##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 20-F
  o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2009
 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
    
    
    5Selected Financial Data
    
    
    5Risk Factors
    
    
    8Tax Risks
    
    
    20Item 4. Information on the Partnership
    
    
    21A. Overview, History and Development
    
    
    21Overview and History
    
    
    21Potential Additional Shuttle Tanker, FSO, and FPSO Projects
    
    
    22B. Business Overview
    
    
    22Shuttle Tanker Segment
    
    
    22Conventional Tanker Segment
    
    
    24FSO Segment
    
    
    25FPSO Segment
    
    
    25Business Strategies
    
    
    26Customers
    
    
    26Safety, Management of Ship Operations and Administration
    
    
    26Risk of Loss, Insurance and Risk Management
    
    
    27Classification, Audits and Inspections
    
    
    27Regulations
    
    
    28C. Organizational Structure
    
    
    31D. Properties
    
    
    31E. Taxation of the Partnership
    
    
    31Item 4A. Unresolved Staff Comments
    
    
    Not applicableItem 5. Operating and Financial Review and Prospects
    
    
    32Overview
    
    
    32Significant Developments
    
    
    33Potential Additional Shuttle Tanker, FSO and FPSO Projects
    
    
    33Our Contracts of Affreightment and Charters
    
    
    34Important Financial and Operational Terms and Concepts
    
    
    34Items You Should Consider When Evaluating Our Results
    
    
    35Results of Operations
    
    
    36Liquidity and Capital Resources
    
    
    45Credit Facilities
    
    
    46Contractual Obligations and Contingencies
    
    
    47Off-Balance Sheet Arrangements
    
    
    47Critical Accounting Estimates
    
    
    47Recent Accounting Pronouncements
    
    
    49Recent Accounting Pronouncements Not Yet Adopted
    
    
    50Item 6. Directors, Senior Management and Employees
    
    
    51A. Directors and Senior Management
    
    
    51Management of Teekay Offshore Partners L.P.
    
    
    51Directors and Executive Officers of Teekay Offshore GP L.L.C
    
    
    51Directors and Executive Officers of Teekay Offshore Operating GP L.L.C
    
    
    52B. Compensation
    
    
    52Reimbursement of Expenses of Our General Partner
    
    
    52Executive Compensation
    
    
    52Compensation of Directors
    
    
    522006 Long Term Incentive Plan
    
    
    53C. Board Practices
    
    
    53D. Employees
    
    
    54E. Unit Ownership
    
    
    54Item 7. Major Unitholders and Related Party Transactions
    
    
    54A. Major Unitholders
    
    
    54B. Certain Relationships and Related Party Transactions
    
    
    55Exhibit 4.8Exhibit 8.1Exhibit 12.1Exhibit 12.2Exhibit 13.1Exhibit 15.1Exhibit 15.2
   2




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##### Table of Contents



PageItem 8. Financial Information
    
    
    58A. Consolidated Financial Statements and Other Financial Information
    
    
    58Consolidated Financial Statements and Notes
    
    
    58Legal Proceedings
    
    
    58Cash Distribution Policy
    
    
    58B. Significant Changes
    
    
    59Item 9. The Offer and Listing
    
    
    59Item 10. Additional Information
    
    
    60Memorandum and Articles of Association
    
    
    60Material Contracts
    
    
    60Exchange Controls and Other Limitations Affecting Unitholders
    
    
    60Material U.S. Federal Income Tax Considerations
    
    
    60Non-United States Tax Consequences
    
    
    63Documents on Display
    
    
    64Item 11. Quantitative and Qualitative Disclosures About Market Risk
    
    
    64Interest Rate Risk
    
    
    64Foreign Currency Fluctuation Risk
    
    
    65Commodity Price Risk
    
    
    65Item 12. Description of Securities Other than Equity Securities
    
    
    Not applicablePART II.Item 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    66Item 14. Material Modifications to the Rights of Unitholders and Use of Proceeds
    
    
    66Item 15. Controls and Procedures
    
    
    66Managements Report on Internal Control over Financial Reporting
    
    
    66Item 16A. Audit Committee Financial Expert
    
    
    66Item 16B. Code of Ethics
    
    
    67Item 16C. Principal Accountant Fees and Services
    
    
    67Item 16D. Exemptions from the Listing Standards for Audit Committees
    
    
    Not applicableItem 16E. Purchases of Units by the Issuer and Affiliated Purchasers
    
    
    Not applicableItem 16F. Change in Registrants Certifying Accountant
    
    
    Not applicableItem 16G. Corporate Governance
    
    
    67PART III.Item 17. Financial Statements
    
    
    Not applicableItem 18. Financial Statements
    
    
    68Item 19. Exhibits
    
    
    68Signatures
    
    
    69
  3




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##### Table of Contents



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, including our expectations as to additional annual cash flow from vessels
operations from the Petrojarl Varg;
 
    
    growth prospects of the offshore and tanker markets;
 
    
    oil fields adjacent to the Petrojarl Vargbecoming operational and our ability to
service these fields;
 
    
    offshore and tanker market fundamentals, including the balance of supply and demand in
the offshore and tanker markets;
 
    
    the expected lifespan of a new shuttle tanker, a floating storage and off-take (or FSO)
unit, a floating production, storage and offloading (or FPSO) unit, and a conventional
tanker;
 
    
    the expected costs of new-buildings and vessel conversions;
 
    
    estimated capital expenditures and the availability of capital resources to fund capital
expenditures;
 
    
    estimated costs and timing of implementation of the EU Directive to burn only low
sulphur fuel, and our ability to timely comply with this Directive;
 
    
    our ability to maintain long-term relationships with major crude oil companies,
including our ability to service fields until they no longer produce;
 
    
    our ability to leverage to our advantage Teekay Corporations relationships and
reputation in the shipping industry;
 
    
    our continued ability to enter into fixed-rate time charters with customers;
 
    
    obtaining offshore projects that we or Teekay Corporation bid on or that Teekay
Corporation is awarded;
 
    
    our ability to maximize the use of our vessels, including the re-deployment or
disposition of vessels no longer under long-term time charter;
 
    
    the ability of the counterparties to our derivative contracts to fulfill their
contractual obligations;
 
    
    our pursuit of strategic opportunities, including the acquisition of vessels and
expansion into new markets vessels;
 
    
    our expected financial flexibility to pursue acquisitions and other expansion
opportunities;
 
    
    anticipated funds for liquidity needs and the sufficiency of cash flows;
 
    
    the future valuation of goodwill;
 
    
    the expected cost of, and our ability to comply with, governmental regulations and
maritime self regulatory organization standards applicable to our business;
 
    
    the expected impact of heightened environmental and quality concerns of insurance
underwriters, regulators and charterers;
 
    
    anticipated taxation of our partnership and its subsidiaries and taxation of
unitholders;
 
    
    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.
  4




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##### Table of Contents



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




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##### Table of Contents



Years Ended December 31,2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009Income Statement Data:Revenues
    
    $
    613,246
    
    
    $
    665,613
    
    
    $
    878,656
    
    
    $
    968,908
    
    
    $
    821,856Operating expenses:Voyage expenses (1)
    
    
    74,543
    
    
    
    94,423
    
    
    
    151,637
    
    
    
    225,029
    
    
    
    111,026Vessel operating expenses (2) (12)
    
    
    109,480
    
    
    
    121,530
    
    
    
    187,403
    
    
    
    224,235
    
    
    
    233,261Time-charter hire expense
    
    
    169,687
    
    
    
    165,614
    
    
    
    150,463
    
    
    
    132,234
    
    
    
    117,202Depreciation and amortization
    
    
    109,824
    
    
    
    108,964
    
    
    
    142,029
    
    
    
    158,533
    
    
    
    166,350General and administrative (12)
    
    
    56,726
    
    
    
    67,433
    
    
    
    70,278
    
    
    
    69,519
    
    
    
    58,016Goodwill impairment charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    127,403
    
    
    
    (Gain) loss on sale of vessels and equipment  net of
writedowns
    
    
    2,820
    
    
    
    (4,778
    )
    
    
    
    
    
    
    
    
    
    
    Restructuring charge
    
    
    955
    
    
    
    832
    
    
    
    
    
    
    
    
    
    
    
    5,008Total operating expenses
    
    
    524,035
    
    
    
    554,018
    
    
    
    701,810
    
    
    
    936,953
    
    
    
    690,863Income from vessel operations
    
    
    89,211
    
    
    
    111,595
    
    
    
    176,846
    
    
    
    31,955
    
    
    
    130,993Interest expense
    
    
    (39,983
    )
    
    
    (77,701
    )
    
    
    (111,120
    )
    
    
    (85,169
    )
    
    
    (43,319
    )Interest income
    
    
    4,612
    
    
    
    5,559
    
    
    
    6,062
    
    
    
    4,157
    
    
    
    1,236Equity income from joint ventures
    
    
    5,955
    
    
    
    6,321
    
    
    
    
    
    
    
    
    
    
    
    Realized and unrealized gains (losses) on non-designated
derivatives
    
    
    
    
    
    
    5,683
    
    
    
    (46,542
    )
    
    
    (188,782
    )
    
    
    53,560Foreign currency exchange gain (loss) (3)
    
    
    34,228
    
    
    
    (65,723
    )
    
    
    (9,760
    )
    
    
    4,293
    
    
    
    (6,151
    )Other  net
    
    
    9,091
    
    
    
    8,673
    
    
    
    10,398
    
    
    
    11,929
    
    
    
    8,918Income tax recovery (expense)
    
    
    12,375
    
    
    
    (6,588
    )
    
    
    (1,481
    )
    
    
    62,344
    
    
    
    (12,638
    )Income (loss) from continuing operations
    
    
    115,489
    
    
    
    (12,181
    )
    
    
    24,403
    
    
    
    (159,273
    )
    
    
    132,599Net loss from discontinued operations (4)
    
    
    (19,347
    )
    
    
    (10,656
    )
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    96,142
    
    
    $
    (22,837
    )
    
    $
    24,403
    
    
    $
    (159,273
    )
    
    $
    132,599Non-controlling interest in net income
    
    $
    229
    
    
    $
    8,442
    
    
    $
    37,573
    
    
    $
    10,863
    
    
    $
    57,490Dropdown Predecessors interest in net income (loss)
    
    
    2,910
    
    
    
    762
    
    
    
    (15,828
    )
    
    
    (151,169
    )
    
    
    11,378General partners interest in net income
    
    
    
    
    
    
    64
    
    
    
    733
    
    
    
    8,918
    
    
    
    2,523Limited partners interest:Net income (loss) from continuing operations
    
    
    112,350
    
    
    
    (21,449
    )
    
    
    1,925
    
    
    
    (27,885
    )
    
    
    61,208Net Income (loss) from continuing operations per:Common unit (basic and diluted)(5)
    
    
    8.92
    
    
    
    (1.55
    )
    
    
    0.13
    
    
    
    (0.65
    )
    
    
    1.85Subordinated unit (basic and diluted)(5)
    
    
    8.92
    
    
    
    (1.74
    )
    
    
    0.13
    
    
    
