 
    
    significantly increase our interest expense or financial leverage if we incur additional
debt to finance acquisitions;
 
    
    incur or assume unanticipated liabilities, losses or costs associated with the business
or vessels acquired; or
 
    
    incur other significant charges, such as impairment of goodwill or other intangible
assets, asset devaluation or restructuring charges.
  Terrorist attacks, piracy, increased hostilities or war could lead to further economic instability,
increased costs and disruption of business.
   Our substantial operations outside the United States expose us to political, governmental and
economic instability, which could harm our operations.
  Marine transportation is inherently risky, particularly in the extreme conditions in which many of
our vessels operate. An incident involving significant loss of product or environmental
contamination by any of our vessels could harm our reputation and business.
  
    
    marine disasters;
 
    
    bad weather;
 
    
    mechanical failures;
 
    
    grounding, capsizing, fire, explosions and collisions;
 
    
    piracy;
 
    
    human error; and
 
    
    war and terrorism.
  16




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##### Table of Contents



Petrojarl Varg
  
    
    death or injury to persons, loss of property or damage to the environment and natural
resources;
 
    
    delays in the delivery of cargo;
 
    
    loss of revenues from charters or contracts of affreightment;
 
    
    liabilities or costs to recover any spilled oil or other petroleum products and to
restore the eco-system affected by the spill;
 
    
    governmental fines, penalties or restrictions on conducting business;
 
    
    higher insurance rates; and
 
    
    damage to our reputation and customer relationships generally.
  Insurance may be insufficient to cover losses that may occur to our property or result from our
operations.
    We may experience operational problems with vessels that reduce revenue and increase costs.
  The offshore shipping and storage industry is subject to substantial environmental and other
regulations, which may significantly limit operations or increase expenses.
   OPA 90 IMO
  17




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##### Table of Contents



Exposure to currency exchange rate fluctuations results in fluctuations in cash flows and operating
results.
  Many seafaring employees are covered by collective bargaining agreements and the failure to renew
those agreements or any future labor agreements may disrupt operations and adversely affect our
cash flows.
  Teekay Corporation may be unable to attract and retain qualified, skilled employees or crew
necessary to operate our business, or may have to pay substantially increased costs for its
employees and crew.
  Teekay Corporation and its affiliates may engage in competition with us.
 offshore vessels
 
    
    own, operate and charter offshore vessels if the remaining duration of the time charter
or contract of affreightment for the vessel, excluding any extension options, is less than
three years;
 
    
    own, operate and charter offshore vessels and related time charters or contracts of
affreightment acquired as part of a business or package of assets and operating or
chartering those vessels if a majority of the value of the total assets or business acquired
is not attributable to the offshore vessels and related contracts, as determined in good
faith by Teekay Corporations Board of Directors or the conflicts committee of the Board of
Directors of Teekay LNG Partners L.P.s general partner, as applicable; however, if at any
time Teekay Corporation or Teekay LNG Partners L.P. completes such an acquisition, it must,
within 365 days of the closing of the transaction, offer to sell the offshore vessels and
related contracts to us for their fair market value plus any additional tax or other similar
costs to Teekay Corporation or Teekay LNG Partners L.P. that would be required to transfer
the vessels and contracts to us separately from the acquired business or package of assets;
or
 
    
    own, operate and charter offshore vessels and related time charters and contracts of
affreightment that relate to tender, bid or award for a proposed offshore project that
Teekay Corporation or any of its subsidiaries has submitted or received hereafter submits or
receives; however, at least 365 days after the delivery date of any such offshore vessel,
Teekay Corporation must offer to sell the vessel and related time charter or contract of
affreightment to us, with the vessel valued (a) for newbuildings originally contracted by
Teekay Corporation, at its fully-built-up cost (which represents the aggregate
expenditures incurred (or to be incurred prior to delivery to us) by Teekay Corporation to
acquire, construct and/or convert and bring such offshore vessel to the condition and
location necessary for our intended use, plus project development costs for completed
projects and projects that were not completed but, if completed, would have been subject to
an offer to us) and (b) for any other vessels, Teekay Corporations cost to acquire a
newbuilding from a third party or the fair market value of an existing vessel, as
applicable, plus in each case any subsequent expenditures that would be included in the
fully-built-up cost of converting the vessel prior to delivery to us.
  18




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##### Table of Contents




    
    acquire, operate and charter offshore vessels and related time charters and contracts of
affreightment if our general partner has previously advised Teekay Corporation or Teekay LNG
Partners L.P. that our general partners Board of Directors has elected, with the approval
of its conflicts committee, not to cause us or our controlled affiliates to acquire or
operate the vessels and related time charters and contracts of affreightment;
 
    
    acquire up to a 9.9% equity ownership, voting or profit participation interest in any
publicly-traded company that engages in, acquires or invests in any business that owns or
operates or charters offshore vessels and related time charters and contracts of
affreightment;
 
    
    provide ship management services relating to owning, operating or chartering offshore
vessels and related time charters and contracts of affreightment; or
 
    
    own a limited partner interest in OPCO or own shares of Teekay Petrojarl.
 Foinaven
  Our general partner and its other affiliates own a controlling interest in us and have conflicts of
interest and limited fiduciary duties, which may permit them to favor their own interests to those
of unitholders.
  
    
    neither our partnership agreement nor any other agreement requires Teekay Corporation or
its affiliates (other than our general partner) to pursue a business strategy that favors us
or utilizes our assets, and Teekay Corporations officers and directors have a fiduciary
duty to make decisions in the best interests of the stockholders of Teekay Corporation,
which may be contrary to our interests;
 
    
    the Chief Executive Officer and Chief Financial Officer and three of the directors of our
general partner also serve as executive officers or directors of Teekay Corporation and the
general partner of Teekay LNG Partners L.P.;
 
    
    our general partner is allowed to take into account the interests of parties other than
us, such as Teekay Corporation, in resolving conflicts of interest, which has the effect of
limiting its fiduciary duty to our unitholders;
 
    
    our general partner has limited its liability and reduced its fiduciary duties under the
laws of the Marshall Islands, while also restricting the remedies available to our
unitholders and unitholders are treated as having agreed to the modified standard of
fiduciary duties and to certain actions that may be taken by our general partner, all as set
forth in our partnership agreement;
 
    
    our general partner determines the amount and timing of our asset purchases and sales,
capital expenditures, borrowings, issuances of additional partnership securities and
reserves, each of which can affect the amount of cash that is available for distribution to
our unitholders;
 
    
    in some instances, our general partner may cause us to borrow funds in order to permit
the payment of cash distributions, even if the purpose or effect of the borrowing is to make
incentive distributions (in each case to affiliates of Teekay Corporation);
 
    
    our general partner determines which costs incurred by it and its affiliates are
reimbursable by us;
 
    
    our partnership agreement does not restrict our general partner from causing us to pay it
or its affiliates for any services rendered to us on terms that are fair and reasonable or
entering into additional contractual arrangements with any of these entities on our behalf;
 
    
    our general partner intends to limit its liability regarding our contractual and other
obligations;
 
    
    our general partner may exercise its right to call and purchase common units if it and
its affiliates own more than 80.0% of our common units;
 
    
    our general partner controls the enforcement of obligations owed to us by it and its
affiliates; and
 
    
    our general partner decides whether to retain separate counsel, accountants or others to
perform services for us.
  19




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##### Table of Contents



The fiduciary duties of the officers and directors of our general partner may conflict with those
of the officers and directors of Teekay Corporation and the general partner of Teekay Offshore
Partners L.P.
  
 Tax Risks
  U.S. tax authorities could treat us as a passive foreign investment company, which could have
adverse U.S. federal income tax consequences to U.S. holders.
 PFIC
 Tidewater Inc. v. United States IRS Tidewater Tidewater Tidewater Tidewater
  The preferential tax rates applicable to qualified dividend income are temporary, and the absence
of legislation extending the term would cause our dividends to be taxed at ordinary graduated tax
rates.
  We may be subject to taxes, which reduces our Cash Available for Distribution to partners.
   20




---



##### Table of Contents



Item 4.
    
    Information on the Partnership
 
 A. Overview, History and Development
 
 Overview and History
   SPT Explorer SPT Navigator Skaugen PetroTrans
 Petrojarl
Varg Petrojarl Varg Talisman Energy
 Falcon Spirit Falcon Spirit
 Rio Das Ostras Petrobras Amundsen Spirit Nansen Spirit
 Peary Spirit
  
    
    Shuttle Tankers.Our shuttle tanker fleet consists of 36 vessels (including one
newbuilding) that operate under fixed-rate contracts of affreightment, time charters and
bareboat charters. Of the 36 shuttle tankers, six are held through 50% owned subsidiaries,
three through a 67% owned subsidiary and five are chartered-in by us. All of these shuttle
tankers provide transportation services to energy companies, primarily in the North Sea and
Brazil. The average term of the contracts of affreightment, weighted based on vessel years,
is 3.5 years. The time charters and bareboat charters have an average remaining contract
term of approximately 4.6 years. As of December 31, 2010, our shuttle tankers, which then
had a total cargo capacity of approximately 4.3 million deadweight tonnes (or dwt),
represented more than 50% of the total tonnage of the world shuttle tanker fleet.
 
    
    Conventional Tankers.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. The average remaining term on these contracts is
approximately 4.2 years. As of December 31, 2010, our conventional tankers had a total cargo
capacity of approximately 1.1 million dwt.
 
    
    FSO Units.We have a fleet of six FSO units. All of the FSO units operate under
fixed-rate contracts, with an average remaining term of approximately 3.8 years. As of
December 31, 2010, our FSO units had a total cargo capacity of approximately 0.7 million
dwt.
 
    
    FPSO Units.We have two FPSO units, which operate under operations and charter contracts
with Talisman Energy and Petrobras. We use the FPSO units to provide production, processing
and storage services to oil companies operating offshore oil field installations.
 th
  21




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##### Table of Contents



Potential Additional Shuttle Tanker, FSO and FPSO Projects
  Foinaven Foinaven
  
 B. Business Overview
 
 Shuttle Tanker Segment
     22




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##### Table of Contents



Positioning
    
    Operating
    
    Contract Type
    
    
    
    RemainingVessel
    
    Capacity (dwt)
    
    
    Built
    
    
    Ownership
    
    system
    
    Region
    
    (1)
    
    Charterer
    
    TermGrena
    
    
    148,000
    
    
    
    2003
    
    
    In-chartered (until 2013) (3)
    
    DP2
    
    North Sea
    
    CoA
    
    Chevron, Hess,Navion Oslo
    
    
    100,300
    
    
    
    2001
    
    
    100%
    
    DP2
    
    North Sea
    
    CoA
    
    Marathon Oil, ENI,Navion Hispania
    
    
    126,700
    
    
    
    1999
    
    
    100%
    
    DP2
    
    North Sea
    
    CoA
    
    DraugenNavion Anglia
    
    
    126,300
    
    
    
    1999
    
    
    100%
    
    DP2
    
    North Sea
    
    CoA
    
    Transport, BP,Navion Britannia (2)
    
    
    124,200
    
    
    
    1998
    
    
    100%
    
    DP2
    
    North Sea
    
    CoA
    
    ConocoPhillips,Aberdeen
    
    
    87,000
    
    
    
    1996
    
    
    In-chartered (until 2012)
    
    DP
    
    North Sea
    
    CoA
    
    Total, Talisman,Navion Europa (2)
    
    
    130,300
    
    
    
    1995
    
    
    67% (4)
    
    DP
    
    North Sea
    
    CoA
    
    Nexen, MTDA andRandgrid (2)
    
    
    124,500
    
    
    
    1995
    
    
    67% (4)
    
    DP
    
    North Sea
    
    CoA
    
    PetroCanada (6).Navion Fennia (2)
    
    
    95,200
    
    
    
    1992
    
    
    100%
    
    DP
    
    North Sea
    
    CoA
    
    Majority of volumes 
are life-of-fieldNavion Akarita
    
    
    107,200
    
    
    
    1991
    
    
    Lease (until 2012) (5)
    
    DP
    
    North Sea
    
    CoAPeary Spirit
    
    
    109,000
    
    
    
    2011
    
    
    0% (12)
    
    DP2
    
    North Sea
    
    Time charter
    
    Statoil (8)
    
    9 yearsAmundsen Spirit
    
    
    109,000
    
    
    
    2010
    
    
    100%
    
    DP2
    
    North Sea
    
    Time charter
    
    Statoil (8)
    
    9 yearsNansen Spirit
    
    
    109,000
    
    
    
    2010
    
    
    100%
    
    DP2
    
    North Sea
    
    Time charter
    
    Statoil (8)
    
    9 yearsStena Natalita
    
    
    108,000
    
    
    
    2001
    
    
    50% (7)
    
    DP2
    
    North Sea
    
    Time charter
    
    ExxonMobil
    
    1 yearNavion Oceania
    
    
    126,300
    
    
    
    1999
    
    
    100%
    
    DP2
    
    North Sea
    
    Time charter
    
    Statoil (8)
    
    5 yearsSallie Knutsen
    
    
    153,600
    
    
    
    1999
    
    
    In-chartered  (until 2015)
    
    DP2
    
    North Sea
    
    Time charter
    
    Statoil (8)
    
    5 yearsKaren Knutsen
    
    
    153,600
    
    
    
    1999
    
    
    In-chartered (until 2013)
    
    DP2
    
    North Sea
    
    Time charter
    
    Statoil (8)
    
    5 yearsStena Sirita
    
    
    127,400
    
    
    
    1999
    
    
    50% (7)
    
    DP2
    
    North Sea
    
    Time charter
    
    ExxonMobil (9)
    
    2 yearsNavion Marita
    
    
    103,900
    
    
    
    1999
    
    
    100%
    
    DP
    
    Brazil
    
    Time charter
    
    Petrobras
    
    1 yearNavion Scandia
    
    
    126,700
    
    
    
    1998
    
    
    100%
    
    DP2
    
    North Sea
    
    Time charter
    
    Statoil (8)
    
    5 yearsStena Alexita
    
    
    127,400
    
    
    
    1998
    
    
    50% (7)
    
    DP2
    
    North Sea
    
    Time charter
    
    ExxonMobil (9)
    
    1 yearNavion Svenita
    
    
    106,500
    
    
    
    1997
    
    
    100%
    
    DP
    
    Brazil
    
    Time charter
    
    Petrobras
    
    4 yearsNavion Norvegia (2)
    
    
    130,600
    
    
    
    1995
    
    
    67% (4)
    
    DP
    
    North Sea
    
    Time charter
    
    Statoil (8)
    
    5 yearsNavion Clipper
    
    
    78,200
    
    
    
    1993
    
    
    100%
    
    DP
    
    Brazil
    
    Time charter
    
    Petrobras
    
    2 yearsNavion Torinita
    
    
    106,800
    
    
    
    1992
    
    
    100%
    
    DP2
    
    North Sea
    
    Time charter
    
    Petrobras
    
    1 yearNavion Savonita
    
    
    108,100
    
    
    
    1992
    
    
    100%
    
    DP
    
    Brazil
    
    Time charter
    
    Petrobras
    
    2 yearsBasker Spirit
    
    
    97,000
    
    
    
    1992
    
    
    100%
    
    DP
    
    Australia
    
    Time charter
    
    RocOil (10)
    
    Navion Gothenburg
    
    
    152,200
    
    
    
    2006
    
    
    50% (7)
    
    DP2
    
    Brazil
    
    Bareboat
    
    Petrobras (11)
    
    9 yearsNordic Brasilia
    
    
    151,300
    
    
    
    2004
    
    
    100%
    
    DP
    
    Brazil
    
    Bareboat
    
    Petrobras (11)
    
    6 yearsNordic Rio
    
    
    151,300
    
    
    
    2004
    
    
    50% (7)
    
    DP
    
    Brazil
    
    Bareboat
    
    Petrobras (11)
    
    6 yearsNavion Stavanger
    
    
    147,500
    
    
    
    2003
    
    
    100%
    
    DP2
    
    Brazil
    
    Bareboat
    
    Petrobras (11)
    
    8 yearsPetroatlantic
    
    
    92,900
    
    
    
    2003
    
    
    100%
    
    DP2
    
    North Sea
    
    Bareboat
    
    Petrojarl/BP
    
    1 yearPetronordic
    
    
    92,900
    
    
    
    2002
    
    
    100%
    
    DP2
    
    North Sea
    
    Bareboat
    
    Petrojarl/BP
    
    1 yearNordic Spirit
    
    
    151,300
    
    
    
    2001
    
    
    100%
    
    DP
    
    Brazil
    
    Bareboat
    
    Petrobras (11)
    
    7 yearsStena Spirit
    
    
    151,300
    
    
    
    2001
    
    
    50% (7)
    
    DP
    
    Brazil
    
    Bareboat
    
    Petrobras (11)
    
    7 yearsNavion Bergen
    
    
    105,600
    
    
    
    2000
    
    
    100%
    
    DP2
    
    Brazil
    
    Bareboat
    
    Petrobras (11)
    
    9 yearsTotal capacity
    
    
    4,347,100
 (1)
    
    CoA refers to contracts of affreightment.(2)
    
    The vessel is capable of loading from a submerged turret loading buoy.(3)
    
    We have options to extend the time charter or purchase the vessel.(4)
    
    Owned through a 67% owned subsidiary. The parties share in the profits and losses of the
subsidiary in proportion to each partys relative capital contributions.(5)
    
    We have options to extend the bareboat lease.(6)
    
    Not all of the contracts of affreightment customers utilize every ship in the contract of
affreightment fleet.(7)
    
    Owned through a 50% owned subsidiary. The parties share in the profits and losses of the
subsidiary in proportion to each partys relative capital contributions.  23




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##### Table of Contents



(8)
    
    Under the terms of the Master Agreement with Statoil, the vessels are chartered under
individual fixed-rate annually renewable time-charter contracts. The number of vessels may be
adjusted annually based on the requirements of the fields serviced.(9)
    
    Charterer has an option to extend the time charter.(10)
    
    Charter expired in March 2011 and was not extended. The vessel is unemployed as from March
2011. We are looking at various options for re-employment.(11)
    
    Charterer has the right to purchase the vessel at end of the bareboat charter.(12)
    
    We expect to acquire the vessel on its delivery in July 2011.    
 Conventional Tanker Segment
       24




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##### Table of Contents



Vessel
    
    Capacity (dwt)
    
    
    Built
    
    
    Ownership
    
    
    Contract Type
    
    
    Charterer

    
    Remaining TermSPT Explorer (1)
    
    
    106,000
    
    
    
    2008
    
    
    
    100
    %
    
    Bareboat
    
    Skaugen PT
    
    7 yearsSPT Navigator (1)
    
    
    106,000
    
    
    
    2008
    
    
    
    100
    %
    
    Bareboat
    
    Skaugen PT
    
    7 yearsKilimanjaro Spirit (2)
    
    
    115,000
    
    
    
    2004
    
    
    
    100
    %
    
    Time charter
    
    Teekay Corporation
    
    8 yearsFuji Spirit (2)
    
    
    106,300
    
    
    
    2003
    
    
    
    100
    %
    
    Time charter
    
    Teekay Corporation
    
    8 yearsHamane Spirit (2)
    
    
    105,200
    
    
    
    1997
    
    
    
    100
    %
    
    Time charter
    
    Teekay Corporation
    
    5 yearsPoul Spirit (2)
    
    
    105,300
    
    
    
    1995
    
    
    
    100
    %
    
    Time charter
    
    Teekay Corporation
    
    3 yearsGotland Spirit (2)
    
    
    95,300
    
    
    
    1995
    
    
    
    100
    %
    
    Time charter
    
    Teekay Corporation
    
    3 yearsTorben Spirit (2)
    
    
    98,600
    
    
    
    1994
    
    
    
    100
    %
    
    Time charter
    
    Teekay Corporation
    
    2 yearsScotia Spirit (3)
    
    
    95,000
    
    
    
    1992
    
    
    
    100
    %
    
    Time charter
    
    Teekay Corporation
    
    1 yearLeyte Spirit (2)
    
    
    98,700
    
    
    
    1992
    
    
    
    100
    %
    
    Time charter
    
    Teekay Corporation
    
    1 yearLuzon Spirit (2)
    
    
    98,600
    
    
    
    1992
    
    
    
    100
    %
    
    Time charter
    
    Teekay Corporation
    
    1 yearTotal capacity
    
    
    1,130,000
 
 (1)
    
    Charterer has options to extend each bareboat charter for periods of two years, two years and
one year for a total of five years after the initial term.(2)
    
    Charterer has options to extend each time charter on an annual basis for a total of five
years after the initial term. Charterer also has the right to purchase the vessel beginning on
the third anniversary of the contract at a specified price.(3)
    
    This vessel has been equipped with FSO equipment and OPCO can terminate the charter upon
30-days notice if it has arranged an FSO project for the vessel.  
 FSO Segment
     Capacity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    RemainingVessel
    
    (dwt)
    
    
    Built
    
    
    Ownership
    
    
    Field name and location
    
    
    Contract Type
    
    
    Charterer

    
    TermNavion Saga (1)
    
    
    149,000
    
    
    
    1991
    
    
    
    100
    %
    
    Volve, Norway
    
    Time charter
    
    Statoil ASA
    
    5 yearsPattani Spirit (2)
    
    
    113,800
    
    
    
    1988
    
    
    
    100
    %
    
    Platong, Thailand
    
    Bareboat
    
    Teekay Corporation
    
    3.3 yearsKarratha Spirit (3)
    
    
    106,600
    
    
    
    1988
    
    
    
    100
    %
    
    Legendre, Australia
    
    Time charter
    
    Apache
    
    0.2 yearDampier Spirit (1)
    
    
    106,700
    
    
    
    1987
    
    
    
    100
    %
    
    Stag, Australia
    
    Time charter
    
    Apache
    
    3.5 yearsFalcon Spirit (1)
    
    
    124,500
    
    
    
    1986
    
    
    
    100
    %
    
    Al Rayyan, Qatar
    
    Time charter
    
    Occidental
    
    6.5 yearsApollo Spirit (4)
    
    
    129,000
    
    
    
    1978
    
    
    
    89
    %
    
    Banff, U.K.
    
    Bareboat
    
    Teekay Corporation
    
    4.0 yearsTotal capacity
    
    
    729,600
 
 (1)
    
    Charterer has option to extend the time charter after the initial fixed period.(2)
    
    This vessel is on a back-to-back charter between Teekay Corporation and Unocol for a
remaining term of 3.3 years.(3)
    
    Charterer did not exercise its option to extend the time-charter after the initial fixed
period. The vessel was sold in March 2011.(4)
    
    Charterer is required to charter the vessel for as long as a specified FPSO unit, the
Petrojarl Banff, produces the Banff field in the North Sea, which could extend to 2014
depending on the field operator.  25




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##### Table of Contents



FPSO Segment
    
 Business Strategies
  
    
    Expand global operations in high growth regions.We seek to expand our shuttle tanker and
FSO unit operations into growing offshore markets such as Brazil and Australia. In addition,
we intend to pursue opportunities in existing markets such as the North Sea.
 
    
    Pursue opportunities in the FPSO sector.We believe that Teekay Corporations ownership
of Teekay Petrojarl, a leading operator in the FPSO section, will enable us to competitively
pursue additional FPSO projects anywhere in the world by combining Teekay Petrojarls
engineering and operational expertise with Teekay Corporations global marketing
organization and extensive customer and shipyard relationships.
 
    
    Acquire additional vessels on long-term, fixed-rate contracts.We intend to continue
acquiring shuttle tankers, FSO units and FPSO units with long-term contracts, rather than
ordering vessels on a speculative basis. We believe this approach facilitates the financing
of new vessels based on their anticipated future revenues and ensures that new vessels will
be employed upon acquisition, which should provide stable cash flows.
 
    
    Provide superior customer service by maintaining high reliability, safety, environmental
and quality standards.Energy companies seek transportation partners that have a reputation
for high reliability, safety, environmental and quality standards. We intend to leverage
OPCOs and Teekay Corporations operational expertise and customer relationships to further
expand a sustainable competitive advantage with consistent delivery of superior customer
service.
 
    
    Manage our conventional tanker fleet to provide stable cash flows.We believe the
fixed-rate time charters for these tankers will provide stable cash flows during their
terms. Depending on prevailing market conditions during and at the end of each existing
charter, we may seek to extend the charter, enter into a new charter, operate the vessel on
the spot market or sell the vessel, in an effort to maximize returns on the conventional
fleet while managing residual value risk.
 
 Customers
    26




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##### Table of Contents



Safety, Management of Ship Operations and Administration
 QATO
  ISM Code ISO OHSAS
   
    
    vessel maintenance;
 
    
    crewing;
 
    
    purchasing;
 
    
    shipyard supervision;
 
    
    insurance; and
 
    
    financial management services.
    
 Risk of Loss, Insurance and Risk Management
     27




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##### Table of Contents



Classification, Audits and Inspections
 Intermediate Survey Special Survey
    
    
    adherence to our operating standards;
 
    
    the structural integrity of the vessel is being maintained;
 
    
    machinery and equipment is being maintained to give full reliability in
service;
 
    
    we are optimizing performance in terms of speed and fuel consumption; and
 
    
    the vessels appearance will support our brand and meet customer
expectations.
   
