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, 2008
 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
      
  o þ
  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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##### 



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
    
    
    4Item 4. Information on the Partnership
    
    
    20Item 4A. Unresolved Staff Comments
    
    
    Not applicableItem 5. Operating and Financial Review and Prospects
    
    
    35Item 6. Directors, Senior Management and Employees
    
    
    50Item 7. Major Unitholders and Related Party Transactions
    
    
    54Item 8. Financial Information
    
    
    57Item 9. The Offer and Listing
    
    
    58Item 10. Additional Information
    
    
    59Item 11. Quantitative and Qualitative Disclosures About Market Risk
    
    
    63Item 12. Description of Securities Other than Equity Securities
    
    
    Not applicablePART II.Item 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    64Item 14. Material Modifications to the Rights of Unitholders and Use of Proceeds
    
    
    64Item 15. Controls and Procedures
    
    
    64Item 16A. Audit Committee Financial Expert
    
    
    65Item 16B. Code of Ethics
    
    
    65Item 16C. Principal Accountant Fees and Services
    
    
    66Item 16D. Exemptions from the Listing Standards for Audit Committees
    
    
    Not applicableItem 16E. Purchases of Units by the Issuer and Affiliated Purchasers
    
    
    Not applicablePART III.Item 17. Financial Statements
    
    
    Not applicableItem 18. Financial Statements
    
    
    67Item 19. Exhibits
    
    
    67Signatures
    
    
    68
  2




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##### 



PART I
 This Annual Report should be read in conjunction with the consolidated financial statements and
accompanying notes included in this report.
 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;
 
    
    growth prospects of the offshore and tanker markets;
 
    
    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, floating storage and off-take (or FSO)
unit and conventional tanker;
 
    
    estimated capital expenditures and the availability of capital resources to fund capital
expenditures;
 
    
    our ability to maintain long-term relationships with major crude oil companies;
 
    
    the recent economic downturn and crisis in the global financial markets, 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;
 
    
    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 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;
 
    
    Teekay Corporation offering to us additional interest in Teekay Offshore Operating L.P.;
 
    
    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 our general partner; and
 
    
    our business strategy and other plans and objectives for future operations.
 SEC
   3




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##### 



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 of Teekay Offshore Partners Predecessor as
at and for the years ended December 31, 2004 and 2005 is derived from the audited combined
consolidated financial statements of Teekay Offshore Partners Predecessor;
 
    
    the historical financial and operating data of Teekay Offshore Partners Predecessor for
the period from January 1, 2006 to December 18, 2006 is derived from the audited combined
consolidated financial statements of Teekay Offshore Partners Predecessor; and
 
    
    the historical financial and operating data of Teekay Offshore Partners L.P. as at
December 31, 2006, 2007 and 2008, for the period from December 19, 2006 to December 31,
2006, and for the years ended December 31, 2007 and 2008, reflect our initial public
offering and are derived from our audited consolidated financial statements.
 Navion Bergen Navion
Gothenburg Dampier
Spirit SPT Explorer SPT Navigator. Dropdown Predecessor Navion Bergen Navion Gothenburg Dampier Spirit SPT Explorer) SPT Navigator)
  Year ended December 31, 2008
 
    
    January 1 to December 31, 2008
 Year ended December 31, 2007
 
    
    January 1 to December 31, 2007
 Year ended December 31, 2006
 
    
    January 1 to December 18, 2006
 
    
    December 19 to December 31, 2006
  4




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##### 



GAAP
 Year Ended December 31, 2006January 1 to
    
    
    December 19 toYear Ended December 31,
    
    
    December 18,
    
    
    December 31,
    
    
    Year Ended December 31,2004
    
    
    2005
    
    
    2006
    
    
    2006
    
    
    2007
    
    
    2008Income Statement Data:Voyage revenues
    
    $
    723,217
    
    
    $
    613,246
    
    
    $
    617,514
    
    
    $
    24,397
    
    
    $
    785,203
    
    
    $
    872,492Operating expenses:Voyage expenses (1)
    
    
    90,414
    
    
    
    74,543
    
    
    
    91,321
    
    
    
    3,102
    
    
    
    151,637
    
    
    
    225,029Vessel operating expenses (2) (14)
    
    
    109,278
    
    
    
    109,480
    
    
    
    107,991
    
    
    
    4,297
    
    
    
    149,660
    
    
    
    184,416Time-charter hire expense
    
    
    177,050
    
    
    
    169,687
    
    
    
    159,973
    
    
    
    5,641
    
    
    
    150,463
    
    
    
    132,234Depreciation and amortization
    
    
    120,197
    
    
    
    109,824
    
    
    
    100,823
    
    
    
    3,726
    
    
    
    124,370
    
    
    
    38,437General and
administrative (14)
    
    
    45,941
    
    
    
    56,726
    
    
    
    63,014
    
    
    
    2,177
    
    
    
    62,404
    
    
    
    64,230(Gain) loss on sale of vessels and equipment  net of
writedowns
    
    
    (3,725
    )
    
    
    2,820
    
    
    
    (4,778
    )
    
    
    
    
    
    
    
    
    
    
    Restructuring charge
    
    
    
    
    
    
    955
    
    
    
    832
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    539,155
    
    
    
    524,035
    
    
    
    519,176
    
    
    
    18,943
    
    
    
    638,534
    
    
    
    744,346Income from vessel operations
    
    
    184,062
    
    
    
    89,211
    
    
    
    98,338
    
    
    
    5,454
    
    
    
    146,669
    
    
    
    128,146Interest
expense (14)
    
    
    (44,268
    )
    
    
    (39,983
    )
    
    
    (64,462
    )
    
    
    (1,617
    )
    
    
    (126,304
    )
    
    
    (215,727
    )Interest income
    
    
    2,459
    
    
    
    4,612
    
    
    
    5,167
    
    
    
    191
    
    
    
    5,871
    
    
    
    4,086Equity income from joint ventures
    
    
    5,514
    
    
    
    5,955
    
    
    
    6,321
    
    
    
    
    
    
    
    
    
    
    
    Gain on sales of marketable securities
    
    
    94,222
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency exchange (loss) gain (3)
    
    
    (37,840
    )
    
    
    34,228
    
    
    
    (66,214
    )
    
    
    (118
    )
    
    
    (11,678
    )
    
    
    4,343Other  net
    
    
    14,064
    
    
    
    9,091
    
    
    
    8,367
    
    
    
    309
    
    
    
    10,403
    
    
    
    11,936Income tax (expense) recovery
    
    
    (29,465
    )
    
    
    12,375
    
    
    
    (3,260
    )
    
    
    (121
    )
    
    
    10,516
    
    
    
    56,704Income (loss) from continuing operations before
non-controlling interest
    
    
    188,748
    
    
    
    115,489
    
    
    
    (15,743
    )
    
    
    4,098
    
    
    
    35,477
    
    
    
    (10,512
    )Non-controlling interest
    
    
    (2,167
    )
    
    
    (229
    )
    
    
    (3,893
    )
    
    
    (2,636
    )
    
    
    (31,519
    )
    
    
    (7,122
    )Income (loss) from continuing operations
    
    
    186,581
    
    
    
    115,260
    
    
    
    (19,636
    )
    
    
    1,462
    
    
    
    3,958
    
    
    
    (17,634
    )Net income (loss) from discontinued operations(4)
    
    
    30,619
    
    
    
    (19,347
    )
    
    
    (10,656
    )
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    217,200
    
    
    $
    95,913
    
    
    $
    (30,292
    )
    
    $
    1,462
    
    
    $
    3,958
    
    
    $
    (17,634
    )Dropdown Predecessors interest in net income
    
    
    4,076
    
    
    $
    2,910
    
    
    $
    3,097
    
    
    $
    114
    
    
    $
    1,300
    
    
    $
    1,333General partners interest in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    733
    
    
    
    8,918Limited partners interest:Net income (loss) from continuing operations
    
    
    182,505
    
    
    
    112,350
    
    
    
    (22,733
    )
    
    
    1,284
    
    
    
    1,925
    
    
    
    (27,885
    )Net Income (loss) from continuing operations per:Common unit (basic and diluted)(5)
    
    
    14.48
    
    
    
    8.92
    
    
    
    (1.80
    )
    
    
    0.07
    
    
    
    0.12
    
    
    
    (0.90
    )Subordinated unit (basic and diluted)(5)
    
    
    14.48
    
    
    
    8.92
    
    
    
    (1.80
    )
    
    
    0.06
    
    
    
    0.07
    
    
    
    (0.90
    )Total unit (basic and diluted)(5)
    
    
    14.48
    
    
    
    8.92
    
    
    
    (1.80
    )
    
    
    0.07
    
    
    
    0.10
    
    
    
    (0.90
    )Limited partners interest:Net income (loss)
    
    
    213,124
    
    
    
    93,003
    
    
    
    (33,389
    )
    
    
    1,284
    
    
    
    1,925
    
    
    
    (27,885
    )Net income (loss) per:Common unit (basic and diluted)(5)
    
    
    16.91
    
    
    
    7.38
    
    
    
    (2.65
    )
    
    
    0.07
    
    
    
    0.12
    
    
    
    (0.90
    )Subordinated unit (basic and diluted)(5)
    
    
    16.91
    
    
    
    7.38
    
    
    
    (2.65
    )
    
    
    0.06
    
    
    
    0.07
    
    
    
    (0.90
    )Total unit (basic and diluted)(5)
    
    
    16.91
    
    
    
    7.38
    
    
    
    (2.65
    )
    
    
    0.07
    
    
    
    0.10
    
    
    
    (0.90
    )Cash distributions declared per unit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.14
    
    
    
    1.65Balance Sheet Data(at end of year):Cash and marketable securities(4) (6)
    
    $
    143,729
    
    
    $
    128,986
    
    
    $
    
    
    
    $
    113,986
    
    
    $
    121,224
    
    
    $
    131,488Vessels and equipment (7) (8)
    
    
    1,440,167
    
    
    
    1,310,135
    
    
    
    
    
    
    
    1,532,743
    
    
    
    1,662,865
    
    
    
    1,708,006Total assets
    
    
    2,054,760
    
    
    
    1,895,601
    
    
    
    
    
    
    
    2,081,224
    
    
    
    2,166,351
    
    
    
    2,180,092Total debt
    
    
    1,178,132
    
    
    
    943,319
    
    
    
    
    
    
    
    1,303,352
    
    
    
    1,517,467
    
    
    
    1,566,436Non-controlling interest
    
    
    14,276
    
    
    
    11,859
    
    
    
    
    
    
    
    427,977
    
    
    
    392,613
    
    
    
    201,383Dropdown Predecessors equity
    
    
    44,016
    
    
    
    47,784
    
    
    
    
    
    
    
    51,792
    
    
    
    
    
    
    
    Total partners/owners equity
    
    
    659,212
    
    
    
    747,879
    
    
    
    
    
    
    
    138,942
    
    
    
    77,401
    
    
    
    100,866Common units outstanding(5)
    
    
    2,800,000
    
    
    
    2,800,000
    
    
    
    2,800,000
    
    
    
    9,800,000
    
    
    
    9,800,000
    
    
    
    15,461,202Subordinated units outstanding (5)
    
    
    9,800,000
    
    
    
    9,800,000
    
    
    
    9,800,000
    
    
    
    9,800,000
    
    
    
    9,800,000
    
    
    
    9,800,000Cash Flow Data:Net cash provided by (used in):Operating activities (9)
    
    $
    247,184
    
    
    $
    157,881
    
    
    $
    
    
    
    $
    
    
    
    $
    45,847
    
    
    $
    122,566Financing activities (9)
    
    
    (74,302
    )
    
    
    (206,748
    )
    
    
    
    
    
    
    
    
    
    
    (23,905
    )
    
    
    38,806Investing activities (9)
    
    
    (190,110
    )
    
    
    34,124
    
    
    
    
    
    
    
    
    
    
    
    (14,704
    )
    
    
    (151,108
    )Other Financial Data:Net voyage revenues (10)
    
    $
    632,803
    
    
    $
    538,703
    
    
    $
    526,193
    
    
    $
    21,295
    
    
    $
    633,566
    
    
    $
    647,463EBITDA (11)
    
    
    409,638
    
    
    
    229,199
    
    
    
    133,086
    
    
    
    6,735
    
    
    
    238,245
    
    
    
    275,740Capital expenditures:Expenditures for vessels and equipment (12)
    
    
    170,630
    
    
    
    24,760
    
    
    
    31,079
    
    
    
    
    
    
    
    31,228
    
    
    
    57,858Expenditures for drydocking
    
    
    9,174
    
    
    
    8,906
    
    
    
    31,255
    
    
    
    
    
    
    
    49,053
    
    
    
    29,075Fleet data:Average number of shuttle tankers (13)
    
    
    37.9
    
    
    
    35.8
    
    
    
    33.9
    
    
    
    36.0
    
    
    
    36.9
    
    
    
    36.6Average number of conventional tankers (13)
    
    
    40.7
    
    
    
    41.2
    
    
    
    22.0
    
    
    
    10.0
    
    
    
    9.3
    
    
    
    10.7Average number of FSO units (13)
    
    
    4.0
    
    
    
    4.0
    
    
    
    4.0
    
    
    
    4.0
    
    
    
    4.6
    
    
    
    5.0
 (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.  5




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##### 



(3)
    
    Substantially all of these foreign currency exchange gains and losses were unrealized and not
settled in cash. Under U.S. accounting guidelines, 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. 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.(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 income (loss) per unit is determined by dividing net income (loss), after deducting the
amount of net income (loss) attributable to the Dropdown Predecessor and the amount of net
income (loss) allocated to our general partners interest for periods subsequent to our
initial public offering on December 19, 2006, by the weighted-average number of units
outstanding during the period. For periods prior to December 19, 2006, such units are deemed
equal to the common and subordinated units received by Teekay Corporation in exchange for a
26.0% interest in OPCO in connection with our initial public offering.(6)
    
    Cash and marketable securities include cash from discontinued operations of $13.4 million and
$2.5 million as at December 31, 2004, and 2005, respectively.(7)
    
    Vessels and equipment consists of (a) vessels, at cost less accumulated depreciation,
(b) vessels under capital leases, at cost less accumulated depreciation, and (c) advances on
newbuildings.(8)
    
    Vessels and equipment includes a vessel held for sale of $19.6 million as at December 31,
2004.(9)
    
    For the year ended December 31, 2006, cash flow data provided by (used in) operating
activities, financing activities and investing activities was $162,228, ($230,238) and
$53,010, respectively.(10)
    
    Consistent with general practice in the shipping industry, we use net voyage revenues
(defined as voyage 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, 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 voyage revenues from different types of contracts may
vary, the net revenues after subtracting voyage expenses, which we call net voyage revenues,
are comparable across the different types of contracts. We principally use net voyage
revenues, a non-GAAP financial measure, because it provides more meaningful information to us
than voyage revenues, the most directly comparable GAAP financial measure. Net voyage 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 voyage revenues with voyage revenues. Year Ended December 31, 2006Year Ended
    
    
    Year Ended
    
    
    January 1 to
    
    
    December 19 to
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 18,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2005
    
    
    2006
    
    
    2006
    
    
    2007
    
    
    2008Voyage revenues
    
    $
    723,217
    
    
    $
    613,246
    
    
    $
    617,514
    
    
    $
    24,397
    
    
    $
    785,203
    
    
    $
    872,492Voyage expenses
    
    
    90,414
    
    
    
    74,543
    
    
    
    91,321
    
    
    
    3,102
    
    
    
    151,637
    
    
    
    225,029Net voyage revenues
    
    $
    632,803
    
    
    $
    538,703
    
    
    $
    526,193
    
    
    $
    21,295
    
    
    $
    633,566
    
    
    $
    647,463
 (11)
    
    EBITDA. Earnings before interest, taxes, depreciation and amortization is used as a
supplemental financial measure by management and by external users of our financial
statements, such as investors, as discussed below: 
    
    Financial and operating performance.EBITDA assists 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 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 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 allows 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 provides 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 as a liquidity measure 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.
  6




---



##### 



Year Ended December 31, 2006January 1 to
    
    
    December 19 toYear Ended December 31,
    
    
    December 18,
    
    
    December 31,
    
    
    Year Ended December 31,2004
    
    
    2005
    
    
    2006
    
    
    2006
    
    
    2007
    
    
    2008Reconciliation of EBITDA to
Net income (loss):Net income (loss)
    
    $
    217,200
    
    
    $
    95,913
    
    
    $
    (30,292
    )
    
    $
    1,462
    
    
    $
    3,958
    
    
    $
    (17,634
    )Depreciation and amortization
    
    
    120,197
    
    
    
    109,824
    
    
    
    100,823
    
    
    
    3,726
    
    
    
    124,370
    
    
    
    138,437Interest expense, net
    
    
    41,809
    
    
    
    35,371
    
    
    
    59,295
    
    
    
    1,426
    
    
    
    120,433
    
    
    
    211,641Income taxes expense (recovery)
    
    
    29,465
    
    
    
    (12,375
    )
    
    
    3,260
    
    
    
    121
    
    
    
    (10,516
    )
    
    
    (56,704
    )Depreciation and amortization
and income tax expense related
to discontinued operations
    
    
    967
    
    
    
    466
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    EBITDA (1)
    
    $
    409,638
    
    
    $
    229,199
    
    
    $
    133,086
    
    
    $
    6,735
    
    
    $
    238,245
    
    
    $
    275,740Reconciliation of EBITDA to
Net operating cash flow:Net operating cash flow
    
    $
    247,184
    
    
    $
    157,881
    
    
    $
    162,112
    
    
    $
    116
    
    
    $
    45,847
    
    
    $
    122,566Non-controlling interest
    
    
    (2,167
    )
    
    
    (229
    )
    
    
    (3,893
    )
    
    
    (2,636
    )
    
    
    (31,519
    )
    
    
    (7,122
    )Expenditures for drydocking
    
    
    9,174
    
    
    
    8,906
    
    
    
    31,255
    
    
    
    
    
    
    
    49,053
    
    
    
    29,075Interest expense, net
    
    
    41,809
    
    
    
    35,371
    
    
    
    59,295
    
    
    
    1,426
    
    
    
    120,433
    
    
    
    211,641(Loss) gain on sale of vessels
    
    
    3,725
    
    
    
    9,423
    
    
    
    6,928
    
    
    
    
    
    
    
    
    
    
    
    Gain on sale of marketable
securities, net of writedowns
    
    
    94,222
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss on writedown of vessels
and equipment
    
    
    
    
    
    
    (12,243
    )
    
    
    (2,150
    )
    
    
    
    
    
    
    
    
    
    
    Write-off of debt issuance costs
    
    
    
    
    
    
    
    
    
    
    (2,790
    )
    
    
    
    
    
    
    
    
    
    
    Equity income (net of dividends
received)
    
    
    (1,986
    )
    
    
    3,205
    
    
    
    319
    
    
    
    
    
    
    
    
    
    
    
    Change in working capital
    
    
    36,757
    
    
    
    (26,539
    )
    
    
    (50,673
    )
    