    (0.92
    )
    
    
    1.80Total unit (basic and diluted)(5)
    
    
    8.92
    
    
    
    (1.67
    )
    
    
    0.13
    
    
    
    (0.76
    )
    
    
    1.84Limited partners interest:Net income (loss)
    
    
    93,003
    
    
    
    (32,105
    )
    
    
    1,925
    
    
    
    (27,885
    )
    
    
    61,208Net income (loss) per:Common unit (basic and diluted)(5)
    
    
    7.38
    
    
    
    (2.33
    )
    
    
    0.13
    
    
    
    (0.65
    )
    
    
    1.85Subordinated unit (basic and diluted)(5)
    
    
    7.38
    
    
    
    (2.58
    )
    
    
    0.13
    
    
    
    (0.92
    )
    
    
    1.80Total unit (basic and diluted)(5)
    
    
    7.38
    
    
    
    (2.50
    )
    
    
    0.13
    
    
    
    (0.76
    )
    
    
    1.84Cash distributions declared per unit
    
    
    
    
    
    
    
    
    
    
    1.14
    
    
    
    1.65
    
    
    
    1.80Balance Sheet Data(at end of year):Cash and marketable securities (4) (6)
    
    $
    128,986
    
    
    $
    124,072
    
    
    $
    128,860
    
    
    $
    132,348
    
    
    $
    101,747Vessels and equipment (7)
    
    
    1,310,135
    
    
    
    1,814,707
    
    
    
    1,927,169
    
    
    
    2,028,150
    
    
    
    1,917,248Total assets
    
    
    1,895,601
    
    
    
    2,493,975
    
    
    
    2,560,360
    
    
    
    2,522,124
    
    
    
    2,387,811Total debt
    
    
    943,319
    
    
    
    1,506,928
    
    
    
    1,744,369
    
    
    
    1,837,214
    
    
    
    1,735,614Non-controlling interest
    
    
    11,859
    
    
    
    443,448
    
    
    
    414,003
    
    
    
    201,383
    
    
    
    219,692Dropdown Predecessors equity
    
    
    47,784
    
    
    
    212,634
    
    
    
    93,245
    
    
    
    13,811
    
    
    
    Partners/owners equity
    
    
    747,879
    
    
    
    138,942
    
    
    
    77,108
    
    
    
    117,910
    
    
    
    213,065Accumulated other comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    45
    
    
    
    (21,911
    )
    
    
    767Common units outstanding (5)
    
    
    2,800,000
    
    
    
    3,049,315
    
    
    
    9,800,000
    
    
    
    15,461,202
    
    
    
    23,476,438Subordinated units outstanding (5)
    
    
    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
    
    $
    159,999
    
    
    $
    159,141
    
    
    $
    149,197
    
    
    $
    205,011
    
    
    $
    168,213Financing activities
    
    
    (208,866
    )
    
    
    (6,834
    )
    
    
    (129,705
    )
    
    
    83,768
    
    
    
    (209,839
    )Investing activities
    
    
    34,124
    
    
    
    (157,221
    )
    
    
    (14,704
    )
    
    
    (285,291
    )
    
    
    11,025Other Financial Data:Net revenues (8)
    
    $
    538,703
    
    
    $
    571,190
    
    
    $
    727,019
    
    
    $
    743,879
    
    
    $
    710,830EBITDA (9)
    
    
    229,428
    
    
    
    164,857
    
    
    
    272,971
    
    
    
    17,928
    
    
    
    353,670Adjusted EBITDA (9)
    
    
    198,975
    
    
    
    218,270
    
    
    
    321,341
    
    
    
    323,180
    
    
    
    296,341Capital expenditures:Expenditures for vessels and equipment (10)
    
    
    24,760
    
    
    
    31,079
    
    
    
    31,228
    
    
    
    57,858
    
    
    
    11,365Expenditures for drydocking (10)
    
    
    8,906
    
    
    
    31,255
    
    
    
    49,053
    
    
    
    29,075
    
    
    
    41,864Fleet data:Average number of shuttle tankers (11)
    
    
    35.8
    
    
    
    33.9
    
    
    
    36.9
    
    
    
    36.7
    
    
    
    35.9Average number of conventional tankers (11)
    
    
    41.2
    
    
    
    22.0
    
    
    
    9.3
    
    
    
    10.7
    
    
    
    11.0Average number of FSO units (11)
    
    
    4.0
    
    
    
    4.0
    
    
    
    4.7
    
    
    
    5.0
    
    
    
    5.0Average number of FPSO units (11)
    
    
    
    
    
    
    0.3
    
    
    
    1.0
    
    
    
    1.0
    
    
    
    1.0
  6




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##### Table of Contents



(1)
    
    Voyage expenses are all expenses unique to a particular voyage, including any bunker fuel
expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and
commissions.(2)
    
    Vessel operating expenses include crewing, repairs and maintenance, insurance, stores, lube
oils and communication expenses.(3)
    
    Substantially all of these foreign currency exchange gains and losses were unrealized and not
settled in cash. Under U.S. accounting 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, the non-controlling
interest and the General Partners interest, by the weighted-average number of units
outstanding during the applicable period.(6)
    
    Cash and marketable securities include cash from discontinued operations of $2.5 million as
at December 31, 2005.(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)
    
    Consistent with general practice in the shipping industry, we use net revenues (defined as
revenues less voyage expenses) as a measure of equating revenues generated from voyage
charters to revenues generated from time charters, which assists us in making operating
decisions about the deployment of vessels and their performance. Under time charters and
bareboat charters, the charterer typically pays the voyage expenses, which are all expenses
unique to a particular voyage, including any bunker fuel expenses, port fees, cargo loading
and unloading expenses, canal tolls and agency fees and commissions, whereas under voyage
charter contracts and contracts of affreightment the shipowner typically pays the voyage
expenses. Some voyage expenses are fixed, and the remainder can be estimated. If we or OPCO,
as the shipowner, pay the voyage expenses, we or OPCO typically pass the approximate amount of
these expenses on to the customers by charging higher rates under the contract or billing the
expenses to them. As a result, although revenues from different types of contracts may vary,
the net revenues are comparable across the different types of contracts. We principally use
net revenues, a non-GAAP financial measure, because it provides more meaningful information to
us than revenues, the most directly comparable GAAP financial measure. Net revenues are also
widely used by investors and analysts in the shipping industry for comparing financial
performance between companies in the shipping industry to industry averages. The following
table reconciles net revenues with revenues. Year Ended
    
    
    Year Ended
    
    
    Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009Revenues
    
    
    613,246
    
    
    
    665,613
    
    
    
    878,656
    
    
    
    968,908
    
    
    
    821,856Voyage expenses
    
    
    74,543
    
    
    
    94,423
    
    
    
    151,637
    
    
    
    225,029
    
    
    
    111,026Net revenues
    
    
    538,703
    
    
    
    571,190
    
    
    
    727,019
    
    
    
    743,879
    
    
    
    710,830
 (9)
    
    EBITDA represents earnings before interest, taxes, depreciation and amortization. Adjusted
EBITDA represents EBITDA before restructuring charges, unrealized foreign exchange (gain)
loss, gain on sale of vessels and equipment  net of writedowns, goodwill impairment charge,
amortization of in-process revenue contracts, unrealized gains (losses) on derivative
instruments and realized (gains) losses on interest rate swaps. EBITDA and Adjusted EBITDA are
used as supplemental financial measures by management and by external users of our financial
statements, such as investors, as discussed below. 
    
    Financial and operating performance. EBITDA and Adjusted EBITDA assist our management and
investors by increasing the comparability of the fundamental performance of us from period
to period and against the fundamental performance of other companies in our industry that
provide EBITDA or Adjusted EBITDA-based information. This increased comparability is
achieved by excluding the potentially disparate effects between periods or companies of
interest expense, taxes, depreciation or amortization, which items are affected by various
and possibly changing financing methods, capital structure and historical cost basis and
which items may significantly affect net income between periods. We believe that including
EBITDA and Adjusted EBITDA as a financial and operating measure benefits investors in (a)
selecting between investing in us and other investment alternatives and (b) monitoring our
ongoing financial and operational strength and health in assessing whether to continue to
hold our common units.
 
    
    Liquidity. EBITDA and Adjusted EBITDA allow us to assess the ability of assets to
generate cash sufficient to service debt, make distributions and undertake capital
expenditures. By eliminating the cash flow effect resulting from the existing capitalization
of us and OPCO and other items such as drydocking expenditures, working capital changes and
foreign currency exchange gains and losses (which may vary significantly from period to
period), EBITDA and Adjusted EBITDA provide a consistent measure of our ability to generate
cash over the long term. Management uses this information as a significant factor in
determining (a) our and OPCOs proper capitalization (including assessing how much debt to
incur and whether changes to the capitalization should be made) and (b) whether to undertake
material capital expenditures and how to finance them, all in light of existing cash
distribution commitments to unitholders. Use of EBITDA and Adjusted EBITDA as liquidity
measures also permits investors to assess the fundamental ability of OPCO and us to generate
cash sufficient to meet cash needs, including distributions on our common units.
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Years Ended December 31,(in thousands)
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009Reconciliation of EBITDA and Adjusted EBITDA to Net
IncomeNet income (loss)
    
    $
    96,142
    
    
    $
    (22,837
    )
    
    $
    24,403
    
    
    $
    (159,273
    )
    
    $
    132,599Depreciation and amortization
    
    
    109,824
    
    
    
    108,964
    
    
    
    142,029
    
    
    
    158,533
    
    
    
    166,350Interest expense, net of interest income
    
    
    35,371
    
    
    
    72,142
    
    
    
    105,058
    
    
    
    81,012
    
    
    
    42,083Income taxes (recovery) expense
    
    
    (12,375
    )
    
    
    6,588
    
    
    
    1,481
    
    
    
    (62,344
    )
    
    
    12,638Depreciation and amortization and income tax
expense related to discontinued operations
    
    
    466
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    EBITDA
    
    
    229,428
    
    
    
    164,857
    
    
    
    272,971
    
    
    
    17,928
    
    
    
    353,670Unrealized (gains) losses on derivative instruments
    
    
    
    
    
    
    (4,173
    )
    
    
    55,446
    
    
    
    172,273
    
    
    
    (110,177
    )Realized (gains) losses on interest rate swaps
    
    
    
    
    
    
    (1,722
    )
    
    
    (6,379
    )
    
    
    19,663
    
    
    
    46,546Restructuring charges
    
    
    955
    
    
    
    832
    
    
    
    
    
    
    
    
    
    
    
    5,008Foreign exchange (gain)loss
    
    
    (34,228
    )
    
    
    65,723
    
    
    
    9,760
    
    
    
    (4,293
    )
    
    
    6,151Loss (gain) on sale of vessels and equipment 
net of writedowns
    
    
    2,820
    
    
    
    (4,778
    )
    
    
    
    
    
    
    
    
    
    
    Goodwill impairment charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    127,403
    
    
    
    Amortization of in-process revenue contracts
    
    
    
    
    
    
    (2,469
    )
    