 Regulations
 General
  International Maritime Organization (or IMO)
   28




---



##### Table of Contents



CLC
 SOLAS ISPS DP
   Annex
VI
  European Union (or EU)
   North Sea
  VOC equipment)
 United States
 OPA 90 CERCLA
  29




---



##### Table of Contents




    
    natural resources damages and the related assessment costs;
 
    
    real and personal property damages;
 
    
    net loss of taxes, royalties, rents, fees and other lost revenues;
 
    
    lost profits or impairment of earning capacity due to property or natural resources
damage;
 
    
    net cost of public services necessitated by a spill response, such as protection from
fire, safety or health hazards; and
 
    
    loss of subsistence use of natural resources.
   Coast Guard
   
    
    address a worst case scenario and identify and ensure, through contract or other
approved means, the availability of necessary private response resources to respond to a
worst case discharge;
 
    
    describe crew training and drills; and
 
    
    identify a qualified individual with full authority to implement removal actions.
    EPA
   30




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##### Table of Contents



Greenhouse Gas Regulation
 Kyoto Protocol
 Low Sulphur Fuel Regulation
  Vessel Security
 MTSA
 
 C. Organizational Structure
   
 D. Properties
  
 E. Taxation of the Partnership
 United States Taxation
 Code
 Election to be Taxed as a Corporation.
 Taxation of Operating Income. Transportation Income
 U.S. Source International Transportation Income U.S. Source
Domestic Transportation Income
  31




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##### Table of Contents



Section 883 Exemption
 The Section 883 Exemption. Section 883 Regulations
  (i) it is organized in a jurisdiction outside the United States that grants an equivalent
exemption from tax to corporations organized in the United States (or an Equivalent Exemption),
 (ii) it satisfies one of the following three ownership tests: (a) the Qualified Shareholder
Test, (b) the Controlled Foreign Corporation Test, or (c) the Publicly Traded Test; and
 (iii) it meets certain substantiation, reporting and other requirements.
  The Net Basis Tax and Branch Profits Tax. Effectively Connected
Income
   The 4.0% Gross Basis Tax.
 Marshall Islands Taxation
  Other Taxation
   32




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##### Table of Contents



Item 4A.
    
    Unresolved Staff Comments
  
 Item 5.
    
    Operating and Financial Review and Prospects
 The following discussion should be read in conjunction with the financial statements and notes
thereto appearing elsewhere in this report.
 Managements Discussion and Analysis of Financial Condition and Results of Operations
 
 OVERVIEW
 OPCO FSO FPSO
 
 SIGNIFICANT DEVELOPMENTS
 Petrojarl Varg Falcon Spirit Falcon Spirit Falcon Spirit
  Statoil CoA Amundsen
Spirit Nansen Spirit Peary Spirit
 Cicade de Rio das Ostras Rio Das
Ostras Petrobras Amundsen Spirit Nansen Spirit Peary Spirit, Scott Spirit
    33




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##### Table of Contents



Potential Additional Shuttle Tanker, FSO and FPSO Projects
  Foinaven Teekay Petrojarl Foinaven
 Petrojarl Cidade de Itajai
  
 Our Contracts of Affreightment and Charters
  
    
    Contracts of affreightment, whereby we carry an agreed quantity of cargo for
a customer over a specified trade route within a given period of time;
 
    
    Time charters, whereby vessels we operate and are responsible for crewing
are chartered to customers for a fixed period of time at rates that are generally fixed,
but may contain a variable component based on inflation, interest rates or current market
rates;
 
    
    Bareboat charters, whereby customers charter vessels for a fixed period of
time at rates that are generally fixed, but the customers operate the vessels with their
own crews; and
 
    
    Voyage charters, which are charters for shorter intervals that are priced on
a current, or spot, market rate.
  Contract of Affreightment
    
    Time Charter
    
    Bareboat Charter
    
    Voyage Charter(1)Typical contract length
    
    One year or more
    
    One year or more
    
    One year or more
    
    Single voyageHire rate basis(2)
    
    Typically daily
    
    Daily
    
    Daily
    
    VariesVoyage expenses(3)
    
    We pay
    
    Customer pays
    
    Customer pays
    
    We payVessel operating expenses(3)
    
    We pay
    
    We pay
    
    Customer pays
    
    We payOff-hire (4)
    
    Customer typically does not pay
    
    Varies
    
    Customer typically pays
    
    Customer does not pay
 
 (1)
    
    Under a consecutive voyage charter, the customer pays for idle time.(2)
    
    Hirerate refers to the basic payment from the charterer for the use of the vessel.(3)
    
    Defined below under Important Financial and Operational Terms and Concepts.(4)
    
    Off-hirerefers to the time a vessel is not available for service. 
 Important Financial and Operational Terms and Concepts
  Revenues.
  34




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##### Table of Contents



Voyage Expenses.
 Net Revenues. GAAP
 Vessel Operating Expenses.
  Time Charter Hire Expenses.
 Income from Vessel Operations.
 Drydocking.
 Depreciation and Amortization.
 
    
    charges related to the depreciation of the historical cost of our fleet
(less an estimated residual value) over the estimated useful lives of the vessels;
 
    
    charges related to the amortization of drydocking expenditures over the
estimated useful life of the drydocking; and
 
    
    charges related to the amortization of the fair value of contracts of
affreightment where amounts have been attributed to those items in acquisitions; these
amounts are amortized over the period in which the asset is expected to contribute to
future cash flows.
 Revenue Days.
 Calendar-Ship-Days.
 VOC Equipment. VOC equipment
  35




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Items You Should Consider When Evaluating Our Results
  
    
    Our financial results reflect the results of the interests in vessels acquired from
Teekay Corporation for all periods the vessels were under common control.In September
2009, we acquired from Teekay Corporation the Petrojarl VargFPSO unit, together with its
operations and charter contracts. In April 2010, we acquired from Teekay Corporation the
Falcon SpiritFSO unit, together with its charter contract. In October 2010, we acquired
from Teekay Corporation the Rio das OstrasFPSO unit and the Amundsen Spiritnewbuilding
shuttle tanker. These transactions were deemed to be business acquisitions between
entities under common control. Accordingly, we have accounted for these transactions in a
manner similar to the pooling of interest method. Under this method of accounting, our
financial statements prior to the date the interests in these vessels were actually
acquired by us are retroactively adjusted to include the results of these acquired vessels.
The periods retroactively adjusted include all periods that we and the acquired vessels
were both under common control of Teekay Corporation and had begun operations. As a result,
our applicable consolidated financial statements reflect the vessels and their results of
operations, referred to herein as the Dropdown Predecessor, as if we had acquired them when
the vessels began operations under the ownership of Teekay Corporation on October 1, 2006,
December 15, 2009, April 1, 2008 and July 30, 2010, respectively. Please read Item 18 
Financial Statements: Note 1  Basis of Presentation.
 
    
    The size of our fleet continues to change.Our results of operations reflect changes in
the size and composition of our fleet due to certain vessel deliveries and vessel
dispositions. Please read  Results of Operations below for further details about vessel
dispositions and deliveries. Due to the nature of our business, we expect our fleet to
continue to fluctuate in size and composition.
 
    
    Our vessel operating costs are facing industry-wide cost pressures.The oil shipping
industry is experiencing a global manpower shortage due to growth in the world fleet. This
shortage resulted in significant crew wage increases during 2007, 2008, to a lesser degree
in 2009 and 2010. We expect that going forward, there will be more upward pressure on crew
compensation which will result in higher manning costs as we keep pace with market
conditions. In addition, factors such as pressure on raw material prices and changes in
regulatory requirements could also increase operating expenditures. We continue to take
measures to improve operational efficiencies and mitigate the impact of inflation and price
escalations; however, we believe that future operational costs will increase.
 
    
    Our financial results of operations are affected by fluctuations in currency exchange
rates. Under GAAP, all foreign currency-denominated monetary assets and liabilities (such
as cash and cash equivalents, accounts receivable, accounts payable, advances from
affiliates and deferred income taxes) are revalued and reported based on the prevailing
exchange rate at the end of the period. OPCO has entered into services agreements with
subsidiaries of Teekay Corporation whereby the subsidiaries operate and crew the vessels.
Payments under the service agreements are adjusted to reflect any change in Teekay
Corporations cost of providing services based on fluctuations in the value of the
Norwegian Kroner relative to the U.S. Dollar, which may result in increased payments under
the services agreements if the strength of the U.S. Dollar declines relative to the
Norwegian Kroner.
 
    
    Our net income (loss) is affected by fluctuations in the fair value of our derivatives.
Our interest rate swaps, cross currency swap and some of our foreign currency forward
contracts are not designated as hedges for accounting purposes. Although we believe these
derivative instruments are economic hedges, the changes in their fair value are included in
our statements of income (loss) as unrealized gains or losses on non-designated derivatives
for interest rate swaps and some of our foreign currency forward contracts and in foreign
exchange gains or losses for the cross currency swap. The changes in fair value do not
affect our cash flows, liquidity or cash distributions to partners.
 
    
    Our operations are seasonal and our financial results vary as a consequence of
drydockings.Historically, the utilization of shuttle tankers in the North Sea is higher in
the winter months, as favorable weather conditions in the warmer months provide
opportunities for repairs and maintenance to our vessels and to offshore oil platforms.
Downtime for repairs and maintenance generally reduces oil production and, thus,
transportation requirements. In addition, we generally do not earn revenue when our vessels
are in scheduled and unscheduled drydocking. Seven vessels are scheduled for drydocking in
2011. From time to time, unscheduled drydockings may cause additional fluctuations in our
financial results.
  
 Results of Operations
 Year Ended December 31, 2010 versus Year Ended December 31, 2009
 Shuttle Tanker Segment
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Year Ended December 31,(in thousands of U.S. dollars, except calendar-ship-days and percentages)
    
    2010
    
    
    2009
    
    
    % ChangeRevenues
    
    
    559,547
    
    
    
    534,464
    
    
    
    4.7Voyage expenses
    
    
    104,460
    
    
    
    85,197
    
    
    
    22.6Net revenues
    
    
    455,087
    
    
    
    449,267
    
    
    
    1.3Vessel operating expenses
    
    
    143,766
    
    
    
    144,007
    
    
    
    (0.2
    )Time-charter hire expense
    
    
    89,795
    
    
    
    117,202
    
    
    
    (23.4
    )Depreciation and amortization
    
    
    111,157
    
    
    
    98,013
    
    
    
    13.4General and administrative (1)
    
    
    42,526
    
    
    
    40,552
    
    
    
    4.9Write down of vessel
    
    
    9,441
    
    
    
    
    
    
    
    Restructuring charge
    
    
    119
    
    
    
    4,734
    
    
    
    (97.5
    )Income from vessel operations
    
    
    58,283
    
    
    
    44,759
    
    
    
    30.2Calendar-Ship-Days
    
    
    
    
    
    
    
    
    
    
    Owned Vessels
    
    
    10,411
    
    
    
    9,855
    
    
    
    5.6Chartered-in Vessels
    
    
    2,434
    
    
    
    3,262
    
    
    
    (25.4
    )Total
    
    
    12,845
    
    
    
    13,117
    
    
    
    (2.1
    )
 (1)
    
    Includes direct general and administrative expenses and indirect general and
administrative expenses (allocated to the shuttle tanker segment based on estimated use of
corporate resources).  
    
    the purchase of two newbuilding shuttle tankers, the Amundsen Spiritand 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
OPCOs majority owned subsidiary (or the 2010 Shuttle Tanker Acquisition).
  
    
    the redelivery of a chartered-in vessel back to their owners in each of June
2009, November 2009, February 2010 and December 2010, respectively; and
 
    
    the 2010 Shuttle Tanker Acquisition;
  
    
    increased spot chartered-in vessels as compared to 2009; and
 
    
    less offhire days as compared to 2009.
 Net Revenues.
 
    
    an increase of $17.5 million due to an increase in rates on certain
contracts of affreightment, time-charter and bareboat contracts as provided for in existing
contracts as well as due to entering into new contracts during 2010;
 
    
    an increase of $4.6 million due to the 2010 Newbuilding Shuttle Tanker
Acquisitions;
 
    
    a net increase of $3.7 million due to a decrease in the number of offhire
days resulting from less scheduled drydockings primarily in the time-chartered fleet,
partially offset by higher unexpected repair offhire days compared to 2009;
 
    
    an increase of $2.7 million due to an increase in reimbursable bunker costs
and a net decrease in non-reimbursable bunker costs resulting primarily from more revenue
days in 2010, as compared to 2009, partially offset by higher bunker prices as compared to
2009;
 
    
    an increase of $0.9 million from the recovery of certain taxes from a
customer; and
 
    
    a $0.8 million payment to us by one of our joint venture partners during
2010 as the number of drydock days for a vessel exceeded the maximum allowed under our
agreement with this joint venture partner;
  
    
    a net decrease of $16.5 million due to fewer revenue days from our shuttle
tankers due to declining oil production at mature oil fields in the North Sea, a decrease
in revenue days in the conventional spot market from decreased demand for conventional
crude transportation, partially offset by an increase in project revenues;
 
    
    a decrease of $6.3 million due to the redelivery of one in-chartered vessel
in June 2009 as it completed its time-charter agreement; and
    
    a decrease of $1.5 million from the recovery of certain Norwegian
environmental taxes from our customers in the Heidrun field in 2009.
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Vessel Operating Expenses.
 
    
    a decrease of $7.0 million relating to the net realized and unrealized
changes in fair value of our foreign currency forward contracts that are or have been
designated as hedges for accounting purposes;
 
    
    a decrease of $4.7 million in crew and manning costs as compared to last
year, resulting primarily from cost saving initiatives that commenced in 2009, as described
below under restructuring charges;
 
    
    a decrease of $2.2 million due to a decrease in the number of vessels
drydocked, and costs related to services, spares and consumables during 2010. Certain
repair and maintenance items are more efficient to complete while a vessel is in drydock.
Consequently, repair and maintenance costs will typically decrease in periods when there is
a decrease in the number of vessels drydocked; and
 
    
    a decrease of $2.0 million due to the redelivery of one in-chartered vessel
in June 2009 as it completed its time-charter agreement;
  
    
    an increase of $6.8 million due to the 2010 Shuttle Tanker Acquisition;
 
    
    an increase of $4.2 million due to the 2010 Newbuilding Shuttle Tanker
Acquisitions;
 
    
    an increase of $2.3 million relating to repairs and maintenance performed in
2010 on certain vessels;
 
    
    an increase of $1.6 million related to the timing of crew training
activities; and
 
    
    an increase of $0.5 million relating to port costs.
 Time-Charter Hire Expense.
 
    
    a net decrease of $24.5 million primarily due to the redelivery of four
chartered-in vessels to their owners in June 2009, November 2009, February 2010 and
December 2010, and
 
    
    a decrease of $12.6 million due to the 2010 Shuttle Tanker Acquisition;
  
    
    an increase of $8.3 million due to increased spot in-chartering of vessels;
 
    
    an increase of $0.7 million due to higher drydocking amortization relating
to one of our in-chartered vessels; and
 
    
    an increase of $0.3 million due to less off-hire in the in-chartered fleet.
 Depreciation and Amortization.
 
    
    an increase of $10.0 million due to increased drydockings in the second half
of 2009 and the first half of 2010, a change in estimate of the useful life of certain
capitalized drydocking expenditures and adjustments to the carrying value of certain
capitalized drydocking expenditures;
 
    
    an increase of $5.4 million due to 2010 Newbuilding Shuttle Tanker
Acquisitions and the 2010 Shuttle Tanker Acquisition; and
 
    
    an increase of $1.1 million due to increased capital upgrades in the second
half of 2009;
  
    
    a decrease of $2.2 million due to changes in the estimated useful lives of
two of our vessels in 2009; and
 
    
    a decrease of $1.0 million in the amortization of our intangible assets.
 Write down of Vessel.
 Restructuring Charge. Basker Spirit
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Conventional Tanker Segment
   Year Ended December 31,(in thousands of U.S. dollars, except calendar-ship-days and percentages)
    
    2010
    
    
    2009
    
    
    % ChangeRevenues
    
    
    114,850
    
    
    
    124,659
    
    
    
    (7.9
    )Voyage expenses
    
    
    19,753
    
    
    
    24,494
    
    
    
    (19.4
    )Net revenues
    
    
    95,097
    
    
    
    100,165
    
    
    
    (5.1
    )Vessel operating expenses
    
    
    23,739
    
    
    
    24,153
    
    
    
    (1.7
    )Depreciation and amortization
    
    
    27,522
    
    
    
    24,042
    
    
    
    14.5General and administrative (1)
    
    
    4,501
    
    
    
    4,746
    
    
    
    (5.2
    )Restructuring charges
    
    
    
    
    
    
    274
    
    
    
    (100.0
    )Income from vessel operations
    
    
    39,335
    
    
    
    46,950
    
    
    
    (16.2
    )Calendar-Ship-DaysOwned Vessels
    
    
    4,015
    
    
    
    4,015
    
    
    
    
 
 (1)
    
    Includes direct general and administrative expenses and indirect general and administrative
expenses (allocated to the conventional tanker segment based on estimated use of corporate
resources). Net Revenues.
 
    
    a decrease of $7.7 million due to an increased number of offhire days from scheduled
drydockings compared to 2009;
  
    
    an increase of $2.2 million in net bunker revenues for 2010, mainly due to an increase
in bunker index prices compared to 2009; and
 
    
    an increase of $0.6 million from increases in the daily hire rates for all nine
time-charter contracts with Teekay Corporation.
 Vessel Operating Expenses.
 
    
    a decrease of $0.5 million relating to lower repairs and maintenance costs compared to
2009; and
 
    
    a decrease of $0.4 million from decreases in crew levels and transportation costs as a
result of a vessel being managed by Teekay Corporation that had been managed previously by
an external party;
  
    
    an increase of $0.5 million due to an increase in the consumption and use of
consumables, lube oil, and freight.
 Depreciation and Amortization.
 FSO Segment
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Year Ended December 31,(in thousands of U.S. dollars, except calendar-ship-days and percentages)
    
    2010
    
    
    2009
    
    
    % ChangeRevenues
    
    
    74,298
    
    
    
    62,644
    
    
    
    18.6Voyage expenses
    
    
    888
    
    
    
    1,335
    
    
    
    (33.5
    )Net revenues
    
    
    73,410
    
    
    
    61,309
    
    
    
    19.7Vessel operating expenses
    
    
    35,214
    
    
    
    27,460
    
    
    
    28.2Depreciation and amortization
    
    
    16,262
    
    
    
    21,763
    
    
    
    (25.3
    )General and administrative (1)
    
    
    3,799
    
    
    
    2,572
    
    
    
    47.7Income from vessel operations
    
    
    18,135
    
    
    
    9,514
    
    
    
    90.6Calendar-Ship-DaysOwned Vessels
    
    
    2,190
    
    
    
    1,842
    
    
    
    18.9
 
 (1)
    
    Includes direct general and administrative expenses and indirect general and administrative
expenses (allocated to the FSO segment based on estimated use of corporate resources). Falcon Spirit Falcon Spirit
 Net Revenues.
 
    
    an increase of $10.6 million due to the Falcon Spiritcommencing operations
in December 2009;
 
    
    an increase of $3.8 million due to foreign currency exchange differences as
compared to the same period last year; and
 
    
    an increase of $0.5 million due to increased charter rates on the Karratha
Spiritand Dampier Spiritas compared to 2009;
  
    
    a net decrease of $2.9 million due to a lower charter rate on the Navion
Sagain accordance with the charter contract that took effect in the second quarter of
2010, partially offset by a one-time reimbursement from customers for certain crewing
costs.
 Vessel Operating Expenses.
 
    
    an increase of $3.3 million due to the Falcon Spiritcommencing operations
in December 2009;
 
    
    an increase of $3.2 million due to weakening of the U.S. Dollar against the
Australian Dollar compared to 2009;
 
    
    an increase of $1.5 million due to increased crew manning compared to 2009
related to timing differences between the years of when costs and recoveries are recorded;
and
 
    
    an increase of $0.5 million due to an increase in provisions compared to
2009;
  
    
    a decrease of $0.4 million due to lower repairs and maintenance costs
compared to 2009.
 Depreciation and amortization. Navion Saga
 Restructuring charge. Karratha Spirit
 FPSO Segment
 Petrojarl Varg Rio das Ostras
  40




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Year Ended December 31,(in thousands of U.S. dollars, except calendar-ship-days and percentages)
    
    2010
    
    
    2009
    
    
    % ChangeRevenues
    
    
    151,851
    
    
    
    149,345
    
    
    
    1.7Vessel operating expenses
    
    
    66,157
    
    
    
    65,357
    
    
    
    1.2Depreciation and amortization
    
    
    35,400
    
    
    
    37,358
    
    
    
    (5.2
    )General and administrative (1)
    
    
    12,388
    
    
    
    13,891
    
    
    
    (10.8
    )Income from vessel operations
    
    
    37,906
    
    
    
    32,739
    
    
    
    15.8Calendar-Ship-DaysOwned Vessels
    
    
    730
    
    
    
    730
    
    
    
    
 
 (1)
    
    Includes direct general and administrative expenses and indirect general and administrative
expenses (allocated to the FPSO segment based on estimated use of corporate resources). Petrojarl Varg Petrojarl Varg Petrojarl Varg
 Rio das Ostras Rio das Ostras
 Revenues.
 
    
    a net increase of $6.2 million as the Petrojarl Vargcommenced a new four-year,
fixed-rate contract extension with Talisman Energy under a new rate structure beginning in
the third quarter of 2009, partially offset by planned maintenance shutdown of 13 days in
the third quarter of 2010;
  
    
    a decrease of $3.7 million as the Rio das Ostrasearned a lower contractual rate for the
period April 23, 2010 until early 2011.
 Vessel Operating Expenses.
 
    
    an increase of $2.9 million due to higher crewing and manning costs compared to 2009
relating to an increase in salary costs;
 
    
    an increase of $2.6 million due to the weakening of the U.S. Dollar against the
Norwegian Kroner compared to 2009; and
 
    
    an increase of $0.8 million due to higher contract costs compared to 2009;
  
    
    a decrease of $4.2 million due to lower repairs and maintenance costs compared to 2009;
 
    
    a decrease of $0.5 million due to lower tax and registration costs compared to 2009; and
 
    
    a decrease of $0.5 million relating to the net realized and unrealized changes in fair
value of our foreign currency forward contracts that are or have been designated as hedges
for accounting purposes.
 Depreciation and Amortization. Petrojarl Varg
 Other Operating Results
 General and Administrative Expenses. Petrojarl Varg Rio das Ostras
 Interest Expense.
 
    
    a decrease of $11.1 million due to lower interest rates during 2010, compared to 2009;
 
    
    a decrease of $2.4 million from the financing of the Petrojarl Varg(including the
Dropdown Predecessor) mainly due to a decrease in interest rates and prepayments of debt
during 2010 and 2009;
 
    
    a decrease of $2.1 million related to scheduled repayments and prepayments of debt
during 2010 and 2009; and
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##### Table of Contents




    
    a decrease of $1.0 million from the financing of the Rio das Ostras(including the
Dropdown Predecessor) mainly due to a decrease in interest rates;
  
    
    an increase of $1.9 million related to loan costs;
 
    
    an increase of $0.9 million relating to acquisitions of the Falcon Spirit,the Nansen
Spiritand the Amundsen Spirit; and
 
    
    an increase of $0.4 million relating to the interest expense incurred in relation to the
Norwegian Kroner bond issued in November 2010 (refer to Significant Developments).
 Realized and Unrealized (Losses) Gains on Derivatives
 Year Ended, December 31(in thousands of U.S. Dollars)
    
    2010
    
    
    2009Realized lossesInterest rate swaps
    
    
    (49,224
    )
    
    
    (51,084
    )Foreign currency forward contracts
    
    
    (1,029
    )
    
    
    (4,196
    )(50,253
    )
    
    
    (55,280
    )Unrealized (losses) gainsInterest rate swaps
    
    
    (10,408
    )
    
    
    102,662Foreign currency forward contracts
    
    
    4,995
    
    
    
    4,562(5,413
    )
    
    
    107,224Total realized and unrealized (losses) gains on derivative instruments
    
    
    (55,666
    )
    
    
    51,944
 Foreign Currency Exchange Gains (Losses).
 Income Tax Recovery (Expense).
 Other Income. VOC
  42




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Year Ended December 31, 2009 versus Year Ended December 31, 2008
 Shuttle Tanker Segment
  Year Ended December 31,(in thousands of U.S. dollars, except calendar-ship-days and percentages)
    
    2009
    
    
    2008
    
    
    % ChangeRevenues
    
    
    534,464
    
    
    
    650,896
    
    
    
    (17.9
    )Voyage expenses
    
    
    85,197
    
    
    
    169,578
    
    
    