    
    7,134
    
    
    
    33,706
    
    
    
    (22,943
    )Distribution from subsidiaries
to non-controlling interest
    
    
    2,347
    
    
    
    9,618
    
    
    
    4,224
    
    
    
    
    
    
    
    78,107
    
    
    
    71,976Change in fair value of
interest rate swaps
    
    
    
    
    
    
    
    
    
    
    2,647
    
    
    
    699
    
    
    
    (45,491
    )
    
    
    (130,482
    )Foreign currency exchange
(loss) gain and other, net
    
    
    (21,427
    )
    
    
    43,806
    
    
    
    (74,188
    )
    
    
    (4
    )
    
    
    (11,891
    )
    
    
    1,029EBITDA (1)
    
    $
    409,638
    
    
    $
    229,199
    
    
    $
    133,086
    
    
    $
    6,735
    
    
    $
    238,245
    
    
    $
    275,740
 (1)
    
    EBITDA is net of non-controlling interest expense of $2.2 million, $0.2 million, $3.9
million, $2.6 million, $31.5 million and $7.1 million for the years ended December 31,
2004 and 2005, and for the periods January 1 to December 18, 2006 and December 19 to
December 31, 2006, and for the years ended December 31, 2007 and 2008, respectively.  Year Ended December 31, 2006January 1 to
    
    
    December 19 toYear Ended December 31,
    
    
    December 18,
    
    
    December 31,
    
    
    Year Ended December 31,2004
    
    
    2005
    
    
    2006
    
    
    2006
    
    
    2007
    
    
    2008$
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $(Loss) gain on sale of vessels and
equipment, net of writedowns
    
    $
    3,725
    
    
    $
    (2,820
    )
    
    $
    4,778
    
    
    $
    
    
    
    $
    
    
    
    $
    Gain on sale of marketable
securities, net of writedowns
    
    
    94,222
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unrealized gains (losses) on foreign
currency forward contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (466
    )
    
    
    (4,137
    )Foreign currency exchange (loss) gain
    
    
    (37,840
    )
    
    
    34,228
    
    
    
    (66,214
    )
    
    
    (118
    )
    
    
    (11,678
    )
    
    
    4,343$
    60,107
    
    
    $
    31,408
    
    
    $
    (61,436
    )
    
    $
    (118
    )
    
    $
    (12,144
    )
    
    $
    206
 (12)
    
    Expenditures for vessels and equipment excludes non-cash investing activities. Please read
Item 18  Financial Statements: Note 14  Supplemental Cash Flow Information.(13)
    
    Average number of ships consists of the average number of owned and chartered-in vessels
(including those in discontinued operations) that were in our possession during the period
(excluding five vessels owned by OPCOs 50% joint ventures for periods prior to December 1,
2006, but including two vessels deemed to be in our possession for accounting purposes as a
result of the inclusion of the Dropdown Predecessor prior to our actual acquisition of such
vessels). On December 1, 2006, the operating agreements for these five joint ventures were
amended, resulting in OPCO controlling these entities and in their being consolidated with
OPCO in accordance with GAAP.(14)
    
    Vessel operating expenses, general and administrative
expense and interest expense, includes unrealized gains (losses) on derivative instruments. Please
read Item 18 - Financial Statements: Note 11 - Derivative Instruments and Hedging Activities.  7




---



##### 



RISK FACTORS
 Our cash flow depends substantially on the ability of our subsidiaries, primarily OPCO, to make
distributions to us.
  
    
    the rates they obtain from their charters and contracts of affreightment (whereby OPCO or
other 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 OPCO or other 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 OPCO or other 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.
   We may not have sufficient cash from operations to enable us to pay the minimum quarterly
distribution on our common units or to maintain or increase distributions.
   8




---



##### 




    
    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.
  Our ability to grow may be adversely affected by our cash distribution policy. OPCOs ability to
meet its financial needs and grow may be adversely affected by its 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.
   9




---



##### 



FPSO
    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.
  10




---



##### 



Restrictions in our debt agreements may prevent us, OPCO or other 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.
   11




---



##### 




    
    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.
   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,
utilization of our shuttle tanker fleet and the success of our shuttle tanker business depends upon
continued production from existing or new oil fields it services, which is beyond our control and
generally declines naturally over time. Any decrease in the volume of oil transported under
contracts of affreightment could adversely affect our business and operating results.
   The duration of many of our shuttle tanker and FSO 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.
   12




---



##### 



The continuation of recent economic conditions, including disruptions in the global credit markets,
could adversely affect our results of operations.
  The recent economic downturn 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;
  13




---



##### 




    
    a backlog of orders at the shipyard;
    
    political or economic disturbances;
    
    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 or OPCO is 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; and
 
    
    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.
  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.
   
    
    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.
  14




---



##### 



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.
   
    
    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 where the spill occurred;
 
    
    governmental fines, penalties or restrictions on conducting business;
 
    
    higher insurance rates; and
 
    
    damage to our reputation and customer relationships generally.
   15




---



##### 



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
    16




---



##### 



Exposure to currency exchange rate fluctuations results in fluctuations in cash flows and operating
results.
  The redeployment risk of FPSO units is high given their lack of alternative uses and significant
costs.
  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.
   17




---



##### 




    
    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 ASA (formally
Petrojarl ASA and referred to herein as Petrojarl).
   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
a distribution on the subordinated units or to make incentive distributions (in each case to
affiliates of Teekay Corporation) or to accelerate the expiration of the subordination
period relating to our subordinated units held by 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.
 Although we control OPCO through our ownership of its general partner, OPCOs general partner owes
fiduciary duties to OPCO and OPCOs other partner, Teekay Corporation, which may conflict with the
interests of us and our unitholders.
   18




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##### 




    
    the allocation of shared overhead expenses to OPCO and us;
 
    
    the interpretation and enforcement of contractual obligations between us and our
affiliates, on the one hand, and OPCO or its subsidiaries, on the other hand;
 
    
    the determination and timing of the amount of cash to be distributed to OPCOs partners
and the amount of cash to be reserved for the future conduct of OPCOs business;
 
    
    the decision as to whether OPCO should make asset or business acquisitions or
dispositions, and on what terms;
 
    
    the determination or the amount and timing of OPCOs capital expenditures;
 
    
    the determination of whether OPCO should use cash on hand, borrow funds or issue equity
to raise cash to finance maintenance or expansion capital projects, repay indebtedness, meet
working capital needs or otherwise; and
 
    
    any decision we make to engage in business activities independent of, or in competition
with, OPCO.
 The fiduciary duties of the officers and directors of our general partner may conflict with those
of the officers and directors of OPCOs general partner.
  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 Code IRS 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.
   19




---



##### 



We may be subject to taxes, which reduces our Cash Available for Distribution to you.
  
 Item 4. Information on the Partnership
 A. Overview, History and Development
 Overview and History
  OPCO FSO
 SPT
Explorer and SPT Navigator Skaugen PetroTrans
  
    
    Shuttle Tankers.Our shuttle tanker fleet consists of 37 vessels that operate under
fixed-rate contracts of affreightment, time charters and bareboat charters. Of the 37
shuttle tankers, 25 are owned by OPCO (including 5 through 50% owned subsidiaries), 10 are
chartered-in by OPCO and 2 are owned by us (including one through a 50% owned subsidiary).
All of these shuttle tankers provide transportation services to energy companies, primarily
in the North Sea and Brazil. The majority of the contracts of affreightment volumes are
life-of-field, which have an estimated weighted-average remaining life of approximately 16
years. The time charters and bareboat charters have an average remaining contract term of
approximately 5 years. As of June 1, 2009, our shuttle tankers, which had a total cargo
capacity of approximately 4.5 million deadweight tonnes (or dwt), represented approximately
57% of the total tonnage of the world shuttle tanker fleet.
 
    
    Conventional Tankers.OPCO has a fleet of 11 Aframax conventional crude oil tankers, 9 of
which operate under fixed-rate time charters with Teekay Corporation. The remaining 2
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 7 years. As of June 1, 2009, our conventional tankers had a total cargo
capacity of approximately 1.1 million dwt.
 
    
    FSO Units.We have a fleet of five FSO units. All of the FSO units operate under
fixed-rate contracts, with an average remaining term of approximately 4 years. As of June 1,
2009, our FSO units had a total cargo capacity of approximately 0.6 million dwt.
 th
 Potential Additional Shuttle Tanker, FSO and FPSO Projects
   Teekay Petrojarl
  20




---



##### 



B. Business Overview
 Shuttle Tanker Segment
     Capacity
    
    
    
    
    
    
    
    
    Positioning
    
    Operating
    
    
    
    
    
    RemainingVessel
    
    (dwt)
    
    
    Built
    
    
    Ownership
    
    system
    
    Region
    
    Contract Type (1)
    
    Charterer
    
    TermNavion Hispania
    
    
    126,700
    
    
    
    1999
    
    
    100%
    
    DP2
    
    North Sea
    
    CoA
    
    StatoilHydro,Navion Oceania
    
    
    126,300
    
    
    
    1999
    
    
    100%
    
    DP2
    
    North Sea
    
    CoA

    Chevron, Hess,Navion Anglia
    
    
    126,300
    
    
    
    1999
    
    
    100%
    
    DP2
    
    North Sea
    
    CoA

    Marathon Oil,Navion Scandia
    
    
    126,700
    
    
    
    1998
    
    
    100%
    
    DP2
    
    North Sea
    
    CoA
    ExxonMobil,Navion Britannia (2)
    
    
    124,200
    
    
    
    1998
    
    
    100%
    
    DP2
    
    North Sea
    
    CoA

    ENI, MTDA,Navion Norvegia (2)
    
    
    130,600
    
    
    
    1995
    
    
    100%
    
    DP
    
    North Sea
    
    CoA

    Draugen Transport,Navion Europa (2)
    
    
    130,300
    
    
    
    1995
    
    
    100%
    
    DP
    
    North Sea
    
    CoA

    BP, ConocoPhillips,Navion Fennia (2)
    
    
    95,200
    
    
    
    1992
    
    
    100%
    
    DP
    
    North Sea
    
    CoA

    Shell, Total,Grena
    
    
    148,000
    
    
    
    2003
    
    
    In-chartered (until 2013) (3)
    
    DP2
    
    North Sea
    
    CoA

    Talisman, Nexen,Navion Oslo
    
    
    100,300
    
    
    
    2001
    
    
    100%
    
    DP2
    
    North Sea
    
    CoA

    DONG, Petrofac,Nordic Torinita
    
    
    106,800
    
    
    
    1992
    
    
    100%
    
    DP2
    
    North Sea
    
    CoA

    Idemitsu andSallie Knutsen
    
    
    153,600
    
    
    
    1999
    
    
    In-chartered  (until 2015)
    
    DP2
    
    North Sea
    
    CoA

    Lundin (6)Karen Knutsen
    
    
    153,600
    
    
    
    1999
    
    
    In-chartered (until 2013)
    
    DP2
    
    North Sea
    
    CoAElisabeth Knutsen
    
    
    124,700
    
    
    
    1997
    
    
    In-chartered (until 2009)
    
    DP2
    
    North Sea
    
    CoA

    Majority ofAberdeen
    
    
    87,000
    
    
    
    1996
    
    
    In-chartered (until 2009)
    
    DP
    
    North Sea
    
    CoA

    volumes areRandgrid (2)
    
    
    124,500
    
    
    
    1995
    
    
    In-chartered (until 2014) (4)
    
    DP
    
    North Sea
    
    CoA

    life-of-fieldTordis Knutsen
    
    
    123,800
    
    
    
    1993
    
    
    In-chartered (unit 2010)
    
    DP
    
    North Sea
    
    CoANavion Akarita
    
    
    107,200
    
    
    
    1991
    
    
    Lease (until 2012) (5)
    
    DP
    
    North Sea
    
    CoAStena Sirita
    
    
    127,400
    
    
    
    1999
    
    
    50% (7)
    
    DP2
    
    North Sea
    
    Time charter

    ExxonMobil (8)
    

    1.5 yearsNavion Clipper
    
    
    78,200
    
    
    
    1993
    
    
    100%
    
    DP
    
    Brazil
    
    Time charter
    
    Petrobras
    
    1 yearsNordic Marita
    
    
    103,900
    
    
    
    1999
    
    
    100%
    
    DP
    
    Brazil
    
    Time charter
    
    Petrobras
    
    1.5 yearsStena Natalita
    
    
    108,000
    
    
    
    2001
    
    
    50% (7)
    
    DP2
    
    North Sea
    
    Time charter
    
    ExxonMobil (8)
    
    1.5 yearsStena Alexita
    
    
    127,400
    
    
    
    1998
    
    
    50% (7)
    
    DP2
    
    North Sea
    
    Time charter
    
    ExxonMobil (8)
    
    1 yearNordic Svenita
    
    
    106,500
    
    
    
    1997
    
    
    100%
    
    DP
    
    Brazil
    
    Time charter
    
    Petrobras
    
    0.3 yearNordic Savonita
    
    
    108,100
    
    
    
    1992
    
    
    100%
    
    DP
    
    Brazil
    
    Time charter
    
    Petrobras
    
    1.5 yearBasker Spirit
    
    
    97,000
    
    
    
    1992
    
    
    100%
    
    DP
    
    Australia
    
    Time charter
    
    RocOil (8)
    
    1.5 yearNavion Stavanger
    
    
    147,500
    
    
    
    2003
    
    
    100%
    
    DP2
    
    Brazil
    
    Bareboat
    
    Petrobras (9)
    
    10 yearsNordic Spirit
    
    
    151,300
    
    
    
    2001
    
    
    100%
    
    DP
    
    Brazil
    
    Bareboat
    
    Petrobras (9)
    
    9 yearsStena Spirit
    
    
    151,300
    
    
    
    2001
    
    
    50% (7)
    
    DP
    
    Brazil
    
    Bareboat
    
    Petrobras (9)
    
    9 yearsNordic Brasilia
    
    
    151,300
    
    
    
    2004
    
    
    100%
    
    DP
    
    Brazil
    
    Bareboat
    
    Petrobras (9)
    
    9 yearsNordic Rio
    
    
    151,300
    
    
    
    2004
    
    
    50% (7)
    
    DP
    
    Brazil
    
    Bareboat
    
    Petrobras (9)
    
    9 yearsNavion Bergen
    
    
    105,600
    
    
    
    2000
    
    
    100%
    
    DP2
    
    Brazil
    
    Bareboat
    
    Petrobras (9)
    
    12 yearsNavion Gothenburg
    
    
    152,200
    
    
    
    2006
    
    
    50% (7)
    
    DP2
    
    Brazil
    
    Bareboat
    
    Petrobras (9)
    
    13 yearsPetroatlantic
    
    
    92,900
    
    
    
    2003
    
    
    100%
    
    DP2
    
    North Sea
    
    Bareboat
    
    Petrojarl/BP (9)
    
    1 yearPetronordic
    
    
    92,900
    
    
    
    2002
    
    
    100%
    
    DP2
    
    North Sea
    
    Bareboat
    
    Petrojarl/BP (9)
    
    1 yearTotal capacity
    
    
    4,268,600
 
 (1)
    
    CoA refers to contracts of affreightment.(2)
    
    The vessel is capable of loading from a submerged turret loading buoy.(3)
    
    OPCO has options to extend the time charter or purchase the vessel.(4)
    
    The time charter period is linked to the term of the transportation service agreement for the
Heidrun field on the Norwegian continental shelf, which term is in turn linked to the
production level at the field.(5)
    
    OPCO has 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. Teekay Corporation
subsidiaries provide operational services for these vessels.(8)
    
    Charterer has an option to extend the time charter.(9)
    
    Charterer has the right to purchase the vessel at end of the bareboat charter.  21




---



##### 



Conventional Tanker Segment
       Capacity
    
    
    
    
    
    
    
    
    
    
    Contract
    
    
    
    
    
    
    RemainingVessel
    
    (dwt)
    
    
    Built
    
    
    Ownership
    
    
    Type
    
    
    Charterer
    
    
    TermSPT Explorer (1)
    
    
    106,000
    
    
    
    2008
    
    
    
    100
    %
    
    Bareboat
    
    Skaugen PT
    
    10 yearsSPT Navigator (1)
    
    
    106,000
    
    
    
    2008
    
    
    
    100
    %
    
    Bareboat
    
    Skaugen PT
    
    10 yearsKilimanjaro Spirit (2)
    
    
    115,000
    
    
    
    2004
    
    
    
    100
    %
    
    Time charter
    
    Teekay
    
    10 yearsFuji Spirit (2)
    
    
    106,300
    
    
    
    2003
    
    
    
    100
    %
    
    Time charter
    
    Teekay
    
    10 yearsHamane Spirit (2)
    
    
    105,200
    
    
    
    1997
    
    
    
    100
    %
    
    Time charter
    
    Teekay
    
    7 yearsPoul Spirit (2)
    
    
    105,300
    
    
    
    1995
    
    
    
    100
    %
    
    Time charter
    
    Teekay
    
    6 yearsGotland Spirit (2)
    
    
    95,300
    
    
    
    1995
    
    
    
    100
    %
    
    Time charter
    
    Teekay
    
    6 yearsTorben Spirit (2)
    
    
    98,600
    
    
    
    1994
    
    
    
    100
    %
    
    Time charter
    
    Teekay
    
    4 yearsScotia Spirit (3)
    
    
    95,000
    
    
    
    1992
    
    
    
    100
    %
    
    Time charter
    
    Teekay
    
    3 yearsLeyte Spirit (2)
    
    
    98,700
    
    
    
    1992
    
    
    
    100
    %
    
    Time charter
    
    Teekay
    
    3 yearsLuzon Spirit (2)
    
    
    98,600
    
    
    
    1992
    
    
    
    100
    %
    
    Time charter
    
    Teekay
    
    3 yearsTotal 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.  22




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##### 



FSO Segment
     Capacity
    
    
    
    
    
    
    
    
    
    
    Field name and
    
    
    
    
    
    RemainingVessel
    
    (dwt)
    
    
    Built
    
    
    Ownership
    
    
    location
    
    Contract Type
    
    Charterer
    
    TermPattani Spirit
    
    
    113,800
    
    
    
    1988
    
    
    
    100
    %
    
    Platong, Thailand
    
    Bareboat
    
    Teekay
    
    5 years (1)Nordic Apollo
    
    
    129,000
    
    
    
    1978
    
    
    
    89
    %
    
    Banff, U.K.
    
    Bareboat
    
    Teekay
    
    6 years (2)Navion Saga
    
    
    149,000
    
    
    
    1991
    
    
    
    100
    %
    
    Volve, Norway
    
    Time charter
    
    StatoilHydro
    
    1 years (3)Karratha Spirit
    
    
    106,600
    
    
    
    1988
    
    
    
    100
    %
    
    Legendre, Australia
    
    Time charter
    
    Apache
    
    2 years (3)Dampier Spirit
    
    
    106,700
    
    
    
    1987
    
    
    
    100
    %
    
    Stag, Australia
    
    Time charter
    
    Apache
    
    5 years (3)Total capacity
    
    
    605,100
 
 (1)
    
    This vessel is on a back-to-back charter between Teekay and Unocol for a remaining term of
five years.(2)
    
    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.(3)
    
    Charterer has option to extend the time charter after the initial fixed period.  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 new markets such as Arctic Russia, Eastern Canada, the
Gulf of Mexico, Asia and Africa.
 