    
    (10,457
    )
    
    
    (9,794
    )
    
    
    (4,857
    )Adjusted EBITDA
    
    $
    198,975
    
    
    $
    218,270
    
    
    $
    321,341
    
    
    $
    323,180
    
    
    $
    296,341Reconciliation of Adjusted EBITDA to Net operating
cash flowNet operating cash flow
    
    $
    159,999
    
    
    $
    159,141
    
    
    $
    149,197
    
    
    $
    205,011
    
    
    $
    168,213Expenditures for drydocking
    
    
    8,906
    
    
    
    31,255
    
    
    
    49,053
    
    
    
    29,075
    
    
    
    41,864Interest expense, net of interest income
    
    
    35,371
    
    
    
    72,142
    
    
    
    105,058
    
    
    
    81,012
    
    
    
    42,083Current income taxes
    
    
    3,839
    
    
    
    4,129
    
    
    
    
    
    
    
    752
    
    
    
    4,392Amortization of in process revenue contracts
    
    
    
    
    
    
    (2,469
    )
    
    
    (10,457
    )
    
    
    (9,794
    )
    
    
    (4,857
    )Realized (gains) losses on interest rate swaps
    
    
    
    
    
    
    (1,722
    )
    
    
    (6,379
    )
    
    
    19,663
    
    
    
    46,546Equity income
    
    
    3,205
    
    
    
    319
    
    
    
    
    
    
    
    
    
    
    
    Change in working capital
    
    
    (19,039
    )
    
    
    (41,456
    )
    
    
    24,871
    
    
    
    (15,619
    )
    
    
    (10,900
    )Restructuring charges
    
    
    955
    
    
    
    832
    
    
    
    
    
    
    
    
    
    
    
    5,008Other, net
    
    
    5,739
    
    
    
    (3,901
    )
    
    
    9,998
    
    
    
    13,080
    
    
    
    3,992Adjusted EBITDA
    
    $
    198,975
    
    
    $
    218,270
    
    
    $
    321,341
    
    
    $
    323,180
    
    
    $
    296,341
 (10)
    
    Expenditures for drydocking
is disclosed on a cash basis. Expenditures for vessels and equipment excludes non-cash investing activities. Please read
Item 18  Financial Statements: Note 15  Supplemental Cash Flow Information.(11)
    
    Average number of vessels consists of the average number of owned and chartered-in vessels
(including those in discontinued operations) that were in our possession during a period,
including the Dropdown Predecessor.(12)
    
    Vessel operating expenses and general and administrative expenses include unrealized gains
(losses) on derivative instruments. Please read Item 18  Financial Statements: Note 12 
Derivative Instruments and Hedging Activities. 
 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;
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##### Table of Contents




    
    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 current level of
distribution on our common units or to maintain or increase distributions.
   
    
    interest expense and principal payments on any indebtedness we incur;
    
    restrictions on distributions contained in any of our current or future debt agreements;
    
    fees and expenses of us, our general partner, its affiliates or third parties we are
required to reimburse or pay, including expenses we incur as a result of being a public
company; and
    
    reserves our general partner believes are prudent for us to maintain for the proper
conduct of our business or to provide for future distributions.
  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.
   9




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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.
  FPSO
    10




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




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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.
   
    
    renew existing charters and contracts of affreightment upon their expiration;
    
    obtain new charters and contracts of affreightment;
    
    successfully interact with shipyards during periods of shipyard construction constraints;
    
    obtain financing on commercially acceptable terms; or
    
    maintain satisfactory relationships with suppliers and other third parties.
   12




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##### Table of Contents



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




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##### Table of Contents



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;
    
    a backlog of orders at the shipyard;
  14




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##### Table of Contents




    
    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;
    
    the cost of retrofitting or modifying existing vessels, as a result of technological
advances in vessel design or equipment, changes in applicable environmental or other
regulations or standards, or otherwise; and
    
    a decrease in oil reserves in the Varg field and other fields in which the Petrojarl Varg
might otherwise be deployed.
  Climate change and greenhouse gas restrictions may adversely impact our operations and markets.
   We may be unable to make or realize expected benefits from acquisitions, and implementing our
growth strategy through acquisitions may harm our business, financial condition and operating
results.
   15




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##### Table of Contents



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




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##### Table of Contents




    
    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.
  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.
 Petrojarl Varg
 The offshore shipping and storage industry is subject to substantial environmental and other
regulations, which may significantly limit operations or increase expenses.
   OPA 90 IMO
  17




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##### Table of Contents



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




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##### Table of Contents




    
    acquire, operate and charter offshore vessels and related time charters and contracts of
affreightment if our general partner has previously advised Teekay Corporation or Teekay LNG
Partners L.P. that our general partners Board of Directors has elected, with the approval
of its conflicts committee, not to cause us or our controlled affiliates to acquire or
operate the vessels and related time charters and contracts of affreightment;
 
    
    acquire up to a 9.9% equity ownership, voting or profit participation interest in any
publicly-traded company that engages in, acquires or invests in any business that owns or
operates or charters offshore vessels and related time charters and contracts of
affreightment;
 
    
    provide ship management services relating to owning, operating or chartering offshore
vessels and related time charters and contracts of affreightment; or
 
    
    own a limited partner interest in OPCO or own shares of Teekay Petrojarl AS (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
incentive distributions (in each case to affiliates of Teekay Corporation);
 
    
    our general partner determines which costs incurred by it and its affiliates are
reimbursable by us;
 
    
    our partnership agreement does not restrict our general partner from causing us to pay it
or its affiliates for any services rendered to us on terms that are fair and reasonable or
entering into additional contractual arrangements with any of these entities on our behalf;
 
    
    our general partner intends to limit its liability regarding our contractual and other
obligations;
 
    
    our general partner may exercise its right to call and purchase common units if it and
its affiliates own more than 80.0% of our common units;
 
    
    our general partner controls the enforcement of obligations owed to us by it and its
affiliates; and
 
    
    our general partner decides whether to retain separate counsel, accountants or others to
perform services for us.
  19




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##### Table of Contents



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.
   
    
    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 Tidewater Tidewater.
  20




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##### Table of Contents



The preferential tax rates applicable to qualified dividend income are temporary, and the absence
of legislation extending the term would cause our dividends to be taxed at ordinary graduated tax
rates.
  We may be subject to taxes, which reduces our Cash Available for Distribution to you.
   
 Item 4. Information on the Partnership
 
 A. Overview, History and Development
 
 Overview and History
  OPCO FSO
 SPT
Explorer and SPT Navigator Skaugen PetroTrans
 Petrojarl Varg Petrojarl Varg Talisman Energy
  
    
    Shuttle Tankers.Our shuttle tanker fleet consists of 34 vessels that operate under
fixed-rate contracts of affreightment, time charters and bareboat charters. Of the 34
shuttle tankers, 26 are owned by OPCO (including 5 through 50% owned subsidiaries, and 3
through a 67% owned subsidiary), 6 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 average term of the
contracts of affreightment, weighted based on projected revenues, is 5.05 years. The time
charters and bareboat charters have an average remaining contract
term of approximately 4.6 years. As of December 31, 2009, our shuttle tankers, which then had a total cargo capacity
of approximately 4.3 million deadweight tonnes (or dwt), represented more than 50% of the
total tonnage of the world shuttle tanker fleet.
  21




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##### Table of Contents




    
    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 Petro Trans Inc., Teekay Corporations 50%-owned joint venture (or
Skaugen PetroTrans). The average remaining term on these contracts is approximately 5.2
years. As of December 31, 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, four of which are owned by OPCO. All of the
FSO units operate under fixed-rate contracts, with an average remaining term of
approximately 2.7 years. As of December 31, 2009, our FSO units had a total cargo capacity
of approximately 0.6 million dwt.
 
    
    FPSO Unit.We have one FPSO unit, which operates under operations and charter contracts
with Talisman Energy. We use the FPSO unit to provide transportation, production, processing
and storage services to oil companies operating offshore oil field installations.
 th
 
 Potential Additional Shuttle Tanker, FSO and FPSO Projects
   Teekay Petrojarl
 
 B. Business Overview
 
 Shuttle Tanker Segment
     22




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##### Table of Contents



Capacity
    
    
    
    
    
    
    Position-
    
    Operating
    
    
    
    
    
    RemainingVessel
    
    (dwt)
    
    
    Built
    
    Ownership
    
    ing system
    
    Region
    
    Contract Type (1)
    
    Charterer
    
    TermNavion Hispania
    
    
    126,700
    
    
    1999
    
    100%
    
    DP2
    
    North Sea
    
    CoA
    (IMAGE)
    Statoil, Chevron, Hess, Marathon Oil, ExxonMobil, 
ENI, MTDA, 
Draugen Transport, BP, ConocoPhillips, Shell, Total, Talisman, Nexen, DONG, Idemitsu and Lundin (6) 
Majority of volumesare life-of-fieldNavion Oceania
    
    
    126,300
    
    
    1999
    
    100%
    
    DP2
    
    North Sea
    
    CoANavion Anglia
    
    
    126,300
    
    
    1999
    
    100%
    
    DP2
    
    North Sea
    
    CoANavion Scandia
    
    
    126,700
    
    
    1998
    
    100%
    
    DP2
    
    North Sea
    
    CoANavion Britannia (2)
    
    
    124,200
    
    
    1998
    
    100%
    
    DP2
    
    North Sea
    
    CoANavion Norvegia (2)
    
    
    130,600
    
    
    1995
    
    67% (3)
    
    DP
    
    North Sea
    
    CoANavion Europa (2)
    
    
    130,300
    
    
    1995
    
    67% (3)
    
    DP
    
    North Sea
    
    CoARandgrid (2)
    
    
    124,500
    
    
    1995
    
    67% (3)
    
    DP
    
    North Sea
    
    CoANavion Fennia (2)
    
    
    95,200
    
    
    1992
    
    100%
    
    DP
    
    North Sea
    
    CoANavion Oslo
    
    
    100,300
    
    
    2001
    
    100%
    
    DP2
    
    North Sea
    
    CoANavion Torinita
    
    
    106,800
    
    
    1992
    
    100%
    
    DP2
    
    North Sea
    
    CoAGrena
    
    
    148,000
    
    
    2003
    
    In-chartered (until 2013) (4)
    
    DP2
    
    North Sea
    
    CoASallie Knutsen
    
    
    153,600
    
    
    1999
    
    In-chartered  (until 2015)
    
    DP2
    
    North Sea
    
    CoAKaren Knutsen
    
    
    153,600
    
    
    1999
    
    In-chartered (until 2013)
    
    DP2
    
    North Sea
    
    CoAAberdeen
    
    
    87,000
    
    
    1996
    
    In-chartered (until 2012)
    
    DP
    
    North Sea
    
    CoATordis Knutsen
    
    
    123,800
    
    
    1993
    
    In-chartered (until 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
    
    0.5 yearNavion Marita
    
    
    103,900
    
    
    1999
    
    100%
    
    DP
    
    Brazil
    
    Time charter
    
    Petrobras
    
    0.2 yearStena Natalita
    
    
    108,000
    
    
    2001
    
    50% (7)
    