    (49.8
    )Net revenues
    
    
    449,267
    
    
    
    481,318
    
    
    
    (6.7
    )Vessel operating expenses
    
    
    144,007
    
    
    
    137,132
    
    
    
    5.0Time-charter hire expense
    
    
    117,202
    
    
    
    132,234
    
    
    
    (11.4
    )Depreciation and amortization
    
    
    98,013
    
    
    
    91,846
    
    
    
    6.7General and administrative (1)
    
    
    40,552
    
    
    
    43,003
    
    
    
    (5.7
    )Restructuring charge
    
    
    4,734
    
    
    
    
    
    
    
    100.0Income from vessel operations
    
    
    44,759
    
    
    
    77,103
    
    
    
    (41.9
    )Calendar-Ship-DaysOwned Vessels
    
    
    9,855
    
    
    
    9,765
    
    
    
    0.9Chartered-in Vessels
    
    
    3,262
    
    
    
    3,624
    
    
    
    (10.0
    )Total
    
    
    13,117
    
    
    
    13,389
    
    
    
    (2.0
    )
 (1)
    
    Includes direct general and administrative expenses and indirect general and
administrative expenses (allocated to the shuttle tanker segment based on estimated use of
corporate resources).  
    
    the redelivery of a chartered-in vessel back to their owners in each of June
2008 and May 2009, respectively;
 
    
    reduced spot chartered-in vessels compared to 2008; and
 
    
    the purchase of an in-chartered shuttle tanker in late March 2008 (or the
2008 Shuttle Tanker Acquisition);
  
    
    the in-chartering of one vessel from December 2008 to June 2009.
 Net Revenues.
 
    
    a decrease of $54.9 million due to fewer revenue days from our shuttle
tankers due to declining oil production at mature oil fields in the North Sea and the
impact on revenue generated by our shuttle tankers operating in the conventional tanker
market from reduced demand for conventional crude transportation, compared to 2008;
 
    
    a decrease of $1.8 million due to a 2008 agreement with certain of our
customers that enabled us to recover certain Norwegian environmental taxes relating to
prior periods; and
 
    
    a decrease of $1.5 million from a reduction in the number of cargo liftings
due to declining oil production at the Heidrun field, a mature oil field in the North Sea,
that is serviced by certain shuttle tankers on contracts of affreightment;
  
    
    an increase of $8.4 million for 2009 due to rate increases on certain
contracts of affreightment, partially offset by rate decreases in certain time-charter and
bareboat contracts;
 
    
    an increase of $5.7 million due to a new time-charter agreement that began
in December 2008;
 
    
    an increase of $5.0 million due to lower bunker prices and daily bunker
consumption in 2009 as compared to 2008, partially offset by a net increase in
non-reimbursable bunker costs resulting primarily from increased idle days in 2009, as
compared to 2008;
 
    
    an increase of $3.5 million due to a decrease in the number of offhire days
resulting from scheduled drydockings primarily in the time-chartered fleet, and from fewer
unplanned repair projects compared to the same periods last year; and
 
    
    an increase of $3.5 million due to a decrease in customer performance claims
under the terms of charter party agreements.
 Vessel Operating Expenses.
 
    
    an increase of $7.8 million relating to the net realized and unrealized
changes in fair value of our foreign currency forward contracts that are or have been
designated as hedges for accounting purposes;
 
    
    an increase of $3.9 million due to an increase in the number of vessels
drydocked primarily in the contract of affreightment fleet, and costs related to services,
spares and consumables during 2009;
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##### Table of Contents




    
    an increase of $3.3 million due to the 2008 Shuttle Tanker Acquisition and
the in-chartering of one vessel from December 2008 to June 2009;
  
    
    a decrease of $3.8 million relating to the crew training;
 
    
    a decrease of $2.9 million in repairs performed for certain vessels in 2009
compared to last year;
 
    
    a decrease of $1.1 million due to a reduction in projects (mainly relating
to equipment upgrades and enhancements) in 2009 compared to last year; and
 
    
    a decrease of $0.8 million in crew and manning costs as compared to last
year, resulting primarily from cost savings initiatives that began in 2009.
 Time-Charter Hire Expense.
 
    
    a decrease of $11.8 million due to increased drydocking and offhire of
chartered-in vessels and a reduction in spot chartered-in vessels during 2009;
 
    
    a decrease of $2.2 million due to the 2008 Shuttle Tanker Acquisition; and
 
    
    a net decrease of $2.1 million primarily due to the redelivery of three
chartered-in vessels to their owners in June 2008, May 2009 and November 2009, partially
offset by one vessel chartered-in from December 2008 to June 2009.
 Depreciation and Amortization.
 
    
    an increase of $3.7 million due to changes in the estimated useful lives of
two of our vessels;
 
    
    an increase of $2.5 million due to increased drydocking during 2009; and
 
    
    an increase of $0.4 million due to the 2008 Shuttle Tanker Acquisition;
  
    
    a decrease of $1.0 million in the amortization of our intangible assets.
 Restructuring Charge.
 Conventional Tanker Segment
  Year Ended December 31,(in thousands of U.S. dollars, except calendar-ship-days and percentages)
    
    2009
    
    
    2008
    
    
    % ChangeRevenues
    
    
    124,659
    
    
    
    153,200
    
    
    
    (18.6
    )Voyage expenses
    
    
    24,494
    
    
    
    53,722
    
    
    
    (54.4
    )Net revenues
    
    
    100,165
    
    
    
    99,478
    
    
    
    0.7Vessel operating expenses
    
    
    24,153
    
    
    
    26,030
    
    
    
    (7.2
    )Depreciation and amortization
    
    
    24,042
    
    
    
    22,901
    
    
    
    5.0General and administrative (1)
    
    
    4,746
    
    
    
    7,800
    
    
    
    (39.2
    )Restructuring charge
    
    
    274
    
    
    
    
    
    
    
    Income from vessel operations
    
    
    46,950
    
    
    
    42,747
    
    
    
    9.8Calendar-Ship-DaysOwned Vessels
    
    
    4,015
    
    
    
    3,931
    
    
    
    2.1
 (1)
    
    Includes direct general and administrative expenses and indirect general and
administrative expenses (allocated to the conventional tanker segment based on estimated use
of corporate resources).  44




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
    
    In June 2008, OPCO acquired the lightering tankers SPT Explorer and SPT
Navigator (collectively, the 2008 Conventional Tanker Acquisitions), which operate under
fixed-rate bareboat charters to Teekay Corporations 50% owned joint venture company,
Skaugen PetroTrans. (However, as a result of the inclusion of the Dropdown Predecessor, the
SPT Explorer and the SPT Navigator have been included for accounting purposes in our
results as if they were acquired on January 7, 2008 and March 28, 2008, respectively, when
they completed construction and began operations as conventional tankers for Teekay
Corporation. Please read Items You Should Consider When Evaluating Our Results of
Operations Our financial results reflect the results of the interests in vessels acquired
from Teekay Corporation for all periods the vessels were under common control above);
 Net Revenues.
 
    
    an increase of $1.4 million due to the 2008 Conventional Tanker Acquisitions
(including the impact of the Dropdown Predecessor); and
 
    
    an increase of $0.7 million due to less off-hire days for scheduled
drydocking partially offset by a decrease in calendar days in 2009;
  
    
    a decrease of $0.8 million in net bunker revenues due to a general decrease
in bunker index prices; and
 
    
    a decrease of $0.8 million due to a net decrease in daily hire rates for all
nine time-charter contracts with Teekay Corporation.
 Vessel Operating Expenses.
 
    
    a decrease of $1.5 million in cost of services, spares and consumables; and
 
    
    a decrease of $0.4 million in crew and manning costs during 2009;
  
    
    an increase of $0.5 million due to increased repairs for certain vessels
during 2009.
 Depreciation and Amortization.
 
    
    an increase of $0.9 million due to an increase in capitalized drydock costs
in the latter half of 2008 and during 2009; and
 
    
    an increase of $0.4 million due to the 2008 Conventional Tanker Acquisitions
(including the impact of the Dropdown Predecessor).
 FSO Segment
  Year Ended December 31,(in thousands of U.S. dollars, except calendar-ship-days and percentages)
    
    2009
    
    
    2008
    
    
    % ChangeRevenues
    
    
    62,644
    
    
    
    68,396
    
    
    
    (8.4
    )Voyage expenses
    
    
    1,335
    
    
    
    1,729
    
    
    
    (22.8
    )Net revenues
    
    
    61,309
    
    
    
    66,667
    
    
    
    (8.0
    )Vessel operating expenses
    
    
    27,460
    
    
    
    27,759
    
    
    
    (1.1
    )Depreciation and amortization
    
    
    21,763
    
    
    
    23,690
    
    
    
    (8.1
    )General and administrative (1)
    
    
    2,572
    
    
    
    2,646
    
    
    
    (2.8
    )Income from vessel operations
    
    
    9,514
    
    
    
    12,572
    
    
    
    (24.3
    )Calendar-Ship-DaysOwned Vessels
    
    
    1,842
    
    
    
    1,830
    
    
    
    0.7
 (1)
    
    Includes direct general and administrative expenses and indirect general and
administrative expenses (allocated to the FSO segment based on estimated use of corporate
resources). Net Revenues.
 
    
    a decrease of $2.9 million due to unfavorable exchange rates; and
 
    
    a decrease of $2.5 million from the Navion Saga being offhire for 43 days in
2009 due to a scheduled drydock;
  45




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##### Table of Contents




    
    an increase of $0.8 million due to a decrease in bunker costs during 2009.
 FPSO Segment
  Year Ended December 31,(in thousands of U.S. dollars, except calendar-ship-days and percentages)
    
    2009
    
    
    2008
    
    
    % ChangeRevenues
    
    
    149,345
    
    
    
    131,069
    
    
    
    13.9Vessel operating expenses
    
    
    65,357
    
    
    
    61,138
    
    
    
    6.9Depreciation and amortization
    
    
    37,358
    
    
    
    29,959
    
    
    
    24.7General and administrative (1)
    
    
    13,891
    
    
    
    15,057
    
    
    
    (7.7
    )Goodwill impairment
    
    
    
    
    
    
    149,129
    
    
    
    (100.0
    )Income from vessel operations
    
    
    32,739
    
    
    
    (124,214
    )
    
    
    (126.4
    )Calendar-Ship-DaysOwned Vessels
    
    
    730
    
    
    
    641
    
    
    
    13.9
 (1)
    
    Includes direct general and administrative expenses and indirect general and
administrative expenses (allocated to the FPSO segment based on estimated use of corporate
resources). Petrojarl Varg Rio das Ostras Petrojarl Varg Petrojarl Varg Rio das Ostras
 Revenues.
 
    
    an increase of $5.7 million as the Petrojarl Vargcommenced a new four-year
contract extension with Talisman Energy beginning in the third quarter of 2009; and
 
    
    an increase of $14.7 million as the Rio das Ostraswas only operating for
three quarters in 2008;
  
    
    a decrease of $2.0 million as a result of decreases in miscellaneous service
revenues as compared to the previous year.
 Vessel Operating Expenses.
 
    
    an increase of $4.0 million as the Rio das Ostraswas only operating for
three quarters in 2008.
 Depreciation and Amortization.
 
    
    an increase of $2.4 million due to Teekay Corporations acquisition of the
remaining 35% interest in the Petrojarl Vargon June 30, 2008; and
 
    
    an increase of $5.0 million as the Rio das Ostraswas only operating for
three quarters in 2008.
 Goodwill impairment charge. Petrojarl Varg Rio das Ostras
 Other Operating Results
 General and Administrative Expenses.
 Interest Expense.
 
    
    a decrease of $29.8 million due to a decline in interest rates during 2009;
  46




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##### Table of Contents




    
    a decrease of $7.4 million relating to the scheduled repayments and
prepayments of debt during 2008 and 2009; and
 
    
    a decrease of $6.3 million from the financing of the Petrojarl Varg
(including the Dropdown Predecessor) mainly due to a decrease in interest rates.
 Realized and Unrealized Gains (Losses) on Derivatives
 Year Ended, December 31(in thousands of U.S. Dollars)
    
    2009
    
    
    2008Realized (losses) gainsInterest rate swaps
    
    
    (51,084
    )
    
    
    (21,470
    )Foreign currency forward contracts
    
    
    (4,196
    )
    
    
    1,972(55,280
    )
    
    
    (19,498
    )Unrealized gains (losses)Interest rate swaps
    
    
    102,662
    
    
    
    (166,047
    )Foreign currency forward contracts
    
    
    4,562
    
    
    
    (7,800
    )107,224
    
    
    
    (173,847
    )Total realized and unrealized gains (losses) on derivative instruments
    
    
    51,944
    
    
    
    (193,345
    )
 Foreign Currency Exchange Gains (Losses).
 Income Tax (Expense) Recovery.
 Other Income.
 
 Liquidity and Capital Resources
 Liquidity and Cash Needs
      47




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Cash Flows.
 Year Ended December 31,(in thousands of U.S. dollars)
    
    2010
    
    
    2009Net cash flow from operating activities
    
    
    286,585
    
    
    
    162,361Net cash flow used for financing activities
    
    
    (211,600
    )
    
    
    (200,360
    )Net cash flow used for investing activities
    
    
    (17,909
    )
    
    
    8,785
 Operating Cash Flows. Petrojarl Varg Falcon Spirit, Rio das Ostras, Amundsen Spirit Nansen
  Financing Cash Flows Falcon
Spirit, Rio Das Ostras, Amundsen Spirit Nansen Spirit
 Petrojarl Varg Falcon Spirit
   Petrojarl Varg .
  Investing Cash Flows. Peary Spirit
  
 Credit Facilities
  
    
    incurring or guaranteeing indebtedness;
 
    
    changing ownership or structure, including by mergers, consolidations,
liquidations and dissolutions;
 
    
    making dividends or distributions when in default of the relevant loans;
 
    
    making capital expenditures in excess of specified levels;
 
    
    making certain negative pledges or granting certain liens;
 
    
    selling, transferring, assigning or conveying assets; or
 
    
    entering into a new line of business.
  48




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##### Table of Contents



Contractual Obligations and Contingencies
  2012
    
    
    2014and
    
    
    and
    
    
    BeyondTotal
    
    
    2011
    
    
    2013
    
    
    2015
    
    
    2015(in millions of U.S. Dollars)Long-term debt(1)
    
    
    1,717.1
    
    
    
    152.1
    
    
    
    481.4
    
    
    
    820.6
    
    
    
    263.0Chartered-in vessels (Operating leases)
    
    
    156.6
    
    
    
    59.6
    
    
    
    76.3
    
    
    
    20.7
    
    
    
    Total contractual obligations
    
    
    1,873.7
    
    
    
    211.7
    
    
    
    557.7
    
    
    
    841.3
    
    
    
    263.0
 
 (1)
    
    Excludes expected interest payments of $17.1 million (2011), $28.1 million (2012 and
2013), $9.5 million (2014 and 2015) and $5.5 million (beyond 2015). Expected interest payments
are based on LIBOR, plus margins which ranged up to 3.25% as at December 31, 2010, and on
NIBOR plus a margin of 4.75%. 
 Off-Balance Sheet Arrangements
  
 Critical Accounting Estimates
  Revenue Recognition
 Description.
 Judgments and Uncertainties.
 Effect if Actual Results Differ from Assumptions.
 Vessel Lives and Impairment
 Description.
  49




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##### Table of Contents



Judgments and Uncertainties.
 Effect if Actual Results Differ from Assumptions.
 Drydocking
 Description.
 Judgments and Uncertainties.
 Effect if Actual Results Differ from Assumptions.
 Goodwill and Intangible Assets
 Description.
 Judgments and Uncertainties .
   Valuation of Derivative Instruments
 Description.
 Judgments and Uncertainties.
 Effect if Actual Results Differ from Assumptions.
  50




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##### Table of Contents



Recent Accounting Pronouncements
 Consolidations
 Receivables
 
 Accounting Pronouncements Not Yet Adopted
 Revenue Recognition
 
 Item 6. Directors, Senior Management and Employees
 
 A. Directors and Senior Management
 
 Management of Teekay Offshore Partners L.P.
    Teekay LNG Teekay Tankers
    51




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##### Table of Contents



Directors and Executive Officers of Teekay Offshore GP L.L.C.
  Name
    
    Age
    
    PositionC. Sean Day
    
    
    61
    
    
    Chairman (1)Bjorn Moller
    
    
    53
    
    
    Vice Chairman and Director until March 31, 2011Peter Evensen
    
    
    52
    
    
    Chief Executive Officer, Chief Financial Officer and DirectorKenneth Hvid
    
    
    42
    
    
    Director (2)David L. Lemmon
    
    
    68
    
    
    Director (1) (3)Carl Mikael L.L. von Mentzer
    
    
    66
    
    
    Director (1) (3)John J. Peacock
    
    
    67
    
    
    Director (1) (3)
 
 (1)
    
    Member of Corporate Governance Committee(2)
    
    Effective April 1, 2011(3)
    
    Member of Audit Committee and Conflicts Committee  C. Sean Day
 Bjorn Moller
 Peter Evensen
 Kenneth Hvid
 David L. Lemmon
 Carl Mikael L.L. von Mentzer
 John J. Peacock
  52




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##### Table of Contents



Directors and Executive Officers of Teekay Offshore Operating GP L.L.C.
  Name
    
    Age
    
    PositionC. Sean Day
    
    
    61
    
    
    ChairmanBjorn Moller
    
    
    53
    
    
    Director until March 31, 2011Peter Evensen
    
    
    52
    
    
    Chief Executive Officer, Chief Financial Officer and DirectorKenneth Hvid
    
    
    42
    
    
    Director effective April 1, 2011
 
 
 B. Compensation
 
 Reimbursement of Expenses of Our General Partner
  
 Executive Compensation
  
 Compensation of Directors
   
 2006 Long-Term Incentive Plan
 
 
 C. Board Practices
  the Board
    53




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##### Table of Contents



Audit Committee
  
    
    the integrity of our financial statements;
 
    
    our compliance with legal and regulatory requirements;
 
    
    the qualifications and independence of our independent auditor; and
 
    
    the performance of our internal audit function and our independent auditor.
 Conflicts Committee.
  
    
    reviews specific matters that the Board believes may involve conflicts of interest; and
 
    
    determines if the resolution of the conflict of interest is fair and reasonable to us.
  Corporate Governance Committee.
  
    
    oversees the operation and effectiveness of the Board and its corporate governance;
 
    
    develops, updates and recommends to the Board corporate governance principles and
policies applicable to us and our general partner and monitors compliance with these
principles and policies; and
 
    
    oversees director compensation and the long-term incentive plan described above.
 
 D. Employees
 Crewing and Staff
   ITF Rio das Ostras
 
  54




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##### Table of Contents



E. Unit Ownership
  Identity of Person or Group
    
    Common Units Owned
    
    
    Percentage of Common Units Owned(3)All directors and officers as a group (7 persons) (1) (2)
    
    
    357,700
    
    
    
    0.57
    %
 
 (1)
    
    Excludes units owned by Teekay Corporation, which controls us. Excludes C. Sean Day,
Bjorn Moller, Peter Evensen and effective April 1, 2011, Kenneth Hvid, who serve as the
Directors and Executive Officers of our general partner. In addition, Mr. Moller was Teekay
Corporations President and Chief Executive Officer until April 1, 2011, and Peter Evensen,
our general partners Chief Executive Officer and Chief Financial Officer and a Director,
was Teekay Corporations Executive Vice President and Chief Strategy Officer until April 1,
2011. Effective April 1, 2011, Mr. Evensen was appointed Teekay Corporations President and
Chief Executive Officer. Please read Item 7: Major Unitholders and Related Party
Transactions Certain Relationships and Related Party Transactions for more detail.(2)
    
    Each director, executive officer and key employee beneficially owns less than one
percent of the outstanding units.(3)
    
    Excludes the 2% general partner interest held by our general partner, a wholly owned
subsidiary of Teekay Corporation. 
 Item 7. Major Unitholders and Related Party Transactions
 
 A. Major Unitholders
  Common Units
    
    
    Percentage ofIdentity of Person or Group
    
    Owned
    
    
    Common Units OwnedTeekay Corporation(1)
    
    
    22,362,814
    
    
    
    35.61
    %Kayne Anderson Capital Advisors, LP, and Richard A. Kayne, as a group (2)
    
    
    3,759,907
    
    
    
    6.0
    %Neuberger Berman Group LLC and Neuberger Berman, LLC, as a group (3)
    
    
    3,738,912
    
    
    
    6.0
    %
 
 (1)
    
    Excludes the 2% general partner interest held by our general partner, a wholly owned
subsidiary of Teekay Corporation.(2)
    
    Includes shared voting power and shared dispositive power as to 3,759,907 units. Kayne
Anderson Capital Advisors, LP, and Richard A. Kayne both have shared voting and dispositive
power. Kayne Anderson Capital Advisors, L.P. is the general partner (or general partner of
the general partner) of the limited partnerships and investment adviser to the other
accounts. Richard A. Kayne is the controlling shareholder of the corporate owner of Kayne
Anderson Investment Management, Inc., the general partner of Kayne Anderson Capital
Advisors, L.P. Mr. Kayne is also a limited partner of each of the limited partnerships and a
shareholder of the registered investment company. This information is based on the Schedule
13G/A filed by this group with the SEC on February 10, 2011.(3)
    
    Includes shared voting power as to 3,380,982 units and shared dispositive power as to
3,738,912 units. Both Neuberger Berman Group LLC and Neuberger Berman LLC have shared
dispositive power. Neuberger Berman, LLC and Neuberger Berman Management LLC serve as
sub-advisor and investment manager, respectively, of Neuberger Berman Group LLCs mutual
funds. The holdings of Neuberger Berman Fixed Income LLC and NB Alternative Fund Management
LLC, affiliates of Neuberger Berman LLC, are also aggregated to comprise the holdings
referenced herein. This information is based on the Schedule 13G filed by this group with
the SEC on February 14, 2011. 
  55




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##### Table of Contents



B. Certain Relationships and Related Party Transactions
 a)
    
    Nine of OPCOs conventional tankers are employed on long-term time-charter contracts
with a subsidiary of Teekay Corporation. Under the terms of seven of these nine
time-charter contracts, OPCO is responsible for the bunker fuel expenses; however, OPCO
adds the approximate amounts of these expenses to the daily hire rate plus a 4.5% margin.
Pursuant to these time-charter contracts, OPCO earned revenues of $104.9 million, $114.7
million and $144.5 million for the years ended December 31, 2010, 2009, and 2008,
respectively.
 b)
    
    Two of OPCOs shuttle tankers are employed on long-term bareboat charters with a
subsidiary of Teekay Corporation. Pursuant to these charter contracts, OPCO earned revenues
of $14.9 million, $12.4 million and $14.8 million during the years ended December 31, 2010,
2009, and 2008, respectively.
 c)
    
    Two of OPCOs FSO units are employed on long-term bareboat charters with a subsidiary
of Teekay Corporation. Pursuant to these charter contracts, OPCO earned revenues of $11.2
million, $11.2 million and $11.2 million, during the years ended December 31, 2010, 2009,
and 2008, respectively.
 d)
    
    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, during
the years ended December 31, 2010, 2009, and 2008, OPCO earned management fees of $3.8
million, $3.2 million and $3.3 million, respectively.
 e)
    
    Eight of OPCOS Aframax
conventional oil tankers, one of OPCOs FSO units, two of our
FSO units and our FPSO units are managed by subsidiaries of Teekay Corporation. Pursuant to
the associated management services agreements, we incurred general and administrative
expenses of $9.2 million, $4.6 million and $3.5 million during the years ended December 31,
2010, 2009, and 2008, respectively.
 f)
    
    We, OPCO and certain of OPCOs operating subsidiaries have entered into services
agreements with certain subsidiaries of Teekay Corporation pursuant to which Teekay
Corporation subsidiaries provide us, OPCO and its operating subsidiaries with
administrative, crew training, advisory and technical services and ship management
services. Pursuant to these service agreements, we incurred $43.0 million, $40.4 million
and $59.2 million, respectively, of these costs during the December 31, 2010, 2009, and
2008, respectively.
 g)
    
    Pursuant to our partnership agreement, we reimburse our General Partner for all
expenses incurred by the General Partner that are necessary or appropriate for the conduct
of our business. During the years ended December 31, 2010, 2009, and 2008, we incurred $0.4
million, $0.5 million and $0.6 million of these costs, respectively.
 h)
    