    
    Pursue opportunities in the FPSO sector.We believe that Teekay Corporations ownership
of Petrojarl will enable us to competitively pursue FPSO projects anywhere in the world by
combining Petrojarls engineering and operational expertise with Teekay Corporations global
marketing organization and extensive customer and shipyard relationships.
  23




---



##### 




    
    Acquire additional vessels on long-term, fixed-rate contracts.We intend to continue
acquiring shuttle tankers and FSO units with long-term contracts, rather than ordering
vessels on a speculative basis, and we intend to follow this same practice in acquiring FPSO
units. 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 stabilize cash flows. Additionally, we anticipate growing by acquiring
additional limited partner interests in OPCO that Teekay Corporation may offer us in the
future.
 
    
    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
and a source of funding for expanding offshore operations. 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 risk.
 Customers
   Safety, Management of Ship Operations and Administration
 QATO
  ISM Code ISO OHSAS
   
    
    vessel maintenance;
 
    
    crewing;
 
    
    purchasing;
 
    
    shipyard supervision;
 
    
    insurance; and
 
    
    financial management services.
     24




---



##### 



Risk of Loss, Insurance and Risk Management
     Classification, Audits and Inspections
 Intermediate Survey Special Survey
  
    
    the vessels flag state, or the vessels classification society if nominated by the flag
state, inspect the vessels to ensure they comply with applicable rules and regulations of
the country of registry of the vessel and the international conventions of which that
country is a signatory;
 
    
    port state control authorities, such as the U.S. Coast Guard and Australian Maritime
Safety Authority, inspect vessels at regular intervals; and
 
    
    customers regularly inspect our vessels as a condition to chartering, and regular
inspections are standard practice under long-term charters.
  
    
    ensure adherence to our operating standards;
 
    
    maintain the structural integrity of the vessel is being maintained;
 
    
    maintain machinery and equipment to give full reliability in service;
 
    
    optimize performance in terms of speed and fuel consumption; and
 
    
    ensure the vessels appearance will support our brand and meet customer expectations.
    25




---



##### 



Regulations
 General
   Regulation  International Maritime Organization (or IMO)
 SOLAS ISPS MARPOL Convention DP
    
    
    is the subject of a contract for a major conversion or original construction on or after
July 6, 1993;
 
    
    commences a major conversion or has its keel laid on or after January 6, 1994; or
 
    
    completes a major conversion or is a newbuilding delivered on or after July 6, 1996.
  Shuttle Tanker, FSO Unit and FPSO Unit Regulation
  Environmental Regulations  The United States Regulations
 OPA 90 CERCLA
  26




---



##### 




    
    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
 COFR
    
    
    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.
   27




---



##### 



Environmental Regulation  Other Environmental Initiatives
 CLC ,
 Annex VI
      VOC equipment)
 Vessel Security Regulation
 MTSA
 C. Organizational Structure
    28




---



##### 



D. Properties
  E. Taxation of the Partnership
 United States Taxation
 Code Treasury Regulations
 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
 Section 883 Exemption
 The Section 883
Exemption. Section 883 Regulations
 Equivalent Exemption Ownership Test
  The Net Basis Tax and Branch Profits Tax. Effectively Connected
Income
  29




---



##### 



The 4.0% Gross Basis Tax.
 Marshall Islands Taxation
  Norway Taxation
   Taxation of Norwegian Subsidiaries Engaged in Business Activities.
    Taxation of Controlled Foreign Corporations. CFC TNOL .
 Taxation of Foreign Companies and Permanent Establishments .
 Taxation of Dividends. i.e.
  30




---



##### 



Correction Income Tax. correction income
tax,
 i.e.
 Taxation of Interest Paid by Norwegian Entities.
 Taxation on Distributions by Norwegian Entities.
  Luxembourg Taxation
  Norsk Teekay TEHS Teekay Netherlands
 NOL
  Taxation of Interest Income.
 Taxation of Potential Foreign Currency Exchange Net Gain.
 Taxation of Interest Payments. European Savings Directive
  31




---



##### 



Taxation of Dividends and Capital Gains.
 
    
    TEHS is a capital company resident in Luxembourg and fully subject to tax in this
country;
 
    
    TEHS owns more than 10% of Teekay Netherlands, or alternatively, TEHS acquisition price
for the shares of Teekay Netherlands equals or exceeds Euro 1.2 million for purposes of the
dividend exemption or Euro 6.0 million for purposes of the capital gains exemption;
 
    
    At the time of the dividend or disposal of shares, TEHS has owned the shares for at least
12 months (or, alternatively in the case of dividends, TEHS commits to hold the shares for
at least 12 months and in the case of capital gains, TEHS commits to continue to hold at
least 10% of the shares of Teekay Netherlands for at least 12 months); and
 
    
    Teekay Netherlands is a resident of the Netherlands for Dutch tax purposes and is covered
by the European Union Parent-Subsidiary Directive.
    Taxation of TEHS Dividends.
 Net Wealth Tax.
 Netherlands Taxation
  NTAS TNAS NOL NGAS NBAS UNS Stena I Stena II TNOL
 Taxation of Dividends and Capital Gains.
 
    
    the company in which the shareholding is held, has a capital divided into shares;
 
    
    the shareholding is at least 5% of the paid up share capital of the company;
 
    
    the consolidated assets of the participation do not, directly or indirectly, consist for
more than 50% out of portfolio investments (asset test);
 
    
    in case that the participations assets do, directly or indirectly, consist for more
than 50% out of portfolio investments, the participation should be subject to a profit tax
which results in taxation at a rate of at least 10% on a profit determined according to
Dutch corporate income tax rules  the subject to tax test.
  32




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##### 



Ownership test.
 Asset test.
 Subject to tax test.
 Conclusion.
 Taxation of Teekay Netherlands Dividends.
 Singapore Taxation
 Taxation of Singapore Companies Operating Ships in International Traffic. TNOL .
 Taxation of Charter Income from Non-Singapore-Registered Ships. AIS
 MPA
 
    
    charter hire/freight income from the operation of non-Singapore-registered
vessels outside the limits of the port of Singapore;
 
    
    dividends from approved shipping subsidiaries;
 
    
    gains from the disposition of non-Singapore-registered ships for a period of
10 years from January 1, 2004 to December 31, 2013; and
 
    
    gains from foreign exchange and risk management activities which are carried out
incurred in connection with the Singapore shipping operations.
  
    
    be a tax resident in Singapore;
 
    
    own and operate a significant fleet of ships;
 
    
    implement the business plan agreed with the MPA at the time of application of the
incentive or such other modified plans as approved by the MPA;
 
    
    the companys shipping operations should be controlled and managed in Singapore;
 
    
    incur directly attributable business spending in Singapore an average of S$4
million a year;
 
    
    support and make significant use of Singapores trade infrastructure, such as
banking, financial, business training, arbitration, and other ancillary services;
 
    
    all ships chartered-in must be conducted on an arms-length basis;
 
    
    inform the MPA of any changes to its Group shareholdings and operations;
 
    
    keep proper books and records and submit annual audited accounts to the MPA,
together with an annual audited statement comparing the actual total business spending
in Singapore against the projected amount within 3 months of their completion; and
 
    
    disclose such information to and permit such inspection of its premises by the
Singapore Government, as required.
   33




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##### 



Taxation of Investment Income.
  Taxation of Ship Management Income.
 Australian Taxation
  Trust Karratha Spirit
 Karratha
Spirit
    TAOH Dampier Spirit
  TNOL
 Taxation of Interest Paid To A Non-Resident.
 
 Item 4A. Unresolved Staff Comments
   34




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##### 



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
 SIGNIFICANT DEVELOPMENTS
 Equity Offerings: Acquisition of Additional 25% Interest in OPCO
   Acquisition of Vessels in 2008
 SPT Explorer SPT Navigator
 Navion Oslo
 Potential Additional Shuttle Tanker, FSO and FPSO Projects
   Varg
    35




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##### 



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
    
    Time
    
    Bareboat
    
    VoyageAffreightment
    
    Charter
    
    Charter
    
    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 typicallydoes not pay
    
    Varies
    
    Customer typicallypays
    
    Customer doesnot 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
  Voyage Revenues.
 Voyage Expenses.
 Net Voyage Revenues. GAAP
 Vessel Operating Expenses.
  Time Charter Hire Expenses.
 Income from Vessel Operations.
 Drydocking.
  36




---



##### 



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 number
of years to the next scheduled 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
 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 July 2007,
we acquired from Teekay Corporation ownership of its 100% interest in the 2000-built
shuttle tanker Navion Bergenand its 50% interest in the 2006-built shuttle tanker Navion
Gothenburg. The acquisitions included the assumption of debt, related interest rate swap
agreements and Teekay Corporations rights and obligations under 13-year, fixed-rate
bareboat charters. In October 2007, we acquired from Teekay Corporation its interest in the
FSO unit Dampier Spirit, along with its 7-year fixed-rate time-charter. In June 2008, we
acquired from Teekay Corporation its interests in two 2008-built Aframax lightering
tankers, the SPT Explorerand the SPT Navigator.This acquisition included the assumption
of debt and Teekay Corporations rights and obligations under the 10-year, fixed-rate
bareboat charters (with options exercisable by the charterer to extend up to an additional
five years).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 statements of income (loss) for the
years ended December 31, 2008, 2007 and 2006 reflect these vessels and their results of
operations, referred to herein as the Dropdown Predecessor, as if we had acquired them when
each respective vessel began operations under the ownership of Teekay Corporation. These
vessels began operations on April 16, 2007 (Navion Bergen), July 24, 2007 (Navion
Gothenburg), March 15, 1998 (Dampier Spirit), January 7, 2008 (SPT Explorer)and March 28,
2008 (SPT Navigator).
 
    
    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. For instance, the average number of owned vessels in our conventional tanker
fleet increased from 9 in 2007 to 11 in 2008. 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 shipping
industry is experiencing a global manpower shortage due to significant growth in the world
fleet. This shortage has resulted in crewing wage increases during 2007 and 2008 and has
continued to date during 2009.
 
    
    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.
Under the services agreements, the applicable sunsidiaries of Teekay Corporation are paid
in U.S. dollars for reasonable direct and indirect expenses, incurred in providing the
services. A substantial majority of those expenses are in Norwegian Kroner. The Teekay
Corporation subsidiaries were paid under the services agreements based on a fixed U.S.
dollar / Norwegian Kroner exchange rate until December 31, 2008. The exchange rate is no
longer fixed under these agreements, which may result in increased payments by us if the
strength of the U.S. Dollar declines relative to the Norwegian Kroner.
 
    
    Our operations are seasonal.Historically, the utilization of shuttle tankers in the
North Sea is higher in the winter months, as favorable weather conditions in the summer
months provide opportunities for repairs and maintenance to our vessels and to the offshore
oil platforms. Downtime for repairs and maintenance generally reduces oil production and,
thus, transportation requirements.
 
    
    The amount and timing of drydockings of our vessels can significantly affect our
revenues between periods.During 2006 to 2008, our vessels were offhire at various points
of time due to scheduled and unscheduled maintenance. The financial impact from these
periods of offhire, if material, is explained in further detail below in  Results of
Operations.
  37




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##### 



Year Ended December 31, 2008 versus Year Ended December 31, 2007
 Shuttle Tanker Segment
   Year Ended December 31,(in thousands of U.S. dollars, except calendar-ship-days and percentages)
    
    2008
    
    
    2007
    
    
    % ChangeVoyage revenues
    
    
    650,896
    
    
    
    590,611
    
    
    
    10.2Voyage expenses
    
    
    169,578
    
    
    
    114,157
    
    
    
    48.5Net voyage revenues
    
    
    481,318
    
    
    
    476,454
    
    
    
    1.0Vessel operating expenses
    
    
    132,415
    
    
    
    103,809
    
    
    
    27.6Time-charter hire expense
    
    
    132,234
    
    
    
    150,463
    
    
    
    (12.1
    )Depreciation and amortization
    
    
    91,846
    
    
    
    86,502
    
    
    
    6.2General and administrative (1)
    
    
    51,996
    
    
    
    50,776
    
    
    
    2.4Income from vessel operations
    
    
    72,827
    
    
    
    84,904
    
    
    
    (14.2
    )Calendar-Ship-DaysOwned Vessels
    
    
    9,765
    
    
    
    9,180
    
    
    
    6.4Chartered-in Vessels
    
    
    3,624
    
    
    
    4,297
    
    
    
    (15.7
    )Total
    
    
    13,389
    
    
    
    13,477
    
    
    
    (0.7
    )
 (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 acquisition in July 2007 of a 2000-built shuttle tanker (the Navion Bergen) and a
50% interest in a 2006-built shuttle-tanker (the Navion Gothenburg) (or the 2007 Shuttle
Tanker Acquisitions). However, as a result of the inclusion of the Dropdown Predecessor,
the Navion Bergenhad been included for accounting purposes in our results as if it had
been acquired on April 16, 2007, when it completed its conversion and began operations as a
shuttle tanker for Teekay Corporation. The Navion Gothenburgcompleted its conversion and
began operations as a shuttle tanker concurrently with its acquisition by us in July 2007.
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; and
 
    
    the purchase of a previously in-chartered shuttle tanker, which was delivered to us in
late March 2008 (or the 2008 Shuttle Tanker Acquisition)
  
    
    the redelivery of two chartered-in vessels back to their owners in December 2007 and
June 2008, respectively; and
 
    
    the 2008 Shuttle Tanker Acquisition.
 Net Voyage Revenues.
 
    
    an increase of $10.2 million due to the 2007 Shuttle Tanker Acquisitions (including the
impact of the Dropdown Predecessor);
 
    
    an increase of $9.6 million due to more revenue days from shuttle tankers servicing
contracts of affreightment and the conventional spot market and earning a higher average
daily charter rate than the same period last year;
 
    
    an increase of $2.5 million due to the redeployment of one shuttle tanker from servicing
contracts of affreightment to a time-charter effective October 2007, and earning a higher
average daily charter rate than for the same period last year; and
 
    
    an increase of $2.3 million due to the recovery of certain Norwegian environmental taxes
as voyage expenses from our customers on the Heidrun oil field in 2008;
  38




---



##### 




    
    a decrease of $10.0 million due to declining oil production at mature oil fields in the
North Sea that are serviced by certain shuttle tankers on contracts of affreightment;
 
    
    a decrease of $3.9 million due to an increased number of offhire days resulting from an
increase in scheduled drydockings and unexpected repairs performed for 2008 compared to
2007;
 
    
    a decrease of $3.4 million due to customer performance claims under the terms of charter
party agreements; and
 
    
    a decrease of $3.0 million due to an increase in bunker costs which are not passed on to
the charterer under certain contracts.
 Vessel Operating Expenses.
 
    
    an increase of $13.6 million in salaries for crew and officers primarily due to general
wage escalations and a change in the crew rotation system;
 
    
    an increase of $5.3 million relating to an increase in services due to the rising cost
of consumables, lubes, and freight;
 
    
    an increase of $4.4 million relating to the 2008 Shuttle Tanker Acquisition;
 
    
    an increase of $3.4 million relating to repairs and maintenance performed for certain
vessels those periods; and
 
    
    an increase of $1.4 million relating to the unrealized change in fair value of our
foreign currency forward contracts.
 Time-Charter Hire Expense.
 
    
    a decrease of $17.4 million due to redelivery of two chartered-in vessels back to their
owners in December 2007 and June 2008, respectively; and
 
    
    a decrease of $9.0 million due to the 2008 Shuttle Tanker Acquisition;
  
    
    by an increase of $8.0 million due to an increase in spot chartered-in vessels during
2008.
 Depreciation and Amortization.
 
    
    an increase of $2.8 million due to the 2007 Shuttle Tanker Acquisitions (including the
impact of the Dropdown Predecessor); and
 
    
    an increase of $1.6 million due to the 2008 Shuttle Tanker Acquisition.
 Conventional Tanker Segment
   Year Ended December 31,(in thousands of U.S. dollars, except calendar-ship-days and percentages)
    
    2008
    
    
    2007
    
    
    % ChangeVoyage revenues
    
    
    153,200
    
    
    
    135,922
    
    
    
    12.7Voyage expenses
    
    
    53,722
    
    
    
    36,594
    
    
    
    46.8Net voyage revenues
    
    
    99,478
    
    
    
    99,328
    
    
    
    0.2Vessel operating expenses
    
    
    25,156
    
    
    
    24,175
    
    
    
    4.1Depreciation and amortization
    
    
    22,901
    
    
    
    21,324
    
    
    
    7.4General and administrative (1)
    
    
    8,674
    
    
    
    7,828
    
    
    
    10.8Income from vessel operations
    
    
    42,747
    
    
    
    46,001
    
    
    
    (7.1
    )Calendar-Ship-DaysOwned Vessels
    
    
    3,931
    
    
    
    3,405
    
    
    
    15.4
 (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).  39




---



##### 




    
    In June 2008, OPCO acquired the lightering tankers SPT Explorerand 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
Explorerand the SPT Navigatorhave 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);
  
    
    transfer of the Navion Sagato the FSO segment as a result of the completion of its
conversion to an FSO unit and commencing a three-year FSO time charter contract in early
May 2007 (prior to the completion of the vessels conversion to an FSO unit, it was
included as a conventional crude oil tanker within the conventional tanker segment).
 Net Voyage Revenues.
 
    
    an increase of $8.6 million due to the 2008 Conventional Tanker Acquisitions (including
the impact of the Dropdown Predecessor);
 
    
    an increase of $3.6 million due to an increase in the daily hire rates for all nine
time-charter contracts with Teekay Corporation; and
 
    
    a relative increase of $1.9 million due to fewer scheduled drydockings;
  
    
    a decrease of $10.1 million in net bunker revenues (under the terms of eight of the nine
time-charter contracts with Teekay Corporation, OPCO is responsible for the bunker fuel
expenses and the approximate amounts of these expenses are added to the daily hire rate;
during the annual review of the daily hire rate in the third quarter of 2007, the rate per
day was adjusted downwards based on the average daily bunker consumption for the preceding
year); and
 
    
    a decrease of $3.4 million due to the transfer of the Navion Sagato the FSO segment in
early May 2007.
 Vessel Operating Expenses.
 
    
    an increase of $1.5 million in salaries for crew and officers, primarily due to general
wage escalations; and
 
    
    an increase of $1.1 million due to an increase in prices for consumables, freight and
lubricants;
  
    
    a decrease of $1.4 million due to the transfer of the Navion Sagato the FSO segment in
early May 2007.
 Depreciation and Amortization.
 
    
    an increase of $2.8 million due to the 2008 Conventional Tanker Acquisitions (including
the impact of the Dropdown Predecessor);
  
    
    a decrease of $1.1 million from the transfer of the Navion Sagato the FSO segment in
early May 2007.
 FSO Segment
   Year Ended December 31,(in thousands of U.S. dollars, except calendar-ship-days and percentages)
    