    DP2
    
    North Sea
    
    Time charter
    
    ExxonMobil (8)
    
    3.0 yearsStena Alexita
    
    
    127,400
    
    
    1998
    
    50% (7)
    
    DP2
    
    North Sea
    
    Time charter
    
    ExxonMobil (8)
    
    3.0 yearsNavion Svenita
    
    
    106,500
    
    
    1997
    
    100%
    
    DP
    
    Brazil
    
    Time charter
    
    Petrobras
    
    3.0 yearsNavion Savonita
    
    
    108,100
    
    
    1992
    
    100%
    
    DP
    
    Brazil
    
    Time charter
    
    Petrobras
    
    0.2 yearBasker Spirit
    
    
    97,000
    
    
    1992
    
    100%
    
    DP
    
    Australia
    
    Time charter
    
    RocOil (8)
    
    0.5 yearNavion Stavanger
    
    
    147,500
    
    
    2003
    
    100%
    
    DP2
    
    Brazil
    
    Bareboat
    
    Petrobras (9)
    
    9 yearsNordic Spirit
    
    
    151,300
    
    
    2001
    
    100%
    
    DP
    
    Brazil
    
    Bareboat
    
    Petrobras (9)
    
    8 yearsStena Spirit
    
    
    151,300
    
    
    2001
    
    50% (7)
    
    DP
    
    Brazil
    
    Bareboat
    
    Petrobras (9)
    
    8 yearsNordic Brasilia
    
    
    151,300
    
    
    2004
    
    100%
    
    DP
    
    Brazil
    
    Bareboat
    
    Petrobras (9)
    
    8 yearsNordic Rio
    
    
    151,300
    
    
    2004
    
    50% (7)
    
    DP
    
    Brazil
    
    Bareboat
    
    Petrobras (9)
    
    8 yearsNavion Bergen
    
    
    105,600
    
    
    2000
    
    100%
    
    DP2
    
    Brazil
    
    Bareboat
    
    Petrobras (9)
    
    11 yearsNavion Gothenburg
    
    
    152,200
    
    
    2006
    
    50% (7)
    
    DP2
    
    Brazil
    
    Bareboat
    
    Petrobras (9)
    
    10.5 yearsPetroatlantic
    
    
    92,900
    
    
    2003
    
    100%
    
    DP2
    
    North Sea
    
    Bareboat
    
    Petrojarl/BP (9)
    
    2 years (10)Petronordic
    
    
    92,900
    
    
    2002
    
    100%
    
    DP2
    
    North Sea
    
    Bareboat
    
    Petrojarl/BP (9)
    
    1.5 years (10)Total capacity
    
    
    4,143,900
 (1)
    
    CoA refers to contracts of affreightment.(2)
    
    The vessel is capable of loading from a submerged turret loading buoy.(3)
    
    Owned through a 67% owned subsidiary. The parties share in the profits and losses of the
subsidiary in proportion to each partys relative capital contributions. Teekay Corporation
subsidiaries provide operational services for these vessels.(4)
    
    OPCO has options to extend the time charter or purchase the vessel.(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.(10)
    
    Remaining term includes option exercised by charterer on March 17, 2010, to extend term by
one year.     23




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##### Table of Contents



Conventional Tanker Segment
       ContractVessel
    
    Capacity (dwt)
    
    
    Built
    
    Ownership
    
    
    Type
    
    Charterer
    
    Remaining TermSPT Explorer (1)
    
    
    106,000
    
    
    2008
    
    
    100
    %
    
    Bareboat
    
    Skaugen PT
    
    9 yearsSPT Navigator (1)
    
    
    106,000
    
    
    2008
    
    
    100
    %
    
    Bareboat
    
    Skaugen PT
    
    9 yearsKilimanjaro Spirit (2)
    
    
    115,000
    
    
    2004
    
    
    100
    %
    
    Time charter
    
    Teekay
    
    9 yearsFuji Spirit (2)
    
    
    106,300
    
    
    2003
    
    
    100
    %
    
    Time charter
    
    Teekay
    
    9 yearsHamane Spirit (2)
    
    
    105,200
    
    
    1997
    
    
    100
    %
    
    Time charter
    
    Teekay
    
    6 yearsPoul Spirit (2)
    
    
    105,300
    
    
    1995
    
    
    100
    %
    
    Time charter
    
    Teekay
    
    4 yearsGotland Spirit (2)
    
    
    95,300
    
    
    1995
    
    
    100
    %
    
    Time charter
    
    Teekay
    
    4 yearsTorben Spirit (2)
    
    
    98,600
    
    
    1994
    
    
    100
    %
    
    Time charter
    
    Teekay
    
    3 yearsScotia Spirit (3)
    
    
    95,000
    
    
    1992
    
    
    100
    %
    
    Time charter
    
    Teekay
    
    2 yearsLeyte Spirit (2)
    
    
    98,700
    
    
    1992
    
    
    100
    %
    
    Time charter
    
    Teekay
    
    2 yearsLuzon Spirit (2)
    
    
    98,600
    
    
    1992
    
    
    100
    %
    
    Time charter
    
    Teekay
    
    2 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.   24




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##### Table of Contents



FSO Segment
     Capacity
    
    
    
    
    
    
    
    
    Field name and
    
    
    
    
    
    RemainingVessel
    
    (dwt)
    
    
    Built
    
    Ownership
    
    
    location
    
    Contract Type
    
    Charterer
    
    TermPattani Spirit
    
    
    113,800
    
    
    1988
    
    
    100
    %
    
    Platong, Thailand
    
    Bareboat
    
    Teekay
    
    4 years (1)Apollo Spirit
    
    
    129,000
    
    
    1978
    
    
    89
    %
    
    Banff, U.K.
    
    Bareboat
    
    Teekay
    
    4 years (2)Navion Saga
    
    
    149,000
    
    
    1991
    
    
    100
    %
    
    Volve, Norway
    
    Time charter
    
    Statoil ASA
    
    0.5 years (3)Karratha Spirit
    
    
    106,600
    
    
    1988
    
    
    100
    %
    
    Legendre, Australia
    
    Time charter
    
    Apache
    
    1 year (3)Dampier Spirit
    
    
    106,700
    
    
    1987
    
    
    100
    %
    
    Stag, Australia
    
    Time charter
    
    Apache
    
    4 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
four 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.  
 FPSO Segment
   Petrojarl
Varg
  25




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##### Table of Contents



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 Teekay Petrojarl will enable us to competitively pursue FPSO projects anywhere in the
world by combining Teekay Petrojarls engineering and operational expertise with Teekay
Corporations global marketing organization and extensive customer and shipyard
relationships.
 
    
    Acquire additional vessels on long-term, fixed-rate contracts.We intend to continue
acquiring shuttle tankers 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;
  26




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##### Table of Contents




    
    purchasing;
 
    
    shipyard supervision;
 
    
    insurance; and
 
    
    financial management services.
    
 Risk of Loss, Insurance and Risk Management
     
 Classification, Audits and Inspections
 Intermediate Survey Special Survey
    
    
    adherence to our operating standards;
 
    
    the structural integrity of the vessel is being maintained;
 
    
    machinery and equipment is being maintained to give full reliability in service;
  27




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##### Table of Contents




    
    we are optimizing performance in terms of speed and fuel consumption; and
 
    
    the vessels appearance will support our brand and meet customer expectations.
   
 Regulations
 General
  International Maritime Organization (or IMO)
  CLC
 SOLAS ISPS DP
   Annex
VI
  European Union (or EU)
   28




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##### Table of Contents



Directive LSMGO HFO
 North Sea
  VOC equipment)
 United States
 OPA 90 CERCLA
  
    
    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.
    29




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##### Table of Contents



Coast Guard
   
    
    address a worst case scenario and identify and ensure, through contract or other
approved means, the availability of necessary private response resources to respond to a
worst case discharge;
 
    
    describe crew training and drills; and
 
    
    identify a qualified individual with full authority to implement removal actions.
    EPA
  Greenhouse Gas Regulation
 Kyoto Protocol
 Vessel Security
 MTSA
  30




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##### Table of Contents



C. Organizational Structure
   
 D. Properties
  
 E. Taxation of the Partnership
 United States Taxation
 Code
 Election to be Taxed as a Corporation.
 Taxation of Operating Income. Transportation Income
 U.S. Source International Transportation Income U.S. Source
Domestic Transportation Income
 Section 883 Exemption
 The Section 883 Exemption. Section 883 Regulations
  Equivalent Exemption
      31




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##### Table of Contents



The Net Basis Tax and Branch Profits Tax. Effectively Connected
Income
   The 4.0% Gross Basis Tax.
 Marshall Islands Taxation
  Other Taxation
  
 Item 4A. Unresolved Staff Comments
  
 Item 5. Operating and Financial Review and Prospects
 The following discussion should be read in conjunction with the financial statements and notes
thereto appearing elsewhere in this report.
 Managements Discussion and Analysis of Financial Condition and Results of Operations
 
 OVERVIEW
 OPCO FSO FPSO
  32




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##### Table of Contents



SIGNIFICANT DEVELOPMENTS
  Petrojarl Varg Petrojarl Varg Talisman Energy
 Petrojarl Varg
 Petrojarl Varg Petrojarl Varg Petrojarl Varg
 Petrojarl Varg Petrojarl Varg
  Petrojarl Varg Falcon Spirit Falcon Spirit Falcon Spirit
 
 Potential Additional Shuttle Tanker, FSO and FPSO Projects
      33




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##### Table of Contents



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




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##### Table of Contents



Depreciation and Amortization.
 
    
    charges related to the depreciation of the historical cost of our fleet (less an
estimated residual value) over the estimated useful lives of the vessels;
 
    
    charges related to the amortization of drydocking expenditures over the estimated useful
life of the drydocking; and
 
    
    charges related to the amortization of the fair value of contracts of affreightment
where amounts have been attributed to those items in acquisitions; these amounts are
amortized over the period in which the asset is expected to contribute to future cash
flows.
 Revenue Days.
 Calendar-Ship-Days.
 VOC Equipment. VOC equipment
 
 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 Bergen and 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 Explorer and 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). In September 2009, we acquired the Petrojarl Varg FPSO unit, together with its
operations and charter contracts.
 Dropdown Predecessor (Petrojarl Varg), Navion Bergen Navion Gothenburg Dampier Spirit SPT Explorer) 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. Please read  Results of Operations below for further details about vessel
dispositions and deliveries. Due to the nature of our business, we expect our fleet to
continue to fluctuate in size and composition.
 
    
    Our vessel operating costs are facing industry-wide cost pressures.The oil shipping
industry is experiencing a global manpower shortage due to growth in the world fleet. This
shortage resulted in significant crew wage increases during 2007, 2008, and to a lesser
degree in 2009. We expect the trend of significant crew compensation increases to abate in
the short term. However this could change if market conditions adjust. In addition,
factors such as pressure on raw material prices and changes in regulatory requirements
could also increase operating expenditures. We have taken various measures throughout 2009
in an effort to reduce costs, improve operational efficiencies, and mitigate the impact of
inflation and price increases and will continue this effort during 2010.
 