    C. Sean Day is the Chairman of our general partner, Teekay Offshore GP L.L.C., and of
Teekay Offshore Operating GP L.L.C., the general partner of OPCO. He also is the Chairman of
Teekay Corporation, Teekay Tankers Ltd. and Teekay GP L.L.C., the general partner of Teekay
LNG.Bjorn Moller was the Vice Chairman of Teekay GP L.L.C., Teekay Offshore Operating GP L.L.C
and Teekay Offshore GP L.L.C. until March 31, 2011. He was also the President and Chief
Executive Officer of Teekay Corporation as well as the Chief Executive Officer and a
director of Teekay Tankers Ltd. until March 31, 2011. He remains a Director of Teekay
Corporation and Teekay Tankers Ltd.Peter Evensen is the Chief Executive Officer and Chief Financial Officer and a director of
Teekay GP L.L.C., Teekay Offshore Operating GP L.L.C., and Teekay Offshore GP L.L.C. He is
a director of Teekay Tankers Ltd. In September 2010, Mr. Evensen was appointed Chief
Executive Officer elect of Teekay Corporation and on April 1, 2011, he assumed the position
of President and Chief Executive Officer of Teekay Corporation. He was also the Executive
Vice President Teekay Tankers Ltd. until March 31, 2011.Effective April 1, 2011, Kenneth Hvid was appointed a director of Teekay GP L.L.C. and
Teekay Offshore GP L.L.C. Mr. Hvid was also appointed to Chief Strategy Officer and
Executive Vice President of Teekay Corporation effective April 1, 2011.Because Mr. Evensen is an employee of Teekay Corporation, his compensation (other than any
awards under the long-term incentive plan) is set and paid by Teekay Corporation. Pursuant
to our partnership agreement, we have agreed to reimburse Teekay Corporation for time spent
by Mr. Evensen on our management matters as our Chief Executive Officer and Chief Financial
Officer.
 i)
    
    We have entered into an amended and restated omnibus agreement with our general
partner, Teekay Corporation, Teekay LNG and related parties. The following discussion
describes certain provisions of the omnibus agreement.
 Noncompetition
 
    
    owning, operating or chartering offshore vessels if the remaining duration of the
time charter or contract of affreightment for the vessel, excluding any extension
options, is less than three years;
 
    
    acquiring offshore vessels and related time charters or contracts of affreightment as
part of a business or package of assets and operating or chartering those vessels if a
majority of the value of the total assets or business acquired is not attributable to
the offshore vessels and related contracts, as determined in good faith by the board of
directors of Teekay Corporation or the conflicts committee of the board of directors of
Teekay LNGs general partner; however, if Teekay Corporation or Teekay LNG completes
such an acquisition, it must, within one year after completing the acquisition, offer to
sell the offshore vessels and related contracts to us for their fair market value plus
any additional tax or other similar costs to Teekay Corporation or Teekay LNG that would
be required to transfer the offshore vessels and contracts to us separately from the
acquired business or package of assets;
  56




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##### Table of Contents




    
    owning, operating or chartering offshore vessels and related time charters and
contracts of affreightment that relate to a tender, bid or award for a proposed offshore
project that Teekay Corporation or any of its subsidiaries has submitted or hereafter
submits or
receives; however, at least one year after the delivery date of any such offshore vessel,
Teekay Corporation must offer to sell the offshore vessel and related contract to us, with
the vessel valued (i) for newbuildings originally contracted by Teekay Corporation, at its
fully-built-up cost (which represents the aggregate expenditures incurred (or to be
incurred prior to delivery to us) by Teekay Corporation to acquire, construct, and/or
convert and bring such offshore vessel to the condition and location necessary for our
intended use, plus project development costs for completed projects and projects that were
not completed but, if completed, would have been subject to an offer to us pursuant to the
omnibus agreement) and (ii) for any other vessels, Teekay Corporations cost to acquire a
newbuilding from a third party or the fair market value of any existing vessel, as
applicable, plus in each case any subsequent expenditures that would be included in the
fully-built-up cost of converting the vessel prior to delivery to us;
 
    
    acquiring, operating or chartering offshore vessels if our general partner has
previously advised Teekay Corporation or Teekay LNG that the board of directors of our
general partner has elected, with the approval of its conflicts committee, not to cause
us or our subsidiaries to acquire or operate the vessels; or
    
    owning a limited partner interest in OPCO or owning shares of Teekay Petrojarl.
  
    
    acquiring oil tankers or LNG carriers and any related time charters as part of a
business or package of assets and operating or chartering those vessels, if a majority
of the value of the total assets or business acquired is not attributable to the oil
tankers and LNG carriers and any related charters, as determined in good faith by the
conflicts committee of our general partners board of directors; however, if at any time
we complete such an acquisition, we are required to promptly offer to sell to Teekay
Corporation the oil tankers and time charters or to Teekay LNG the LNG carriers and time
charters for fair market value plus any additional tax or other similar costs to us that
would be required to transfer the vessels and contracts to Teekay Corporation or Teekay
LNG separately from the acquired business or package of assets; or
 
    
    acquiring, operating or chartering oil tankers or LNG carriers if Teekay Corporation
or Teekay LNG, respectively, has previously advised our general partner that it has
elected not to acquire or operate those vessels.
 Rights of First Offer on Conventional Tankers, LNG Carriers and Offshore Vessels.
 Foinaven Foinaven
 j)
    
    From December 2008 to June 2009, OPCO entered into a bareboat charter contract to
in-charter one shuttle tanker from a subsidiary of Teekay Corporation. Pursuant to the
charter contract, OPCO incurred time-charter hire expenses of $3.4 million and $0.2 million
during the years ended December 31, 2009 and 2008, respectively.
 k)
    
    In March 2008, Teekay Corporation agreed to reimburse us for repair costs relating to
one of our shuttle tankers. The vessel was purchased from Teekay Corporation in July 2007
and had, as of the date of acquisition, an inherent minor defect that required repairs.
Pursuant to this agreement, Teekay Corporation reimbursed us $0.7 million of these costs
during the year ended December 31, 2008.
 l)
    
    In March 2008, a subsidiary of OPCO sold certain vessel equipment to a subsidiary of
Teekay Corporation for proceeds equal to its net book value of $1.4 million.
 m)
    
    Concurrently with the closing of our public offering of common units in June 2008, we
acquired from Teekay Corporation an additional 25% interest in OPCO for $205.5 million,
thereby increasing the our ownership interest in OPCO to 51%. We financed the acquisition
with the net proceeds from the public offering and a concurrent private placement of common
units to Teekay Corporation. In connection with the valuation of the purchase of the
additional 25% interest in OPCO, we incurred a fairness opinion fee of $1.1 million. The
excess of the proceeds paid by us over Teekay Corporations historical book value for the
25% interest in OPCO was accounted for as an equity distribution to Teekay Corporation of
$91.6 million. In March 2011, we acquired Teekay Corporations remaining 49% limited
partner interest in OPCO through 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.
 n)
    
    On June 18, 2008, OPCO acquired from Teekay Corporation two ship owning subsidiaries
(SPT Explorer L.L.C. and the SPT Navigator L.L.C.) for a total cost of approximately $106.0
million, including the assumption of third-party debt of approximately $89.3 million and
the non-cash settlement of related party working capital of $1.2 million. The acquired
subsidiaries own two 2008-built Aframax lightering tankers (the SPT Explorerand the SPT
Navigator) and their related 10-year, fixed-rate bareboat charters (with options
exercisable by the charterer to extend up to an additional five years) entered into with
Skaugen PetroTrans, a joint venture in which Teekay Corporation owns a 50% interest. These
two lightering tankers are specially designed to be used in ship-to-ship oil transfer
operations. This purchase was financed with the assumption of debt, together with cash
balances. The excess of the proceeds paid by us over Teekay Corporations historical book
value was accounted for as an equity distribution to Teekay Corporation of $16.2 million.Pursuant to the bareboat charters for the vessels, OPCO earned revenues of $9.9 million, $9.9
million and $8.7 million for the years ended December 31, 2010, 2009, and 2008, respectively
(including revenues earned as part of the Dropdown Predecessor prior to OPCOs acquisition of
the vessels).
  57




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o)
    
    In June 2008, Teekay Corporation agreed to reimburse OPCO for certain costs relating to
events which occurred prior to our initial public offering in December 2006, totalling $0.7
million, primarily relating to the settlement of repair costs not covered by insurance
providers for work performed in early 2006 on two of OPCOs shuttle tankers.
 p)
    
    During August 2008, two of OPCOs in-chartered shuttle tankers were employed on a
single-voyage charter with a subsidiary of Teekay Corporation. Pursuant to this charter
contract, OPCO earned revenues of $11.3 million for 2008.
 q)
    
    On September 10, 2009, we 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 was financed through vendor financing made available by Teekay
Corporation of $220 million. The remaining $100 million was paid in cash and financed from
existing debt facilities. The $220 million vendor financing from Teekay Corporation was
comprised of two tranches. The senior tranche was a $160 million short-term debt facility
bearing interest at LIBOR plus a margin of 3.25%. The junior tranche of the vendor
financing was a $60 million unsecured subordinated debt facility bearing interest at 10%
per annum. In November 2009, we repaid $160 million of the Teekay Corporation vendor
financing when we entered into a new $260 million revolving credit facility with a
syndicate of banks. The new $260 million revolving credit facility is primarily secured by
the Petrojarl Vargand an assignment of earnings from its contracts with Talisman Energy.
In March 2010, we repaid the remaining $60 million of the Teekay Corporation vendor
financing. For the years ended December 31, 2010 and 2009, respectively, we incurred
interest expense of $1.4 million and $2.9 million in relation to the $220 million vendor
financing from Teekay Corporation.
 r)
    
    On April 1, 2010, we acquired from Teekay Corporation its 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 Spiritis 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 Spiritis 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 us 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. 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 our statement of cash flow. The
portion of the purchase price for the acquisition of the equity interest in Teekay Al
Raayan LLC ($11.3 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 our 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 ($32.8 million) was accounted for as repayment of
debt.
 s)
    
    On October 1, 2010, we acquired from Teekay Corporation the Rio das OstrasFPSO 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. Immediately prior to the
acquisition, $163.0 million of amounts due to Teekay Corporation were converted to equity
and are treated as a non-cash transaction in our statement of cash flow. The purchase price
was financed through the assumption of debt of $93.8 million and the remainder was paid in
cash. The purchase price is accounted for as an equity distribution to Teekay Corporation.
To the extent the purchase price is less than the corresponding book value, the excess is
reflected as an addition in our equity and the remainder is shown as a reduction in
Dropdown Predecessor Equity.
 t)
    
    On October 1, 2010, OPCO acquired from Teekay Corporation the newbuilding shuttle
tanker, the Amundsen Spirit, which is on a time-charter to Statoil ASA, for a purchase
price of $128.0 million. The purchase price was financed through the assumption of debt of
$93.3 million, the issuance of new units by OPCO of $17.0 million and $17.7 million with
cash. The excess of $31.2 million of the purchase price over the book value of the assets
of ($3.5) million, which includes the fair value of an interest rate swap of ($25.9)
million, is accounted for as an equity distribution to Teekay Corporation. Immediately
prior to the acquisition, $32.7 million of amounts due to Teekay Corporation was converted
to equity and is treated as a non-cash transaction in our statement of cash flow.
 u)
    
    On October 1, 2010, OPCO agreed to acquire from Teekay Corporation its 100% interest in
the Nansen Spirit LLC, which owns the newbuilding shuttle tanker, the Nansen Spirit. On
December 10, 2010, the Nansen Spiritcommenced its time-charter with Statoil ASA and OPCO
acquired 100% of Teekay Corporations interest in the Nansen Spirit LLC for a purchase
price of $126.3 million. The purchase price was financed through the assumption of debt of
$93.3 million, the issuance of new units by OPCO of $16.4 million and $16.6 million with
cash. The excess of $4.4 million of the purchase price over the book value of the assets of
$28.6 million was accounted for as an equity distribution to Teekay Corporation.
Immediately prior to the acquisition, $31.5 million of amounts due to Teekay Corporation
was converted to equity and is treated as a non-cash transaction in our statement of cash
flow. For the period October 1, 2010 to December 10, 2010, we consolidated Nansen Spirit
LLC on our financial statements as it was considered a variable interest entity and we were
the primary beneficiary.
 v)
    
    On October 1, 2010, OPCO agreed to acquire an additional newbuilding shuttle tanker,
the Peary Spirit,from Teekay Corporation for approximately $133 million. The acquisition
of this newbuilding shuttle tanker is expected to coincide with the commencement of its
time-charter contract under a Master Agreement with Statoil in July 2011. As the entity
that owns the Peary Spirit is considered a variable interest entity prior to its
acquisition by OPCO and we are the primary beneficiary, our consolidated financial
statements reflect the financial position, results of operations and cash flows of the
Peary Spiritfrom October 1, 2010 to the end of the year.
 w)
    
    On October 1, 2010, OPCO agreed to acquire two interest rate swaps from Teekay
Corporation on the same date as it would acquire the Nansen Spiritand the Peary Spirit
from Teekay Corporation. Pending acquisition of the interest rate swaps, these agreements
are derivative instruments with Teekay Corporation. The fair value of the interest rate
swaps of ($57.1) million on October 1, 2010, was accounted for as an equity distribution to
Teekay Corporation.
 x)
    
    At December 31, 2010, due from affiliates totaled $19.1 million (December 31, 2009 -
$17.7 million) and due to affiliates totaled $67.4 million (December 31, 2009  $40.2
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.
  58




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Item 8. Financial Information
 
 A. Consolidated Financial Statements and Other Financial Information
 
 Consolidated Financial Statements and Notes
  
 Legal Proceedings
 Navion Hispania Njord Bravo Njord Bravo Njord Bravo Statoil Navion
Hispania Navion Hispania Njord Bravo
 Njord Bravo
 Navion Hispania Njord Bravo Navion Hispania
  
 Cash Distribution Policy
 Rationale for Our Cash Distribution Policy
  Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy
  
    
    Our unitholders have no contractual or other legal right to receive distributions other
than the obligation under our partnership agreement to distribute available cash on a
quarterly basis, which is subject to our general partners broad discretion to establish
reserves and other limitations.
 
    
    The Board of Directors of OPCOs general partner, Teekay Offshore Operating GP L.L.C.
(subject to approval by the Board of Directors of our general partner), has authority to
establish reserves for the prudent conduct of OPCOs business. The establishment of these
reserves could result in a reduction in cash distributions.
 
    
    While our partnership agreement requires us to distribute all of our available cash, our
partnership agreement, including provisions requiring us to make cash distributions
contained therein, may be amended with the approval of a majority of the outstanding common
units.
 
    
    Even if our cash distribution policy is not modified or revoked, the amount of
distributions we pay under our cash distribution policy and the decision to make any
distribution is determined by the Board of Directors of our general partner, taking into
consideration the terms of our partnership agreement.
 
    
    Under Section 51 of the Marshall Islands Limited Partnership Act, we may not make a
distribution to unitholders if the distribution would cause our liabilities to exceed the
fair value of our assets.
  59




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
    
    We may lack sufficient cash to pay distributions to our unitholders due to decreases in
net revenues or increases in operating expenses, principal and interest payments on
outstanding debt, tax expenses, working capital requirements, maintenance capital
expenditures or anticipated cash needs.
 
    
    Our distribution policy may be affected by restrictions on distributions under our
credit facility agreements, which contain material financial tests and covenants that must
be satisfied. Should we be unable to satisfy these restrictions included in the credit
agreements or if we are otherwise in default under the credit agreements, we would be
prohibited from making cash distributions, which would materially hinder our ability to
make cash distributions to unitholders, notwithstanding our stated cash distribution
policy.
 
    
    If we make distributions out of capital surplus, as opposed to operating surplus (as
such terms are defined in our partnership agreement), such distributions will constitute a
return of capital and will result in a reduction in the minimum quarterly distribution and
the target distribution levels under our partnership agreement. We do not anticipate that
we will make any distributions from capital surplus.
 Incentive Distribution Rights
   Marginal Percentage InterestTotal Quarterly
    
    in DistributionsDistribution Target Amount
    
    Unitholders
    
    
    General PartnerMinimum Quarterly Distribution
    
    $0.35
    
    
    98.0
    %
    
    
    2.0
    %First Target Distribution
    
    Up to $0.4025
    
    
    98.0
    %
    
    
    2.0
    %Second Target Distribution
    
    Above $0.4025 up to $0.4375
    
    
    85.0
    %
    
    
    15.0
    %Third Target Distribution
    
    Above $0.4375 up to $0.525
    
    
    75.0
    %
    
    
    25.0
    %Thereafter
    
    Above $0.525
    
    
    50.0
    %
    
    
    50.0
    %
 
 B. Significant Changes
 
  60




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Item 9. The Offer and Listing
  Dec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,Year Ended
    
    2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006 (1)High
    
    $
    29.79
    
    
    $
    19.63
    
    
    $
    26.46
    
    
    $
    37.45
    
    
    $
    26.77Low
    
    $
    17.79
    
    
    $
    8.74
    
    
    $
    6.58
    
    
    $
    24.04
    
    
    $
    21.00
 Mar. 31,
    
    
    Dec. 31,
    
    
    Sept. 30,
    
    
    June 30,
    
    
    Mar. 31,
    
    
    Dec. 31,
    
    
    Sept. 30,
    
    
    June 30,Quarter Ended
    
    2011
    
    
    2010
    
    
    2010
    
    
    2010
    
    
    2010
    
    
    2009
    
    
    2009
    
    
    2009High
    
    $
    30.50
    
    
    $
    29.79
    
    
    $
    23.60
    
    
    $
    22.33
    
    
    $
    20.95
    
    
    $
    20.06
    
    
    $
    16.51
    
    
    $
    14.32Low
    
    $
    27.18
    
    
    $
    23.50
    
    
    $
    20.81
    
    
    $
    17.79
    
    
    $
    18.23
    
    
    $
    15.32
    
    
    $
    12.84
    
    
    $
    11.76
 Mar. 31,
    
    
    Feb 28,
    
    
    Jan. 31,
    
    
    Dec. 31,
    
    
    Nov. 30,
    
    
    Oct. 31,Month Ended
    
    2011
    
    
    2011
    
    
    2011
    
    
    2010
    
    
    2010
    
    
    2010High
    
    $
    30.50
    
    
    $
    28.77
    
    
    $
    28.25
    
    
    $
    29.11
    
    
    $
    29.79
    
    
    $
    26.52Low
    
    $
    28.14
    
    
    $
    27.50
    
    
    $
    27.18
    
    
    $
    26.86
    
    
    $
    26.67
    
    
    $
    23.50
 
 (1)
    
    Period beginning December 13, 2006. 
 Item 10. Additional Information
 
 Memorandum and Articles of Association
  
 Material Contracts
  a)
    
    Agreement, dated June 26, 2003, for a U.S. $455,000,000 Revolving Credit Facility
between Norsk Teekay Holdings Ltd., Den Norske Bank ASA and various other banks. This
facility bears interest at LIBOR plus a margin of 0.625%. The amount available under the
facility reduces semi-annually, with a bullet reduction of $131.0 million on maturity in
October 2014. The credit facility may be used for acquisitions and for general partnership
purposes. Our obligations under the facility are secured by first-priority mortgages on
seven shuttle tankers and one FSO unit.
 b)
    
    Agreement, dated October 2, 2006, for a U.S. $940,000,000 Revolving Credit Facility
between Teekay Offshore Operating L.P., Den Norske Bank ASA and various other banks. This
facility bears interest at LIBOR plus a margin of 0.625%. The amount available under the
facility reduces semi-annually, with a bullet reduction of $350.0 million on maturity in
October 2014. The credit facility may be used for acquisitions and for general partnership
purposes. In addition, this facility allows OPCO to make working capital borrowings and
loan the proceeds to us, which we could use to make distributions, provided that such
amounts are paid down annually. Our obligations under the facility are secured by
first-priority mortgages on 11 shuttle tankers and eight conventional tankers.
 c)
    
    Amended and Restated Omnibus Agreement, dated December 19, 2006, among us, our general
partner, Teekay Corporation, Teekay LNG and related parties. Please read Item 7  Major
Unitholders and Related Party Transactions  Certain Relationships and Related Party
Transactions for a summary of certain contract terms.
 d)
    
    We, OPCO and certain of our and its operating subsidiaries have entered into services
agreements with certain subsidiaries of Teekay Corporation pursuant to which the Teekay
Corporation subsidiaries provide us, OPCO, and our and its operating subsidiaries with
administrative, advisory, technical, strategic consulting services and ship management
services for a reasonable fee that includes reimbursement of their direct and indirect
expenses incurred in providing these services. Please read Item 7  Major Unitholders and
Related Party Transactions  Certain Relationships and Related Party Transactions for a
summary of certain contract terms.
 e)
    
    Teekay Offshore Partners L.P. 2006 Long-Term Incentive Plan. Please read Item 6 
Directors, Senior Management and Employees for a summary of certain plan terms.
  61




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f)
    
    Agreement, dated September 10, 2009, between Petrojarl Varg AS and Varg L.L.C.,
relating to the purchase of the Petrojarl Varg. Please read Item 7  Major Unitholders and
Related Party Transactions  Certain Relationships and Related Party Transactions for a
summary of certain contract terms.
 g)
    
    Agreement, dated November 25, 2010, for NOK 600,000,000 Senior Unsecured Bonds due
November 2013, among us, Teekay Offshore Operating L.P. and Norsk Tillitsman ASA. All
payments are at NIBOR plus 4.75% per annum.
 h)
    
    Agreement, dated March 8, 2011, between Teekay Holdings Limited and Teekay Offshore
Partners L.P., relating to the purchase of limited partner interests of OPCO. Please read
Item 7  Major Unitholders and Related Party Transactions  Certain Relationships and
Related Party Transactions for a summary of certain contract terms.
 
 Exchange Controls and Other Limitations Affecting Unitholders
   
 Material U.S. Federal Income Tax Considerations
 Code Treasury Regulations
  
    
    dealers in securities or currencies,
 
    
    traders in securities that have elected the mark-to-market method of accounting for
their securities,
 
    
    persons whose functional currency is not the U.S. dollar,
 
    
    persons holding our common units as part of a hedge, straddle, conversion or other
synthetic security or integrated transaction,
 
    
    certain U.S. expatriates,
 
    
    financial institutions,
 
    
    insurance companies,
 
    
    persons subject to the alternative minimum tax,
 
    
    persons that actually or under applicable constructive ownership rules own 10% or more
of our common units; and
 
    
    entities that are tax-exempt for U.S. federal income tax purposes.
   United States Federal Income Taxation of U.S. Holders
 U.S. Holder
 Distributions
 PFICs
  62




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##### Table of Contents



U.S. Individual Holder
   Sale, Exchange or other Disposition of Common Units
   Consequences of Possible PFIC Classification
   Tidewater Inc. v. United States IRS Tidewater Tidewater Tidewater Tidewater
 QEF election
 Taxation of U.S. Holders Making a Timely QEF Election Electing Holder
  63




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##### Table of Contents



Taxation of U.S. Holders Making a Mark-to-Market Election
  Taxation of U.S. Holders Not Making a Timely QEF or Mark-to-Market Election Non-Electing Holder
 
    
    the excess distribution or gain would be allocated ratably over the Non-Electing Holders
aggregate holding period for the common units;
 
    
    the amount allocated to the current taxable year and any taxable year prior to the taxable
year we were first treated as a PFIC with respect to the Non-Electing Holder would be taxed as
ordinary income in the current taxable year;
 
    
    the amount allocated to each of the other taxable years would be subject to U.S. federal
income tax at the highest rate of tax in effect for the applicable class of taxpayer for that
year; and
 
    
    an interest charge for the deemed deferral benefit would be imposed with respect to the
resulting tax attributable to each such other taxable year.
  U.S. Holders are urged to consult their own tax advisors regarding the applicability, availability
and advisability of, and procedure for, making QEF, Mark-to-Market Elections and other available
elections with respect to us, and the U.S. federal income tax consequences of making such
elections.
 U.S. Return Disclosure Requirements for U.S. Individual Holders
   64




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##### Table of Contents



United States Federal Income Taxation of Non-U.S. Holders
 Non-U.S. Holder
 Distributions
  Sale, Exchange or other Disposition of Common Units
  Backup Withholding and Information Reporting
  
    
    fails to timely provide an accurate taxpayer identification number;
 
    
    is notified by the IRS that it has failed to report all interest or distributions required to
be shown on its U.S. federal income tax returns; or
 
    
    in certain circumstances, fails to comply with applicable certification requirements.
   