    2008
    
    
    2007
    
    
    % ChangeVoyage revenues
    
    
    68,396
    
    
    
    58,670
    
    
    
    16.6Voyage expenses
    
    
    1,729
    
    
    
    886
    
    
    
    95.1Net voyage revenues
    
    
    66,667
    
    
    
    57,784
    
    
    
    15.4Vessel operating expenses
    
    
    26,845
    
    
    
    21,676
    
    
    
    23.8Depreciation and amortization
    
    
    23,690
    
    
    
    16,544
    
    
    
    43.2General and administrative (1)
    
    
    3,560
    
    
    
    3,800
    
    
    
    (6.3
    )Income from vessel operations
    
    
    12,572
    
    
    
    15,764
    
    
    
    (20.2
    )Calendar-Ship-DaysOwned Vessels
    
    
    1,830
    
    
    
    1,705
    
    
    
    7.3
 (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).  40




---



##### 



Dampier Spirit Dampier Spirit
 Navion Saga
 Net Voyage Revenues.
 
    
    an increase of $6.9 million from the inclusion of the Navion Sagain the FSO segment
from May 2007; and
 
    
    a relative increase of $3.3 million from the Dampier Spiritbeing offhire for 110 days
during the first half of 2007 due to a scheduled drydock;
  
    
    a relative decrease due to the receipt of a mobilization fee of $3.5 million during
2007.
 Vessel Operating Expenses. Navion Saga
 Depreciation and Amortization. Navion Saga
 Other Operating Results
 General and Administrative Expenses.
 
    
    an increase of $6.8 million, primarily due to an increase in crew training costs;
  
    
    a decrease of $5.4 million in management fees payable to a subsidiary of Teekay
Corporation for services rendered to us during 2008. Included in the management fee is an
allocation of accrued costs relating to a long-term incentive plan (the Vision Incentive
Plan or VIP) maintained by Teekay Corporation for the benefit of its senior management,
some of whom provide services to us. As a result of decreases in Teekay Corporations share
price, there was a decrease in the accrual of the long-term incentive plan compensation
expense for 2008.
 Interest Expense.
 
    
    an increase of $86.8 million relating to the unrealized change in fair value of our
interest rate swaps;
 
    
    an increase of $7.0 million due to the assumption of debt relating to the 2007 Shuttle
Tanker Acquisitions and the 2008 Conventional Tanker Acquisitions; and
 
    
    an increase of $4.3 due to the increase in debt relating to the purchase of the Dampier
Spirit;
  
    
    a decrease of $5.4 million relating to the timing difference in the reset dates between
OPCOs loans and related interest rate swaps; and
 
    
    a decrease of $4.1 million relating to the scheduled repayment of debt during 2007 and
2008 for five of our subsidiaries.
  Foreign Currency Exchange Gains (Losses).
 Income Tax Recovery (Expense).
 Other Income.
 Net (Loss) Income.
  41




---



##### 



Year Ended December 31, 2007 versus Year Ended December 31, 2006
 Shuttle Tanker Segment
  Year Ended December 31,(in thousands of U.S. dollars, except calendar-ship-days and percentages)
    
    2007
    
    
    2006
    
    
    % ChangeVoyage revenues
    
    
    590,611
    
    
    
    535,972
    
    
    
    10.2Voyage expenses
    
    
    114,157
    
    
    
    88,446
    
    
    
    29.1Net voyage revenues
    
    
    476,454
    
    
    
    447,526
    
    
    
    6.5Vessel operating expenses
    
    
    103,809
    
    
    
    80,307
    
    
    
    29.3Time-charter hire expense
    
    
    150,463
    
    
    
    165,614
    
    
    
    (9.1
    )Depreciation and amortization
    
    
    86,502
    
    
    
    71,367
    
    
    
    21.2General and administrative (1)
    
    
    50,776
    
    
    
    50,353
    
    
    
    0.8Gain on sale of vessels and equipment  net of writedowns
    
    
    
    
    
    
    (4,778
    )
    
    
    (100.0
    )Income from vessel operations
    
    
    84,904
    
    
    
    84,663
    
    
    
    0.3Calendar-Ship-DaysOwned Vessels
    
    
    9,180
    
    
    
    7,559
    
    
    
    21.4Chartered-in Vessels
    
    
    4,297
    
    
    
    4,824
    
    
    
    (10.9
    )Total
    
    
    13,477
    
    
    
    12,383
    
    
    
    8.8
 (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 consolidation into our results of the five vessels owned by OPCOs 50% owned
subsidiaries, effective December 1, 2006 upon amendments to the applicable operating
agreements that granted OPCO control of the subsidiaries (the Consolidation of 50%-Owned
Subsidiaries). Prior to December 1, 2006, these entities were equity accounted for as joint
ventures. Please read Items You Should Consider When Evaluating Our Results of
Operations Amendments to certain operating agreements in December 2006 have resulted in
five 50% owned subsidiaries being consolidated with us under GAAP above; and
 
    
    the acquisition in July 2007 of a 2000-built shuttle tanker (the Navion Bergen) and a
50% interest in a 2006-built shuttle-tanker (the Navion Gothenburg) (the 2007 Shuttle
Tanker Acquisitions). (However, as a result of the inclusion of the Dropdown Predecessor,
the Navion Bergenhad been included for accounting purposes in our results as if it had
been acquired on April 16, 2007, when it completed its conversion and began operations as a
shuttle tanker for Teekay Corporation. The Navion Gothenburgcompleted its conversion and
began operations as a shuttle tanker concurrently with its acquisition in July 2007. 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);
  
    
    the sale of a 1981-built shuttle tanker (the Nordic Laurita) in July 2006 to a third
party and the sale of a 1987-built shuttle tanker (the Nordic Trym) to Teekay Corporation
in November 2006 (collectively, the 2006 Shuttle Tanker Dispositions).
  
    
    the redelivery of one chartered-in vessel back to its owner in April 2006; and
 
    
    the sale in July 2006 to Teekay Corporation of a time charter-in contract for a
1992-built shuttle tanker (the Borga).
 Net Voyage Revenues.
 
    
    an increase of $40.8 million due to the Consolidation of 50%-Owned Subsidiaries;
 
    
    an increase of $12.2 million due to the 2007 Shuttle Tanker Acquisitions (including the
impact of the Dropdown Predecessor); and
 
    
    an increase of $3.6 million due to the renewal of certain vessels on time charter
contracts at higher daily rates during 2006;
  42




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##### 




    
    a decrease of $13.6 million in revenues due to (a) fewer revenue days for shuttle
tankers servicing contracts of affreightment during 2007 due to a decline in oil production
from mature oil fields in the North Sea and (b) the redeployment of idle shuttle tankers
servicing contracts of affreightment in the conventional spot market at a lower average
charter rate during the fourth quarter of 2007 due to a weaker spot tanker market;
 
    
    a decrease of $7.6 million due to the 2006 Shuttle Tanker Dispositions;
 
    
    a decrease of $4.4 million due to the sale of the time charter-in contract for the
Borga;and
 
    
    a decrease of $2.9 million from the redelivery of one chartered-in vessel to its owner
in April 2006.
 Vessel Operating Expenses.
 
    
    an increase of $17.3 million due to the Consolidation of 50%-Owned Subsidiaries;
 
    
    an increase of $7.0 million in salaries for crew and officers primarily due to general
wage escalations from the renegotiation of seafarer contracts, changes in crew composition
and a change in the crew rotation system; and
 
    
    an increase of $1.9 million relating to an increase in services due to the rising cost
of consumables, lubes, and freight during 2007;
  
    
    a decrease of $3.2 million due to the 2006 Shuttle Tanker Dispositions.
 Time-Charter Hire Expense.
 Depreciation and Amortization.
 
    
    an increase of $13.7 million due to the Consolidation of 50%-Owned Subsidiaries;
 
    
    an increase of $4.1 million due to the 2007 Shuttle Tanker Acquisitions (including the
impact of the Dropdown Predecessor); and
 
    
    an increase of $3.9 million from the amortization of vessel upgrades and drydock costs
incurred during 2006 and 2007;
  
    
    a decrease of $5.7 million relating to the 2006 Shuttle Tanker Dispositions.
 Gain on sale of vessels equipment  net of writedowns.
 
    
    a $6.4 million gain relating to the sale of a 1981-built shuttle tanker (the Nordic
Laurita) in July 2006;
  
    
    a $2.2 million writedown in 2006 of certain offshore equipment servicing a marginal oil
field that was prematurely shut down in June 2005 due to lower than expected oil
production. (This writedown occurred due to a reassessment of the estimated net realizable
value of the equipment and follows a $12.2 million writedown in 2005 arising from the early
termination of a contract for the equipment (some of this equipment was re-deployed on
another field in October 2005)).
 Conventional Tanker Segment
  Year Ended December 31,(in thousands of U.S. dollars, except calendar-ship-days and percentages)
    
    2007
    
    
    2006
    
    
    % ChangeVoyage revenues
    
    
    135,922
    
    
    
    70,056
    
    
    
    94.0Voyage expenses
    
    
    36,594
    
    
    
    4,892
    
    
    
    648.0Net voyage revenues
    
    
    99,328
    
    
    
    65,164
    
    
    
    52.4Vessel operating expenses
    
    
    24,175
    
    
    
    19,378
    
    
    
    24.8Depreciation and amortization
    
    
    21,324
    
    
    
    21,212
    
    
    
    0.5General and administrative (1)
    
    
    7,828
    
    
    
    11,789
    
    
    
    (33.6
    )Restructuring charge
    
    
    
    
    
    
    832
    
    
    
    (100.0
    )Income from vessel operations
    
    
    46,001
    
    
    
    11,953
    
    
    
    284.8Calendar-Ship-DaysOwned Vessels
    
    
    3,405
    
    
    
    3,650
    
    
    
    (6.7
    )
 (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).  43




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##### 



Navion Saga
 Net Voyage Revenues.  Items You Should Consider When Evaluating Our Results  Our
financial results of operations reflect different time charter terms for OPCOs nine conventional
tankers
 Vessel Operating Expenses.
 Depreciation and Amortization. Navion Saga
 FSO Segment
  Year Ended December 31,(in thousands of U.S. dollars, except calendar-ship-days and percentages)
    
    2007
    
    
    2006
    
    
    % ChangeVoyage revenues
    
    
    58,670
    
    
    
    35,883
    
    
    
    63.5Voyage expenses
    
    
    886
    
    
    
    1,085
    
    
    
    (18.3
    )Net voyage revenues
    
    
    57,784
    
    
    
    34,798
    
    
    
    66.1Vessel operating expenses
    
    
    21,676
    
    
    
    12,603
    
    
    
    72.0Depreciation and amortization
    
    
    16,544
    
    
    
    11,970
    
    
    
    38.2General and administrative (1)
    
    
    3,800
    
    
    
    3,049
    
    
    
    24.6Income from vessel operations
    
    
    15,764
    
    
    
    7,176
    
    
    
    119.7Calendar-Ship-DaysOwned Vessels
    
    
    1,705
    
    
    
    1,460
    
    
    
    16.8
 (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). Dampier Spirit Dampier Spirit
 Navion Saga Navion
Saga.
 Other Operating Results
 General and Administrative Expenses.
 
    
    a decrease in management fees owing to subsidiaries of Teekay Corporation (prior to our
initial public offering, general and administrative expenses were allocated based on OPCOs
proportionate share of Teekay Corporations total ship-operating (calendar) days for each
of the periods presented; since the initial public offering, we have incurred general and
administrative expenses primarily through services agreements between us, OPCO and certain
of its subsidiaries and subsidiaries of Teekay Corporation);
  
    
    an increase of $2.4 million relating to additional expenses as a result of our being a
publicly-traded limited partnership since our initial public offering in December 2006.
  44




---



##### 



Interest Expense.
 
    
    an increase of $48.9 million relating to the unrealized change in fair value of our
interest rate swaps;
 
    
    an increase of $35.9 million relating to a full year of interest incurred on debt under
a revolving credit facility OPCO entered into during the fourth quarter of 2006;
 
    
    an increase of $11.3 million due to the Consolidation of 50%-Owned Subsidiaries; and
 
    
    increase of $4.7 million due to the assumption of debt relating to the 2007 Shuttle
Tanker Acquisitions (including the Navion Bergens interest expense from April 16, 2007
until we acquired it on July 1, 2007);
  
    
    a decrease of $14.2 million in interest incurred on a Norwegian Kroner-denominated loan
owing by a subsidiary of OPCO to Teekay Corporation from October 2006 until our initial
public offering in December 2006 (Teekay Corporation sold this loan receivable to OPCO
immediately before our initial public offering);
 
    
    a decrease of $12.9 million relating to the settlement of interest-bearing advances from
affiliates during the fourth quarter of 2006;
 
    
    a decrease of $7.5 million relating to interest incurred under a revolving credit
facility that was prepaid and cancelled prior to our initial public offering; and
 
    
    a decrease of $6.3 million relating to interest incurred by Teekay Offshore Partners
Predecessor on one of its revolving credit facilities, which was not transferred to OPCO
prior to our initial public offering.
  Equity Income From Joint Ventures.
 Foreign Currency Exchange Losses.
 Income Tax Recovery (Expense).
 Other Income.
 Net Loss from Discontinued Operations.
 Net Income (Loss)
 Restructuring Costs
  Liquidity and Capital Resources
 Liquidity and Cash Needs
 SPT Explorer SPT Navigator
  45




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##### 



Cash Flows.
 Years Ended December 31,2008
    
    
    2007($000s)
    
    
    ($000s)Net cash flow from operating activities
    
    
    122,566
    
    
    
    45,847Net cash flow from (used in) financing activities
    
    
    38,806
    
    
    
    (23,905
    )Net cash flow used in investing activities
    
    
    (151,108
    )
    
    
    (14,704
    )
 Operating Cash Flows. SPT Explorer SPT Navigator Navion Oslo Navion Bergen Dampier Spirit Navion Gothenburg
 Financing Cash Flows. SPT Explorer SPT Navigator Navion Oslo SPT Explorer SPT Navigator
   Investing Cash Flows. Navion Oslo
 Credit Facilities
     46




---



##### 




    
    incurring or guaranteeing indebtedness (applicable to our term loans and two of our
revolving credit facilities);
 
    
    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.
  Contractual Obligations and Contingencies
  2010
    
    
    2012And
    
    
    andTotal
    
    
    2009
    
    
    2011
    
    
    2013
    
    
    Beyond 2013(in millions of U.S. dollars)Long-term debt (1)
    
    
    1,566.4
    
    
    
    125.5
    
    
    
    304.0
    
    
    
    302.5
    
    
    
    834.4Chartered-in vessels (operating leases)
    
    
    393.9
    
    
    
    109.8
    
    
    
    151.5
    
    
    
    103.6
    
    
    
    29.0Total contractual obligations
    
    
    1,960.3
    
    
    
    235.3
    
    
    
    455.5
    
    
    
    406.1
    
    
    
    863.4
 
 (1)
    
    Excludes expected interest payments of $51.2 million (2009), $88.7 million (2010 and 2011),
$68.0 million (2012 and 2013) and $27.6 million (beyond 2013). Expected interest payments are
based on December 31, 2008 LIBOR, plus margins which ranged between 0.45% and 0.95% as at December 31, 2008. Off-Balance Sheet Arrangements
  Critical Accounting Estimates
  Revenue Recognition
 Description.
 Judgments and Uncertainties.
  47




---



##### 



Effect if Actual Results Differ from Assumptions.
 Vessel Lives and Impairment
 Description.
 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 .
 Effect if Actual Results Differ from Assumptions.
  Valuation of Derivative Instruments
 Description. SFAS Fair Value Measurements Effective Date of FASB Statement No. 157
  48




---



##### 



Judgments and Uncertainties.
 Effect if Actual Results Differ from Assumptions.
 Recent Accounting Pronouncements
 FASB SFAS Recognition and Presentation of
Other-Than-Temporary Impairments
 Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability has Significantly Decreased and Identifying Transactions that
are Not Orderly Fair Value Measurements Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active
 Interim Disclosures About Fair Value of
Financial Instruments Disclosures
about Fair Value of Financial Instruments Interim Financial Reporting
 Accounting for Assets Acquired and Liabilities
Assumed in a Business Combination that Arise from Contingencies Business Combinations
 Determining the Fair Value of a Financial Asset in
a Market That Is Not Active
 Disclosures about Derivative Instruments and Hedging
Activities, an amendment of Statement of Financial Accounting Standards No. 133 SFAS 161
 Business Combinations SFAS 141(R) , Business Combinations
 Noncontrolling Interests in Consolidated Financial
Statements, an Amendment of Accounting Research Bulletin SFAS 160
  49




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##### 



Item 6. Directors, Senior Management and Employees
 A. Directors and Senior Management
 Management of Teekay Offshore Partners L.P.
    Teekay LNG Teekay Tankers
   Directors and Executive Officers of Teekay Offshore GP L.L.C.
  Name
    
    Age
    
    PositionC. Sean Day
    
    
    59
    
    
    Chairman (1)Bjorn Moller
    
    
    51
    
    
    Vice Chairman (1)Peter Evensen
    
    
    50
    
    
    Chief Executive Officer, Chief Financial Officer and DirectorDavid L. Lemmon
    
    
    66
    
    
    Director (2)Carl Mikael L.L. von Mentzer
    
    
    64
    
    
    Director (2)John J. Peacock
    
    
    65
    
    
    Director (2)
 
 (1)
    
    Member of Corporate Governance Committee(2)
    
    Member of Audit Committee and Conflicts Committee  C. Sean Day
 Bjorn Moller
  50




---



##### 



Peter Evensen
 David L. Lemmon
 Carl Mikael L.L. von Mentzer
 John J. Peacock
 Directors and Executive Officers of Teekay Offshore Operating GP L.L.C.
  Name
    
    Age
    
    PositionC. Sean Day
    
    
    59
    
    
    ChairmanBjorn Moller
    
    
    51
    
    
    Vice ChairmanPeter Evensen
    
    
    50
    
    
    Chief Executive Officer, Chief Financial Officer and Director
  B. Compensation
 Reimbursement of Expenses of Our General Partner
  Executive Compensation
  Compensation of Directors
   51




---



##### 



2006 Long-Term Incentive Plan
  C. Board Practices
  the Board
   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.
  52




---



##### 




    
    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
  E. Unit Ownership
  Percentage ofPercentage of
    
    
    
    
    
    
    Percentage of
    
    
    Total CommonCommon Units
    
    
    Common Units
    
    
    Subordinated
    
    
    Subordinated
    
    
    and SubordinatedIdentity of Person or Group
    
    Owned
    
    
    Owned
    
    
    Units Owned
    
    
    Units Owned
    
    
    Units Owned(3)All directors and officers
as a group (6 persons)
(1) (2)
    
    
    314,999
    
    
    
    1.54
    %
    
    
    
    
    
    
    
    
    