    
    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.
Beginning in 2009, payments under the service agreements have been adjusted to reflect any
change in Teekay Corporations cost of providing services based on fluctuations in the
value of the Norwegian Kroner relative to the U.S. Dollar, which may result in increased
payments under the services agreements if the strength of the U.S. Dollar declines relative
to the Norwegian Kroner.
 
    
    Our net income is affected by fluctuations in the fair value of our derivatives. Our
interest rate swaps and some of our foreign currency forward contracts are not designated
as hedges for accounting purposes. Although we believe these derivative instruments are
economic hedges, the changes in their fair value are included in our statements of income
(loss) as unrealized gains or losses on non-designated derivatives. The changes in fair
value do not affect our cash flows, liquidity or cash distributions to partners.
  35




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
    
    Our operations are seasonal and our financial results vary as a consequence of
drydockings.Historically, the utilization of shuttle tankers in the North Sea is higher in
the winter months, as favorable weather conditions in the warmer months provide
opportunities for repairs and maintenance to our vessels and to the offshore oil platforms.
Downtime for repairs and maintenance generally reduces oil production and thus,
transportation requirements. In addition, we generally do not earn revenue when our vessels
are in scheduled and unscheduled drydocking. During 2009, eleven of our vessels completed
their scheduled drydockings. Eleven vessels are scheduled for drydocking in 2010. From time
to time, unscheduled drydockings may cause additional fluctuations in our financial
results.
  
 Results of Operations
 Year Ended December 31, 2009 versus Year Ended December 31, 2008
 Shuttle Tanker Segment
   Year Ended December 31,(in thousands of U.S. dollars, except calendar-ship-days and percentages)
    
    2009
    
    
    2008
    
    
    % ChangeRevenues
    
    
    534,464
    
    
    
    650,896
    
    
    
    (17.9
    )Voyage expenses
    
    
    85,197
    
    
    
    169,578
    
    
    
    (49.8
    )Net revenues
    
    
    449,267
    
    
    
    481,318
    
    
    
    (6.7
    )Vessel operating expenses
    
    
    140,751
    
    
    
    130,033
    
    
    
    8.2Time-charter hire expense
    
    
    117,202
    
    
    
    132,234
    
    
    
    (11.4
    )Depreciation and amortization
    
    
    98,013
    
    
    
    91,846
    
    
    
    6.7General and administrative (1)
    
    
    43,808
    
    
    
    50,102
    
    
    
    (12.6
    )Restructuring charges
    
    
    4,734
    
    
    
    
    
    
    
    100.00Income from vessel operations
    
    
    44,759
    
    
    
    77,103
    
    
    
    (41.9
    )Calendar-Ship-DaysOwned Vessels
    
    
    9,855
    
    
    
    9,765
    
    
    
    0.9Chartered-in Vessels
    
    
    3,262
    
    
    
    3,624
    
    
    
    (10.0
    )Total
    
    
    13,117
    
    
    
    13,389
    
    
    
    (2.0
    )
 (1)
    
    Includes direct general and administrative expenses and indirect general and administrative
expenses (allocated to the shuttle tanker segment based on estimated use of corporate
resources).  
    
    the redelivery of two chartered-in vessels back to their owners in June 2008 and May
2009, respectively;
 
    
    reduced spot chartered-in vessels compared to 2008; and
 
    
    the purchase of an in-chartered shuttle tanker in late March 2008 (or the 2008 Shuttle
Tanker Acquisition);
  
    
    the in-chartering of one vessel from December 2008 to June 2009.
 Net Revenues.
 
    
    a decrease of $54.9 million due to fewer revenue days from shuttle tankers servicing
contracts of affreightment and from trading in the conventional spot market, as well as
lower spot rates earned in the conventional spot market, compared to 2008;
 
    
    a decrease of $1.8 million from the recovery of certain Norwegian environmental taxes
from our customers, compared to 2008; and
 
    
    a decrease of $1.5 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;
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
    
    an increase of $8.4 million for 2009 due to rate increases on certain contracts of
affreightment, partially offset by rate decreases in certain time-charter and bareboat
contracts;
 
    
    an increase of $5.7 million due to a new time-charter agreement that began in December
2008;
 
    
    an increase of $5.0 million due to lower bunker prices in 2009 as compared to 2008,
partially offset by an increase in non-reimbursable bunker costs resulting primarily from
increased idle days in 2009, as compared to 2008;
 
    
    an increase of $3.5 million due to a decrease in the number of offhire days resulting
from scheduled drydockings primarily in the time-chartered fleet, and from fewer unexpected
repairs compared to the same periods last year; and
 
    
    an increase of $3.5 million due to a decrease in customer performance claims under the
terms of charter party agreements.
 Vessel Operating Expenses.
 
    
    an increase of $7.8 million relating to the net realized and unrealized changes in fair
value of our foreign currency forward contracts that are or have been designated as hedges
for accounting purposes;
 
    
    an increase of $3.9 million due to an increase in the number of vessels drydocked
primarily in the contract of affreightment fleet, and costs related to services, spares and
consumables during 2009;
 
    
    an increase of $3.3 million due to the 2008 Shuttle Tanker Acquisition and the
in-chartering of one vessel from December 2008 to June 2009;
  
    
    a decrease of $2.9 million in repairs performed for certain vessels in 2009 as compared
to last year;
 
    
    a decrease of $1.1 million primarily due to a reduction in projects (mainly relating to
equipment upgrades and enhancements) during 2009 as compared to last year; and
 
    
    a decrease of $ 0.8 million in crew and manning costs as compared to last year,
resulting primarily from cost savings initiatives that began in 2009.
 Time-Charter Hire Expense.
 
    
    a decrease of $11.8 million due to increased drydocking and offhire of chartered-in
vessels and a reduction in spot chartered-in vessels during 2009;
 
    
    a decrease of $2.2 million due to the 2008 Shuttle Tanker Acquisition; and
 
    
    a net decrease of $2.1 million primarily due to the redelivery of three chartered-in
vessels to their owners in June 2008, May 2009 and November 2009, partially offset by one
vessel chartered-in from December 2008 to June 2009.
 Depreciation and Amortization.
 
    
    an increase of $3.7 million due to changes in the estimated useful lives of two of our
vessels;
 
    
    an increase of $2.5 million due to increased drydocking during 2009; and
 
    
    an increase of $0.4 million due to the 2008 Shuttle Tanker Acquisition;
  
    
    a decrease of $1.0 million in the amortization of our intangible assets.
 Restructuring Charge.
 Conventional Tanker Segment
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Year Ended December 31,(in thousands of U.S. dollars, except calendar-ship-days and percentages)
    
    2009
    
    
    2008
    
    
    % ChangeRevenues
    
    
    124,659
    
    
    
    153,200
    
    
    
    (18.6
    )Voyage expenses
    
    
    24,494
    
    
    
    53,722
    
    
    
    (54.4
    )Net revenues
    
    
    100,165
    
    
    
    99,478
    
    
    
    0.7Vessel operating expenses
    
    
    23,503
    
    
    
    25,156
    
    
    
    (6.6
    )Depreciation and amortization
    
    
    24,042
    
    
    
    22,901
    
    
    
    5.0General and administrative (1)
    
    
    5,396
    
    
    
    8,674
    
    
    
    (37.8
    )Restructuring charges
    
    
    274
    
    
    
    
    
    
    
    Income from vessel operations
    
    
    46,950
    
    
    
    42,747
    
    
    
    9.8Calendar-Ship-DaysOwned Vessels
    
    
    4,015
    
    
    
    3,931
    
    
    
    2.1
 (1)
    
    Includes direct general and administrative expenses and indirect general and administrative
expenses (allocated to the conventional tanker segment based on estimated use of corporate
resources).  
    
    In June 2008, OPCO acquired the lightering tankers SPT Explorer and SPT Navigator
(collectively, the 2008 Conventional Tanker Acquisitions), which operate under fixed-rate
bareboat charters to Teekay Corporations 50% owned joint venture company, Skaugen
PetroTrans. (However, as a result of the inclusion of the Dropdown Predecessor, the SPT
Explorer and the SPT Navigator have been included for accounting purposes in our results as
if they were acquired on January 7, 2008 and March 28, 2008, respectively, when they
completed construction and began operations as conventional tankers for Teekay Corporation.
Please read Items You Should Consider When Evaluating Our Results of Operations Our
financial results reflect the results of the interests in vessels acquired from Teekay
Corporation for all periods the vessels were under common control above);
 Net Revenues.
 
    
    an increase of $1.4 million due to the 2008 Conventional Tanker Acquisitions (including
the impact of the Dropdown Predecessor); and
 
    
    an increase of $0.7 million due to less off-hire days for scheduled drydocking partially
offset by a decrease in calendar days in 2009;
  
    
    a decrease of $0.8 million in net bunker revenues due to a general decrease in bunker
index prices; and
 
    
    a decrease of $0.8 million due to a net decrease in daily hire rates for all nine
time-charter contracts with Teekay Corporation.
 Vessel Operating Expenses.
 
    
    a decrease of $1.5 million in cost of services, spares and consumables; and
 
    
    a decrease of $0.4 million in crew and manning costs during 2009;
  
    
    an increase of $0.5 million due to increased repairs for certain vessels during 2009.
 Depreciation and Amortization.
 
    
    an increase of $0.9 million due to an increase in capitalized drydock costs in the
latter half of 2008 and during 2009; and
 
    
    an increase of $0.4 million due to the 2008 Conventional Tanker Acquisitions (including
the impact of the Dropdown Predecessor).
 FSO Segment
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Year Ended December 31,(in thousands of U.S. dollars, except calendar-ship-days and percentages)
    
    2009
    
    
    2008
    
    
    % ChangeRevenues
    
    
    62,706
    
    
    
    68,396
    
    
    
    (8.3
    )Voyage expenses
    
    
    1,335
    
    
    
    1,729
    
    
    
    (22.8
    )Net revenues
    
    
    61,371
    
    
    
    66,667
    
    
    
    (7.9
    )Vessel operating expenses
    
    
    26,569
    
    
    
    26,845
    
    
    
    (1.0
    )Depreciation and amortization
    
    
    21,763
    
    
    
    23,690
    
    
    
    (8.1
    )General and administrative (1)
    
    
    3,097
    
    
    
    3,560
    
    
    
    (13.0
    )Income from vessel operations
    
    
    9,942
    
    
    
    12,572
    
    
    
    (20.9
    )Calendar-Ship-DaysOwned Vessels
    
    
    1,825
    
    
    
    1,830
    
    
    
    (0.3
    )
 (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). Net Revenues.
 
    
    a decrease of $2.9 million due to unfavorable exchange rates; and
 
    
    a decrease of $2.5 million from the Navion Saga being offhire for 43 days in 2009 due to
a scheduled drydock;
  
    
    an increase of $0.8 million due to a decrease in bunker costs during 2009.
 FPSO Segment
 Petrojarl Varg
  Year Ended December 31,(in thousands of U.S. dollars, except calendar-ship-days and percentages)
    