 Non-United States Tax Consequences
 Marshall Islands Tax Consequences
 Canadian Federal Income Tax Consequences. Canada Tax Act Canada-U.S. Treaty U.S. Resident Holders
     65




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##### Table of Contents



Documents on Display
 EDGAR www.sec.gov
 
 Item 11. Quantitative and Qualitative Disclosures About Market Risk
 
 Interest Rate Risk
    Expected Maturity Date
    
    
    
    
    
    
    Fair Value2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    2015
    
    
    Thereafter
    
    
    Total
    
    
    Liability
    
    
    Rate (1)(in millions of U.S. dollars, except percentages)Long-Term Debt:Variable Rate (2)
    
    
    152.1
    
    
    
    185.0
    
    
    
    296.4
    
    
    
    772.3
    
    
    
    48.3
    
    
    
    263.0
    
    
    
    1,717.1
    
    
    
    (1,620.4
    )
    
    
    1.3
    %Interest Rate Swaps:Contract Amount (3)
    
    
    120.8
    
    
    
    226.3
    
    
    
    132.0
    
    
    
    91.7
    
    
    
    16.8
    
    
    
    946.7
    
    
    
    1,534.3
    
    
    
    (175.8
    )
    
    
    4.3
    %Average Fixed Pay Rate(2)
    
    
    3.0
    %
    
    
    2.6
    %
    
    
    2.8
    %
    
    
    4.9
    %
    
    
    5.0
    %
    
    
    5.0
    %
    
    
    4.3
    %
 
 (1)
    
    Rate refers to the weighted-average effective interest rate for our debt, including the
margin paid on our floating-rate debt and the average fixed pay rate for interest rate swaps.
The average fixed pay rate for interest rate swaps excludes the margin paid on the
floating-rate debt, which as of December 31, 2010 ranged from 0.30% and 3.25% based on LIBOR
and 4.75% based on NIBOR.(2)
    
    Interest payments on floating-rate debt and interest rate swaps are based on LIBOR and NIBOR.(3)
    
    The average variable receive rate for interest rate swaps is set quarterly at the 3-month
LIBOR or semi-annually at the 6-month LIBOR. 
 Foreign Currency Fluctuation Risk
   Contract Amount
    
    
    Average
    
    
    Expected Maturityin Foreign Currency
    
    
    Forward
    
    
    2011
    
    
    2012(thousands)
    
    
    Rate(1)
    
    
    (in thousands of U.S. Dollars)Norwegian Kroner
    
    
    623,000
    
    
    
    6.30
    
    
    
    61,356
    
    
    
    37,585British Pound
    
    
    4,490
    
    
    
    0.66
    
    
    
    5,646
    
    
    
    1,111Euro
    
    
    17,323
    
    
    
    0.75
    
    
    
    17,031
    
    
    
    6,17684,033
    
    
    
    44,872
 1)
    
    Average forward rate represents the contracted amount of foreign currency one U.S. Dollar
will buy.  66




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##### Table of Contents



Commodity Price Risk
  
 Item 12. Description of Securities Other than Equity Securities
  
 Item 13. Defaults, Dividend Arrearages and Delinquencies
  
 Item 14. Material Modifications to the Rights of Unitholders and Use of Proceeds
  
 Item 15. Controls and Procedures
     
 Managements Report on Internal Control over Financial Reporting
     67




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Item 16A. Audit Committee Financial Expert
  
 Item 16B. Code of Ethics
 www.teekayoffshore.com
 
 Item 16C. Principal Accountant Fees and Services
  2010
    
    
    2009(in thousands of U.S. dollars)Audit Fees(1)
    
    $
    1,380
    
    
    $
    1,374Tax Fees(2)
    
    
    14
    
    
    
    51Other Fees(3)
    
    
    2
    
    
    
    Total
    
    $
    1,396
    
    
    $
    1,425
 (1)
    
    Audit fees represent fees for professional services provided in connection with the audit of
our consolidated financial statements, review of our quarterly consolidated financial
statements and audit services provided in connection with other statutory or regulatory
filings, including professional services in connection with the review of our regulatory
filings for our follow-on offering of common units and audit of dropdown transactions in 2010.
Audit fees also include $100,000 related to additional fees for the 2009 audit, which were not
agreed until after we had filed our 2009 Annual Report on Form 20-F with the SEC on April 30,
2010.(2)
    
    For 2010 and 2009, tax fees relate primarily to corporate tax compliance fees.(3)
    
    Other fees relate to Ernst & Young Online access fees.  
 Item 16D. Exemptions from the Listing Standards for Audit Committees
  
 Item 16E. Purchases of Units by the Issuer and Affiliated Purchasers
  
 Item 16F. Change in Registrants Certifying Accountant
  
 Item 16G. Corporate Governance
  
 Item 17. Financial Statements
   68




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##### Table of Contents



Item 18. Financial Statements
  PageReports of Independent Registered Public Accounting Firm
    
    
    F - 1, F - 2Consolidated Financial StatementsConsolidated Statements of Income (Loss)
    
    
    F - 3Consolidated Balance Sheets
    
    
    F - 4Consolidated Statements of Cash Flows
    
    
    F - 5Consolidated Statements of Changes in Total Equity
    
    
    F - 6Consolidated Statements of Comprehensive Income (Loss)
    
    
    F - 8Notes to the Consolidated Financial Statements
    
    
    F - 9
  
 Item 19. Exhibits
  1.1
    
    Certificate of Limited Partnership of Teekay Offshore Partners L.P. (1)1.2
    
    First Amended and Restated Agreement of Limited Partnership of Teekay Offshore Partners L.P. (2)1.3
    
    Certificate of Formation of Teekay Offshore GP L.L.C. (1)1.4
    
    Amended and Restated Limited Liability Company Agreement of Teekay Offshore GP L.L.C. (1)1.5
    
    Certificate of Limited Partnership of Teekay Offshore Operating L.P. (1)1.6
    
    Amended and Restated Agreement of Limited Partnership of Teekay Offshore Operating Partners L.P. (1)1.7
    
    Certificate of Formation of Teekay Offshore Operating GP L.L.C. (1)1.8
    
    Amended and Restated Limited Liability Company Agreement of Teekay Offshore Operating GP L.L.C. (1)2.1
    
    Agreement, dated November 25, 2010, among Teekay Offshore Partners L.P., Teekay Offshore Operating L.P. and Norsk Tillitsman ASA
for NOK 600,000,000 Senior Unsecured Bonds due 2013.4.1
    
    Agreement, dated June 26, 2003, for a U.S $455,000,000 Revolving Credit Facility between Norsk Teekay Holdings Ltd., Den Norske
Bank ASA and various other banks (1)4.2
    
    Agreement, dated October 2, 2006, for a U.S $940,000,000 Revolving Credit Facility between Teekay Offshore Operating L.P., Den
Norske Bank ASA and various other banks (1)4.3
    
    Teekay Offshore Partners L.P. 2006 Long-Term Incentive Plan (1)4.4
    
    Amended and Restated Omnibus Agreement (1)4.5
    
    Administrative Services Agreement between Teekay Offshore Operating Partners L.P. and Teekay Limited (3)4.6
    
    Advisory, Technical and Administrative Services Agreement between Teekay Offshore Operating Partners L.P. and Teekay Limited (3)4.7
    
    Administrative Services Agreement between Teekay Offshore Partners L.P. and Teekay Limited (3)4.8
    
    Agreement, dated September 10, 2009, between Petrojarl Varg AS and Varg L.L.C., relating to the purchase of the Petrojarl Varg(4)4.9
    
    Agreement, dated March 8, 2011, between Teekay Holdings Limited and Teekay Offshore Partners L.P., relating to the purchase of
limited partner interests of OPCO.8.1
    
    List of Subsidiaries of Teekay Offshore Partners L.P.12.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Teekay Offshore Partners L.P.s Chief Executive Officer12.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Teekay Offshore Partners L.P.s Chief Financial Officer13.1
    
    Teekay Offshore Partners L.P. Certification of Peter Evensen, Chief Executive Officer and Chief Financial Officer, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.15.1
    
    Consent of Ernst & Young LLP, as independent registered public accounting firm.
 (1)
    
    Previously filed as an exhibit to our Registration Statement on Form F-1 (File No.
333-139116), filed with the SEC on December 4, 2006, and hereby incorporated by reference to
such Registration Statement.(2)
    
    Previously filed as Appendix A to our Rule 424(b)(4) Prospectus filed with the SEC on
December 14, 2006, and hereby incorporated by reference to such Prospectus.(3)
    
    Previously filed as an exhibit to our Amendment No. 1 to Registration Statement on Form F-1
(File No. 333-139116), filed with the SEC on December 8, 2006, and hereby incorporated by
reference to such Registration Statement.(4)
    
    Previously filed as an exhibit to our Annual Report on Form 20-F (File No.1-33198), filed
with the SEC on April 30, 2010, and hereby incorporated by reference to such Annual Report.  69




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##### Table of Contents



SIGNATURE
  TEEKAY OFFSHORE PARTNERS L.P.By:
    Teekay Offshore GP L.L.C., its General PartnerDate: April 11, 2011
    By:
    /s/ Peter EvensenPeter EvensenChief Executive Officer and Chief Financial Officer
(Principal Financial and Accounting Officer)  70




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Partnership
    Vancouver, Canada
    
    /s/ ERNST & YOUNG LLPApril 11, 2011
    
    Chartered Accountants
  F - 1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
       Vancouver, Canada
    
    /s/ ERNST & YOUNG LLPApril 11, 2011
    
    Chartered Accountants
  F - 2




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)
 
 CONSOLIDATED STATEMENTS OF INCOME (LOSS)
 (in thousands of U.S. dollars, except unit and per unit data)
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31
    
    
    December 31
    
    
    December 312010
    
    
    2009
    
    
    2008$
    
    
    $
    
    
    $REVENUES(Including $140,971, $148,319, and $190,536 from related
parties for 2010, 2009, 2008, respectively,  notes 11a, 11b, 11c, 11l and 11o)
    
    
    900,546
    
    
    
    871,112
    
    
    
    1,003,561OPERATING EXPENSESVoyage expenses
    
    
    125,101
    
    
    
    111,026
    
    
    
    225,029Vessel operating expenses (including $5,322, $5,059 and $8,106 from related
parties for 2010, 2009, 2008, respectively,  notes 11f, 11i, 11m, 11p, and 12)
    
    
    268,876
    
    
    
    260,977
    
    
    
    252,059Time-charter hire expense (including $nil, $3,416 and $240 from related parties for
2010, 2009, 2008, respectively  note 11n)
    
    
    89,795
    
    
    
    117,202
    
    
    
    132,234Depreciation and amortization
    
    
    190,341
    
    
    
    181,176
    
    
    
    168,396General and administrative (including $53,313, $52,617, and $69,529 from related
parties 2010, 2009, 2008, respectively  notes 11d, 11e,11f, 11g,11p, 11q,
11r, 11s, note 12)
    
    
    63,214
    
    
    
    61,761
    
    
    
    68,506Goodwill impairment charge
    
    
    
    
    
    
    
    
    
    
    149,129Write down of vessel (note 18)
    
    
    9,441
    
    
    
    
    
    
    
    Restructuring charge (note 9)
    
    
    119
    
    
    
    5,008
    
    
    
    Total operating expenses
    
    
    746,887
    
    
    
    737,150
    
    
    
    995,353Income from vessel operations
    
    
    153,659
    
    
    
    133,962
    
    
    
    8,208OTHER ITEMSInterest
expense (including ($4,199), ($11,021), and ($17,823) from related parties
for 2010, 2009, 2008, respectively  notes 11p, 11q, 11r, 11s and note 7)
    
    
    (37,411
    )
    
    
    (50,798
    )
    
    
    (93,381
    )Interest income
    
    
    842
    
    
    
    1,239
    
    
    
    4,208Realized and
unrealized (loss) gain on derivative instruments (including
($5,658),
$6,892, and ($37,244) from related parties for 2010, 2009, 2008, respectively 
notes 11p, 11r, 11s and note 12)
    
    
    (55,666
    )
    
    
    51,944
    
    
    
    (193,345
    )Foreign currency exchange gain (loss) (note 12)
    
    
    911
    
    
    
    (11,242
    )
    
    
    9,841Other income  net (note 10)
    
    
    6,810
    
    
    
    9,489
    
    
    
    11,830Total other items
    
    
    (84,514
    )
    
    
    632
    
    
    
    (260,847
    )Income (loss) before income tax recovery (expense)
    
    
    69,145
    
    
    
    134,594
    
    
    
    (252,639
    )Income tax recovery (expense) (note 13)
    
    
    9,718
    
    
    
    (13,792
    )
    
    
    62,090Net income (loss)
    
    
    78,863
    
    
    
    120,802
    
    
    
    (190,549
    )Non-controlling interest in net income
    
    
    37,378
    
    
    
    57,490
    
    
    
    10,489Dropdown Predecessors interest in net income (loss) (note 1)
    
    
    (16,685
    )
    
    
    (419
    )
    
    
    (182,071
    )General Partners interest in net income (loss)
    
    
    4,359
    
    
    
    2,523
    
    
    
    8,918Limited partners interest in net income (loss)
    
    
    53,811
    
    
    
    61,208
    
    
    
    (27,885
    )Limited partners interest in net income (loss) per unit (note 16)- Common unit (basic and diluted)
    
    
    1.22
    
    
    
    1.85
    
    
    
    (0.65
    )- Subordinated unit (basic and diluted)
    
    
    
    
    
    
    1.80
    
    
    
    (0.92
    )- Total unit (basic and diluted)
    
    
    1.22
    
    
    
    1.84
    
    
    
    (0.76
    )Weighted-average number of units outstanding:- Common units (basic and diluted)
    
    
    44,278,158
    
    
    
    23,476,438
    
    
    
    15,461,202- Subordinated units (basic and diluted)
    
    
    
    
    
    
    9,800,000
    
    
    
    9,800,000- Total units (basic and diluted)
    
    
    44,278,158
    
    
    
    33,276,438
    
    
    
    25,261,202Cash distribution declared per unit
    
    
    1.88
    
    
    
    1.80
    
    
    
    1.65
 The accompanying notes are an integral part of the unaudited consolidated financial statements.
  F - 3




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TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands of U.S. dollars)
 As at
    
    
    As atDecember 31, 2010
    
    
    December 31, 2009$
    
    
    $ASSETSCurrentCash and cash equivalents (note 7)
    
    
    166,483
    
    
    
    109,407Accounts receivable
    
    
    64,993
    
    
    
    78,182Net investments in direct financing leases  current (note 8)
    
    
    21,157
    
    
    
    22,656Prepaid expenses
    
    
    29,740
    
    
    
    35,308Due from affiliates (note 11w)
    
    
    19,135
    
    
    
    17,673Current portion of derivative instruments (note 12)
    
    
    6,180
    
    
    
    6,157Other current assets
    
    
    1,288
    
    
    
    1,399Total current assets
    
    
    308,976
    
    
    
    270,782Vessels and equipment(note 7 and 8)At cost, less accumulated depreciation of $1,200,325 (December 31, 2009 - $1,018,018)
    
    
    2,247,323
    
    
    
    2,120,688Advances on newbuilding contracts
    
    
    52,184
    
    
    
    Net investments in direct financing leases (note 8)
    
    
    50,413
    
    
    
    71,722Derivative instruments (note 12)
    
    
    5,202
    
    
    
    2,225Other assets (note 13)
    
    
    22,652
    
    
    
    21,582Intangible assets  net (note 5)
    
    
    28,763
    
    
    
    36,957Goodwill (note 5)
    
    
    127,113
    
    
    
    127,113Total assets
    
    
    2,842,626
    
    
    
    2,651,069LIABILITIES AND EQUITYCurrentAccounts payable
    
    
    12,749
    
    
    
    14,843Accrued liabilities (note 6)
    
    
    88,538
    
    
    
    62,010Due to affiliates (note 11w)
    
    
    67,390
    
    
    
    40,220Current portion of derivative instruments (note 12)
    
    
    45,793
    
    
    
    35,389Current portion of long-term debt (note 7)
    
    
    152,096
    
    
    
    120,259Total current liabilities
    
    
    366,566
    
    
    
    272,721Long-term debt (including a loan due to parent and a loan due to parent by Dropdown
Predecessors of $nil and $266,591 as at December 31, 2010 and 2009, respectively  note 7)
    
    
    1,565,044
    
    
    
    1,924,796Deferred income tax (note 13)
    
    
    1,605
    
    
    
    16,481Derivative instruments (note 12)
    
    
    119,491
    
    
    
    42,876Other long-term liabilities
    
    
    19,746
    
    
    
    23,324Total liabilities
    
    
    2,072,452
    
    
    
    2,280,198Commitments and contingencies (notes 7, 8, 12, and 14)Redeemable non-controlling interest(note 1)
    
    
    41,725
    
    
    
    EquityPartners equity
    
    
    556,828
    
    
    
    213,065Non-controlling interest
    
    
    170,876
    
    
    
    219,692Dropdown predecessor equity (deficiency)
    
    
    
    
    
    
    (61,174
    )Accumulated other comprehensive income (loss)
    
    
    745
    
    
    
    (712
    )Total equity
    
    
    728,449
    
    
    
    370,871Total liabilities and total equity
    
    
    2,842,626
    
    
    
    2,651,069
 (note 14)
 The accompanying notes are an integral part of the unaudited consolidated financial statements.
  F - 4




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars)
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2008$
    
    
    $
    
    
    $Cash and cash equivalents provided by (used for)OPERATING ACTIVITIESNet income (loss)
    
    
    78,863
    
    
    
    120,802
    
    
    
    (190,549
    )Non-cash items:Unrealized loss (gain) on derivative instruments (note 12)
    
    
    5,618
    
    
    
    (113,570
    )
    
    
    175,456Depreciation and amortization
    
    
    190,341
    
    
    
    181,176
    
    
    
    168,396Write down of vessel
    
    
    9,441
    
    
    
    
    
    
    
    Deferred income tax (recovery) expense
    
    
    (15,756
    )
    
    
    8,209
    
    
    
    (63,096
    )Goodwill impairment charge
    
    
    
    
    
    
    
    
    
    
    149,129Foreign currency exchange loss (gain) and other
    
    
    7,251
    
    
    
    (1,323
    )
    
    
    (18,929
    )Change in non-cash working capital items related to operating activities (note 15)
    
    
    34,464
    
    
    
    8,931
    
    
    
    6,987Expenditures for drydocking
    
    
    (23,637
    )
    
    
    (41,864
    )
    
    
    (29,075
    )Net operating cash flow
    
    
    286,585
    
    
    
    162,361
    
    
    
    198,319FINANCING ACTIVITIESProceeds from drawdown of long-term debt
    
    
    355,678
    
    
    
    279,575
    
    
    
    259,255Repayments of long-term debt
    
    
    (90,835
    )
    
    
    (34,948
    )
    
    
    (73,331
    )Repayments of long-term debt relating to Dropdown Predecessors
    
    
    (41,909
    )
    
    
    (12,100
    )
    
    
    (6,050
    )Prepayments of long-term debt
    
    
    (568,236
    )
    
    
    (426,090
    )
    
    
    (138,085
    )Net advances to affiliates
    
    
    
    
    
    
    
    
    
    
    (46,544
    )Repayments of joint venture partner advances
    
    
    
    
    
    
    (21,532
    )
    
    
    Joint venture partner advances
    
    
    
    
    
    
    477
    
    
    
    17,485Equity contribution from joint venture partner
    
    
    633
    
    
    
    4,772
    
    
    
    5,200Purchase of vessels from Teekay Corporation (note 15f)
    
    
    (107,051
    )
    
    
    (100,000
    )
    
    
    (16,661
    )Contribution of capital from Teekay Corporation to Dropdown Predecessors (note 15g)
    
    
    4,313
    
    
    
    131,965
    
    
    
    119,233Excess purchase price over the contributed basis of a 25% interest in Teekay
Offshore Operating L.P. (note 11k)
    
    
    
    
    
    
    
    
    
    
    (91,562
    )Proceeds from equity offerings
    
    
    419,989
    
    
    
    109,227
    
    
    
    216,837Expenses of equity offerings
    
    
    (18,498
    )
    
    
    (5,100
    )
    
    
    (6,192
    )Cash distributions paid by the Partnership
    
    
    (85,077
    )
    
    
    (60,452
    )
    
    
    (42,226
    )Cash distributions paid by subsidiaries to non-controlling interests
    
    
    (77,236
    )
    
    
    (61,065
    )
    
    
    (71,976
    )Other
    
    
    (3,371
    )
    
    
    (5,089
    )
    
    
    (2,195
    )Net financing cash flow
    
    
    (211,600
    )
    
    
    (200,360
    )
    
    
    123,188INVESTING ACTIVITIESExpenditures for vessels and equipment
    
    
    (39,759
    )
    
    
    (13,681
    )
    
    
    (73,587
    )Investment in direct financing lease assets
    
    
    (886
    )
    
    
    (579
    )
    
    
    (536
    )Direct financing lease payments received
    
    
    22,736
    
    
    
    23,045
    
    
    
    22,352Purchase of 18% of Rio das Ostras by Teekay Corporation (note 1)
    
    
    
    
    
    
    
    
    
    
    (10,726
    )Purchase of 25% interest in Teekay Offshore Operating L.P. (note 11k)
    
    
    
    
    
    
    
    
    
    
    (115,066
    )Purchase of 35% of Petrojarl Varg by Teekay Corporation (note 1)
    
    
    
    
    
    
    
    
    
    
    (134,183
    )Net investing cash flow
    
    
    (17,909
    )
    
    
    8,785
    
    
    
    (311,746
    )Increase in cash and cash equivalents
    
    
    57,076
    
    
    
    (29,214
    )
    
    
    9,761Cash and cash equivalents, beginning of the year
    
    
    109,407
    
    
    
    138,621
    
    
    
    128,860Cash and cash equivalents, end of the year
    
    
    166,483
    
    
    
    109,407
    
    
    
    138,621
 (note 15)
 The accompanying notes are an integral part of the consolidated financial statements.
  F - 5




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)
 
 CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY
 (in thousands of U.S. dollars and units)
 PARTNERS EQUITYLimited PartnersAccumulatedOther
    
    
    
    
    
    
    
    
    
    
    RedeemableDropdown
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive
    
    
    Non-
    
    
    
    
    
    
    Non-Predecessor
    
    
    
    
    
    
    
    
    
    General
    
    
    Income (Loss)
    
    
    controlling
    
    
    Total
    
    
    controllingEquity
    
    
    Common
    
    
    
    
    
    
    Subordinated
    
    
    
    
    
    
    Partner
    
    
    (Note 12)
    
    
    Interest
    
    
    Equity
    
    
    Interest$
    
    
    Units
    
    
    $
    
    
    Units
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $Balance as at December 31, 2007
    
    
    93,245
    
    
    
    9,800
    
    
    
    119,844
    
    
    
    9,800
    
    
    
    (41,795
    )
    
    
    (941
    )
    
    
    45
    
    
    
    414,003
    
    
    
    584,401
    
    
    
    Net loss
    
    
    (182,071
    )
    
    
    
    
    
    
    (19,049
    )
    
    
    
    
    
    
    (8,836
    )
    
    
    8,918
    
    
    
    
    
    
    
    10,489
    
    
    
    (190,549
    )
    
    
    Unrealized net loss on qualifying cash
flow hedging instruments (note 12)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,372
    )
    
    
    (16,862
    )
    
    
    (40,234
    )
    
    
    Realized net loss on qualifying cash
flow hedging instruments (note 12)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,844
    
    
    
    352
    
    
    
    3,196
    
    
    
    Pension adjustments (note 17)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,930
    )
    
    
    
    
    
    
    (2,930
    )
    
    
    Purchase of a 25% interest in Teekay
Offshore Operating L.P. from Teekay
Corporation (note 11k)
    
    
    
    
    
    
    
    
    
    
    (30,025
    )
    
    
    
    
    
    
    (58,846
    )
    
    
    (3,657
    )
    
    
    966
    
    
    
    (115,065
    )
    
    
    (206,627
    )
    
    
    Purchase of SPT Explorer L.L.C. and SPT
Navigator L.L.C. from Teekay
Corporation (note 11l)
    
    
    (1,333
    )
    
    
    
    
    
    
    (5,231
    )
    
    
    
    
    
    
    (10,253
    )
    
    
    (638
    )
    
    
    
    
    
    
    
    
    
    
    (17,455
    )
    
    
    Proceeds from follow-on public offering
and private placement of limited
partnership interests, net of offering
costs of $6,192 (note 3)
    
    
    
    
    
    
    10,625
    
    
    
    206,308
    
    
    
    
    
    
    
    
    
    
    
    4,337
    
    
    
    
    
    
    
    
    
    
    
    210,645
    
    
    
    Equity contribution from joint venture
partner
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,200
    
    
    
    5,200
    
    
    
    Cash distributions
    
    
    
    
    
    
    
    
    
    
    (25,201
    )
    
    
    
    
    
    
    (16,170
    )
    
    
    (855
    )
    
    
    
    
    
    
    (71,976
    )
    
    
    (114,202
    )
    
    
    Net change in Parents equity in
Dropdown Predecessor (note 11 p, r)
    
    
    56,806
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (134
    )
    
    
    (24,758
    )
    
    
    31,914
    
    
    
    Balance as at December 31, 2008
    
    
    (33,353
    )
    
    
    20,425
    
    
    
    246,646
    
    
    
    9,800
    
    
    
    (135,900
    )
    
    
    7,164
    
    
    
    (22,581
    )
    
    
    201,383
    
    
    
    263,359
    
    
    
    Net income
    
    
    (419
    )
    
    
    
    
    
    
    43,546
    
    
    
    
    
    
    
    17,662
    
    
    
    2,523
    
    
    
    
    
    
    
    57,490
    
    
    
    120,802
    
    
    
    Unrealized net gain on qualifying cash
flow hedging instruments (note 12)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,030
    
    
    
    12,717
    
    
    