    
    1.04
    %
 
 (1)
    
    Excludes units owned by Teekay Corporation, which controls us and on the board of which
serve the directors of our general partner, C. Sean Day and Bjorn Moller. In addition, Mr.
Moller is Teekay Corporations President and Chief Executive Officer, and Peter Evensen,
our general partners Chief Executive Officer and Chief Financial Officer and a Director,
is Teekay Corporations Executive Vice President and Chief Strategy Officer. Please read
Item 7: Major Shareholders and Related Party Transactions for more detail.(2)
    
    Each director, executive officer and key employee beneficially owns less than one
percent of the outstanding common and subordinated units.(3)
    
    Excludes the 2% general partner interest held by our general partner, a wholly owned
subsidiary of Teekay Corporation.  53




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##### 



Item 7. Major Unitholders and Related Party Transactions
 A. Major Unitholders
  Percentage of TotalPercentage of
    
    
    
    
    
    
    Percentage of
    
    
    Common andCommon Units
    
    
    Common Units
    
    
    Subordinated
    
    
    Subordinated
    
    
    Subordinated UnitsIdentity of Person or Group
    
    Owned
    
    
    Owned
    
    
    Units Owned
    
    
    Units Owned
    
    
    OwnedTeekay Corporation(1)
    
    
    5,000,000
    
    
    
    24.5
    %
    
    
    9,800,000
    
    
    
    100.0
    %
    
    
    49.0
    %Kayne Anderson Capital Advisors, LP,
and Richard A. Kayne, as a group
(2)
    
    
    1,388,216
    
    
    
    6.8
    %
    
    
    
    
    
    
    
    
    
    
    4.6
    %Neuberger Berman, Inc. and Neuberger
Berman, LLC, as a group (3)
    
    
    1,360,560
    
    
    
    6.7
    %
    
    
    
    
    
    
    
    
    
    
    4.5
    %Luxor Capital Group, LP, Luxor
Management, LLC, and Mr. Christian
Leone, as a group (4)
    
    
    1,289,479
    
    
    
    6.3
    %
    
    
    
    
    
    
    
    
    
    
    4.3
    %
 
 (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 1,388,216 units. Kayne
Anderson Capital Advisors, LP, and Richard A. Kayne both have shared voting and dispositive
power. Kayne Anderson Capital Advisors, LP serves as an investment adviser of Kayne Anderson
Capital Advisor, LPs mutual funds. This information is based on the Schedule 13G/A filed by
this group with the SEC on February 11, 2009.(3)
    
    Includes sole voting power as to 1,278,860 units and shared dispositive power as to
1,360,560 units. Both Neuberger Berman, LLC and Neuberger Berman Inc. have shared
dispositive power. Neuberger Berman, LLC and Neuberger Berman Management Inc. serve as
sub-advisor and investment manager, respectively, of Neuberger Berman Inc.s mutual funds.
This information is based on the Schedule 13G filed by this group with the SEC on February
12, 2009.(4)
    
    Includes shared voting power and shared dispositive power as to 1,289,479 units. Luxor
Capital Group, LP, Luxor Management, LLC, and Mr. Christian Leone all have shared voting and
dispositive power. Luxor Capital Group, LP serves as an investment manager of Luxor Capital
Group, LPs mutual funds. This information is based on the Schedule 13G/A filed by this
group with the SEC on February 17, 2009.  B. Related Party Transactions
 a)
    
    On October 1, 2006, OPCO entered into time-charter contracts for its nine Aframax
conventional tankers with a subsidiary of Teekay Corporation at then-prevailing
market-based daily rates for terms of five to twelve years. Under the terms of eight 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.
Pursuant to these time-charter contracts, OPCO earned voyage revenues of $144.5 million
during 2008.
 b)
    
    Effective October 1, 2006, two of OPCOs shuttle tankers commenced employment on
long-term bareboat charters with a subsidiary of Teekay Corporation. Pursuant to these
charter contracts, OPCO earned voyage revenues of $14.8 million during 2008.
 c)
    
    During 2008, two of OPCOs FSO units were employed on long-term bareboat charters with
a subsidiary of Teekay Corporation. Pursuant to these charter contracts, OPCO earned voyage
revenues of $11.2 million during 2008.
 d)
    
    On October 1, 2006, a subsidiary of Teekay Corporation 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. During 2008, OPCO earned
management fees of $3.3 million under the agreement.
 e)
    
    Eight of OPCOS Aframax conventional oil tankers and three FSO units are managed by
subsidiaries of Teekay Corporation. Pursuant to the associated management services
agreements, OPCO incurred general and administrative expenses of $3.7 million during 2008.
 f)
    
    In December 2006, we, OPCO, and certain of our and its subsidiaries entered into
services agreements with certain subsidiaries of Teekay Corporation, pursuant to which the
Teekay Corporation subsidiaries provide to us, OPCO, and our and its subsidiaries
administrative, advisory and technical services and ship management. These services are
provided in a commercially reasonably manner and upon the reasonable request of our general
partner or our or OPCOs operating subsidiaries, as applicable. The Teekay Corporation
subsidiaries that are parties to the services agreements provide these services directly or
subcontract for certain of these services with other entities, including other Teekay
Corporation subsidiaries. We pay arms-length fees for the services that include
reimbursement of the reasonable cost of any direct and indirect expenses the Teekay
Corporation subsidiaries incur in providing these services. During 2008, we incurred $50.3
million of costs under these agreements.
 g)
    
    Pursuant to our partnership agreement, we reimburse our general partner for all
expenses necessary or appropriate for the conduct of our business. During 2008, we incurred
$0.6 million of these costs.
 h)
    
    In July 2007, we acquired interests in two double-hull shuttle tankers from Teekay
Corporation for a total cost of $159.1 million, including assumption of debt of $93.7
million and the related interest rate swap agreement. We acquired Teekay Corporations 100%
interest in the 2000-built Navion Bergenand its 50% interest in the 2006-built Navion
Gothenburg, together with their respective 13-year, fixed-rate bareboat charters to
Petroleo Brasileiro S.A. We financed the purchases with one of our existing revolving
credit facilities and the assumption of debt. The excess of the proceeds we paid over
Teekay Corporations historical cost were accounted for as an equity distribution to Teekay
Corporation of $25.4 million.
  54




---



##### 



i)
    
    In October 2007, we acquired from Teekay Corporation an FSO unit, the Dampier Spirit,
along with its 7-year fixed-rate time-charter to Apache Corporation for a total cost of
$30.3 million. We financed the purchase with one of our existing revolving credit
facilities. The excess of the proceeds we paid over Teekay Corporations historical cost
was accounted for as an equity distribution to Teekay Corporation of $13.9 million.
 j)
    
    In December 2007, Teekay Corporation contributed a $65.6 million, nine-year, 4.98%
interest rate swap agreement (used to hedge the debt assumed in the purchase of the Navion
Bergen) having a fair value liability of $2.6 million, to us for no consideration and was
accounted for as an equity distribution to Teekay Corporation.
 k)
    
    In December 2007, Teekay Corporation agreed to reimburse OPCO for certain costs
relating to events which occurred prior to our initial public offering, totaling $4.8
million, including the settlement of a customer dispute in respect of vessels delivered
prior to our initial public offering and other costs.
 l)
    
    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 and Teekay GP L.L.C., the general partner of Teekay
LNG.Bjorn Moller is the Vice Chairman of Teekay Offshore GP L.L.C., Teekay Offshore Operating GP
L.L.C. and Teekay GP L.L.C. He also is the President and Chief Executive Officer and a
director of Teekay Corporation and the Chief Executive Officer and a director of Teekay
Tankers.Peter Evensen is the Chief Executive Officer and Chief Financial Officer and a director of
Teekay Offshore GP L.L.C., Teekay Offshore Operating GP L.L.C. and Teekay GP L.L.C. He also
is the Executive Vice President and Chief Strategy Officer of Teekay Corporation and the
Executive Vice President and a director of Teekay Tankers.Because Mr. Evensen is an employee of a subsidiary of Teekay Corporation, his compensation
(other than any awards under the long-term incentive plan) is set and paid by the Teekay
Corporation subsidiary. Pursuant to our partnership agreement, we have agreed to reimburse
the Teekay Corporation subsidiary for time spent by Mr. Evensen on our management matters as
our Chief Executive Officer and Chief Financial Officer.
 m)
    
    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. Under the omnibus agreement, Teekay Corporation and Teekay LNG have agreed,
and have caused their controlled affiliates (other than us) to agree, not to own, operate or
charter offshore vessels (i.e. dynamically positioned shuttle tankers (other than those
operating in the conventional oil tanker trade under contracts with a remaining duration of
less that three years, excluding extension options), FSOs and FPSOs). This restriction does
not prevent Teekay Corporation, Teekay LNG or any of their other controlled affiliates from,
among other things:
 
    
    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;
 
    
    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 ASA
(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.
  55




---



##### 



Rights of First Offer on Conventional Tankers, LNG Carriers and Offshore Vessels. Varg
  (n)
    
    In January 2007, Teekay Corporation contributed foreign exchange contracts for the
forward purchase of a total of Australian Dollars 4.5 million having a fair value asset of
$0.1 million, net of non-controlling interest, to OPCO for no consideration and was
accounted for as an equity contribution from Teekay Corporation. The foreign currency
forward contracts matured by December 2007.
 (o)
    
    During 2007, $1.2 million of interest expense attributable to the operations of the
Navion Bergenwas incurred by Teekay Corporation and has been allocated to us as part of
the results of the Dropdown Predecessor.
 p)
    
    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.
 q)
    
    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.
 r)
    
    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. See Note 2. 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.
 s)
    
    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 voyage revenues of $8.7
million for 2008 (including voyage revenues earned as part of the Dropdown Predecessor
prior to OPCOs acquisition of the vessels  see Note 1).
 t)
    
    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.
 u)
    
    At December 31, 2008, due from affiliates totaled $10.1 million and due to affiliates
totaled $8.7 million. Due to and from affiliate are non-interest bearing and unsecured.
 v)
    
    During August 2008, one of OPCOs in-chartered shuttle tankers was employed on a
single-voyage charter with a subsidiary of Teekay Corporation. Pursuant to this charter
contract, OPCO earned voyage revenues of $11.3 million for 2008.
  56




---



##### 



Item 8. Financial Information
 A. Consolidated Financial Statements and Other Financial Information
 Consolidated Financial Statements and Notes
  Legal Proceedings
 OPCO Navion
Hispania Njord Bravo Njord Bravo Njord Bravo StatoilHydro 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. Although during the subordination period (defined in our
partnership agreement), with certain exceptions, our partnership agreement may not be
amended without the approval of non-affiliated common unitholders, our partnership
agreement can be amended with the approval of a majority of the outstanding common units
after the subordination period has ended.
 
    
    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.
 
    
    We may lack sufficient cash to pay distributions to our unitholders due to decreases in
net voyage 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 and
OPCOs credit facility agreements, which contain material financial tests and covenants
that must be satisfied. Should we or OPCO be unable to satisfy these restrictions included
in the credit agreements or if we or OPCO is otherwise in default under the credit
agreements, we or it 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.
  57




---



##### 



Minimum Quarterly Distribution
   Subordination Period
  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
  
 Item 9. The Offer and Listing
  Dec. 31,
    
    
    Dec. 31,
    
    
    Dec. 31,Year Ended
    
    2008
    
    
    2007
    
    
    2006 (1)High
    
    $
    26.46
    
    
    $
    37.45
    
    
    $
    26.77Low
    
    
    6.58
    
    
    
    24.04
    
    
    
    21.00
  58




---



##### 



Dec. 31,
    
    
    Sept. 30,
    
    
    June 30,
    
    
    Mar. 31,
    
    
    Dec. 31,
    
    
    Sept 30,
    
    
    Jun. 30,
    
    
    Mar 31,Quarter Ended
    
    2008
    
    
    2008
    
    
    2008
    
    
    2008
    
    
    2007
    
    
    2007
    
    
    2007
    
    
    2007High
    
    $
    14.05
    
    
    $
    19.69
    
    
    $
    24.35
    
    
    $
    26.46
    
    
    $
    29.38
    
    
    $
    37.45
    
    
    $
    35.40
    
    
    $
    31.66Low
    
    
    6.58
    
    
    
    11.25
    
    
    
    19.74
    
    
    
    20.71
    
    
    
    24.04
    
    
    
    28.00
    
    
    
    29.79
    
    
    
    26.00
 May 31,
    
    
    Apr. 30,
    
    
    Mar. 31,
    
    
    Feb. 29,
    
    

    Jan 31,
    
    
    Dec. 31,Months Ended
    
    2009
    
    
    2009
    
    
    2009
    
    
    2009
    
    

2009
    
    
    2008High
    
    $
    13.92
    
    
    $
    14.07
    
    
    $
    13.36
    
    
    $
    14.37
    
    
    $
    14.89
    
    
    $
    12.26Low
    
    $
    12.77
    
    
    
    11.76
    
    
    
    9.75
    
    
    
    11.13
    
    
    
    12.53
    
    
    
    8.80
 
 (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 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 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.
 Exchange Controls and Other Limitations Affecting Unitholders
   Material U.S. Federal Income Tax Considerations
 Code Treasury Regulations
  59




---



##### 



United States Federal Income Taxation of U.S. Holders
    Distributions
 PFICs
 U.S. Individual Holder
  Consequences of Possible PFIC Classification
   Tidewater Inc. v. United States IRS Tidewater Tidewater
  60




---



##### 




    
    the excess distribution or gain will be allocated ratably over the unitholders
holding period;
 
    
    the amount allocated to the current taxable year and any year prior to the first
year in which we were a PFIC will be taxed as ordinary income in the current year;
 
    
    the amount allocated to each of the other taxable years in the unitholders
holding period will be subject to U.S. federal income tax at the highest rate in effect
for the applicable class of taxpayer for that year; and
 
    
    an interest charge for the deemed deferral benefit will be imposed with respect
to the resulting tax attributable to each such other taxable year.
   Consequences of Possible Controlled Foreign Corporation Classification
 United States Stockholder CFC
 Sale, Exchange or other Disposition of Common Units
  United States Federal Income Taxation of Non-U.S. Holders
 Non-U.S. Holder
 Distributions
  Disposition of Common Units
  Backup Withholding and Information Reporting
  
    
    fails to 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.
  61




---



##### 



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
   Documents on Display
 EDGAR www.sec.gov
 
 Item 11. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
    Expected Maturity Date
    
    
    
    
    
    
    Fair Value2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    Thereafter
    
    
    Total
    
    
    Asset/(Liability)
    
    
    Rate(1)(in millions of U.S. dollars, except percentages)Long-Term Debt:U.S Dollar- denominated (2)
    
    
    125.5
    
    
    
    134.7
    
    
    
    169.3
    
    
    
    147.1
    
    
    
    155.4
    
    
    
    834.4
    
    
    
    1,566.4
    
    
    
    (1,476.6
    )
    
    
    3.4
    %Interest Rate Swaps:Contract Amount (3)
    
    
    552.5
    
    
    
    18.1
    
    
    
    18.6
    
    
    
    19.2
    
    
    
    19.9
    
    
    
    703.8
    
    
    
    1,332.3
    
    
    
    (159.2
    )
    
    
    4.8
    %Average Fixed Pay Rate (2)
    
    
    4.7
    %
    
    
    4.9
    %
    
    
    4.9
    %
    
    
    4.9
    %
    
    
    4.9
    %
    
    
    4.8
    %
    
    
    4.8
    %
 
 (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, 2008 ranged from 0.45% to 0.95%.(2)
    
    Interest payments on floating-rate debt and interest rate swaps are based on LIBOR.(3)
    
    The average variable receive rate for interest rate swaps is set quarterly at the 3-month
LIBOR or semi-annually at 6-month LIBOR.  62




---



##### 



Foreign Currency Fluctuation Risk
    Contract Amount in
    
    
    Average
    
    
    Expected MaturityForeign Currency
    
    
    Forward Rate(1)
    
    
    2009
    
    
    2010(millions)
    
    
    
    
    
    
    (in millions of U.S. Dollars)Norwegian Kroner
    
    
    1,228.8
    
    
    
    5.83
    
    
    
    114.7
    
    
    
    96.1Australian Dollar
    
    
    3.3
    
    
    
    1.12
    
    
    
    3.0
    
    
    
    British Pound
    
    
    0.4
    
    
    
    0.52
    
    
    
    0.7
    
    
    
    0.1Euro
    
    
    24.7
    
    
    
    0.69
    
    
    
    23.7
    
    
    
    12.2$
    142.1
    
    
    $
    108.4
 
 (1)
    
    Average forward rate represents the contracted amount of foreign currency one U.S. Dollar
will buy.
   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
   63




---



##### 



Managements Report on Internal Control over Financial Reporting
      
 Item 16A. Audit Committee Financial Expert
  
 Item 16B. Code of Ethics
 www.teekayoffshore.com
  64




---



##### 



Item 16C. Principal Accountant Fees and Services
  Fees
    
    2008
    
    
    2007Audit Fees (1)
    
    $
    1,355,500
    
    
    $
    437,800Tax Fees (2)
    
    
    3,400
    
    
    
    15,800Total
    
    $
    1,358,900
    
    
    $
    453,600
 
 (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 in June 2008. Audit fees also include fees
of $418,100 related to the restatement of our historical results for the five years ended
December 31, 2007 and $90,400
related to additional fees for the 2007 audit, which were not agreed until after we had filed our 2007 Annual Report on Form 20-F with the
SEC on April 11, 2008.(2)
    
    For 2008 and 2007, respectively, tax fees principally included corporate tax compliance fees of $3,400 and $15,800.  
 Item 16D. Exemptions from the Listing Standards for Audit Committees
  
 Item 16E. Purchases of Units by the Issuer and Affiliated Purchasers
   65




---



##### 



PART III
 
 Item 17. Financial Statements
  
 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 Partners Equity/Owners Equity
    
    
    F-6Notes 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)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)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.15.2
    
    
    Consolidated Balance Sheet of Teekay Offshore GP L.L.C.
 (1)
    
    Previously filed as an exhibit to the Partnerships 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 the Partnerships 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 the Partnerships 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.  66




---



##### 



SIGNATURE
  TEEKAY OFFSHORE PARTNERS L.P.By:
    Teekay Offshore GP L.L.C., its general partnerDated:  June 29, 2009
    By:
    /s/ Peter EvensenPeter EvensenChief Executive Officer and Chief Financial Officer
(Principal Financial and Accounting Officer)  67




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Teekay Offshore Partners L.P. and subsidiaries Partnership
 Year Ended December 31, 2008
 
    
    January 1 to December 31, 2008
 Year Ended December 31, 2007
 
    
    January 1 to December 31, 2007
 Year Ended December 31, 2006
 
    
    January 1 to December 18, 2006
    
    December 19 to December 31, 2006
    Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109
  Vancouver, Canada
    
    /s/ Ernst & Young LLPJune 24, 2009
    
    Chartered Accountants
  F - 1




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Partnerships COSO criteria
      Vancouver, Canada
    