    2009
    
    
    2008
    
    
    % ChangeRevenues
    
    
    100,027
    
    
    
    96,416
    
    
    
    3.7Vessel operating expenses
    
    
    42,438
    
    
    
    42,201
    
    
    
    0.6Depreciation and amortization
    
    
    22,532
    
    
    
    20,096
    
    
    
    12.1General and administrative (1)
    
    
    5,715
    
    
    
    7,183
    
    
    
    (20.4
    )Goodwill impairment charge
    
    
    
    
    
    
    127,403
    
    
    
    (100.0
    )Income (loss) from vessel operations
    
    
    29,342
    
    
    
    (100,467
    )
    
    
    (129.2
    )Calendar-Ship-DaysOwned Vessels
    
    
    365
    
    
    
    366
    
    
    
    (0.3
    )
 (1)
    
    Includes direct general and administrative expenses and indirect general and administrative
expenses (allocated to the FPSO segment based on estimated use of corporate resources). Petrojarl Varg Petrojarl Varg Petrojarl Varg
 Revenues.
 
    
    an increase of $5.7 million during 2009 as the Petrojarl Varg commenced a new four-year
contract extension with Talisman Energy beginning in the third quarter of 2009;
  
    
    a decrease of $2.0 million for 2009 as a result of decreases in miscellaneous service
revenues as compared to the previous year.
 Depreciation and Amortization. Petrojarl Varg
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Goodwill impairment charge. Petrojarl Varg
 Other Operating Results
 General and Administrative Expenses.
 Interest Expense.
 
    
    a decrease of $29.8 million due to a decline in interest rates during 2009;
 
    
    a decrease of $7.4 million relating to the scheduled repayments and prepayments of debt
during 2008 and 2009;
 
    
    a decrease of $6.3 million from the financing of the Petrojarl Varg (including the
Dropdown Predecessor) mainly due to a decrease in interest rates.
 Realized and Unrealized Gains (Losses) on Non-designated Derivatives
 Year Ended December 31,(in thousands of U.S. Dollars)
    
    2009
    
    
    2008Realized (losses) gainsInterest rate swaps
    
    
    (46,546
    )
    
    
    (19,663
    )Foreign currency forward contracts
    
    
    (4,196
    )
    
    
    1,972(50,742
    )
    
    
    (17,691
    )Unrealized gains (losses)Interest rate swaps
    
    
    99,740
    
    
    
    (163,291
    )Foreign currency forward contracts
    
    
    4,562
    
    
    
    (7,800
    )104,302
    
    
    
    (171,091
    )Total realized and unrealized gains (losses) on non-designated derivative instruments
    
    
    53,560
    
    
    
    (188,782
    )
 Foreign Currency Exchange Gains (Losses).
 Income Tax (Expense) Recovery.
 Other Income.
 Net Income (Loss).
  40




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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
    
    
    % ChangeRevenues
    
    
    650,896
    
    
    
    590,611
    
    
    
    10.2Voyage expenses
    
    
    169,578
    
    
    
    114,157
    
    
    
    48.5Net revenues
    
    
    481,318
    
    
    
    476,454
    
    
    
    1.0Vessel operating expenses
    
    
    130,033
    
    
    
    104,128
    
    
    
    24.9Time-charter hire expense
    
    
    132,234
    
    
    
    150,463
    
    
    
    (12.1
    )Depreciation and amortization
    
    
    91,846
    
    
    
    86,502
    
    
    
    6.2General and administrative (1)
    
    
    50,102
    
    
    
    50,835
    
    
    
    (1.4
    )Income from vessel operations
    
    
    77,103
    
    
    
    84,526
    
    
    
    (8.8
    )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 Bergen had 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 Gothenburg completed 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 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;
  
    
    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; and
 
    
    an increase of $3.4 million relating to repairs and maintenance performed for certain
vessels those periods;
  
    
    a decrease of $0.5 million relating to the unrealized change in fair value of our
foreign currency forward contracts.
  41




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##### Table of Contents



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;
  
    
    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
    
    
    % ChangeRevenues
    
    
    153,200
    
    
    
    135,922
    
    
    
    12.7Voyage expenses
    
    
    53,722
    
    
    
    36,594
    
    
    
    46.8Net 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).  
    
    In June 2008, OPCO acquired the lightering tankers SPT Explorer and SPT Navigator
(collectively, the 2008 Conventional Tanker Acquisitions), which operate under fixed-rate
bareboat charters to Teekay Corporations 50% owned joint venture company, Skaugen
PetroTrans. (However, as a result of the inclusion of the Dropdown Predecessor, the SPT
Explorer and the SPT Navigator have been included for accounting purposes in our results as
if they were acquired on January 7, 2008 and March 28, 2008, respectively, when they
completed construction and began operations as conventional tankers for Teekay Corporation.
Please read Items You Should Consider When Evaluating Our Results of Operations Our
financial results reflect the results of the interests in vessels acquired from Teekay
Corporation for all periods the vessels were under common control above);
  
    
    transfer of the Navion Saga to 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 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;
  42




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
    
    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 Saga to 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 Saga to 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 Saga to 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
    
    
    % ChangeRevenues
    
    
    68,396
    
    
    
    58,670
    
    
    
    16.6Voyage expenses
    
    
    1,729
    
    
    
    886
    
    
    
    95.1Net 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). Dampier Spirit Dampier Spirit
 Navion Saga
 Net Revenues.
 
    
    an increase of $6.9 million from the inclusion of the Navion Saga in the FSO segment
from May 2007; and
 
    
    a relative increase of $3.3 million from the Dampier Spirit being 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
  43




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FPSO Segment
  Year Ended December 31,(in thousands of U.S. dollars, except calendar-ship-days and percentages)
    
    2008
    
    
    2007
    
    
    % ChangeRevenues
    
    
    96,416
    
    
    
    93,453
    
    
    
    3.2Vessel operating expenses
    
    
    42,201
    
    
    
    37,424
    
    
    
    12.8Depreciation and amortization
    
    
    20,096
    
    
    
    17,659
    
    
    
    13.8General and administrative (1)
    
    
    7,183
    
    
    
    7,815
    
    
    
    (8.1
    )Goodwill impairment
    
    
    127,403
    
    
    
    
    
    
    
    100.0(Loss) income from vessel operations
    
    
    (100,467
    )
    
    
    30,555
    
    
    
    (428.8
    )Calendar-Ship-DaysOwned Vessel
    
    
    366
    
    
    
    365
    
    
    
    0.3
 (1)
    
    Includes direct general and administrative expenses and indirect general and administrative
expenses (allocated to the FPSO segment based on estimated use of corporate resources). Petrojarl Varg Petrojarl Varg Petrojarl Varg
 Revenues.
 
    
    an increase of $3.7 million primarily due to an increase in the daily hire rate during
2008 and an increase in net revenue days;
  
    
    a decrease of $0.7 million as a result of decreases in miscellaneous service revenues as
compared to last year.
 Vessel Operating Expenses.
 
    
    an increase of $1.2 million resulting from an increase in salaries for crew and
officers, primarily due to general wage escalations;
 
    
    an increase of $1.8 million due to due to the strengthening of the Norwegian Kroner
against the U.S. Dollar compared to last year;
 
    
    an increase of $1.5 million due to an increase in service costs; and
 
    
    an increase of $0.7 million relating to the unrealized changes in fair value of our
foreign currency forward contracts.
 Depreciation and Amortization. Petrojarl Varg
 Goodwill impairment charge. Petrojarl Varg
 Other Operating Results
 General and Administrative Expenses.
 
    
    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;
  
    
    an increase of $3.1 million, primarily due to an increase in crew training costs; and
 
    
    an increase of $1.5 million from unrealized losses on foreign currency forward
contracts.
  44




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##### Table of Contents



Interest Expense.
 
    
    a decrease of $26.0 million due to a decline in interest rates during 2008; and
 
    
    a decrease of $7.9 million from the financing of the Petrojarl Varg (the Dropdown
Predecessor) mainly due to a decrease in interest rates;
  
    
    an increase of $5.0 million due to the assumption of debt relating to the 2007 Shuttle
Tanker Acquisitions and the 2008 Conventional Tanker Acquisitions; and
 
    
    an increase of $3.0 due to the increase in debt mainly relating to the purchase of the
Dampier Spirit.
 Realized and Unrealized Gains (Losses) on Non-designated Derivatives
 Year Ended December 31,(in thousands of U.S. Dollars)
    
    2008
    
    
    2007Realized (losses) gainsInterest rate swaps
    
    
    (19,663
    )
    
    
    6,379Foreign currency forward contracts
    
    
    1,972
    
    
    
    2,296(17,691
    )
    
    
    8,675Unrealized (losses) gainsInterest rate swaps
    
    
    (163,291
    )
    
    
    (57,357
    )Foreign currency forward contracts
    
    
    (7,800
    )
    
    
    2,140(171,091
    )
    
    
    (55,217
    )Total realized and unrealized losses on non-designated derivative instruments
    
    
    (188,782
    )
    
    
    (46,542
    )
 Foreign Currency Exchange Gains (Losses).
 Income Tax Recovery (Expense).
 Other Income.
 Net (Loss) Income.
 
 Liquidity and Capital Resources
 Liquidity and Cash Needs
     45




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##### Table of Contents



Cash Flows.
 Years Ended December 31,2009
    
    
    2008($000s)
    
    
    ($000s)Net cash flow from operating activities
    
    
    168,213
    
    
    
    205,011Net cash flow (used in) from financing activities
    
    
    (209,839
    )
    
    
    83,768Net cash flow from (used in) investing activities
    
    
    11,025
    
    
    
    (285,291
    )
 Operating Cash Flows.
 Financing Cash Flows. Petrojarl Varg .
  SPT Explorer SPT Navigator Navion Oslo Petrojarl Varg SPT Explorer SPT Navigator
   Investing Cash Flows.
 Petrojarl Varg Navion Oslo
  
 Credit Facilities
   46




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##### Table of Contents




    
    incurring or guaranteeing indebtedness (applicable to our term loans and three 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
  2011
    
    
    2013and
    
    
    andTotal
    
    
    2010
    
    
    2012
    
    
    2014
    
    
    Beyond 2014(in millions of U.S. dollars)Long-term debt (1)
    
    
    1,735.6
    
    
    
    108.2
    
    
    
    344.6
    
    
    
    1,094.5
    
    
    
    188.3Chartered-in vessels (operating leases)
    
    
    227.1
    
    
    
    74.0
    
    
    
    101.6
    
    
    
    44.9
    
    
    
    6.6Total contractual obligations
    
    
    1,962.7
    
    
    
    182.2
    
    
    
    446.2
    
    
    
    1,139.4
    
    
    
    194.9
 
 (1)
    
    Excludes expected interest payments of $28.2 million (2010), $51.0 million (2011 and 2012),
$28.7 million (2013 and 2014) and $3.7 million (beyond 2014). Expected interest payments are
based on December 31, 2009 LIBOR, plus margins which ranged between 0.45% and 3.25% as at
December 31, 2009. 
 Off-Balance Sheet Arrangements
  
 Critical Accounting Estimates
   47




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##### Table of Contents



Revenue Recognition
 Description.
 Judgments and Uncertainties.
 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 .
  48




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Effect if Actual Results Differ from Assumptions.
  Valuation of Derivative Instruments
 Description.
 Judgments and Uncertainties.
 Effect if Actual Results Differ from Assumptions.
 