    27,747
    
    
    
    Realized net loss on qualifying cash
flow hedging instruments (note 12)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,229
    
    
    
    4,395
    
    
    
    9,624
    
    
    
    Pension adjustments (note 17)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,233
    )
    
    
    
    
    
    
    (1,233
    )
    
    
    Net change in Parents equity in
Dropdown Predecessor relating to
Petrojarl Varg (note 11p)
    
    
    110,386
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110,386
    
    
    
    Net liabilities of Dropdown Predecessor
relating to Petrojarl Vargretained
by Teekay Corporation on
Dropdown (note 11p)
    
    
    172,174
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,843
    
    
    
    
    
    
    
    175,017
    
    
    
    Purchase of Petrojarl Vargfrom Teekay
Corporation (note 11p)
    
    
    (307,749
    )
    
    
    
    
    
    
    (3,934
    )
    
    
    
    
    
    
    (7,712
    )
    
    
    (605
    )
    
    
    
    
    
    
    
    
    
    
    (320,000
    )
    
    
    Proceeds from equity offerings, net of
offering costs of $5,100 (note 3)
    
    
    
    
    
    
    7,475
    
    
    
    101,942
    
    
    
    
    
    
    
    
    
    
    
    2,185
    
    
    
    
    
    
    
    
    
    
    
    104,127
    
    
    
    Equity contribution from joint venture
partner
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,772
    
    
    
    4,772
    
    
    
    Cash distributions
    
    
    
    
    
    
    
    
    
    
    (40,129
    )
    
    
    
    
    
    
    (17,640
    )
    
    
    (2,683
    )
    
    
    
    
    
    
    (61,065
    )
    
    
    (121,517
    )
    
    
    Net change in Parents equity in
Dropdown Predecessor (note 11q, 11r)
    
    
    (2,213
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,213
    )
    
    
    Balance as at December 31, 2009
    
    
    (61,174
    )
    
    
    27,900
    
    
    
    348,071
    
    
    
    9,800
    
    
    
    (143,590
    )
    
    
    8,584
    
    
    
    (712
    )
    
    
    219,692
    
    
    
    370,871
    
    
    
    
  F - 6




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)
CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY
 (in thousands of U.S. dollars and units)
 PARTNERS EQUITYLimited PartnersAccumulatedOther
    
    
    
    
    
    
    
    
    
    
    RedeemableDropdown
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive
    
    
    Non-
    
    
    
    
    
    
    Non-Predecessor
    
    
    
    
    
    General
    
    
    Income (Loss)
    
    
    controlling
    
    
    Total
    
    
    controllingEquity
    
    
    Common
    
    
    
    
    
    
    Subordinated
    
    
    
    
    
    
    Partner
    
    
    (Note 12)
    
    
    Interest
    
    
    Equity
    
    
    Interest$
    
    
    Units
    
    
    $
    
    
    Units
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $Balance as at December 31, 2009
    
    
    (61,174
    )
    
    
    27,900
    
    
    
    348,071
    
    
    
    9,800
    
    
    
    (143,590
    )
    
    
    8,584
    
    
    
    (712
    )
    
    
    219,692
    
    
    
    370,871
    
    
    
    Conversion of subordinated units to
common units (note 16)
    
    
    
    
    
    
    9,800
    
    
    
    (143,590
    )
    
    
    (9,800
    )
    
    
    143,590
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    (16,685
    )
    
    
    
    
    
    
    53,811
    
    
    
    
    
    
    
    
    
    
    
    4,359
    
    
    
    
    
    
    
    37,378
    
    
    
    78,863
    
    
    
    Reclassification of redeemable
non-controlling interest in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (806
    )
    
    
    (806
    )
    
    
    806Unrealized net loss on qualifying
cash flow hedging instruments (note 12)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,599
    )
    
    
    (1,555
    )
    
    
    (3,154
    )
    
    
    Realized net loss on qualifying
cash flow hedging instruments (note 12)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,708
    
    
    
    1,535
    
    
    
    3,243
    
    
    
    Pension adjustments (note 17)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (909
    )
    
    
    
    
    
    
    (909
    )
    
    
    Cash distributions
    
    
    (1,878
    )
    
    
    
    
    
    
    (80,766
    )
    
    
    
    
    
    
    
    
    
    
    (4,311
    )
    
    
    
    
    
    
    (73,091
    )
    
    
    (160,046
    )
    
    
    (2,267
    )Proceeds from follow-on public
offering, net of offering costs of
$18,498 (note 3)
    
    
    
    
    
    
    17,538
    
    
    
    393,091
    
    
    
    
    
    
    
    
    
    
    
    8,400
    
    
    
    
    
    
    
    
    
    
    
    401,491
    
    
    
    Dilution loss on initiation of
majority owned subsidiary (note 14a)
    
    
    
    
    
    
    
    
    
    
    (3,714
    )
    
    
    
    
    
    
    
    
    
    
    (76
    )
    
    
    
    
    
    
    (3,642
    )
    
    
    (7,432
    )
    
    
    7,432Equity contribution from non-
controlling interest (note 14a)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,754Contribution of capital to joint venture
partner
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    400
    
    
    
    400
    
    
    
    Purchase of the Falcon Spirit
from Teekay Corporation (note 11q)
    
    
    (4,606
    )
    
    
    
    
    
    
    (6,555
    )
    
    
    
    
    
    
    
    
    
    
    (134
    )
    
    
    
    
    
    
    
    
    
    
    (11,295
    )
    
    
    Net change in Parents equity in
Dropdown Predecessor (note 11q, r, s)
    
    
    30,495
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,495
    
    
    
    Purchase of the Amundsen Spirit
from Teekay Corporation (note 11s)
    
    
    (3,496
    )
    
    
    
    
    
    
    (15,593
    )
    
    
    
    
    
    
    
    
    
    
    (259
    )
    
    
    
    
    
    
    (15,285
    )
    
    
    (34,633
    )
    
    
    Issuance of Teekay Offshore Operating
L.P. units to non-controlling
interests (note 11s, t)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,469
    
    
    
    33,469
    
    
    
    Conversion of intercorporate debt to
equity (note 11t)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,470
    
    
    
    31,470
    
    
    
    Purchase of the Nansen Spirit
from Teekay Corporation (note 11t)
    
    
    
    
    
    
    
    
    
    
    (2,213
    )
    
    
    
    
    
    
    
    
    
    
    (45
    )
    
    
    
    
    
    
    (30,724
    )
    
    
    (32,982
    )
    
    
    Loss on acquisition of interest rate
swaps (note 11v)
    
    
    
    
    
    
    
    
    
    
    (28,514
    )
    
    
    
    
    
    
    
    
    
    
    (582
    )
    
    
    
    
    
    
    (27,965
    )
    
    
    (57,061
    )
    
    
    Purchase of the Rio das Ostras
from Teekay Corporation (note 11r)
    
    
    (103,245
    )
    
    
    
    
    
    
    26,327
    
    
    
    
    
    
    
    
    
    
    
    537
    
    
    
    
    
    
    
    
    
    
    
    (76,381
    )
    
    
    Net liabilities of Dropdown
Predecessor relating to Rio das
Ostrasretained by Teekay
Corporation on Dropdown (note 11r)
    
    
    (2,406
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,257
    
    
    
    
    
    
    
    (149
    )
    
    
    Net change in Parents equity in
Dropdown Predecessor relating to Rio
das Ostras (note 11r)
    
    
    162,995
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    162,995
    
    
    
    Balance as at December 31, 2010
    
    
    
    
    
    
    55,238
    
    
    
    540,355
    
    
    
    
    
    
    
    
    
    
    
    16,473
    
    
    
    745
    
    
    
    170,876
    
    
    
    728,449
    
    
    
    41,725
 The accompanying notes are an integral part of the unaudited consolidated financial statements.
  F - 7




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 (in thousands of U.S. dollars and units)
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2008$
    
    
    $
    
    
    $Net income (loss)
    
    
    78,863
    
    
    
    120,802
    
    
    
    (190,549
    )Other comprehensive income (loss):Unrealized net (loss) gain on qualifying cash flow hedging instruments
(net of tax of $nil, ($580), and $1,017 for 2010, 2009, 2008, respectively, note 12)
    
    
    (3,154
    )
    
    
    27,747
    
    
    
    (40,234
    )Realized net loss on qualifying cash flow hedging instruments (net of tax of $nil,
($207) and ($317) for 2010, 2009, 2008, respectively, note 12)
    
    
    3,243
    
    
    
    9,624
    
    
    
    3,196Pension adjustments, net of tax of $nil, $nil, and $1,044 for 2010, 2009, 2008,
respectively
    
    
    (909
    )
    
    
    (1,233
    )
    
    
    (2,930
    )Other comprehensive (loss) income
    
    
    (820
    )
    
    
    36,138
    
    
    
    (39,968
    )Comprehensive income (loss)
    
    
    78,043
    
    
    
    156,940
    
    
    
    (230,517
    )Non-controlling interest in comprehensive income (loss)
    
    
    37,358
    
    
    
    74,602
    
    
    
    (6,021
    )Dropdown Predecessors interest in comprehensive (loss) income
    
    
    (17,463
    )
    
    
    797
    
    
    
    (187,228
    )Limited partners interest in comprehensive income (loss)
    
    
    58,148
    
    
    
    81,541
    
    
    
    (37,268
    )
  F - 8




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 1.
    
    Summary of Significant Accounting Policies
 Basis of presentationThe 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, and certain variable interest entities as
described in Note 14c (collectively, the Partnership). Significant intercompany balances and
transactions have been eliminated upon consolidation. The preparation of consolidated financial
statements in conformity with GAAP requires management to make estimates and assumptions that
affect the amounts reported in the balance sheet and accompanying notes. Actual results may
differ from those estimates.During August 2006, Teekay Corporation formed Teekay Offshore Partners L.P., as part of its
strategy to expand in the marine transportation, processing and storage sectors of the offshore
oil industry and for the Partnership to acquire, in connection with the Partnerships initial
public offering of its common units, a 26.0% interest in Teekay Offshore Operating L.P. (or
OPCO), consisting of a 25.99% limited partner interest to be held directly by the Partnership
and a 0.01% general partner interest to be held through the Partnerships ownership of Teekay
Offshore Operating GP L.L.C., OPCOs sole general partner. In June 2008, the Partnership
purchased from Teekay Corporation an additional 25.0% limited partner interest in OPCO. Teekay
Corporation owned the remaining 49.0% interest in OPCO as at December 31, 2010.The Partnership has 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 the pooling of interests method of accounting. Under
this method, the carrying amount of net assets recognized in the balance sheets of each
combining entity are 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 the 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 during the periods they were
under common control of Teekay Corporation.In June 2008, OPCO acquired from Teekay Corporation its interest in two 2008- built Aframax
lightering tankers, the SPT Explorerand the SPT Navigator. On September 10, 2009, the
Partnership acquired from Teekay Corporation the floating production storage and offloading (or
FPSO) unit, the Petrojarl Varg, together with its operations and charter contracts with Talisman
Energy. 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. On October 1,
2010, the Partnership acquired the Cidade de Rio das Ostras(or Rio das Ostras) FPSO unit from
Teekay Corporation. On October 1, 2010, OPCO acquired the newbuilding shuttle tanker, the
Amundsen Spirit, from Teekay Corporation. All of these transactions were deemed to be business
acquisitions between entities under common control. As a result, the Partnerships consolidated
statements of income (loss), cash flows and changes in total equity for the years ended December
31, 2010, 2009 and 2008, and the Partnerships balance sheets as at December 31, 2009 and 2008
reflect these six vessels and their results of operations, referred to herein as the Dropdown
Predecessor, as if the Partnership had acquired them when each respective vessel began
operations under the ownership of Teekay Corporation. These vessels began operations under the
ownership of Teekay Corporation on January 7, 2008 (SPT Explorer),March 28, 2008 (SPT
Navigator), December 15, 2009 (Falcon Spirit) and July 30, 2010 (Amundsen Spirit). Teekay
Corporation acquired a 65% interest in the Petrojarl Vargon October 1, 2006, and acquired the
remaining 35% interest on June 30, 2008. The June 2008 acquisition resulted in increases in
vessels and equipment ($75.9 million), other non-current assets ($0.5 million), goodwill ($49.2
million), deferred income tax liability ($16.5 million), owners equity ($134.2 million) and a
decrease in non-controlling interest of $25.1 million. The acquisition was financed with debt.
Teekay Corporation had an 82% interest in the Rio das Ostraswhen it commenced operations on
April 1, 2008. Teekay Corporation acquired the remaining 18% interest on June 30, 2008. The
effect of adjusting the Partnerships financial statements to account for these common control
transfers (decreased) increased the Partnerships net income (loss) and (decreased) increased
comprehensive income (loss) by ($16.7) million and ($17.5) million, respectively, for the year
ended December 31, 2010, ($0.4) million and $0.8 million, respectively, for the year ended
December 31, 2009, ($182.1) million and ($187.2) million, respectively, for the year ended
December 31, 2008.Teekay Corporation uses a centralized treasury system. As a result, cash and cash equivalents
attributable to the operations of the Dropdown Predecessor were in certain cases co-mingled with
cash and cash equivalents from other operations of Teekay Corporation. This cash and cash
equivalents are not reflected in the balance sheet of the Dropdown Predecessor. However, any
cash transactions from these bank accounts that were made on behalf of companies in the Dropdown
Predecessor, which were acquired by the Partnership, are reflected as increases or decreases of
advances from affiliates. Any other cash transactions from these bank accounts that were
directly related to the operations of the Dropdown Predecessor are reflected as increases or
decreases in owners equity.For periods prior to the Partnerships acquisition of the Petrojarl Vargand the Rio das Ostras,
the vessels were used as collateral for certain credit facilities (the Varg and Rio das Ostras
Credit Facilities). The Petrojarl Vargsand the Rio das Ostraspro-rata shares of the Varg and
Rio das Ostras Credit Facilities, respectively, have been allocated to the Dropdown Predecessor.
The pro-rata share was determined using the relative fair value of the Varg and Rio das Ostras
Businesses, respectively, compared to the fair value of all net assets used as collateral for
these facilities. The Varg and Rio das Ostras Credit Facilities were used directly to partially
finance the purchase of these vessels. Interest has been allocated to the Dropdown Predecessor
based on the Petrojarl Vargsand Rio das Ostrasshare of these facilities, respectively. In
addition, Teekay Corporation used certain of its corporate facilities to finance the remaining
portion of the acquisition of the Petrojarl Vargand the Rio das Ostras. Interest has been
allocated to the Dropdown Predecessor based on the amount drawn on these facilities at the time
of the acquisitions and Teekay Corporations weighted average borrowing cost. In addition,
Teekay Corporation has entered into certain interest rate swaps. The Vargs and Rio das Ostras
pro-rata shares of these interest rate swaps, respectively, have been allocated to the Dropdown
Predecessor. The pro-rata shares were determined using the relative collateral fair values of
the Varg and Rio das Ostras Credit Facilities.
  F - 9




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 For periods prior to the Partnerships acquisition of the Petrojarl Varg, the operations of the
vessel were generally subject to Norwegian tax. The operations of the vessel were carved out
from a number of different subsidiaries of Teekay Corporation. Certain of these subsidiaries
were a part of one or more Norwegian tax groups. Income tax attributable to the Petrojarl Varg
has been allocated using the separate return method. Under this method, income tax is calculated
as if the Petrojarl Varghad been in its own tax group and not part of the larger tax group. The
income taxes attributable to the Petrojarl Vargin the Dropdown Predecessor reflect its
historical tax status and do not reflect its change in tax status as a result of the
Partnerships acquisition. All net operating loss carryforwards related to the Petrojarl Vargin
the Dropdown Predecessor, would be available to offset future taxable income of the Dropdown
Predecessor in Norway. However, none of these loss carryforwards are available to be used by the
Partnership subsequent to its acquisition of the Petrojarl Varg. Current tax payable related to
Petrojarl Vargduring the Dropdown Predecessor periods is assumed to be paid by Teekay
Corporation and has been reflected as an increase in owners equity.General and administrative expenses (consisting primarily of salaries, defined benefit pension
plan benefits, and other employee related costs, office rent, legal and professional fees, and
travel and entertainment) were allocated to the Dropdown Predecessor based on estimated use of
resources. In addition, Teekay Corporation entered into certain foreign exchange forward
contracts to minimize the impact from changes in the foreign exchange rate between the Norwegian
Kroner and the US Dollar on its operating expenditures. A portion of these foreign exchange
forward contracts have been accounted for as hedges and were allocated to the Dropdown
Predecessor based on the relative amount of Norwegian Kroner expenditures from the Petrojarl
Vargand the Rio das Ostrascompared to Teekay Corporations other operations that the contracts
were entered into for.The consolidated financial statements reflect the consolidated financial position, results of
operations and cash flows of the Partnership and its subsidiaries, including, as applicable, the
Dropdown Predecessor. In the preparation of these consolidated financial statements, general and
administrative expenses, interest expense and realized and unrealized gains (losses) on
non-designated derivative instruments were not identifiable as relating solely to each specific
vessel. Amounts have been allocated to the Dropdown Predecessor for general and administrative
expenses, interest expense and realized and unrealized gains (losses) on non-designated
derivative instruments for the years ended December 31, 2010, 2009, and 2008, respectively. See
note 11p, q, r and s. Management believes these allocations reasonably present the general and
administrative expenses, interest expense, and realized and unrealized (losses) gains on
non-designated derivative instruments of the Dropdown Predecessor. Estimates have been made when
allocating expenses from Teekay Corporation to the Dropdown Predecessor and such estimates may
not be reflective of actual results.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 OPCO holds a
put option which, if exercised, would obligate OPCO to purchase the non-controlling interest
(see Note 14a). 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.Foreign currencyThe consolidated financial statements are stated in U.S. Dollars and the functional currency of
the Partnership and its subsidiaries is the U.S. Dollar. Transactions involving other currencies
during the year are converted into U.S. dollars using the exchange rates in effect at the time
of the transactions. At the balance sheet dates, monetary assets and liabilities that are
denominated in currencies other than the U.S. dollar are translated to reflect the year-end
exchange rates. Resulting gains or losses are reflected separately in the accompanying
consolidated statements of income (loss).Operating revenues and expensesThe Partnership recognizes revenues from time charters and bareboat charters daily over the term
of the charter as the applicable vessel operates under the charter. The Partnership does not
recognize revenue during days that the vessel is off-hire. Shuttle tanker voyages servicing
contracts of affreightment with offshore oil fields commence with tendering of notice of
readiness at a field, within the agreed lifting range, and ends with tendering of notice of
readiness at a field for the next lifting. Receipt of incentive-based revenue from the
Partnerships FPSO is dependent upon the operating performance of the vessel and such revenue is
recognized when earned by fulfillment of the applicable performance criteria. Time-charter
contracts that are accounted for as direct financing leases are reflected on the balance sheets
as net investments in direct financing leases. The lease revenue is recognized on an effective
interest rate method over the lease term and is included in voyage revenues. All other revenues
from voyage charters are recognized on a percentage of completion method. The Partnership used a
discharge-to-discharge basis in determining percentage of completion for all voyage charters,
whereby it recognizes revenue ratably from when product is discharged (unloaded) at the end of
one voyage to when it is discharged after the next voyage. The Partnership does not begin
recognizing revenue until a charter has been agreed to by the customer and the Partnership, even
if the vessel has discharged its cargo and is sailing to the anticipated load port on its next
voyage. The consolidated balance sheets reflect the deferred portion of revenues and expenses,
which will be earned and incurred, respectively, in subsequent periods.Voyage expenses are all expenses unique to a particular voyage, including bunker fuel expenses,
port fees, cargo loading and unloading expenses, canal tolls, agency fees and commissions.
Vessel operating expenses include crewing, repairs and maintenance, insurance, stores, lube oils
and communication expenses. Voyage expenses and vessel operating expenses are recognized when
incurred.
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TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 Cash and cash equivalentsThe Partnership classifies all highly liquid investments with an original maturity date of three
months or less when purchased as cash and cash equivalents.Accounts receivable and allowance for doubtful accountsAccounts receivable are recorded at the invoiced amount and do not bear interest. The allowance
for doubtful accounts is the Partnerships best estimate of the amount of probable credit losses
in existing accounts receivable. The Partnership determines the allowance based on historical
write-off experience and customer economic data. The Partnership reviews the allowance for
doubtful accounts regularly and past due balances are reviewed for collectability. Account
balances are charged off against the allowance when the Partnership believes that the receivable
will not be recovered.Vessels and equipmentAll pre-delivery costs incurred during the construction of newbuildings, including interest,
supervision and technical costs, are capitalized. The acquisition cost and all costs incurred to
restore used vessels purchased by the Partnership to the standards required to properly service
the Partnerships customers are capitalized.Vessel capital modifications include the addition of new equipment or can encompass various
modifications to the vessel which are aimed at improving and/or increasing the operational
efficiency and functionality of the asset. This type of expenditure is amortized over the
estimated useful life of the modification. Expenditures covering recurring routine repairs or
maintenance are expensed as incurred.Depreciation is calculated on a straight-line basis over a vessels estimated useful life, less
an estimated residual value. Depreciation is calculated using an estimated useful life of 25
years for Aframax and Suezmax tankers and 20 to 25 years for FPSO units, commencing the date the
vessel is delivered from the shipyard, or a shorter period if regulations prevent the
Partnership from operating the vessel for 25 years. Depreciation of vessels and equipment
(including depreciation attributable to the Dropdown Predecessor) for the years ended December
31, 2010, 2009, and 2008, totalled $142.7 million, $146.7 million, and $136.1 million,
respectively. Depreciation and amortization includes depreciation on all owned vessels.Generally, the Partnership drydocks each shuttle tanker and conventional oil tanker every two
and a half to five years. FSO and FPSO units are generally not drydocked. The Partnership
capitalizes a portion of the costs incurred during drydocking and amortizes those costs on a
straight-line basis from the completion of a drydocking over the estimated useful life of the
drydock. The Partnership includes in capitalized drydocking those costs incurred as part of the
drydocking to meet regulatory requirements, or expenditures that either add economic life to the
vessel, increase the vessels earning capacity or improve the vessels operating efficiency. The
Partnership expenses costs related to routine repairs and maintenance performed during
drydocking that do not improve operating efficiency or extend the useful lives of the assets.Drydocking activity for the three years ended December 31, 2010, 2009, and 2008 is summarized as
follows:
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2008$
    
    
    $
    
    
    $Balance at beginning of the year
    
    
    86,134
    
    
    
    76,619
    
    
    
    71,910Cost incurred for drydocking
    
    
    24,869
    
    
    
    34,974
    
    
    
    26,944Drydocking amortization
    
    
    (39,654
    )
    
    
    (25,459
    )
    
    
    (22,235
    )Balance at end of the year
    
    
    71,349
    
    
    
    86,134
    
    
    
    76,619
 Vessels and equipment that are held and used are assessed for impairment when events or
circumstances indicate the carrying amount of the asset may not be recoverable. If the assets
net carrying value exceeds the net undiscounted cash flows expected to be generated over its
remaining useful life, the carrying amount of the asset is reduced to its estimated fair value.
Estimated fair value is determined based on discounted cash flows or appraised values depending
on the nature of the asset.Direct financing leasesThe 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.
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TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 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:
 Year EndedDecember 31, 2010Credit Quality Indicator
    
    
    Grade

    
    $Direct financing leases
    
    Payment activity
    
    Performing
    
    
    71,570
 Debt issuance costsDebt issuance costs, including fees, commissions and legal expenses, are deferred and presented
as other non-current assets and amortized on an effective interest rate method over the term of
the relevant loan. Amortization of debt issuance costs is included in interest expense.Goodwill and intangible assetsGoodwill is not amortized, but reviewed for impairment annually or more frequently if impairment
indicators arise. A fair value approach is used to identify potential goodwill impairment and,
when necessary, measure the amount of impairment. The Partnership uses a discounted cash flow
model to determine the fair value of reporting units, unless there is a readily determinable
fair market value. Intangible assets are assessed for impairment when and if impairment
indicators exist. An impairment loss is recognized if the carrying amount of an intangible asset
is not recoverable and its carrying amount exceeds its fair value.The Partnerships intangible assets are amortized over their respective lives with the amount
amortized each year being weighted based on the projected revenue to be earned under the
contracts.Derivative instrumentsAll derivative instruments are initially recorded at cost as either assets or liabilities in the
accompanying consolidated balance sheets and subsequently remeasured to fair value, regardless
of the purpose or intent for holding the derivative. The method of recognizing the resulting
gain or loss is dependent on whether the derivative contract is designed to hedge a specific
risk and also qualifies for hedge accounting. The Partnership generally does not apply hedge
accounting to its derivative instruments, except for certain foreign exchange currency contracts
(See Note 12.)When a derivative is designated as a cash flow hedge, the Partnership formally documents the
relationship between the derivative and the hedged item. This documentation includes the
strategy and risk management objective for undertaking the hedge and the method that will be
used to assess the effectiveness of the hedge. Any hedge ineffectiveness is recognized
immediately in earnings, as are any gains and losses on the derivative that are excluded from
the assessment of hedge effectiveness. The Partnership does not apply hedge accounting if it is
determined that the hedge was not effective or will no longer be effective, the derivative was
sold or exercised, or the hedged item was sold, repaid or no longer possible of occurring.For derivative financial instruments designated and qualifying as cash flow hedges, changes in
the fair value of the effective portion of the derivative financial instruments are initially
recorded as a component of accumulated other comprehensive income in equity. In the periods when
the hedged items affect earnings, the associated fair value changes on the hedging derivatives
are transferred from equity to the corresponding earnings line item. The ineffective portion of
the change in fair value of the derivative financial instruments is immediately recognized in
earnings. If a cash flow hedge is terminated and the originally hedged items may still possibly
affect earnings, the gains and losses initially recognized in equity remain until the hedged
item impacts earnings, at which point they are transferred to the corresponding earnings line
item. If the hedged items may no longer affect earnings, amounts recognized in equity are
immediately transferred to earnings. Gains and losses from the Partnerships hedge accounted
foreign currency forward contracts are recorded primarily in vessel operating expenses and
general and administrative expense.For derivative financial instruments that are not designated or that do not qualify as
accounting hedges, the changes in the fair value of the derivative financial instruments are
recognized in earnings. Gains and losses from the Partnerships non-designated foreign currency
forward contracts and interest rate swaps are recorded in realized and unrealized gains (losses)
on non-designated derivative instruments in the consolidated statements of income (loss). Gains
and losses from the Partnerships non-designated cross currency swap are recorded in foreign
currency exchange gain (loss) in the consolidated statements of income (loss).Employee pension plansThe Dropdown Predecessor has defined benefit pension plans covering certain of its employees.
The Dropdown Predecessor accrues the costs and related obligations associated with its defined
benefit pension plans based on actuarial computations using the projected benefits obligation
method and managements best estimates of expected plan investment performance, salary
escalation, and other relevant factors. For the purpose of calculating the expected return on
plan assets, those assets are valued at fair value. The overfunded or underfunded status of the
defined benefit pension plan is recognized as assets or liabilities in the consolidated balance
sheets. Gains or losses that arise during a period but that are not recognized as part of net
periodic benefit costs in the current period are recognized as a component of other
comprehensive (loss) income.
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TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 Income taxesThe Partnerships Norwegian and Australian subsidiaries are subject to income taxes. The
Partnership accounts for such taxes using the liability method. Under the liability method,
deferred tax assets and liabilities are recognized for the anticipated future tax effects of
temporary differences between the financial statement basis and the tax basis of the
Partnerships assets and liabilities using the applicable jurisdictional tax rates. A valuation
allowance for deferred tax assets is recorded when it is more likely than not that some or all
of the benefit from the deferred tax asset will not be realized.Recognition of uncertain tax positions is dependent upon whether it is more-likely-than-not that
a tax position taken or expected to be taken in a tax return will be sustained upon examination,
including resolution of any related appeals or litigation processes, based on the technical
merits of the position. If a tax position meets the more-likely-than-not recognition threshold,
it is measured to determine the amount of benefit to recognize in the consolidated financial
statements based on guidance in the interpretation. The Partnership recognizes interest and
penalties related to uncertain tax positions in income tax expense.Adoption of new accounting pronouncementsIn 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.In July 2010, the FASB issued an amendment to FASB ASC 310, Receivables, that requires companies
to provide more information in their disclosures about the credit quality of their financing
receivables and the credit reserves held against them. The disclosure required on the adoption
of this amendment is included as part of this note.
 2.
    