    /s/ Ernst & Young LLPJune 24, 2009
    
    Chartered Accountants
  F - 2




---



##### 



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)
(Successor to Teekay Offshore Partners Predecessor)
 
 CONSOLIDATED STATEMENTS OF INCOME (LOSS)
 (in thousands of U.S. dollars, except unit and per unit data)
 January 1
    
    
    December 19Year Ended
    
    
    Year Ended
    
    
    to
    
    
    toDecember 31,
    
    
    December 31,
    
    
    December 18,
    
    
    December 31,2008
    
    
    2007
    
    
    2006
    
    
    2006$
    
    
    $
    
    
    $
    
    
    $VOYAGE REVENUES($190,536, $154,605, and $74,651 for 2008, 2007,
and 2006, respectively, from related parties  notes 10a, 10f,
10g, 10h, 10i, 10w, and 10aa)
    
    
    872,492
    
    
    
    785,203
    
    
    
    617,514
    
    
    
    24,397OPERATING EXPENSESVoyage expenses
    
    
    225,029
    
    
    
    151,637
    
    
    
    91,321
    
    
    
    3,102Vessel operating expenses (including ($1,445) and ($4,800) from
related parties for 2008 and 2007 respectively  notes 10r, 10t
and 10x, note 11)
    
    
    184,416
    
    
    
    149,660
    
    
    
    107,991
    
    
    
    4,297Time-charter hire expense
    
    
    132,234
    
    
    
    150,463
    
    
    
    159,973
    
    
    
    5,641Depreciation and amortization
    
    
    138,437
    
    
    
    124,370
    
    
    
    100,823
    
    
    
    3,726General and administrative ($51,314, $55,543, and $28,102 for
2008, 2007 and 2006, respectively, from related parties  notes
10j, 10k, 10l, and 10m, note 11)
    
    
    64,230
    
    
    
    62,404
    
    
    
    63,014
    
    
    
    2,177Gain on sale of vessels and equipment  net of writedowns (note 15)
    
    
    
    
    
    
    
    
    
    
    (4,778
    )
    
    
    Restructuring charge (note 9)
    
    
    
    
    
    
    
    
    
    
    832
    
    
    
    Total operating expenses
    
    
    744,346
    
    
    
    638,534
    
    
    
    519,176
    
    
    
    18,943Income from vessel operations
    
    
    128,146
    
    
    
    146,669
    
    
    
    98,338
    
    
    
    5,454OTHER ITEMSInterest expense (note 6,includes $132,617, $44,523 and $(3,346)
for 2008, 2007 and 2006, respectively, in unrealized losses
(gains) related to interest rate swaps  note 11, and $1,236 and $27,056 for 2007 and 2006, respectively, from related parties -
notes 10d, 10e, and 10z)
    
    
    (215,727
    )
    
    
    (126,304
    )
    
    
    (64,462
    )
    
    
    (1,617
    )Interest income
    
    
    4,086
    
    
    
    5,871
    
    
    
    5,167
    
    
    
    191Equity income from joint ventures
    
    
    
    
    
    
    
    
    
    
    6,321
    
    
    
    Foreign currency exchange gain (loss) (note 11)
    
    
    4,343
    
    
    
    (11,678
    )
    
    
    (66,214
    )
    
    
    (118
    )Other income  net (note 9)
    
    
    11,936
    
    
    
    10,403
    
    
    
    8,367
    
    
    
    309Total other items
    
    
    (195,362
    )
    
    
    (121,708
    )
    
    
    (110,821
    )
    
    
    (1,235
    )(Loss) income from continuing operations before
non-controlling interest and income tax recovery (expense)
    
    
    (67,216
    )
    
    
    24,961
    
    
    
    (12,483
    )
    
    
    4,219Income tax recovery (expense) (note 12)
    
    
    56,704
    
    
    
    10,516
    
    
    
    (3,260
    )
    
    
    (121
    )(Loss) income from continuing operations before
non-controlling interest
    
    
    (10,512
    )
    
    
    35,477
    
    
    
    (15,743
    )
    
    
    4,098Non-controlling interest
    
    
    (7,122
    )
    
    
    (31,519
    )
    
    
    (3,893
    )
    
    
    (2,636
    )Net (loss) income from continuing operations
    
    
    (17,634
    )
    
    
    3,958
    
    
    
    (19,636
    )
    
    
    1,462Net loss from discontinued operations (note 18)
    
    
    
    
    
    
    
    
    
    
    (10,656
    )
    
    
    Net (loss) income
    
    
    (17,634
    )
    
    
    3,958
    
    
    
    (30,292
    )
    
    
    1,462Dropdown predecessors interest in net income (note 1)
    
    
    1,333
    
    
    
    1,300
    
    
    
    3,097
    
    
    
    114General partners interest in net income
    
    
    8,918
    
    
    
    733
    
    
    
    
    
    
    
    64Limited partners interest: (note 16)Net (loss) income from continuing operations
    
    
    (27,885
    )
    
    
    1,925
    
    
    
    (22,733
    )
    
    
    1,284Net (loss) income from continuing operations per:- Common unit (basic and diluted)
    
    
    (0.90
    )
    
    
    0.12
    
    
    
    (1.80
    )
    
    
    0.07- Subordinated unit (basic and diluted)
    
    
    (0.90
    )
    
    
    0.07
    
    
    
    (1.80
    )
    
    
    0.06- Total unit (basic and diluted)
    
    
    (0.90
    )
    
    
    0.10
    
    
    
    (1.80
    )
    
    
    0.07Net loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (10,656
    )
    
    
    Net loss from discontinued operations per:- Common unit (basic and diluted)
    
    
    
    
    
    
    
    
    
    
    (0.85
    )
    
    
    - Subordinated unit (basic and diluted)
    
    
    
    
    
    
    
    
    
    
    (0.85
    )
    
    
    - Total unit (basic and diluted)
    
    
    
    
    
    
    
    
    
    
    (0.85
    )
    
    
    Net (loss) income
    
    
    (27,885
    )
    
    
    1,925
    
    
    
    (33,389
    )
    
    
    1,284Net (loss) income per:- Common unit (basic and diluted)
    
    
    (0.90
    )
    
    
    0.12
    
    
    
    (2.65
    )
    
    
    0.07- Subordinated unit (basic and diluted)
    
    
    (0.90
    )
    
    
    0.07
    
    
    
    (2.65
    )
    
    
    0.06- Total unit (basic and diluted)
    
    
    (0.90
    )
    
    
    0.10
    
    
    
    (2.65
    )
    
    
    0.07Weighted average number of units outstanding:- Common units (basic and diluted)
    
    
    15,461,202
    
    
    
    9,800,000
    
    
    
    2,800,000
    
    
    
    9,800,000- Subordinated units (basic and diluted)
    
    
    9,800,000
    
    
    
    9,800,000
    
    
    
    9,800,000
    
    
    
    9,800,000- Total units (basic and diluted)
    
    
    25,261,202
    
    
    
    19,600,000
    
    
    
    12,600,000
    
    
    
    19,600,000Cash distributions declared per unit
    
    
    1.65
    
    
    
    1.14
    
    
    
    
    
    
    
    
 The accompanying notes are an integral part of the consolidated financial statements.
  F - 3




---



##### 



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)
(Successor to Teekay Offshore Partners Predecessor)
 
 CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars)
 As at
    
    
    As atDecember 31, 2008
    
    
    December 31, 2007$
    
    
    $ASSETSCurrentCash and cash equivalents (note 6)
    
    
    131,488
    
    
    
    121,224Accounts receivable
    
    
    39,500
    
    
    
    42,245Net investment in direct financing leases  current (note 7)
    
    
    22,941
    
    
    
    22,268Prepaid expenses
    
    
    25,334
    
    
    
    34,219Due from affiliates (note 10y)
    
    
    10,110
    
    
    
    18,350Other current assets
    
    
    2,585
    
    
    
    7,644Total current assets
    
    
    231,958
    
    
    
    245,950Vessels and equipment(note 6)At cost, less accumulated depreciation of $793,918 (December 31, 2007  $694,258)
    
    
    1,708,006
    
    
    
    1,662,865Net investment in direct financing leases (note 7)
    
    
    55,710
    
    
    
    78,199Other assets
    
    
    12,015
    
    
    
    14,423Intangible assets  net (note 4)
    
    
    45,290
    
    
    
    55,355Goodwill  shuttle tanker segment
    
    
    127,113
    
    
    
    127,113Total assets
    
    
    2,180,092
    
    
    
    2,183,905LIABILITIES AND PARTNERS EQUITYCurrentAccounts payable
    
    
    9,901
    
    
    
    12,076Accrued liabilities (note 5)
    
    
    44,467
    
    
    
    38,464Due to affiliate (note 10y)
    
    
    8,715
    
    
    
    17,554Current portion of derivative instruments (note 11)
    
    
    54,937
    
    
    
    5,277Current portion of long-term debt (note 6)
    
    
    125,503
    
    
    
    64,060Due to joint venture partners
    
    
    21,019
    
    
    
    3,534Total current liabilities
    
    
    264,542
    
    
    
    140,965Long-term debt (note 6)
    
    
    1,440,933
    
    
    
    1,453,407Deferred income tax (note 12)
    
    
    12,648
    
    
    
    77,306Derivative instruments (note 11)
    
    
    138,374
    
    
    
    17,770Other long-term liabilities
    
    
    21,346
    
    
    
    24,443Total liabilities
    
    
    1,877,843
    
    
    
    1,713,891Commitments and contingencies (notes 6, 7, 11 and 13)Non-controlling interest
    
    
    201,383
    
    
    
    392,613Partners equityPartners equity
    
    
    117,910
    
    
    
    77,108Accumulated other comprehensive (loss) income
    
    
    (17,044
    )
    
    
    293Total partners equity
    
    
    100,866
    
    
    
    77,401Total liabilities and partners equity
    
    
    2,180,092
    
    
    
    2,183,905
 The accompanying notes are an integral part of the consolidated financial statements.
  F - 4




---



##### 



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)
(Successor to Teekay Offshore Partners Predecessor)
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands of U.S. dollars)
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2008
    
    
    2007
    
    
    2006$
    
    
    $
    
    
    $Cash and cash equivalents provided by (used for)OPERATING ACTIVITIESNet (loss) income
    
    
    (17,634
    )
    
    
    3,958
    
    
    
    (28,830
    )Non-cash items:Unrealized loss (gain) on derivative instruments (note 11)
    
    
    130,482
    
    
    
    45,957
    
    
    
    (3,346
    )Depreciation and amortization
    
    
    138,437
    
    
    
    124,370
    
    
    
    104,549Non-controlling interest
    
    
    7,122
    
    
    
    31,519
    
    
    
    6,529Gain on sale of vessels
    
    
    
    
    
    
    
    
    
    
    (6,928
    )Loss on writedown of vessels and equipment
    
    
    
    
    
    
    
    
    
    
    2,150Equity income (net of dividends received: December 31, 2006  $6,002)
    
    
    
    
    
    
    
    
    
    
    (319
    )Income tax (recovery) expense
    
    
    (56,704
    )
    
    
    (10,516
    )
    
    
    425Foreign currency exchange (gain) loss and other
    
    
    (1,029
    )
    
    
    11,425
    
    
    
    72,438Change in non-cash working capital items related to operating activities (note 14)
    
    
    22,943
    
    
    
    (33,706
    )
    
    
    51,039Distribution from subsidiaries to non-controlling interest owners
    
    
    (71,976
    )
    
    
    (78,107
    )
    
    
    (4,224
    )Expenditures for drydocking
    
    
    (29,075
    )
    
    
    (49,053
    )
    
    
    (31,255
    )Net operating cash flow
    
    
    122,566
    
    
    
    45,847
    
    
    
    162,228FINANCING ACTIVITIESProceeds from issuance of long-term debt
    
    
    191,000
    
    
    
    298,443
    
    
    
    1,290,750Debt issuance costs
    
    
    (1,500
    )
    
    
    
    
    
    
    (6,178
    )Scheduled repayments of long-term debt
    
    
    (68,031
    )
    
    
    (17,328
    )
    
    
    (119,900
    )Prepayments of long-term debt
    
    
    (119,000
    )
    
    
    (152,000
    )
    
    
    (493,527
    )Repayments of capital lease obligations
    
    
    
    
    
    
    
    
    
    
    (34,245
    )Net advances to affiliates
    
    
    (46,544
    )
    
    
    (42,935
    )
    
    
    (793,488
    )Net advances from joint venture partners
    
    
    17,485
    
    
    
    
    
    
    
    Equity contribution from joint venture partner
    
    
    5,200
    
    
    
    
    
    
    
    Equity distribution from (to) Teekay Corporation
    
    
    
    
    
    
    1,819
    
    
    
    (230,886
    )Proceeds from issuance of common units (note 2)
    
    
    216,837
    
    
    
    
    
    
    
    157,963Expenses from issuance of common units
    
    
    (6,192
    )
    
    
    (2,793
    )
    
    
    Distribution to Teekay Corporation relating to purchase of SPT Explorer L.L.C. and SPT NavigatorL.L.C. (note 10w)
    
    
    (16,661
    )
    
    
    
    
    
    
    Distribution to Teekay Corporation relating to purchase of
Dampier LLC (note 10p)
    
    
    
    
    
    
    (30,253
    )
    
    
    Excess purchase price over the contributed basis of a 25% interest in
Teekay Offshore Operating L.P. (note 10v)
    
    
    (91,562
    )
    
    
    
    
    
    
    Distribution to Teekay Corporation relating to purchase of Navion Bergen L.L.C.
(note 10o)
    
    
    
    
    
    
    (48,800
    )
    
    
    Excess of purchase price over the contributed basis of a 50% interest in
Navion Gothenburg L.L.C. (note 10o)
    
    
    
    
    
    
    (6,358
    )
    
    
    Cash distributions paid
    
    
    (42,226
    )
    
    
    (22,700
    )
    
    
    Other
    
    
    
    
    
    
    (1,000
    )
    
    
    (727
    )Net financing cash flow
    
    
    38,806
    
    
    
    (23,905
    )
    
    
    (230,238
    )INVESTING ACTIVITIESExpenditures for vessels and equipment
    
    
    (57,858
    )
    
    
    (20,997
    )
    
    
    (31,079
    )Proceeds from sale of vessels and equipment
    
    
    
    
    
    
    3,225
    
    
    
    61,713Investment in direct financing lease assets
    
    
    (536
    )
    
    
    (8,378
    )
    
    
    (13,256
    )Direct financing lease payments received
    
    
    22,352
    
    
    
    21,677
    
    
    
    19,323Purchase of a 25% interest in Teekay Offshore Operating L.P (note 10v)
    
    
    (115,066
    )
    
    
    
    
    
    
    Cash assumed upon consolidation of 50%-owned subsidiaries
    
    
    
    
    
    
    
    
    
    
    17,055Purchase of a 50% interest in Navion Gothenburg L.L.C. (note 10o)
    
    
    
    
    
    
    (10,231
    )
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    (746
    )Net investing cash flow
    
    
    (151,108
    )
    
    
    (14,704
    )
    
    
    53,010Increase (decrease) in cash and cash equivalents
    
    
    10,264
    
    
    
    7,238
    
    
    
    (15,000
    )Adjustment for net change in cash and cash equivalents in discontinued operations
    
    
    
    
    
    
    
    
    
    
    2,456Cash and cash equivalents, beginning of the year
    
    
    121,224
    
    
    
    113,986
    
    
    
    126,530Cash and cash equivalents, end of the year
    
    
    131,488
    
    
    
    121,224
    
    
    
    113,986
 (note 14)   The accompanying notes are an integral part of the consolidated financial statements.
  F - 5




---



##### 



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)
(Successor to Teekay Offshore Partners Predecessor)
 
 CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS EQUITY/OWNERS EQUITY
 (in thousands of U.S. dollars and units)
 AccumulatedOtherComprehensive
    
    
    Total OwnersOwners Equity
    
    
    Income (Loss)
    
    
    Equity$
    
    
    $
    
    
    $Balance as at December 31, 2005
    
    
    795,663
    
    
    
    
    
    
    
    795,663Net loss and comprehensive loss (January 1 to December 18, 2006)
    
    
    (30,292
    )
    
    
    
    
    
    
    (30,292
    )Net change in parents equity in Dropdown Predecessor
    
    
    798
    
    
    
    
    
    
    
    798Gain on sale of Navion Shipping Ltd. to Teekay Corporation (notes 10a and 18)
    
    
    18,468
    
    
    
    
    
    
    
    18,468Gain on sale of Norwegian subsidiaries to Teekay Corporation (note 10c)
    
    
    23,260
    
    
    
    
    
    
    
    23,260Loss on sale of the Borgato Teekay Corporation (note 10b)
    
    
    (11,900
    )
    
    
    
    
    
    
    (11,900
    )Stock compensation expense (note 1)
    
    
    1,048
    
    
    
    
    
    
    
    1,048Excess purchase price over the contributed basis of Teekay Offshore Partners
Predecessor (note 1)
    
    
    (231,684
    )
    
    
    
    
    
    
    (231,684
    )Purchase of a 26% interest in Teekay Offshore Operating L.P. from Teekay
Corporation (note 1)
    
    
    (134,629
    )
    
    
    
    
    
    
    (134,629
    )Reclassification adjustment for Teekay Corporations 74% non-controlling
interest in Teekay Offshore Operating L.P. (note 1)
    
    
    (376,089
    )
    
    
    
    
    
    
    (376,089
    )Balance as at December 18, 2006
    
    
    54,643
    
    
    
    
    
    
    
    54,643
 The accompanying notes are an integral part of the consolidated financial statements.
  F - 6




---



##### 



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)
(Successor to Teekay Offshore Partners Predecessor)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS EQUITY/OWNERS EQUITY
(in thousands of U.S. dollars and units)
 AccumulatedOwners Equity
    
    
    PARTNERS EQUITY
    
    
    Other(Predecessor
    
    
    Limited Partners
    
    
    General
    
    
    Comprehensiveand Dropdown
    
    
    Common
    
    
    Subordinated
    
    
    Partner
    
    
    Income (Loss)
    
    
    TotalPredecessor)
    
    
    Units
    
    
    $
    
    
    Units
    
    
    $
    
    
    $
    
    
    $
    
    
    $Balance as at December 18, 2006
    
    
    54,643
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,643Net income
and comprehensive income (December 19  31, 2006)
    
    
    114
    
    
    
    
    
    
    
    678
    
    
    
    
    
    
    
    606
    
    
    
    64
    
    
    
    
    
    
    
    1,462Allocation of Predecessor and Dropdown Predecessors equity to
unitholders (note 1)
    
    
    (2,965
    )
    
    
    2,800
    
    
    
    634
    
    
    
    9,800
    
    
    
    2,220
    
    
    
    111
    
    
    
    
    
    
    
    Proceeds from initial public offering of limited partnership
interests, net of offering costs of $13,788 (note 2)
    
    
    
    
    
    
    8,050
    
    
    
    155,262
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    155,262Redemption of common units from Teekay Corporation (note 2)
    
    
    
    
    