 Recent Accounting Pronouncements
 FASB ASC Business Combinations
 Consolidation
 Fair Value Measurements and Disclosures,
 Derivatives and Hedging,
 Earnings Per Share, EPU MLPs IDRs
  49




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##### Table of Contents



Intangibles  Goodwill and Other,
 Investments  Equity Method and Joint
Ventures,
 Financial Instruments,
 Subsequent Events,
 SEC
 Fair Value Measurements and Disclosures,
 
 Recent Accounting Pronouncements Not Yet Adopted
 Consolidations
 Transfers and Services
 Revenue Recognition
 Fair Value Measurements and
Disclosures
  50




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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
    
    
    60
    
    
    Chairman (1)Bjorn Moller
    
    
    52
    
    
    Vice Chairman (1)Peter Evensen
    
    
    51
    
    
    Chief Executive Officer, Chief Financial Officer and DirectorDavid L. Lemmon
    
    
    67
    
    
    Director (2)Carl Mikael L.L. von Mentzer
    
    
    65
    
    
    Director (2)John J. Peacock
    
    
    66
    
    
    Director (2)
 
 (1)
    
    Member of Corporate Governance Committee(2)
    
    Member of Audit Committee and Conflicts Committee  C. Sean Day
 Bjorn Moller
  51




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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
    
    
    60
    
    
    ChairmanBjorn Moller
    
    
    52
    
    
    Vice ChairmanPeter Evensen
    
    
    51
    
    
    Chief Executive Officer, Chief Financial Officer and Director
  
 B. Compensation
 
 Reimbursement of Expenses of Our General Partner
  
 Executive Compensation
  
 Compensation of Directors
   52




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##### Table of Contents



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.
  53




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##### Table of Contents




    
    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
  Identity of Person or Group
    
    Common Units Owned
    
    
    Percentage of Common Units Owned(3)All directors and officers as a group (6 persons) (1) (2)
    
    
    321,530
    
    
    
    0.85
    %
 
 (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 Unitholders and Related Party Transactions Certain Relationships and
Related Party Transactions for more detail.(2)
    
    Each director, executive officer and key employee beneficially owns less than one
percent of the outstanding units.(3)
    
    Excludes the 2% general partner interest held by our general partner, a wholly owned
subsidiary of Teekay Corporation. 
 Item 7. Major Unitholders and Related Party Transactions
 
 A. Major Unitholders
   54




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##### Table of Contents



Identity of Person or Group
    
    Common Units Owned
    
    
    Percentage of Common Units OwnedTeekay Corporation(1)
    
    
    14,800,000
    
    
    
    39.3
    %Kayne Anderson Capital Advisors,
LP, and Richard A. Kayne, as a
group (2)
    
    
    2,531,562
    
    
    
    6.7
    %Neuberger Berman Group LLC and
Neuberger Berman, LLC, as a
group (3)
    
    
    1,706,001
    
    
    
    4.5
    %
 
 (1)
    
    Excludes the 2% general partner interest held by our general partner, a wholly owned
subsidiary of Teekay Corporation. All of the 9,800,000 subordinated units Teekay Corporation
held at December 31, 2009 converted into common units on January 1, 2010.(2)
    
    Includes shared voting power and shared dispositive power as to 2,531,562 units. Kayne
Anderson Capital Advisors, LP, and Richard A. Kayne both have shared voting and dispositive
power. Kayne Anderson Capital Advisors, L.P. is the general partner (or general partner of
the general partner) of the limited partnerships and investment adviser to the other
accounts. Richard A. Kayne is the controlling shareholder of the corporate owner of Kayne
Anderson Investment Management, Inc., the general partner of Kayne Anderson Capital
Advisors, L.P. Mr. Kayne is also a limited partner of each of the limited partnerships and a
shareholder of the registered investment company. This information is based on the Schedule
13G/A filed by this group with the SEC on February 11, 2010.(3)
    
    Includes shared voting power as to 1,617,881 units and shared dispositive power as to
1,706,001 units. Both Neuberger Berman Group LLC and Neuberger Berman LLC have shared
dispositive power. Neuberger Berman, LLC and Neuberger Berman Management LLC serve as
sub-advisor and investment manager, respectively, of Neuberger Berman Group LLCs mutual
funds. The holdings of Neuberger Berman Fixed Income LLC and NB Alternative Fund Management
LLC, affiliates of Neuberger Berman LLC, are also aggregated to comprise the holdings
referenced herein. This information is based on the Schedule 13G filed by this group with
the SEC on February 16, 2010.  
 B. Certain Relationships and Related Party Transactions
 a)
    
    Two of OPCOs FSO units are employed on long-term bareboat charters with a subsidiary
of Teekay Corporation. Pursuant to these charter contracts, OPCO earned revenues of $11.2
million, $11.2 million and $12.0 million during the years ended December 31, 2009, 2008 and
2007, respectively.
 b)
    
    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. Pursuant to this agreement, during the years
ended December 31, 2009, 2008 and 2007, OPCO earned management fee of $3.2 million, $3.3
million and $3.3 million, respectively.
 c)
    
    Eight of OPCOS Aframax conventional oil tankers, one of OPCOs FSO units, one of our
FSO units and our FPSO unit are managed by subsidiaries of Teekay Corporation. Pursuant to
the associated management services, we incurred general and administrative expenses of $5.3
million, $3.5 million and $4.5 million during the years ended December 31, 2009, 2008 and
2007, respectively.
 d)
    
    We, OPCO and certain of OPCOs operating subsidiaries have entered into services
agreements with certain subsidiaries of Teekay Corporation, pursuant to which Teekay
Corporation subsidiaries provide us, OPCO and its operating subsidiaries with
administrative, advisory and technical services and ship management services. Pursuant to
these service agreements, we incurred $39.7 million, $50.3 million and $53.0 million of
these costs during the December 31, 2009, 2008, and 2007, respectively.
 e)
    
    Pursuant to our partnership agreement, we reimburse our General Partner for all
expenses incurred by the General Partner that are necessary or appropriate for the conduct
of our business. The General Partner incurred $0.5 million, $0.6 million and $0.8 million
of these costs during the years ended December 31, 2009, 2008 and 2007, respectively.
 f)
    
    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.
 g)
    
    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 revenues of $114.7 million, $144.5
million and $128.4 million for the years ended December 31, 2009, 2008 and 2007,
respectively.
 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
revenues of $12.4 million, $14.8 million and $14.2 million during the years ended December
31, 2009, 2008 and 2007, respectively.
 i)
    
    In October 2007, we acquired from Teekay Corporation a 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.
  55




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##### Table of Contents



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.
    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
 
    
    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 AS
(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
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##### Table of Contents




    
    acquiring, operating or chartering oil tankers or LNG carriers if Teekay Corporation
or Teekay LNG, respectively, has previously advised our general partner that it has
elected not to acquire or operate those vessels.
 Rights of First Offer on Conventional Tankers, LNG Carriers and Offshore Vessels.
  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 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 us as part of the results of the Dropdown Predecessor.
 p)
    
    From December 2008 to June 2009, OPCO entered into a bareboat charter contract to
in-charter one shuttle tanker from a subsidiary of Teekay Corporation. Pursuant to the
charter contract, OPCO incurred time-charter hire expenses of $3.4 million and $0.2 million
during the years ended December 31, 2009 and 2008, respectively.
 q)
    
    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.
 r)
    
    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.
 s)
    
    Concurrently with the closing of our public offering of common units in June 2008, we
acquired from Teekay Corporation an additional 25% interest in OPCO for $205.5 million,
thereby increasing the our ownership interest in OPCO to 51%. We financed the acquisition
with the net proceeds from the public offering and a concurrent private placement of common
units to Teekay Corporation. In connection with the valuation of the purchase of the
additional 25% interest in OPCO, we incurred a fairness opinion fee of $1.1 million. The
excess of the proceeds paid by us over Teekay Corporations historical book value for the
25% interest in OPCO was accounted for as an equity distribution to Teekay Corporation of
$91.6 million.
 t)
    
    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.
  u)
    
    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.
 v)
    
    During August 2008, two
of OPCOs in-chartered shuttle tankers were employed on a
single-voyage charter with a subsidiary of Teekay Corporation. Pursuant to this charter
contract, OPCO earned revenues of $11.3 million for 2008.
 w)
    
    On September 10, 2009, we acquired from Teekay Corporation the Petrojarl Varg,together
with its operations and charter contracts with Talisman Energy, for a purchase price of
$320 million. The purchase was financed through vendor financing made available by Teekay
Corporation of $220 million. The remaining $100 million was paid in cash and financed from
existing debt facilities. The $220 million vendor financing from Teekay Corporation was
comprised of two tranches. The senior tranche was a $160 million short-term debt facility
bearing interest at LIBOR plus a margin of 3.25%. The junior tranche of the vendor
financing was a $60 million unsecured subordinated debt facility bearing interest at 10%
per annum. For the year ended December 31, 2009, we incurred interest expense of $2.9
million in relation to the $220 million vendor financing from Teekay Corporation. In
November 2009, we repaid $160 million of the Teekay Corporation vendor financing when we
entered into a new $260 million revolving credit facility with a syndicate of banks. The
new $260 million revolving credit facility is primarily secured by the Petrojarl Vargand
an assignment of earnings from its contracts with Talisman Energy. In March 2010, we repaid
the remaining $60 million of the Teekay Corporation vendor financing.
 x)
    
    At December 31, 2009, due from affiliates totaled $17.7 million (December 31, 2008 -
$10.1 million), and due to affiliates totaled $39.9 million (December 31, 2008  $8.7
million). Due to and from affiliates are non-interest bearing and unsecured and are
expected to be settled within the next fiscal year in the normal course of operations.
  57




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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 with the approval of a majority of the outstanding common
units.
 
    
    Even if our cash distribution policy is not modified or revoked, the amount of
distributions we pay under our cash distribution policy and the decision to make any
distribution is determined by the Board of Directors of our general partner, taking into
consideration the terms of our partnership agreement.
 
    
    Under Section 51 of the Marshall Islands Limited Partnership Act, we may not make a
distribution to unitholders if the distribution would cause our liabilities to exceed the
fair value of our assets.
  58




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
    
    We may lack sufficient cash to pay distributions to our unitholders due to decreases in
net revenues or increases in operating expenses, principal and interest payments on
outstanding debt, tax expenses, working capital requirements, maintenance capital
expenditures or anticipated cash needs.
 