    Fair Value Measurements
 The following methods and assumptions were used to estimate the fair value of each class of
financial instrument:Cash and cash equivalents The fair value of the Partnerships cash and cash equivalents
approximate their carrying amounts reported in the accompanying consolidated balance sheets.Due to / from affiliates The fair value of the amounts due to and from affiliates approximate
their carrying amounts reported in the accompanying consolidated balance sheets due to the
current nature of the balances.Long-term debt The fair values of the Partnerships variable-rate long-term debt are either
based on quoted market prices or estimated using discounted cash flow analyses, based on rates
currently available for debt with similar terms and remaining maturities and the current credit
worthiness of the Partnership.Loan due to parent The fair value of the Partnerships loans due to its parent approximates
its carrying amount reported in the accompanying consolidated balance sheets.Derivative instruments The fair value of the Partnerships derivative instruments is the
estimated amount that the Partnership would receive or pay to terminate the agreements at the
reporting date, taking into account current interest rates, foreign exchange rates and the
current credit worthiness of both the Partnership and the derivative counterparties. The
estimated amount is the present value of future cash flows. 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; andLevel 3. Unobservable inputs in which there is little or no market data, which require the
reporting entity to develop its own assumptions.
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TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 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:
 December 31, 2010
    
    
    December 31, 2009Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairFair Value

    
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueHierarchy

    
    
    Asset (Liability)
    
    
    Asset (Liability)
    
    
    Asset (Liability)
    
    
    Asset (Liability)Level(1)
    
    
    $
    
    
    $
    
    
    $
    
    
    $Cash and cash equivalents
    
    
    
    
    
    
    166,483
    
    
    
    166,483
    
    
    
    109,407
    
    
    
    109,407Due from affiliates (note 11w)
    
    
    
    
    
    
    19,135
    
    
    
    19,135
    
    
    
    17,673
    
    
    
    17,673Due to affiliates (note 11w)
    
    
    
    
    
    
    (67,390
    )
    
    
    (67,390
    )
    
    
    (40,220
    )
    
    
    (40,220
    )Long-term debt (note 7)
    
    
    
    
    
    
    (1,717,140
    )
    
    
    (1,620,355
    )
    
    
    (1,778,464
    )
    
    
    (1,655,973
    )Loan due to Parent (note 7)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60,000
    )
    
    
    (60,000
    )Loan due to Parent by Dropdown
Predecessor (note 7)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (206,591
    )
    
    
    (206,591
    )Derivative instrumentsInterest rate swap agreements
    
    Level 2
    
    
    (175,784
    )
    
    
    (175,784
    )
    
    
    (84,968
    )
    
    
    (84,968
    )Cross currency swap agreement
    
    Level 2
    
    
    4,233
    
    
    
    4,233
    
    
    
    
    
    
    
    Foreign currency forward contracts
    
    Level 2
    
    
    6,909
    
    
    
    6,909
    
    
    
    6,227
    
    
    
    6,227
 (1)
    
    The fair value hierarchy level is only applicable to each financial instrument on the
consolidated balance sheets that are recorded at fair value on a recurring basis.The Partnership has determined that there were no non-financial assets or non-financial
liabilities carried at fair value at December 31, 2010 and 2009, except for a 1992-built shuttle
tanker, which was written-down to fair value of $11.0 million at December 31, 2010. The fair
market value of the shuttle tanker was determined based on directly observable inputs (Level 2).
(See note 18.) 3.
    
    Public Offerings
   Petrojarl Varg Falcon Spirit
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TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 4.
    
    Segment Reporting
    Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,(U.S. dollars in millions)
    
    2010
    
    
    2009
    
    
    2008Statoil ASA (1)
    
    $236.0 or 26%
    
    $248.5 or 28%
    
    $320.7 or 32%Petrobras Transporte S.A (3)
    
    $179.6 or 20%
    
    $168.4 or 19%
    
    $150.3 or 15%Teekay Corporation (2)
    
    $141.0 or 16%
    
    $148.3 or 17%
    
    $181.9 or 18%Talisman Energy Inc(4)
    
    $106.2 or 12%
    
    $100.0 or 12%
    
    $96.4 or 10%
 
 (1)
    
    Shuttle tanker segment(2)
    
    Shuttle tanker, conventional tanker and FSO segments(3)
    
    Shuttle tanker and FPSO segment(4)
    
    FPSO segment  Shuttle
    
    
    ConventionalTanker
    
    
    Tanker
    
    
    FSO
    
    
    FPSOYear ended December 31, 2010
    
    Segment
    
    
    Segment
    
    
    Segment
    
    
    Segment
    
    
    TotalRevenues
    
    
    559,547
    
    
    
    114,850
    
    
    
    74,298
    
    
    
    151,851
    
    
    
    900,546Voyage expenses
    
    
    104,460
    
    
    
    19,753
    
    
    
    888
    
    
    
    
    
    
    
    125,101Vessel operating expenses
    
    
    143,766
    
    
    
    23,739
    
    
    
    35,214
    
    
    
    66,157
    
    
    
    268,876Time-charter hire expense
    
    
    89,795
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89,795Depreciation and amortization
    
    
    111,157
    
    
    
    27,522
    
    
    
    16,262
    
    
    
    35,400
    
    
    
    190,341General and administrative (1)
    
    
    42,526
    
    
    
    4,501
    
    
    
    3,799
    
    
    
    12,388
    
    
    
    63,214Write down of vessels
    
    
    9,441
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,441Restructuring charge
    
    
    119
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119Income from vessel operations
    
    
    58,283
    
    
    
    39,335
    
    
    
    18,135
    
    
    
    37,906
    
    
    
    153,659Expenditures for vessels and equipment(2)
    
    
    32,012
    
    
    
    1,179
    
    
    
    140
    
    
    
    6,428
    
    
    
    39,759Expenditures for drydock
    
    
    13,382
    
    
    
    11,487
    
    
    
    
    
    
    
    
    
    
    
    24,869
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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 Shuttle
    
    
    ConventionalTanker
    
    
    Tanker
    
    
    FSO
    
    
    FPSOYear ended December 31, 2009
    
    Segment
    
    
    Segment
    
    
    Segment
    
    
    Segment
    
    
    TotalRevenues
    
    
    534,464
    
    
    
    124,659
    
    
    
    62,644
    
    
    
    149,345
    
    
    
    871,112Voyage expenses
    
    
    85,197
    
    
    
    24,494
    
    
    
    1,335
    
    
    
    
    
    
    
    111,026Vessel operating expenses
    
    
    144,007
    
    
    
    24,153
    
    
    
    27,460
    
    
    
    65,357
    
    
    
    260,977Time-charter hire expense
    
    
    117,202
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    117,202Depreciation and amortization
    
    
    98,013
    
    
    
    24,042
    
    
    
    21,763
    
    
    
    37,358
    
    
    
    181,176General and administrative
    
    
    40,552
    
    
    
    4,746
    
    
    
    2,572
    
    
    
    13,891
    
    
    
    61,761Restructuring charge
    
    
    4,734
    
    
    
    274
    
    
    
    
    
    
    
    
    
    
    
    5,008Income from vessel operations
    
    
    44,759
    
    
    
    46,950
    
    
    
    9,514
    
    
    
    32,739
    
    
    
    133,962Expenditures for vessels and equipment(2)
    
    
    10,341
    
    
    
    1,024
    
    
    
    
    
    
    
    2,316
    
    
    
    13,681Expenditures for drydock
    
    
    29,822
    
    
    
    1,644
    
    
    
    3,508
    
    
    
    
    
    
    
    34,974
 Shuttle
    
    
    ConventionalTanker
    
    
    Tanker
    
    
    FSO
    
    
    FPSOYear ended December 31, 2008
    
    Segment
    
    
    Segment
    
    
    Segment
    
    
    Segment
    
    
    TotalRevenues
    
    
    650,896
    
    
    
    153,200
    
    
    
    68,396
    
    
    
    131,069
    
    
    
    1,003,561Voyage expenses
    
    
    169,578
    
    
    
    53,722
    
    
    
    1,729
    
    
    
    
    
    
    
    225,029Vessel operating expenses
    
    
    137,132
    
    
    
    26,030
    
    
    
    27,759
    
    
    
    61,138
    
    
    
    252,059Time-charter hire expense
    
    
    132,234
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    132,234Depreciation and amortization
    
    
    91,846
    
    
    
    22,901
    
    
    
    23,690
    
    
    
    29,959
    
    
    
    168,396General and administrative
    
    
    43,003
    
    
    
    7,800
    
    
    
    2,646
    
    
    
    15,057
    
    
    
    68,506Goodwill impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    149,129
    
    
    
    149,129Income from vessel operations
    
    
    77,103
    
    
    
    42,747
    
    
    
    12,572
    
    
    
    (124,214
    )
    
    
    8,208Expenditures for vessels and equipment(2)
    
    
    53,231
    
    
    
    3,648
    
    
    
    979
    
    
    
    15,729
    
    
    
    73,587Expenditures for drydock
    
    
    20,574
    
    
    
    7,355
    
    
    
    (985
    )
    
    
    
    
    
    
    26,944
 
 (1)
    
    Includes direct general and administrative expenses and indirect general and
administrative expenses (allocated to each segment based on estimated use of corporate
resources).(2)
    
    Excludes non-cash investing activities (see Note 15).  December 31, 2010
    
    
    December 31, 2009$
    
    
    $Shuttle tanker segment
    
    
    1,711,341
    
    
    
    1,516,988Conventional tanker segment
    
    
    304,655
    
    
    
    317,690FSO segment
    
    
    119,844
    
    
    
    143,308FPSO segment
    
    
    513,886
    
    
    
    540,824Unallocated:Cash and cash equivalents
    
    
    166,483
    
    
    
    109,407Other assets
    
    
    26,417
    
    
    
    22,852Consolidated total assets
    
    
    2,842,626
    
    
    
    2,651,069
 
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TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 
 5.
    
    Goodwill and Intangible Assets
 a) Goodwill
  December 31, 2010
    
    
    December 31, 2009
    
    
    December 31, 2008$
    
    
    $
    
    
    $Balance at beginning of year(1)
    
    
    127,113
    
    
    
    127,113
    
    
    
    209,470Goodwill acquired
    
    
    
    
    
    
    
    
    
    
    70,900Reduction of deferred tax valuation allowance
    
    
    
    
    
    
    
    
    
    
    (4,128
    )Goodwill impairment(2)
    
    
    
    
    
    
    
    
    
    
    (149,129
    )Balance at end of year(1)
    
    
    127,113
    
    
    
    127,113
    
    
    
    127,113
 (1)
    
    The carrying amount of goodwill for the shuttle tanker segment was $127.1 million as at
December 31, 2010, 2009, and 2008 and January 1, 2008. The carrying amount of goodwill for
the FPSO segment was nil as at December 31, 2008 and $82.4 million as at January 1, 2008.(2)
    
    During the fourth quarter of 2008, sufficient indicators of impairment existed,
including a significant and sustained decline in Teekay Corporations market capitalization
below book value, deteriorating market conditions and tightening credit markets, such that
the parent of the Dropdown Predecessor performed a goodwill impairment test as of December
31, 2008. The goodwill impairment charge was from a write-down of goodwill from the Teekay
Petrojarl acquisition as management concluded that the carrying value of goodwill in the
FPSO segment exceeded its fair value.  b) Intangible Assets
  Gross Carrying
    
    
    Accumulated
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    AmountCustomer contracts (shuttle tanker segment)
    
    
    124,250
    
    
    
    (96,070
    )
    
    
    28,180Customer contracts (FPSO segment)
    
    
    353
    
    
    
    (160
    )
    
    
    193Other intangible assets (FPSO segment)
    
    
    390
    
    
    
    
    
    
    
    390124,993
    
    
    
    (96,230
    )
    
    
    28,763
  Gross Carrying
    
    
    Accumulated
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    AmountCustomer contracts (shuttle tanker segment)
    
    
    124,250
    
    
    
    (88,016
    )
    
    
    36,234Customer contracts (FPSO segment)
    
    
    353
    
    
    
    (92
    )
    
    
    261Other intangible assets (FPSO segment)
    
    
    462
    
    
    
    
    
    
    
    462125,065
    
    
    
    (88,108
    )
    
    
    36,957
   F - 17




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 6.
    
    Accrued Liabilities
 December 31, 2010
    
    
    December 31, 2009$
    
    
    $Voyage and vessel
    
    
    66,084
    
    
    
    47,940Interest
    
    
    14,815
    
    
    
    12,544Payroll and benefits
    
    
    7,639
    
    
    
    1,52688,538
    
    
    
    62,010
 7.
    
    Long-Term Debt
 December 31, 2010
    
    
    December 31, 2009$
    
    
    $U.S. Dollar-denominated Revolving Credit Facilities due through 2018
    
    
    1,066,909
    
    
    
    1,406,974Norwegian Kroner Bond due in 2013
    
    
    103,061
    
    
    
    U.S. Dollar-denominated Term Loans due through 2017
    
    
    244,958
    
    
    
    268,640U.S. Dollar-denominated Term Loans due through 2023
    
    
    302,212
    
    
    
    102,850U.S. Dollar-denominated Terms Loan Due to Parent
    
    
    
    
    
    
    60,000U.S. Dollar-denominated Loan Due to Parent by Dropdown Predecessor
    
    
    
    
    
    
    206,5911,717,140
    
    
    
    2,045,055Less current portion
    
    
    152,096
    
    
    
    120,259Total
    
    
    1,565,044
    
    
    
    1,924,796
    Rio das Ostras Amundsen Spirit Nansen Spirit Peary Spirit
   F - 18




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 Falcon Spirit Falcon Spirit
 Rio das Ostras Rio das Ostras
    8.
    
    Leases
 Charters-out
   Direct Financing Lease
  Falcon Spirit
 Charters-in
  9.
    
    Restructuring Charge
   F - 19




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 
 10.
    
    Other Income  Net
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2008$
    
    
    $
    
    
    $VOC Equipment lease income (note 8)
    
    
    4,978
    
    
    
    6,970
    
    
    
    9,727Miscellaneous
    
    
    1,832
    
    
    
    2,519
    
    
    
    2,103Other income  net
    
    
    6,810
    
    
    
    9,489
    
    
    
    11,830
 11.
    
    Related Party Transactions
 a)
    
    Nine of OPCOs conventional tankers are employed on long-term time-charter contracts
with a subsidiary of Teekay Corporation. Under the terms of seven of these nine
time-charter contracts, OPCO is responsible for the bunker fuel expenses; however, OPCO
adds the approximate amounts of these expenses to the daily hire rate plus a 4.5% margin.
Pursuant to these time-charter contracts, OPCO earned revenues of $104.9 million, $114.7
million and $144.5 million for the years ended December 31, 2010, 2009, and 2008,
respectively.b)
    
    Two of OPCOs shuttle tankers are employed on long-term bareboat charters with a
subsidiary of Teekay Corporation. Pursuant to these charter contracts, OPCO earned revenues
of $14.9 million, $12.4 million and $14.8 million during the years ended December 31, 2010,
2009, and 2008, respectively.c)
    
    Two of OPCOs FSO units are employed on long-term bareboat charters with a subsidiary
of Teekay Corporation. Pursuant to these charter contracts, OPCO earned revenues of $11.2
million, $11.2 million and $11.2 million, during the years ended December 31, 2010, 2009,
and 2008, respectively.d)
    
    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, during
the years ended December 31, 2010, 2009, and 2008, OPCO earned management fees of $3.8
million, $3.2 million and $3.3 million, respectively.e)
    
    Eight of OPCOS Aframax conventional oil tankers, one of OPCOs FSO units, two of the
Partnerships FSO units and the Partnerships FPSO units are managed by subsidiaries of
Teekay Corporation. Pursuant to the associated management services agreements, the
Partnership incurred general and administrative expenses of $9.2 million, $4.6 million and
$3.5 million during the years ended December 31, 2010, 2009, and 2008, respectively.f)
    
    The Partnership, OPCO and certain of OPCOs operating subsidiaries have entered into
services agreements with certain subsidiaries of Teekay Corporation pursuant to which
Teekay Corporation subsidiaries provide the Partnership, OPCO and its operating
subsidiaries with administrative, crew training, advisory and technical services and ship
management services. Pursuant to these service agreements, the Partnership incurred $43.0
million, $40.4 million and $59.2 million, respectively, of these costs during the December
31, 2010, 2009, and 2008, respectively.g)
    
    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. During the years ended December
31, 2010, 2009, and 2008, the Partnership incurred $0.4 million, $0.5 million and $0.6
million of these costs, respectively.h)
    
    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.i)
    
    In March 2008, Teekay Corporation agreed to reimburse the Partnership for repair costs
relating to one of the Partnerships shuttle tankers. The vessel was purchased from Teekay
Corporation in July 2007 and had, as of the date of acquisition, an inherent minor defect
that required repairs. Pursuant to this agreement, Teekay Corporation reimbursed $0.7
million of these costs during the year ended December 31, 2008.j)
    
    In March 2008, a subsidiary of OPCO sold certain vessel equipment to a subsidiary of
Teekay Corporation for proceeds equal to its net book value of $1.4 million.k)
    
    Concurrently with the closing of the Partnerships follow-on offering on June 18, 2008,
the Partnership acquired from Teekay Corporation an additional 25% interest in OPCO for
$205.5 million, thereby increasing the Partnerships ownership interest in OPCO to 51%. The
Partnership financed the acquisition with the net proceeds from the follow-on offering and
a concurrent private placement of common units to Teekay Corporation. (See Note 3). In
connection with the valuation of the purchase of the additional 25% interest in OPCO, the
Partnership incurred a fairness opinion fee of $1.1 million. The excess of the proceeds
paid by the Partnership over Teekay Corporations historical book value for the 25%
interest in OPCO was accounted for as an equity distribution to Teekay Corporation of $91.6
million.
  F - 20




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 l)
    
    On June 18, 2008, OPCO acquired from Teekay Corporation two ship owning subsidiaries
(SPT Explorer L.L.C. and the SPT Navigator L.L.C.) for a total cost of approximately $106.0
million, including the assumption of third-party debt of approximately $89.3 million and
the non-cash settlement of related party working capital of $1.2 million. The acquired
subsidiaries own two 2008-built Aframax lightering tankers (the SPT Explorerand the SPT
Navigator) and their related 10-year, fixed-rate bareboat charters (with options
exercisable by the charterer to extend up to an additional five years) entered into with Skaugen PetroTrans, a
joint venture in which Teekay Corporation owns a 50% interest. These two lightering tankers
are specially designed to be used in ship-to-ship oil transfer operations. This purchase was
financed with the assumption of debt, together with cash balances. The excess of the proceeds
paid by the Partnership over Teekay Corporations historical book value was accounted for as
an equity distribution to Teekay Corporation of $16.2 million.Pursuant to the bareboat charters for the vessels, OPCO earned revenues of $9.9 million, $9.9
million and $8.7 million during the years ended December 31, 2010, 2009, and 2008,
respectively (including revenues earned as part of the Dropdown Predecessor prior to OPCOs
acquisition of the vessels).m)
    
    In June 2008, Teekay Corporation agreed to reimburse OPCO for certain costs relating to
events which occurred prior to the Partnerships offering in December 2006, totalling $0.7
million, primarily relating to the settlement of repair costs not covered by insurance
providers for work performed in early 2006 on two of OPCOs shuttle tankers.n)
    
    From December 2008 to June 2009, OPCO entered into a bareboat charter contract to
in-charter one shuttle tanker from a subsidiary of Teekay Corporation. Pursuant to the
charter contract, OPCO incurred time-charter hire expenses of $3.4 million and $0.2 million
during the years ended December 31, 2009 and 2008, respectively.o)
    
    During August 2008, two of OPCOs in-chartered shuttle tankers were employed on a
single-voyage charter with a subsidiary of Teekay Corporation. Pursuant to this charter
contract, OPCO earned revenues of $11.3 million for the year ended December 31, 2008.p)
    
    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 is accounted for as an
equity distribution to Teekay Corporation. To the extent the purchase price is greater than
the corresponding book value, the excess is reflected as a reduction in Partners Equity
and the remainder is shown as a reduction in Dropdown Predecessor Equity. The purchase was
financed through vendor financing made available by Teekay Corporation of $220 million. The
remaining $100 million was paid in cash and financed from existing debt facilities. The
$220 million vendor financing from Teekay Corporation 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
and was repaid in March 2010. For the years ended December 31, 2010 and 2009, respectively,
the Partnership incurred interest expense of $1.4 million and $2.9 million in relation to
the $220 million vendor financing from Teekay Corporation.
 Petrojarl Varg
 Petrojarl Varg
 
    
    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 $3.9 million and $6.6 million for
the years ended December 31, 2009 and 2008, respectively, has been allocated to the
Partnership.
    
    Interest expense incurred by Teekay Corporation on its credit facilities that were
used to finance the acquisition of the Petrojarl Vargof $6.5 million and $16.7 million,
respectively, for the years ended December 31, 2009 and 2008, has been allocated to the
Partnership.
    
    Teekay Corporation entered into interest rate swaps to offset increases or decreases
in the variable-rate interest payments of the credit facilities that were used to
finance the acquisition of the Petrojarl Varg. The realized and unrealized gains
(losses) on these interest rate swaps allocated to the Partnership were $6.2 million and
($35.7) million, respectively, for the years ended December 31, 2009 and 2008. These
amounts are reflected in the realized and unrealized gains (losses) on non-designated
derivative instruments.
    