    
    (1,050
    )
    
    
    (20,633
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,633
    )Balance as at December 31, 2006
    
    
    51,792
    
    
    
    9,800
    
    
    
    135,941
    
    
    
    9,800
    
    
    
    2,826
    
    
    
    175
    
    
    
    
    
    
    
    190,734Net income (January 1 - December 31, 2007)
    
    
    1,300
    
    
    
    
    
    
    
    1,225
    
    
    
    
    
    
    
    700
    
    
    
    733
    
    
    
    
    
    
    
    3,958Other comprehensive income:Unrealized net gain on qualifying cash flow
hedging instruments (note 11)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    281
    
    
    
    281Realized net loss on qualifying cash flow
hedging instruments (note 11)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    12Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,251Contribution of foreign currency
forward contracts from Teekay
Corporation (note 10s)
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    89
    
    
    
    4
    
    
    
    
    
    
    
    109Offering costs from public offering of
limited partnership interests
    
    
    
    
    
    
    
    
    
    
    (93
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (93
    )Net change in parents equity in Dropdown
Predecessor (note 14e)
    
    
    (6,939
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,939
    )Purchase of Navion Bergen LLC and Navion
Gothenburg LLC from Teekay Corporation(note 10o)
    
    
    (29,756
    )
    
    
    
    
    
    
    (3,720
    )
    
    
    
    
    
    
    (20,832
    )
    
    
    (850
    )
    
    
    
    
    
    
    (55,158
    )Purchase of Dampier Spirit LLC from
Teekay Corporation (note 10p)
    
    
    (16,397
    )
    
    
    
    
    
    
    (2,029
    )
    
    
    
    
    
    
    (11,363
    )
    
    
    (464
    )
    
    
    
    
    
    
    (30,253
    )Contribution of interest rate swap agreement
from Teekay Corporation (note 10q)
    
    
    
    
    
    
    
    
    
    
    (373
    )
    
    
    
    
    
    
    (2,092
    )
    
    
    (85
    )
    
    
    
    
    
    
    (2,550
    )Cash distributions
    
    
    
    
    
    
    
    
    
    
    (11,123
    )
    
    
    
    
    
    
    (11,123
    )
    
    
    (454
    )
    
    
    
    
    
    
    (22,700
    )Balance as at December 31, 2007
    
    
    
    
    
    
    9,800
    
    
    
    119,844
    
    
    
    9,800
    
    
    
    (41,795
    )
    
    
    (941
    )
    
    
    293
    
    
    
    77,401
 The accompanying notes are an integral part of the consolidated financial statements.
  F - 7




---



##### 



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)
(Successor to Teekay Offshore Partners Predecessor)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS EQUITY/OWNERS EQUITY
(in thousands of U.S. dollars and units)
 AccumulatedOwners
    
    
    PARTNERS EQUITY
    
    
    OtherEquity
    
    
    Limited Partners
    
    
    General
    
    
    Comprehensive(Dropdown
    
    
    Common
    
    
    Subordinated
    
    
    Partner
    
    
    Income (Loss)
    
    
    TotalPredecessor)
    
    
    Units
    
    
    $
    
    
    Units
    
    
    $
    
    
    $
    
    
    $
    
    
    $Balance as at December 31, 2007
    
    
    
    
    
    
    9,800
    
    
    
    119,844
    
    
    
    9,800
    
    
    
    (41,795
    )
    
    
    (941
    )
    
    
    293
    
    
    
    77,401Net loss (January 1  December 31, 2008)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,333
    
    
    
    (19,049
    )
    
    
    (8,836
    )
    
    
    8,918
    
    
    
    (17,634
    )Unrealized net loss on qualifying cash flow
hedging instruments (note 11)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,209
    )
    
    
    (20,209
    )Realized net gain on qualifying cash flow
hedging instruments (note 11)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,906
    
    
    
    1,906Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,937
    )Purchase of a 25% interest in Teekay
Offshore Operating L.P. from Teekay
Corporation (note 10v)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,025
    )
    
    
    (58,846
    )
    
    
    (3,657
    )
    
    
    966
    
    
    
    (91,562
    )Proceeds from follow-on public offering and private placement of
limited partnership interests, net
of offering costs of $6,192 (note 2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,625
    
    
    
    206,308
    
    
    
    4,337
    
    
    
    210,645Purchase of SPT Explorer L.L.C. and SPT
Navigator L.L.C. from Teekay Corporation
(note 10w)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,333
    )
    
    
    (5,231
    )
    
    
    (10,253
    )
    
    
    (638
    )
    
    
    (17,455
    )Cash distributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,201
    )
    
    
    (16,170
    )
    
    
    (855
    )
    
    
    (42,226
    )Balance as at December 31, 2008
    
    
    
    
    
    
    20,425
    
    
    
    246,646
    
    
    
    9,800
    
    
    
    (135,900
    )
    
    
    7,164
    
    
    
    (17,044
    )
    
    
    100,866
 The accompanying notes are an integral part of the consolidated financial statements.
  F - 8




---



##### 



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor to Teekay Offshore Partners Predecessor)
 
 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 presentation
 Partnership OPCO
 Norsk Teekay FSO Teekay Offshore Partners Predecessor Predecessor the General Partner
  Navion Bergen Navion Gothenburg Dampier Spirit SPT Explorer SPT Navigator Dropdown Predecessor Navion Bergen Navion Gothenburg Dampier Spirit SPT Explorer) SPT Navigator)
   F - 9




---



##### 



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor to Teekay Offshore Partners Predecessor)  (Contd)
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)
 GAAP
   Reporting currency
  Operating revenues and expenses
   Cash and cash equivalents
  Accounts receivable and allowance for doubtful accounts
  Vessels and equipment
   F - 10




---



##### 



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor to Teekay Offshore Partners Predecessor)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Contd)
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
     Year Ended December 31, 2006Year Ended
    
    
    Year Ended
    
    
    December 19 to
    
    
    January 1 toDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 18,2008
    
    
    2007
    
    
    2006
    
    
    2006$
    
    
    $
    
    
    $
    
    
    $Balance at beginning of period
    
    
    71,910
    
    
    
    39,875
    
    
    
    40,179
    
    
    
    21,856Cost incurred for drydocking
    
    
    26,944
    
    
    
    37,243
    
    
    
    
    
    
    
    31,339Drydock amortization
    
    
    (22,235
    )
    
    
    (14,812
    )
    
    
    (304
    )
    
    
    (7,845
    )Vessel sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,171
    )Amounts acquired from business acquisitions
    
    
    
    
    
    
    9,604
    
    
    
    
    
    
    
    Balance at end of period
    
    
    76,619
    
    
    
    71,910
    
    
    
    39,875
    
    
    
    40,179
  Direct financing leases
 VOC equipment
 Investment in joint ventures
   Debt issuance costs
   F - 11




---



##### 



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor to Teekay Offshore Partners Predecessor)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Contd)
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 Goodwill and intangible assets
   Derivative instruments
    Accounting for Derivative Instruments and Hedging Activities
  Income taxes
 Accounting for Income Taxes
 FASB Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 FIN 48
    F - 12




---



##### 



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor to Teekay Offshore Partners Predecessor)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Contd)
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 Accounting for stock-based compensation
 Share-Based Payment SFAS 123(R)
 Accounting for Stock-Based
Compensation.
   Recent Accounting Pronouncements
 FASB SFAS Recognition and Presentation of
Other-Than-Temporary Impairments
 Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability has Significantly Decreased and Identifying Transactions
that are Not Orderly Fair Value Measurements Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active
 Interim Disclosures About Fair Value of
Financial Instruments Disclosures
about Fair Value of Financial Instruments Interim Financial Reporting
 Accounting for Assets Acquired and Liabilities
Assumed in a Business Combination that Arise from Contingencies Business Combinations
 Determining the Fair Value of a Financial Asset in
a Market That Is Not Active
 Disclosures about Derivative Instruments and
Hedging Activities, an amendment of Statement of Financial Accounting Standards No. 133 SFAS
161
 Business Combinations SFAS 141(R , Business Combinations
  F - 13




---



##### 



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor to Teekay Offshore Partners Predecessor)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Contd)
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 Noncontrolling Interests in Consolidated
Financial Statements, an Amendment of Accounting Research Bulletin No. 51 SFAS 160
 2.
    
    Public Offerings
 Offering
 Proceeds received:Sale of 8,050,000 common units at $21.00 per unit
    
    $
    169,050Use of proceeds from sale of common units:Underwriting and structuring fees
    
    $
    11,088Professional fees and other offering expenses to third parties
    
    
    2,793Repayment of promissory notes and redemption of 1.05 million
common units from Teekay Corporation
    
    
    155,169$
    169,050
 Follow-on
Offering
 OPCO
 3.
    
    Segment Reporting
    Year Ended December 31, 2006January 1
    
    
    December 19Year Ended
    
    
    Year Ended
    
    
    to
    
    
    toDecember 31,
    
    
    December 31,
    
    
    December 18,
    
    
    December 31,(U.S. dollars in millions)
    
    2008
    
    
    2007
    
    
    2006
    
    
    2006StatoilHydro ASA (1) (2)
    
    $320.7 or 37%
    
    $309.6 or 39%
    
    $187.6 or 30%
    
    $6.9 or 28%Teekay Corporation (3)
    
    $181.9 or 21%
    
    $154.6 or 20%
    
    $68.9 or 11%
    
    $5.3 or 22%Petrobras Transporte S.A (1) (2)
    
    $115.7 or 13%
    
    $100.8 or 13%
    
    
    
    
    
    
    
 
 (1)
    
    Shuttle tanker segment.(2)
    
    Statoil ASA and Petrobras Transporte S.A. are international oil companies.(3)
    
    Shuttle tanker, conventional tanker and FSO segments.
  F - 14




---



##### 



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor to Teekay Offshore Partners Predecessor)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Contd)
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
  Year Ended December 31, 2008
    
    
    Year Ended December 31, 2007Shuttle
    
    
    Conventional
    
    
    
    
    
    
    
    
    
    
    Shuttle
    
    
    ConventionalTanker
    
    
    Tanker
    
    
    FSO
    
    
    
    
    
    
    Tanker
    
    
    Tanker
    
    
    FSOSegment
    
    
    Segment
    
    
    Segment
    
    
    Total
    
    
    Segment
    
    
    Segment
    
    
    Segment
    
    
    Total$
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $Voyage revenues
    
    
    650,896
    
    
    
    153,200
    
    
    
    68,396
    
    
    
    872,492
    
    
    
    590,611
    
    
    
    135,922
    
    
    
    58,670
    
    
    
    785,203Voyage expenses
    
    
    169,578
    
    
    
    53,722
    
    
    
    1,729
    
    
    
    225,029
    
    
    
    114,157
    
    
    
    36,594
    
    
    
    886
    
    
    
    151,637Vessel operating expenses
    
    
    132,415
    
    
    
    25,156
    
    
    
    26,845
    
    
    
    184,416
    
    
    
    103,809
    
    
    
    24,175
    
    
    
    21,676
    
    
    
    149,660Time-charter hire expense
    
    
    132,234
    
    
    
    
    
    
    
    
    
    
    
    132,234
    
    
    
    150,463
    
    
    
    
    
    
    
    
    
    
    
    150,463Depreciation and amortization
    
    
    91,846
    
    
    
    22,901
    
    
    
    23,690
    
    
    
    138,437
    
    
    
    86,502
    
    
    
    21,324
    
    
    
    16,544
    
    
    
    124,370General and administrative (1)
    
    
    51,996
    
    
    
    8,674
    
    
    
    3,560
    
    
    
    64,230
    
    
    
    50,776
    
    
    
    7,828
    
    
    
    3,800
    
    
    
    62,404Income from vessel operations
    
    
    72,827
    
    
    
    42,747
    
    
    
    12,572
    
    
    
    128,146
    
    
    
    84,904
    
    
    
    46,001
    
    
    
    15,764
    
    
    
    146,669Expenditures for vessels and equipment
(2)
    
    
    53,231
    
    
    
    3,648
    
    
    
    979
    
    
    
    57,858
    
    
    
    18,189
    
    
    
    1,998
    
    
    
    11,041
    
    
    
    31,228
 Year Ended December 31, 2006January 1 to December 18, 2006
    
    
    December 19 to December 31, 2006Shuttle
    
    
    Conventional
    
    
    
    
    
    
    
    
    
    
    Shuttle
    
    
    ConventionalTanker
    
    
    Tanker
    
    
    FSO
    
    
    
    
    
    
    Tanker
    
    
    Tanker
    
    
    FSOSegment
    
    
    Segment
    
    
    Segment
    
    
    Total
    
    
    Segment
    
    
    Segment
    
    
    Segment
    
    
    Total$
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $Voyage revenues
    
    
    516,187
    
    
    
    66,673
    
    
    
    34,654
    
    
    
    617,514
    
    
    
    19,785
    
    
    
    3,383
    
    
    
    1,229
    
    
    
    24,397Voyage expenses
    
    
    85,451
    
    
    
    4,841
    
    
    
    1,029
    
    
    
    91,321
    
    
    
    2,995
    
    
    
    51
    
    
    
    56
    
    
    
    3,102Vessel operating expenses
    
    
    77,085
    
    
    
    18,754
    
    
    
    12,152
    
    
    
    107,991
    
    
    
    3,222
    
    
    
    624
    
    
    
    451
    
    
    
    4,297Time charter hire expense
    
    
    159,973
    
    
    
    
    
    
    
    
    
    
    
    159,973
    
    
    
    5,641
    
    
    
    
    
    
    
    
    
    
    
    5,641Depreciation and amortization
    
    
    68,784
    
    
    
    20,507
    
    
    
    11,532
    
    
    
    100,823
    
    
    
    2,583
    
    
    
    705
    
    
    
    438
    
    
    
    3,726General and administrative(1)
    
    
    48,490
    
    
    
    11,571
    
    
    
    2,953
    
    
    
    63,014
    
    
    
    1,863
    
    
    
    218
    
    
    
    96
    
    
    
    2,177Gain on sale of vessels and equipment 
net of writedowns
    
    
    (4,778
    )
    
    
    
    
    
    
    
    
    
    
    (4,778
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restructuring charge
    
    
    
    
    
    
    832
    
    
    
    
    
    
    
    832
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income from vessel operations
    
    
    81,182
    
    
    
    10,168
    
    
    
    6,988
    
    
    
    98,338
    
    
    
    3,481
    
    
    
    1,785
    
    
    
    188
    
    
    
    5,454Equity income from joint ventures
    
    
    6,321
    
    
    
    
    
    
    
    
    
    
    
    6,321
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expenditures for vessels and
equipment(2)
    
    
    25,055
    
    
    
    6,024
    
    
    
    
    
    
    
    31,079
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (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 14).
  December 31,
    
    
    December 31,2008
    
    
    2007$
    
    
    $Shuttle tanker segment
    
    
    1,517,961
    
    
    
    1,559,261Conventional tanker segment
    
    
    332,795
    
    
    
    255,460FSO segment
    
    
    108,304
    
    
    
    131,080UnallocatedCash and cash equivalents
    
    
    131,488
    
    
    
    121,224Accounts receivable and other assets
    
    
    89,544
    
    
    
    116,880Consolidated total assets
    
    
    2,180,092
    
    
    
    2,183,905
  F - 15




---



##### 



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor to Teekay Offshore Partners Predecessor)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Contd)
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 4.
    
    Intangible Assets
  Weighted-
    
    
    December 31, 2008
    
    
    December 31, 2007Average
    
    
    Gross
    
    
    
    
    
    
    Net
    
    
    GrossAmortization
    
    
    Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    Net CarryingPeriod
    
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    Amount(years)
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $Contracts of affreightment
    
    
    10.2
    
    
    
    124,250
    
    
    
    (78,960
    )
    
    
    45,290
    
    
    
    124,250
    
    
    
    (68,895
    )
    
    
    55,355
  5.
    
    Accrued Liabilities
 December 31,
    
    
    December 31,2008
    
    
    2007$
    
    
    $Voyage and vessel
    
    
    31,162
    
    
    
    26,015Interest
    
    
    11,994
    
    
    
    10,932Payroll and benefits
    
    
    1,311
    
    
    
    1,51744,467
    
    
    
    38,464
 6.
    
    Long-Term Debt
 December 31, 
2008
    
    
    December 31, 
2007$
    
    
    $U.S. Dollar-denominated Revolving Credit Facilities due through 2018
    
    
    1,314,264
    
    
    
    1,205,808U.S. Dollar-denominated Term Loans due through 2017
    
    
    252,172
    
    
    
    311,6591,566,436
    
    
    
    1,517,467Less current portion
    
    
    125,503
    
    
    
    64,060Total
    
    
    1,440,933
    
    
    
    1,453,407
 Revolvers
     F - 16




---



##### 



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor to Teekay Offshore Partners Predecessor)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Contd)
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 7.
    
    Leases
 Charters-out and Direct Financing Lease
    Charters-in
  8.
    
    Fair Value of Measurements
 Fair Value Measurements Effective
Date of FASB Statement No. 157
      Cash and cash equivalents
 Due to / from affiliates
 Long-term debt
 Due to joint venture partners
 Derivative instruments
  F - 17




---



##### 



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor to Teekay Offshore Partners Predecessor)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Contd)
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
  December 31, 2008
    
    
    December 31, 2007Fair Value
    
    
    Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairHierarchy
    
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueLevel
    
    
    $
    
    
    $
    
    
    $
    
    
    $Cash and cash equivalents
    
    
    
    
    
    
    131,488
    
    
    
    131,488
    
    
    
    121,224
    
    
    
    121,224Due from affiliate (note 10y)
    
    
    
    
    
    
    10,110
    
    
    
    10,110
    
    
    
    18,350
    
    
    
    18,350Due to affiliate (note 10y)
    
    
    
    
    
    
    (8,715
    )
    
    
    (8,715
    )
    
    
    (17,554
    )
    
    
    (17,554
    )Long-term debt
    
    Level 2
    
    
    
    (1,566,436
    )
    
    
    (1,476,608
    )
    
    
    (1,517,467
    )
    
    
    (1,517,467
    )Due to joint venture partners
    
    
    
    
    
    
    (21,019
    )
    
    
    (21,019
    )
    
    
    (3,534
    )
    
    
    (3,534
    )Derivative instruments(1)(note 11)Interest rate swap agreements(2)
    
    Level 2
    
    
    
    (159,169
    )
    
    
    (159,169
    )
    
    
    (21,050
    )
    
    
    (21,050
    )Foreign currency forward contracts
    
    Level 2
    
    
    
    (37,554
    )
    
    
    (37,554
    )
    
    
    1,122
    
    
    
    1,122
 
 (1)
    
    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.(2)
    
    The fair value of the Partnerships interest rate swap agreements includes $3.4 million
of accrued interest which is recorded in accrued liabilities on the balance sheet.
 9.
    