    Teekay Corporation entered into foreign exchange forward contracts into to minimize
the impact from changes in the foreign exchange rate between the Norwegian Kroner and
the US Dollar on operating expenses of the Petrojarl Varg. These foreign exchange
forward contracts have been allocated to the Partnership. For the year ended December
31, 2009, the amount of the gain (loss) allocated to the Partnership was $2.6 million,
of which ($0.5) million is reflected in vessel operating expenses, $0.4 million in
general and administrative expenses, $0.7 million in realized and unrealized gains
(losses) on non-designated derivative instruments and $2.0 million in other
comprehensive income. For the year ended December 31, 2008, a loss of ($4.8) million
was allocated, of which ($0.7) million is reflected in vessel operating expenses, ($0.6)
million in general and administrative expenses, ($1.6) million in realized and
unrealized gains (losses) on non-designated derivative instruments and ($1.9) million in
other comprehensive loss.
    
    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 $110.4 million for the period from January 1, 2009 to September 9,
2009 and $73.1 million for the year ended December 31, 2008.
  F - 21




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 q)
    
    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 (see Note 3). The Falcon Spiritis 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
Spiritis 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 $11.3 million and Teekay Corporations interest in amounts due to
Teekay Corporation from Teekay Al Raayan LLC for $32.8 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
($11.3 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 ($32.8 million) was accounted for as repayment of debt.The following costs attributable to the operations of the Falcon Spiritwere 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 year ended December 31, 2010.
    
    Interest expense incurred by Teekay Corporation on its credit facilities that were
used to finance the acquisition of the Falcon Spiritof $0.4 million for the year ended
December 31, 2010.
 r)
    
    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. Immediately prior
to the acquisition, $163.0 million of amounts due to Teekay Corporation were converted to
equity and are treated as a non-cash transaction in the Partnerships statement of cash
flow. The purchase price was financed through the assumption of debt of $93.8 million and
the remainder was paid in cash. The purchase price is accounted for as an equity
distribution to Teekay Corporation. To the extent the purchase price is less than the
corresponding book value, the excess is reflected as an addition in Partners Equity and
the remainder is shown as a reduction in Dropdown Predecessor Equity.On the dropdown, certain assets and liabilities of the Rio das Ostraswere retained by Teekay
Corporation. These net assets retained by Teekay Corporation totaled $0.1 million and are
accounted for as a non-cash equity distribution to Teekay Corporation.The following costs attributable to the operations of the Rio das Ostraswere 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 $5.4 million, $8.6 million and $7.4
million, respectively, for the years ended December 31, 2010, 2009, and 2008, has been
allocated to the Partnership.
    
    Interest expense incurred by Teekay Corporation on its credit facilities that were
used to finance the acquisition of the Rio das Ostrasof $2.2 million, $1.7 million and
$1.1 million, respectively, for the years ended December 31, 2010, 2009, and 2008, has
been allocated to the Partnership.
    
    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 Rio das Ostras. These foreign exchange forward
contracts have been allocated to the Partnership. For the year ended December 31, 2010,
the amount of the gain allocated to the Partnership was $0.1 million, of which ($0.1)
million is reflected in general and administrative expenses and $0.1 million in other
comprehensive income. For the year ended December 31, 2009, the amount of the gain of
$0.8 million was allocated, of which $0.4 million is reflected in million in general and
administrative expenses and $0.4 million in other comprehensive loss. For the year ended
December 31, 2008, a (loss) of ($0.9) million was allocated, of which ($0.5) million is
reflected in million in general and administrative expenses and ($0.4) million in other
comprehensive loss.
    
    Teekay Corporation uses a centralized treasury system. As a result, cash and cash
equivalents attributable to the operations of the Rio das Ostras, 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 (distributions) were $5.8 million, $3.7 million and ($16.3) million for
the period from January 1, 2010 to October 1, 2010, for the year ended December 31,
2009, and for the period from April 1, 2008 to December 31, 2008.
  F - 22




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 s)
    
    On October 1, 2010, OPCO acquired from Teekay Corporation the newbuilding shuttle
tanker, the Amundsen Spirit, which is on a time-charter to Statoil ASA, for a purchase
price of $128.0 million. The purchase price was financed through the assumption of debt of
$93.3 million, the issuance of new units by OPCO of $17.0 million and $17.7 million with
cash. The excess of $31.2 million of the purchase price over the book value of the assets
of ($3.5) million, which includes the fair value of an interest rate swap of ($25.9)
million, is accounted for as an equity distribution to Teekay Corporation. Immediately
prior to the acquisition, $32.7 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 following costs attributable to the operations of the Amundsen Spiritwere 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)
of $0.2 million for the year ended December 31, 2010.
    
    Interest expense incurred by Teekay Corporation on its credit facilities that were
used to finance the acquisition of the Amundsen Spiritof $0.3 million for the year
ended December 31, 2010.
    
    Teekay Corporation entered into an interest rate swap to offset increases or
decreases in the variable-rate interest payments of the credit facilities that were used
to finance the acquisition of the Amundsen Spirit. The realized and unrealized gains
(losses) on this interest rate swap allocated to the Partnership is ($5.6) million for
the year ended December 31, 2010. This amount is reflected in the realized and
unrealized gains (losses) on non-designated derivative instruments.
 t)
    
    On October 1, 2010, OPCO agreed to acquire from Teekay Corporation its 100% interest in
the Nansen Spirit LLC, which owns the newbuilding shuttle tanker, the Nansen Spirit. On
December 10, 2010, the Nansen Spiritcommenced its time-charter with Statoil ASA and OPCO
acquired 100% of Teekay Corporations interest in the Nansen Spirit LLC for a purchase
price of $126.3 million. The purchase price was financed through the assumption of debt of
$93.3 million, the issuance of new units by OPCO of $16.4 million and $16.6 million with
cash. The excess of $4.4 million of the purchase price over the book value of the assets of
$28.6 million was accounted for as an equity distribution to Teekay Corporation.
Immediately prior to the acquisition, $31.5 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. For the period October 1, 2010 to December 10, 2010, the
Partnership consolidated Nansen Spirit LLC on its financial statements as it was considered
a variable interest entity and the Partnership was the primary beneficiary (see Note 14c).
 u)
    
    On October 1, 2010, OPCO agreed to acquire an additional newbuilding shuttle tanker,
the Peary Spirit,from Teekay Corporation for approximately $133 million (see Note 14c).
The acquisition of this newbuilding shuttle tanker is expected to coincide with the
commencement of its time-charter contract under a Master Agreement with Statoil in July
2011.
 v)
    
    On October 1, 2010, OPCO agreed to acquire two interest rate swaps from Teekay
Corporation on the same date as it would acquire the Nansen Spiritand the Peary Spirit
from Teekay Corporation. Pending acquisition of the interest rate swaps, these agreements
are derivative instruments with Teekay Corporation. The fair value of the interest rate
swaps of ($57.1) million on October 1, 2010, was accounted for as an equity distribution to
Teekay Corporation.
 w)
    
    At December 31, 2010, due from affiliates totaled $19.1 million (December 31, 2009 -
$17.7 million) and due to affiliates totaled $67.4 million (December 31, 2009  $40.2
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.
 12.
    
    Derivative Instruments
  Foreign Exchange Risk
   F - 23




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TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
  Contract Amount
    
    
    Fair Value / Carryingin Foreign
    
    
    Amount of Asset/(Liability)
    
    
    Average
    
    
    Expected MaturityCurrency
    
    
    (in thousands of U.S. Dollars)
    
    
    Forward
    
    
    2011
    
    
    2012(thousands)
    
    
    Hedge
    
    
    Non-hedge
    
    
    Rate(1)
    
    
    (in thousands of U.S. Dollars)Norwegian Kroner
    
    
    623,000
    
    
    
    2,277
    
    
    
    4,433
    
    
    
    6.30
    
    
    
    61,356
    
    
    
    37,585British Pound
    
    
    4,490
    
    
    
    
    
    
    
    238
    
    
    
    0.66
    
    
    
    5,646
    
    
    
    1,111Euro
    
    
    17,323
    
    
    
    
    
    
    
    (39
    )
    
    
    0.75
    
    
    
    17,031
    
    
    
    6,1762,277
    
    
    
    4,632
    
    
    
    
    
    
    
    84,033
    
    
    
    44,872
 (1)
    
    Average forward rate represents the contracted amount of foreign currency one U.S.
Dollar will buy.  Interest Rate Risk
   Fair Value /Carrying
    
    
    Weighted-Amount of
    
    
    Average
    
    
    FixedInterest
    
    
    Principal
    
    
    Assets
    
    
    Remaining
    
    
    InterestRate
    
    
    Amount
    
    
    (Liability)
    
    
    Term
    
    
    RateIndex
    
    
    $
    
    
    $
    
    
    (years)
    
    
    (%)(1)U.S. Dollar-denominated interest rate swaps
    
    LIBOR
    
    
    800,000
    
    
    
    (111,730
    )
    
    
    12.57
    
    
    
    4.6U.S. Dollar-denominated interest rate swaps(2)
    
    LIBOR
    
    
    734,309
    
    
    
    (64,054
    )
    
    
    6.12
    
    
    
    3.91,534,309
    
    
    
    (175,784
    )
 (1)
    
    Excludes the margin the Partnership pays on its variable-rate debt, which as at
December 31, 2010, ranged from 0.30% and 3.25%.(2)
    
    Principal amount reduces quarterly or semi-annually. Tabular disclosure
  Current
    
    
    
    
    
    
    
    
    
    
    Currentportion of
    
    
    
    
    
    
    
    
    
    
    portion ofderivative
    
    
    Derivative
    
    
    Accrued
    
    
    derivative
    
    
    Derivativeassets
    
    
    assets
    
    
    liabilities
    
    
    liabilities
    
    
    liabilitiesAs at December 31, 2010Foreign 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
    )
  F - 24




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 Current
    
    
    
    
    
    
    
    
    
    
    Currentportion of
    
    
    
    
    
    
    
    
    
    
    portion ofderivative
    
    
    Derivative
    
    
    Accrued
    
    
    derivative
    
    
    Derivativeassets
    
    
    assets
    
    
    liabilities
    
    
    liabilities
    
    
    liabilitiesAs at December 31, 2009Foreign currency contracts  cash flow hedges
    
    
    6,157
    
    
    
    447
    
    
    
    
    
    
    
    (15
    )
    
    
    Foreign currency contracts  not designated as hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (265
    )
    
    
    (97
    )Interest rate swaps  not designated as hedges
    
    
    
    
    
    
    1,778
    
    
    
    (8,858
    )
    
    
    (35,109
    )
    
    
    (42,779
    )6,157
    
    
    
    2,225
    
    
    
    (8,858
    )
    
    
    (35,389
    )
    
    
    (42,876
    )
 AOCI
 Year Ended December 31, 2010
 BalanceSheet(AOCI)
    
    
    Statement of Income (Loss)Effective
    
    
    Effective
    
    
    IneffectivePortion
    
    
    Portion
    
    
    Portion(3,154
    )
    
    
    34
    
    
    
    (2,819
    )
    
    Vessel operating expenses(3,277
    )
    
    
    (1,417
    )
    
    General and administrative expenses(3,154
    )
    
    
    (3,243
    )
    
    
    (4,236
    )
 Year Ended December 31, 2009
 BalanceSheet(AOCI)
    
    
    Statement of Income (Loss)Effective
    
    
    Effective
    
    
    IneffectivePortion
    
    
    Portion
    
    
    Portion28,327
    
    
    
    (6,775
    )
    
    
    2,492
    
    
    Vessel operating expenses(3,056
    )
    
    
    3,854
    
    
    General and administrative expenses28,327
    
    
    
    (9,831
    )
    
    
    6,346
   Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2008$
    
    
    $
    
    
    $Realized (losses) gains relating to:Interest rate swaps
    
    
    (49,224
    )
    
    
    (51,084
    )
    
    
    (21,470
    )Foreign currency forward contracts
    
    
    (1,029
    )
    
    
    (4,196
    )
    
    
    1,972(50,253
    )
    
    
    (55,280
    )
    
    
    (19,498
    )Unrealized (losses) gains relating to:Interest rate swaps
    
    
    (10,408
    )
    
    
    102,662
    
    
    
    (166,047
    )Foreign currency forward contracts
    
    
    4,995
    
    
    
    4,562
    
    
    
    (7,800
    )(5,413
    )
    
    
    107,224
    
    
    
    (173,847
    )Total realized and unrealized (losses) gains on
non-designated derivative instruments
    
    
    (55,666
    )
    
    
    51,944
    
    
    
    (193,345
    )
    F - 25




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 13.
    
    Income Taxes
  December 31, 2010
    
    
    December 31, 2009$
    
    
    $Deferred tax assets:Tax losses carried forward(1)
    
    
    74,149
    
    
    
    64,889Provisions
    
    
    1,878
    
    
    
    841Gross deferred tax assets:
    
    
    76,027
    
    
    
    65,730Valuation allowance
    
    
    
    
    
    
    (1,152
    )Total deferred tax assets:
    
    
    76,027
    
    
    
    64,578Deferred tax liabilities:Vessels and equipment
    
    
    41,614
    
    
    
    48,029Long-term debt
    
    
    31,077
    
    
    
    29,599Other
    
    
    2,900
    
    
    
    2,729Total deferred tax liabilities
    
    
    75,591
    
    
    
    80,357Net deferred tax assets (liabilities)(2)
    
    
    436
    
    
    
    (15,779
    )Current portion
    
    
    
    
    
    
    Long-term portion of net deferred tax assets (liabilities)
    
    
    436
    
    
    
    (15,779
    )Disclosed in:Other assets
    
    
    2,041
    
    
    
    702Deferred income tax
    
    
    (1,605
    )
    
    
    (16,481
    )Net deferred tax assets (liabilities)
    
    
    436
    
    
    
    (15,779
    )
 
 (1)
    
    The net operating loss carryforwards of $230.9 million are available to offset future
taxable income in the applicable jurisdictions, and can be carried forward indefinitely.(2)
    
    The change in the net deferred tax liabilities is related to the change in temporary
differences and foreign exchange gains.  Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2008$
    
    
    $
    
    
    $Current
    
    
    (6,038
    )
    
    
    (5,583
    )
    
    
    (1,006
    )Deferred
    
    
    15,756
    
    
    
    (8,209
    )
    
    
    63,096Income tax recovery (expense)
    
    
    9,718
    
    
    
    (13,792
    )
    
    
    62,090
    F - 26




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2008$
    
    
    $
    
    
    $Net income (loss) before taxes
    
    
    69,145
    
    
    
    134,594
    
    
    
    (252,639
    )Net income (loss) not subject to taxes
    
    
    (121,917
    )
    
    
    269,581
    
    
    
    (497,214
    )Net income (loss) subject to taxes
    
    
    191,062
    
    
    
    (134,987
    )
    
    
    244,575At applicable statutory tax rates
    
    
    43,139
    
    
    
    (43,032
    )
    
    
    60,037Permanent difference
    
    
    (44,706
    )
    
    
    (17,718
    )
    
    
    (11,683
    )Adjustments related to currency differences
    
    
    (9,514
    )
    
    
    70,654
    
    
    
    (112,497
    )Temporary differences for which no deferred tax asset was recognized
    
    
    1,363
    
    
    
    205
    
    
    
    1,304Prior year current taxes accrued
    
    
    
    
    
    
    3,683
    
    
    
    749Tax (recovery) expense related to current year
    
    
    (9,718
    )
    
    
    13,792
    
    
    
    (62,090
    )
  Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2008$
    
    
    $
    
    
    $Balance of unrecognized tax benefits as at January 1,
    
    
    5,516
    
    
    
    
    
    
    
    Increases for positions related to prior years
    
    
    
    
    
    
    5,049
    
    
    
    Increases for positions related to the current year
    
    
    413
    
    
    
    467
    
    
    
    Balance of unrecognized tax benefits as at December 31,
    
    
    5,929
    
    
    
    5,516
    
    
    
    
   14.
    
    Commitments and Contingencies
 a)
    
    During the year ended December 31, 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. No remeasurement was required as of December 31, 2010.b)
    
    The Partnership may, from time to time, be involved in legal proceedings and claims
that arise in the ordinary course of business. The Partnership believes that any adverse
outcome, individually or in the aggregate, of any existing claims would not have a material
affect on its financial position, results of operations or cash flows, when taking into
account its insurance coverage and indemnifications from charterers or Teekay Corporation.c)
    
    The Partnership consolidates certain variable interest entities (or VIEs). In general,
a variable interest entity 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.The Partnership consolidated Nansen Spirit LLC, which owns the newbuilding shuttle tanker,
the Nansen Spirit, in its consolidated financial statements effective October 1, 2010. On
that date Nansen Spirit LLC became a VIE and the Partnership became its primary beneficiary
upon the Partnerships agreement to acquire all of Teekay Corporations interests in Nansen
Spirit LLC (see Note 11t). Upon the Partnerships acquisition of Nansen Spirit LLC on
December 10, 2010, which coincides with the commencement of the time-charter contract for the
Nansen Spirit, Nansen Spirit LLC was no longer a VIE. Subsequent to the acquisition of the
Nansen Spirit LLC, this vessel company continues to be consolidated as we hold voting
control.
  F - 27




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 Peary Spirit Peary Spirit
  As atDecember 31,2010$ASSETSVessels and equipmentAdvances on newbuilding contracts
    
    
    52,195Other assets
    
    
    1,486Total assets
    
    
    53,681Accrued liabilities
    
    
    56Current portion of long term-debt
    
    
    1,037Advances from affiliates
    
    
    28,760Long-term debt
    
    
    23,843Total liabilities
    
    
    53,696Total deficit
    
    
    (15
    )Total liabilities
    
    
    53,681
 Peary Spirit
 15.
    
    Supplemental Cash Flow Information
 a)
    
    The changes in non-cash working capital items related to operating activities for the
years ended December 31, 2010, 2009, and 2008 are as follows:
 Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2008$
    
    
    $
    
    
    $Accounts receivable
    
    
    13,189
    
    
    
    (29,304
    )
    
    
    (6,270
    )Prepaid expenses and other assets
    
    
    5,680
    
    
    
    (7,190
    )
    
    
    15,695Accounts payable and accrued liabilities
    
    
    23,526
    
    
    
    21,483
    
    
    
    (4,386
    )Advances (to) from affiliate
    
    
    (7,931
    )
    
    
    23,942
    
    
    
    1,94834,464
    
    
    
    8,931
    
    
    
    6,987
 b)
    
    Cash interest paid (including interest paid by the Dropdown Predecessor and realized
losses on interest rate swaps) during the years ended December 31, 2010, 2009, and 2008
totaled $80.5 million, $97.2 million, and $107.0 million, respectively.c)
    
    Taxes paid (including taxes paid by the Dropdown Predecessor) during the years ended
December 31, 2010, 2009, and 2008 totaled $1.1 million, ($0.4) million and $1.1 million,
respectively.d)
    
    The Partnerships consolidated statement of cash flows for the year ended December 31,
2010 reflects the Dropdown Predecessors as if the Partnership had acquired the Dropdown
Predecessors when the vessel began operations under the ownership of Teekay Corporation.
For non-cash changes related to the Dropdown Predecessors, see note 11.e)
    
    The contribution from the non-controlling interest owner described in note 14a has been
treated as a non-cash transaction in the Partnerships consolidated statement of cash
flows.
  F - 28




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 f)
    
    The cash portion of the purchase price of vessels acquired from Teekay Corporation is
as follows:
 Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2008$
    
    
    $
    
    
    $Falcon Spirit (note 11q)
    
    
    (14,099
    )
    
    
    
    
    
    
    Rio das Ostras (note 11r)
    
    
    (58,721
    )
    
    
    
    
    
    
    Amundsen Spirit (note 11s)
    
    
    (17,671
    )
    
    
    
    
    
    
    Nansen Spirit (note 11t)
    
    
    (16,560
    )
    
    
    
    
    
    
    Petrojarl Varg (note 11p)
    
    
    
    
    
    
    (100,000
    )
    
    
    SPT Explorer L.L.C and SPT Navigator (note 11l)
    
    
    
    
    
    
    
    
    
    
    (16,661
    )(107,051
    )
    
    
    (100,000
    )
    
    
    (16,661
    )
 g)
    
    Contribution (distribution) of capital from (to) Teekay Corporation to (from) the
Dropdown Predecessor is as follows:
 Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2008$
    
    
    $
    
    
    $Relating to Falcon Spirit (note 11q)
    
    
    3,608
    
    
    
    104
    
    
    
    Relating to Rio das Ostras (note 11r)
    
    
    (2,791
    )
    
    
    21,475
    
    
    
    46,165Relating to Amundsen Spirit (note 11s)
    
    
    3,496
    
    
    
    
    
    
    
    Relating to Petrojarl Varg (note 11p)
    
    
    
    
    
    
    110,386
    
    
    
    73,0684,313
    
    
    
    131,965
    
    
    
    119,233
 16.
    
    Partners Equity and Net Income (Loss) Per Unit
  Limited Partners Rights
  
    
    Right to receive distribution of available cash within approximately 45 days after the
end of each quarter.
    
    No limited partner shall have any management power over the Partnerships business and
affairs; the general partner shall conduct, direct and manage our activities.
    
    The General Partner may be removed if such removal is approved by unitholders holding
at least 66 2/3% of the outstanding units voting as a single class, including units held
by the General Partner and its affiliates.
 Subordinated Units
   Incentive Distribution Rights
   F - 29




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 Quarterly Distribution Target Amount (per unit)
    
    Unitholders
    
    
    General PartnerMinimum quarterly distribution of $0.35
    
    
    98
    %
    
    
    2
    %Up to $0.4025
    
    
    98
    %
    
    
    2
    %Above $0.4025 up to $0.4375
    
    
    85
    %
    
    
    15
    %Above $0.4375 up to $0.525
    
    
    75
    %
    
    
    25
    %Above $0.525
    
    
    50
    %
    
    
    50
    %
   Net Income (Loss) Per Unit
    F - 30




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 17.
    
    Pension Benefits
 Plans
 Year endedDecember 31,2009$Change in benefit obligation:Beginning balance
    
    
    2,213Service cost
    
    
    251Interest cost
    
    
    93Actuarial loss
    
    
    407Benefit payments
    
    
    Exchange rate changes
    
    
    507Ending balance
    
    
    3,471Change in fair value of plan assets:Beginning balance
    
    
    965Actual return
    
    
    (312
    )Employer contributions
    
    
    1,485Benefit payments
    
    
    Administration expenses
    
    
    (14
    )Exchange rate changes
    
    
    292Ending balance
    
    
    2,416Funded status:Net underfunded status of the plans
    
    
    (1,055
    )Payroll tax on funded status
    
    
    (149
    )Net liability recognized on balance sheet
    
    
    (1,204
    )Amounts recognized in the balance sheets:Other long-term liabilities
    
    
    1,204Accumulated other comprehensive lossNet actuarial losses
    
    
    1,478
  December 31,2009$Benefit obligation
    
    
    3,471Fair value of plan assets
    
    
    2,416Accumulated benefit obligation
    
    
    2,117Fair value of plan assets
    
    
    2,416
  F - 31




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
  Period ended
    
    
    Year ended
    
    
    Year endedOctober 1,
    
    
    December 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2008$
    
    
    $
    
    
    $Net periodic pension cost:Service cost
    
    
    373
    
    
    
    1,139
    
    
    
    1,379Interest cost
    
    
    149
    
    
    
    341
    
    
    
    415Expected return on plan assets
    
    
    (176
    )
    
    
    (352
    )
    
    
    (429
    )Administration expenses
    
    
    20
    
    
    
    52
    
    
    
    27Amortization of net actuarial losses
    
    
    64
    
    
    
    109
    
    
    
    Payroll tax
    
    
    51
    
    
    
    167
    
    
    
    196481
    
    
    
    1,456
    
    
    
    1,588
   December 31,2009$Equity investments
    
    
    365Debt securities
    
    
    1,338Money market
    
    
    268Real estate
    
    
    413Other
    
    
    32Total
    
    
    2,416
  December 31,2009$Discount rates
    
    
    4.50
    %Rate of compensation increase
    
    
    4.50
    %
  Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2008$
    
    
    $
    
    
    $Discount rates
    
    
    4.50
    %
    
    
    4.50
    %
    
    
    3.80
    %Rate of compensation increase
    
    
    4.50
    %
    
    
    4.50
    %
    
    
    4.00
    %Expected long-term rates of return (1)
    
    
    5.70
    %
    
    
    5.70
    %
    
    
    5.80
    %
 (1)
    
    To the extent the expected return on plan assets varies from the actual return, an
actuarial gain or loss results. The expected long-term rates of return on plan assets
assumptions is based on an estimated weighted average of long-term returns of major asset
classes. In determining asset class returns, the Dropdown Predecessor takes into account
long-term returns of major asset classes, historical performance of plan assets, as well as
the current interest rate environment.  F - 32




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 18.
    
    Write-down of Vessel
  19.
    
    Accounting Pronouncements Not Yet Adopted
 Revenue Recognition,
 20.
    
    Subsequent Events
   F - 33