    Restructuring Charge and Other Income  Net
  Year Ended December 31, 2006January 1
    
    
    December 19Year Ended
    
    
    Year Ended
    
    
    to
    
    
    toDecember 31,
    
    
    December 31,
    
    
    December 18,
    
    
    December 31,2008
    
    
    2007
    
    
    2006
    
    
    2006$
    
    
    $
    
    
    $
    
    
    $Volatile organic
compound emissions
plant lease income
    
    
    9,727
    
    
    
    10,960
    
    
    
    11,037
    
    
    
    408Miscellaneous
    
    
    2,209
    
    
    
    (557
    )
    
    
    (2,670
    )
    
    
    (99
    )Other income  net
    
    
    11,936
    
    
    
    10,403
    
    
    
    8,367
    
    
    
    309
 10.
    
    Related Party Transactions and Balances
 a.
    
    On July 1, 2006, the Predecessor sold Navion Shipping Ltd. to a subsidiary of Teekay
Corporation for $53.7 million. The resulting gain on sale of $18.5 million was accounted
for as an equity contribution by Teekay Corporation. Please read Note 18.During the first half of 2006, three of the Predecessors conventional tankers were employed
on time-charters with a subsidiary of Teekay Corporation. Pursuant to these charter
contracts, OPCO earned voyage revenues of $5.3 million during the first half of 2006.During the first half of 2006, the Predecessor earned $5.1 million of management fees from
ship management services provided to a subsidiary of Teekay Corporation, relating to the
vessels chartered from Navion Shipping Ltd during that period.b.
    
    During 2006, the Predecessor paid $11.9 million to Teekay Corporation for it to assume
the time-charter contract for one of the Predecessors in-chartered shuttle tankers, the
Borga. The resulting $11.9 million loss on sale was accounted for as an equity distribution
to Teekay Corporation.c.
    
    In 2006, prior to the Offering, the Predecessor sold to Teekay Corporation certain
subsidiaries and fixed assets for $64.7 million. The resulting $23.3 million gain on sale
was accounted for as an equity contribution by Teekay Corporation.d.
    
    Prior to the Offering, the Predecessor settled its Norwegian Kroner-denominated demand
promissory note of 1.1 billion Norwegian Kroner ($166.3 million) and its Australian
Dollar-denominated demand promissory note of 25.5 million Australian Dollars ($19.2
million) owing to Teekay Corporation. Interest expense incurred on these demand promissory
notes for the period prior to the Offering (January 1 to December 18, 2006) was
$12.9 million.e.
    
    In October 2006, Teekay Corporation loaned 5.6 billion Norwegian Kroner ($863.0
million) to a subsidiary of OPCO primarily for the purchase of eight Aframax conventional
crude oil tankers from Teekay Corporation. Immediately preceding the Offering, this
interest-bearing loan was sold to OPCO. The interest expense incurred on this loan prior to
its sale to OPCO was $14.2 million.
  F - 18




---



##### 



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor to Teekay Offshore Partners Predecessor)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Contd)
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 f.
    
    Nine of OPCOs conventional tankers are employed on long-term time-charter contracts
with a subsidiary of Teekay Corporation. Under the terms of eight 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 voyage revenues of $144.5 million,
$128.4 million and $22.3 million for the year ended December 31, 2008 and 2007 and for the
three months ended December 31, 2006, respectively.During the first nine months of 2006, seven of these nine tankers were employed on
time-charter contracts with a subsidiary of Teekay Corporation. The rates earned by each
vessel, which were generally lower than market rates, depended upon the cash flow
requirements of each vessel, which included operating expenses, loan principal and interest
payments and drydock expenditures. Pursuant to these time-charter contracts, the Predecessor
earned voyage revenues of $24.6 million during the first nine months of 2006.g.
    
    One of OPCOs FSO units and one of OPCOs conventional tankers were employed on
short-term bareboat charters with a subsidiary of Teekay Corporation during the last half
of 2006. Pursuant to these charter contracts, OPCO earned voyage revenues of $3.4 million
revenues during the last half of 2006.h.
    
    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 voyage
revenues of $14.8 million, $14.2 million and $3.6 million during the year ended December
31, 2008 and 2007, and the three months ended December 31, 2006, respectively.i.
    
    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 voyage revenues of
$11.2 million, $12.0 million and $10.2 million during the years ended December 31, 2008,
2007 and 2006, respectively.j.
    
    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 year ended December 31, 2008 and 2007 and the three months ended December 31, 2006,
OPCO earned management fees of $3.3 million, $3.3 million and $0.5 million, respectively.k.
    
    Eight of OPCOS Aframax conventional oil tankers and three FSO units are managed by
subsidiaries of Teekay Corporation. Pursuant to the associated management services
agreements, the Partnership incurred general and administrative expenses of $3.7 million,
$4.5 million and $6.1 million during the years ended December 31, 2008, 2007, and 2006,
respectively. During the years ended December 31, 2007 and 2006, $0.1 million, and $0.8
million, respectively, of general and administrative expenses attributable to the
operations of the Dampier Spiritwere incurred by Teekay Corporation and have been
allocated to the Partnership as part of the results of the Dropdown Predecessor.l.
    
    The Partnership, OPCO and certain of OPCOs operating subsidiaries have entered into
services agreements with certain subsidiaries of Teekay Corporation in connection with the
Offering, pursuant to which Teekay Corporation subsidiaries provide the Partnership, OPCO
and its operating subsidiaries with administrative, advisory and technical services and
ship management services. Pursuant to these service agreements, the Partnership incurred
$50.3 million and $52.7 million, respectively, of these costs during the year ended
December 31, 2008 and 2007. Prior to the Offering, the shore-based staff who provided these
services to the Predecessor were transferred to a subsidiary of Teekay Corporation. During
the year ended December 31, 2006, $21.6 million of general and administrative expenses
attributable to the operations of the Predecessor prior to the Offering were incurred by
Teekay Corporation and have been allocated to the Predecessor.m.
    
    Pursuant to the Partnerships partnership agreement, the Partnership reimburses the
General Partner for all expenses incurred by the Partnership that are necessary or
appropriate for the conduct of the Partnerships business. During the years ended December
31, 2008 and 2007, the Partnership incurred $ 0.6 million and $0.8 million of these costs,
respectively.n.
    
    The Partnership has entered into an omnibus agreement with Teekay Corporation, Teekay
LNG Partners L.P., the General Partner and others governing, among other things, when the
Partnership, Teekay Corporation and Teekay LNG Partners L.P. may compete with each other
and certain rights of first offering on liquefied natural gas carriers, oil tankers,
shuttle tankers, FSO units and floating production, storage and offloading units.o.
    
    In July 2007, the Partnership acquired interests in two double-hull shuttle tankers
from Teekay Corporation for a total cost of $159.1 million, including assumption of debt of
$93.7 million and the related interest rate swap agreement. The Partnership acquired Teekay
Corporations 100% interest in the 2000-built Navion Bergenand its 50% interest in the
2006-built Navion Gothenburg, together with their respective 13-year, fixed-rate bareboat
charters to Petroleo Brasileiro S.A. The purchases were financed with one of the
Partnerships existing Revolvers and the assumption of debt. The excess of the proceeds
paid by the Partnership over Teekay Corporations depreciated historical cost was accounted
for as an equity distribution to Teekay Corporation of $25.4 million.p.
    
    In October 2007, the Partnership acquired from Teekay Corporation an FSO unit, the
Dampier Spirit, along with its 7-year fixed-rate time-charter to Apache Corporation, for a
total cost of $30.3 million. The purchase was financed with one of the Partnerships
existing Revolvers. The excess of the proceeds paid by the Partnership over Teekay
Corporations depreciated historical cost was accounted for as an equity distribution to
Teekay Corporation of $13.9 million.
  F - 19




---



##### 



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor to Teekay Offshore Partners Predecessor)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Contd)
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 q.
    
    In December 2007, Teekay Corporation contributed a $65.6 million, nine-year, 4.98%
interest rate swap agreement (used to hedge the debt assumed in the purchase of the Navion
Bergen) having a fair value liability of $2.6 million (Note 11), to the Partnership for no
consideration and was accounted for as an equity distribution to Teekay Corporation.r.
    
    In December 2007, Teekay Corporation agreed to reimburse OPCO for certain costs
relating to events which occurred prior to the Offering, totalling $4.8 million, including
the settlement of a customer dispute in respect of vessels delivered prior to the Offering
and other costs.s.
    
    In January 2007, Teekay Corporation contributed foreign exchange contracts for the
forward purchase of a total of Australian Dollars 4.5 million having a fair value asset of
$0.1 million, net of non-controlling interest, to OPCO for no consideration and was
accounted for as an equity contribution from Teekay Corporation. The foreign currency
forward contracts matured by December 2007.t.
    
    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.u.
    
    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.v.
    
    Concurrently with the closing of the Partnerships Follow-on Offering, 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 2. 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.w.
    
    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 voyage
revenues of $8.7 million for the year ended December 31, 2008 (including voyage revenues
earned as part of the Dropdown Predecessor prior to OPCOs acquisition of the vessels  see
Note 1).x.
    
    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.y.
    
    At December 31, 2008, due from affiliates totaled $10.1 million (December 31, 2007 -
$18.4 million) and due to affiliates totaled $8.7 million (December 31, 2007  $17.6
million). Due to and from affiliate are non-interest bearing and unsecured.z.
    
    During the year ended December 31, 2007, $1.2 million of interest expense attributable
to the operations of the Navion Bergenwas incurred by Teekay Corporation and has been
allocated to the Partnership as part of the results of the Dropdown Predecessor.aa.
    
    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 voyage revenues of $11.3 million for the year ended December 31,
2008.
  F - 20




---



##### 



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor to Teekay Offshore Partners Predecessor)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Contd)
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 11.
    
    Derivative Instruments and Hedging Activities
   Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,2008
    
    
    2007$
    
    
    $Vessel operating expenses
    
    
    4,942
    
    
    
    General and administrative
    
    
    1,422
    
    
    
    (57
    )Foreign currency exchange loss
    
    
    (14
    )
    
    
    Total
    
    
    6,350
    
    
    
    (57
    )
  Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,2008
    
    
    2007$
    
    
    $Vessel operating expenses
    
    
    (2,020
    )
    
    
    (429
    )General and administrative
    
    
    (4,159
    )
    
    
    Foreign currency exchange gain
    
    
    22
    
    
    
    59Total
    
    
    (6,157
    )
    
    
    (370
    )
   Contract Amount
    
    
    Fair Value / CarryingIn
    
    
    Amount
    
    

    Average
    
    
    Expected MaturityForeign Currency
    
    
    of Liability
    
    
    Forward Rate(1)
    
    
    2009
    
    
    2010(thousands)
    
    
    (thousands of U.S. Dollars)
    
    
    
    
    
    (in thousands of U.S. Dollars)Norwegian Kroner
    
    
    1,228,764
    
    
    $
    35,157
    
    
    
    5.83
    
    
    $
    114,718
    
    
    $
    96,068Australian Dollar
    
    
    3,300
    
    
    
    646
    
    
    
    1.12
    
    
    
    2,952
    
    
    
    British Pound
    
    
    443
    
    
    
    199
    
    
    
    0.52
    
    
    
    750
    
    
    
    100Euro
    
    
    24,725
    
    
    
    1,552
    
    
    
    0.69
    
    
    
    23,702
    
    
    
    12,254$
    37,554
    
    
    
    
    
    
    $
    142,122
    
    
    $
    108,422
 (1)
    
    Average forward rate represents the contracted amount of foreign currency one U.S. Dollar
will buy.
    Fair Value /Interest
    
    
    
    
    
    
    Carrying Amount of
    
    
    Weighted-Average
    
    
    FixedRate
    
    
    Principal Amount
    
    
    Liability
    
    
    Remaining Term
    
    
    Interest RateIndex
    
    
    $
    
    
    $
    
    
    (Years)
    
    
    (%)(1)U.S. Dollar-denominated interest rate swaps
    
    LIBOR
    
    
    935,000
    
    
    
    88,580
    
    
    
    5.5
    
    
    
    4.7U.S. Dollar-denominated interest rate swaps(2)
    
    LIBOR
    
    
    397,279
    
    
    
    70,589
    
    
    
    12.4
    
    
    
    5.01,332,279
    
    
    
    159,169
 (1)
    
    Excludes the margin the Partnership pays on its variable-rate debt, which as at December
31, 2008, ranged from 0.45% and 0.95%.(2)
    
    Principal amount reduces quarterly or semi-annually.(3)
    
    The fair value of the Partnerships interest rate swap agreements includes $3.4 million of
accrued interest which is recorded in accrued liabilities on the balance sheet.
  F - 21




---



##### 



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor to Teekay Offshore Partners Predecessor)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Contd)
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
  12.
    
    Income TaxesThe significant components of the Partnerships deferred tax liabilities and assets are as
follows:
 December 31,
    
    
    December 31,2008
    
    
    2007$
    
    
    $Deferred tax liabilities:Vessels and equipment
    
    
    50,231
    
    
    
    84,077Goodwill and intangible assets
    
    
    
    
    
    
    266Long-term debt
    
    
    11,505
    
    
    
    94,071Total deferred tax liabilities
    
    
    61,736
    
    
    
    178,414Deferred tax assets:Other
    
    
    1,521
    
    
    
    1,012Tax losses carried forward (1)
    
    
    47,567
    
    
    
    100,096Total deferred tax assets
    
    
    49,088
    
    
    
    101,108Net deferred tax liabilities (2)
    
    
    12,648
    
    
    
    77,306Current portion
    
    
    
    
    
    
    Long-term portion of net deferred tax liabilities
    
    
    12,648
    
    
    
    77,306
 (1)
    
    The net operating loss carryforwards of $169.0 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 31,2008
    
    
    2007
    
    
    2006$
    
    
    $
    
    
    $Current
    
    
    (752
    )
    
    
    
    
    
    
    (2,956
    )Deferred
    
    
    57,456
    
    
    
    10,516
    
    
    
    (425
    )Income tax recovery (expense)
    
    
    56,704
    
    
    
    10,516
    
    
    
    (3,381
    )
  Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2008
    
    
    2007
    
    
    2006$
    
    
    $
    
    
    $Net loss before taxes
    
    
    (74,338
    )
    
    
    (6,558
    )
    
    
    (25,449
    )Net loss not subject to taxes
    
    
    (314,613
    )
    
    
    160,672
    
    
    
    (5,413
    )Net income subject to taxes
    
    
    240,275
    
    
    
    (167,230
    )
    
    
    (20,036
    )At applicable statutory tax rates
    
    
    58,939
    
    
    
    (54,303
    )
    
    
    (8,095
    )Permanent differences and adjustments related to currency differences
    
    
    (115,643
    )
    
    
    43,787
    
    
    
    11,476Tax (recovery) expense related to current year
    
    
    (56,704
    )
    
    
    (10,516
    )
    
    
    3,381
  F-22




---



##### 



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor to Teekay Offshore Partners Predecessor)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Contd)
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 13.
    
    Commitments and Contingencies
  14.
    
    Supplemental Cash Flow Information
 a)
    
    The changes in non-cash working capital items related to operating activities for the
years ended December 31, 2008, 2007 and 2006 are as follows:
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2008
    
    
    2007
    
    
    2006$
    
    
    $
    
    
    $Accounts receivable
    
    
    2,745
    
    
    
    (16,206
    )
    
    
    3,452Prepaid expenses and other assets
    
    
    13,944
    
    
    
    (1,957
    )
    
    
    4,164Accounts payable and accrued liabilities
    
    
    4,306
    
    
    
    (6,126
    )
    
    
    4,643Advances from (to) affiliate
    
    
    1,948
    
    
    
    (9,417
    )
    
    
    38,78022,943
    
    
    
    (33,706
    )
    
    
    51,039
 b)
    
    Cash interest paid (including interest paid by the Dropdown Predecessor) during the
years ended December 31, 2008, 2007, and 2006 totaled $76.0 million, $73.9 million, and
$44.0 million, respectively.c)
    
    Taxes paid (including taxes paid by the Dropdown Predecessor) during the years ended
December 31, 2008, 2007 and 2006 totaled $1.1 million, $1.8 million, and $0.2 million,
respectively.d)
    
    The Partnerships consolidated statement of cash flows for the years ended December 31,
2008, 2007 and 2006 reflect the Dropdown Predecessor as if the Partnership had acquired the
Dropdown Predecessor when each respective vessel began operations under the ownership of
Teekay Corporation. If Teekay Corporation financed the construction or purchase of the
vessel prior to the Dropdown Predecessor being included in the results of the Partnership,
the expenditures for the vessel by Teekay Corporation have been treated as a non-cash
transaction in the Partnerships consolidated statement of cash flows. The non-cash
investing activities related to the Dropdown Predecessor were $90.5 million and $71.6 million for
expenditures for vessels and equipment in the years ended December 31, 2008 and December 31, 2007, respectively.e)
    
    Net change in parents equity in the Dropdown Predecessor includes the equity of the
Dropdown Predecessor when initially pooled for accounting purposes and any subsequent
non-cash equity transactions of the Dropdown Predecessor.
 15.
    
    Vessel and Equipment Sales and Write-downs
 a)
    
    Vessel Sales
   b)
    
    Equipment Writedowns
  16.
    
    Partners Capital 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.
  F-23




---



##### 



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor to Teekay Offshore Partners Predecessor)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Contd)
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 
    
    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
  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
  Participating Securities and Two-Class
Method under FASB Statement No. 128, Earnings Per Share
   F-24




---



##### 



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor to Teekay Offshore Partners Predecessor)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Contd)
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 17.
    
    Change in accounting estimate
  18.
    
    Discontinued Operations
   January 1 to June 30,2006Voyage revenues(1)
    
    $
    80,014Loss from discontinued operations before income tax expense
    
    
    (10,656
    )Income tax expense
    
    
    Loss from discontinued operations
    
    $
    (10,656
    )
 (1)
    
    During the six months ended June 30, 2006 the Predecessor earned $79.5 million of
time charter revenue from a subsidiary of Teekay Corporation pursuant to the agreement
with Navion Shipping Ltd.During the six months ended June 30, 2006, $10.7 million of general and administrative
expenses attributable to the operations of Navion Shipping Ltd. were incurred by Teekay
Corporation and have been allocated to Navion Shipping Ltd.
  19.
    
    Subsequent events
 (a)
    
    In February 2009, the Partnership declared a cash distribution of $0.45 per unit for
the quarter ended December 31, 2008. The cash distribution was paid on February 13, 2009
to all unitholders of record on February 6, 2009.In May 2009, the Partnership declared a cash distribution of $0.45 per unit for the
quarter ended March 31, 2009. The cash distribution was paid on May 15, 2009 to all
unitholders of record on May 8, 2009.(b)
    
    During  2009 the Partnership intends to reflag seven of
its vessels from Norwegian flag to Bahamian flag and to change the nationality mix of its crews. Under this plan, the Partnership will record and pay the restructuring
charges of approximately $4.4 million during 2009. The actual charges are recorded in the
period in which the Partnership commits to a formalized restructuring plan or executes the
specific actions contemplated by the program and all criteria for
restructuring charge recognition under the applicable accounting
guidance have been met. The
Partnership expects the reflagging will result in a reduction in its crewing costs for these
vessels.
  F-25