    
    Our distribution policy may be affected by restrictions on distributions under our 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.
 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,
    
    
    Dec. 31,Year Ended
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006 (1)High
    
    $
    19.63
    
    
    $
    26.46
    
    
    $
    37.45
    
    
    $
    26.77Low
    
    
    8.74
    
    
    
    6.58
    
    
    
    24.04
    
    
    
    21.00
 Mar 31,
    
    
    Dec. 31,
    
    
    Sept. 30,
    
    
    June 30,
    
    
    Mar. 31,
    
    
    Dec. 31,
    
    
    Sept. 30,
    
    
    June 30,Quarter Ended
    
    2010
    
    
    2009
    
    
    2009
    
    
    2009
    
    
    2009
    
    
    2008
    
    
    2008
    
    
    2008High
    
    $
    20.95
    
    
    $
    20.06
    
    
    $
    16.51
    
    
    $
    14.32
    
    
    $
    14.89
    
    
    $
    14.05
    
    
    $
    19.69
    
    
    $
    24.35Low
    
    
    18.23
    
    
    
    15.32
    
    
    
    12.84
    
    
    
    11.76
    
    
    
    9.75
    
    
    
    6.58
    
    
    
    11.25
    
    
    
    19.74
 Mar 31,
    
    
    Feb 28,
    
    
    Jan 31,
    
    
    Dec. 31,
    
    
    Nov. 30,
    
    
    Oct. 31,Months Ended
    
    2010
    
    
    2010
    
    
    2010
    
    
    2009
    
    
    2009
    
    
    2009High
    
    $
    20.54
    
    
    $
    20.77
    
    
    $
    20.95
    
    
    $
    20.06
    
    
    $
    17.89
    
    
    $
    18.16Low
    
    
    18.63
    
    
    
    18.23
    
    
    
    18.98
    
    
    
    17.65
    
    
    
    15.32
    
    
    
    15.77
 
 (1)
    
    Period beginning December 13, 2006.  59




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Item 10. Additional Information
 
 Memorandum and Articles of Association
  
 Material Contracts
  a)
    
    Agreement, dated June 26, 2003, for a U.S. $455,000,000 Revolving Credit Facility
between Norsk Teekay Holdings Ltd., Den Norske Bank ASA and various other banks. This
facility bears interest at LIBOR plus a margin of 0.625%. The amount available under the
facility reduces semi-annually, with a bullet reduction of $131.0 million on maturity in
October 2014. The credit facility may be used for acquisitions and for general partnership
purposes. Our obligations under the facility are secured by first-priority mortgages on
seven shuttle tankers and one FSO unit.
 b)
    
    Agreement, dated October 2, 2006, for a U.S. $940,000,000 Revolving Credit Facility
between Teekay Offshore Operating L.P., Den Norske Bank ASA and various other banks. This
facility bears interest at LIBOR plus a margin of 0.625%. The amount available under the
facility reduces semi-annually, with a bullet reduction of $350.0 million on maturity in
October 2014. The credit facility may be used for acquisitions and for general partnership
purposes. In addition, this facility allows OPCO to make working capital borrowings and
loan the proceeds to us, which we could use to make distributions, provided that such
amounts are paid down annually. Our obligations under the facility are secured by
first-priority mortgages on 11 shuttle tankers and eight conventional tankers.
 c)
    
    Amended and Restated Omnibus Agreement, dated December 19, 2006, among us, our general
partner, Teekay Corporation, Teekay LNG and related parties. Please read Item 7  Major
Unitholders and Related Party Transactions  Certain Relationships and Related Party
Transactions for a summary of certain contract terms.
 d)
    
    We, OPCO and certain of our and its operating subsidiaries have entered into services
agreements with certain subsidiaries of Teekay Corporation pursuant to which the Teekay
Corporation subsidiaries provide us, OPCO, and our and its operating subsidiaries with
administrative, advisory, technical, strategic consulting services and ship management
services for a reasonable fee that includes reimbursement of their direct and indirect
expenses incurred in providing these services. Please read Item 7  Major Unitholders and
Related Party Transactions  Certain Relationships and Related Party Transactions for a
summary of certain contract terms.
 e)
    
    Teekay Offshore Partners L.P. 2006 Long-Term Incentive Plan. Please read Item 6 
Directors, Senior Management and Employees for a summary of certain plan terms.
 f)
    
    Agreement, dated September 10, 2009, between Petrojarl Varg AS and Varg L.L.C.,
relating to the purchase of the Petrojarl Varg. See Item 7  Major Unitholders and Related
Party Transactions  Certain Relationships and Related Party Transactions for a summary.
 
 Exchange Controls and Other Limitations Affecting Unitholders
   
 Material U.S. Federal Income Tax Considerations
 Code
  
    
    dealers in securities or currencies,
 
    
    traders in securities that have elected the mark-to-market method of accounting for
their securities,
 
    
    persons whose functional currency is not the U.S. dollar,
 
    
    persons holding our common units as part of a hedge, straddle, conversion or other
synthetic security or integrated transaction,
 
    
    certain U.S. expatriates,
 
    
    financial institutions,
 
    
    insurance companies,
  60




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##### Table of Contents




    
    persons subject to the alternative minimum tax,
 
    
    persons that actually or under applicable constructive ownership rules own 10% or more
of our common units; and
 
    
    entities that are tax-exempt for U.S. federal income tax purposes.
   United States Federal Income Taxation of U.S. Holders
 U.S. Holder
 Distributions
 PFICs
 U.S. Individual Holder
   Consequences of Possible PFIC Classification
   Tidewater Inc. v. United States Tidewater Tidewater
  61




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##### Table of Contents



QEF
election
 Taxation of U.S. Holders Making a Timely QEF Election Electing Holder
   Taxation of U.S. Holders Making a Mark-to-Market Election
  Taxation of U.S. Holders Not Making a Timely QEF or Mark-to-Market Election Non-Electing Holder
 
    
    the excess distribution or gain would be allocated ratably over the Non-Electing Holders
aggregate holding period for the common units;
 
    
    the amount allocated to the current taxable year and any taxable year prior to the taxable
year we were first treated as a PFIC with respect to the Non-Electing Holder would be taxed as
ordinary income in the current taxable year;
 
    
    the amount allocated to each of the other taxable years would be subject to U.S. federal
income tax at the highest rate of tax in effect for the applicable class of taxpayer for that
year; and an interest charge for the deemed deferral benefit would be imposed with respect to
the resulting tax attributable to each such other taxable year.
  62




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U.S. Holders are urged to consult their own tax advisors regarding the applicability, availability
and advisability of, and procedure for, making QEF, Mark-to-Market Elections and other available
elections with respect to us, and the U.S. federal income tax consequences of making such
elections.
 Sale, Exchange or other Disposition of Common Units
   United States Federal Income Taxation of Non-U.S. Holders
 Non-U.S. Holder
 Distributions
  Sale, Exchange or other Disposition of Common Units
  Backup Withholding and Information Reporting
  
    
    fails to timely provide an accurate taxpayer identification number;
 
    
    is notified by the IRS that it has failed to report all interest or distributions required to
be shown on its U.S. federal income tax returns; or
 
    
    in certain circumstances, fails to comply with applicable certification requirements.
   
 Non-United States Tax Consequences
 Marshall Islands Tax Consequences
  63




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##### Table of Contents



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 Value2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    Thereafter
    
    
    Total
    
    
    Asset/(Liability)
    
    
    Rate (1)(in millions of U.S. dollars, except percentages)Long-Term Debt:U.S Dollar- denominated (2)Variable rate
    
    
    108.2
    
    
    
    183.8
    
    
    
    160.8
    
    
    
    328.9
    
    
    
    705.6
    
    
    
    188.3
    
    
    
    1,675.6
    
    
    
    (1,559.2
    )
    
    
    1.4
    %Fixed rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60.0
    (4)
    
    
    
    
    
    
    60.0
    
    
    
    (60.0
    )
    
    
    10
    %Interest Rate Swaps:Contract Amount (3)
    
    
    68.1
    
    
    
    108.7
    
    
    
    214.2
    
    
    
    119.9
    
    
    
    40.3
    
    
    
    663.5
    
    
    
    1,214.7
    
    
    
    (76.1
    )
    
    
    3.9
    %Average Fixed Pay Rate (2)
    
    
    3.0
    %
    
    
    2.7
    %
    
    
    2.5
    %
    
    
    2.6
    %
    
    
    4.8
    %
    
    
    4.8
    %
    
    
    3.9
    %
 
 (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, 2009 ranged from 0.45% to 3.25%.  64




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##### Table of Contents



(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.(4)
    
    The U.S. Dollar denominated term loan from Teekay Corporation was repaid in March 2010. 
 Foreign Currency Fluctuation Risk
   Contract Amount in
    
    
    Average
    
    
    Expected MaturityForeign Currency
    
    
    Forward
    
    
    (thousands of U.S. Dollars)(thousands)
    
    
    Rate(1)
    
    
    2010
    
    
    2011Norwegian Kroner
    
    
    694,000
    
    
    
    6.15
    
    
    
    96,585
    
    
    
    16,343British Pound
    
    
    53
    
    
    
    0.53
    
    
    
    99
    
    
    
    Euro
    
    
    19,622
    
    
    
    0.71
    
    
    
    24,611
    
    
    
    3,194$
    121,295
    
    
    $
    19,537
 (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
   65




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##### Table of Contents



PART II
 
 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
 Exchange Act
    
 Managements Report on Internal Control over Financial Reporting
      
 Item 16A. Audit Committee Financial Expert
   66




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##### Table of Contents



Item 16B. Code of Ethics
 www.teekayoffshore.com
 
 Item 16C. Principal Accountant Fees and Services
  Fees
    
    2009
    
    
    2008Audit Fees (1)
    
    $
    1,374,000
    
    
    $
    1,355,500Tax Fees (2)
    
    
    51,000
    
    
    
    3,400Total
    
    $
    1,425,000
    
    
    $
    1,358,900
 
 (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 August 2009. Audit fees also include
$318,000 related to additional fees for the 2008 audit, which were not agreed until after we
had filed our 2009 Annual Report on Form 20-F with the SEC on June 29, 2009.(2)
    
    For 2009 and 2008, respectively, tax fees principally included corporate tax compliance fees
of $51,000 and $3,400.  
 Item 16D. Exemptions from the Listing Standards for Audit Committees
  
 Item 16E. Purchases of Units by the Issuer and Affiliated Purchasers
  
 Item 16F. Change in Registrants Certifying Accountant
  
 Item 16G. Corporate Governance
   67




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##### Table of Contents



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 Total Equity
    
    
    F-6Notes to the Consolidated Financial Statements
    
    
    F-8
  
 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)4.8
    
    
    Agreement, dated September 10, 2009, between Petrojarl Varg AS and Varg L.L.C., relating to the purchase of the Petrojarl Varg.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.  68




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##### Table of Contents



SIGNATURE
  TEEKAY OFFSHORE PARTNERS L.P.By: Teekay Offshore GP L.L.C., its general partnerDated: April 30, 2010
    
    By:
    
    /s/ Peter Evensen

Peter EvensenChief Executive Officer and Chief Financial Officer(Principal Financial and Accounting Officer)
  69




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 TEEKAY OFFSHORE PARTNERS L.P.
 Partnership
   Consolidation
  Internal Control-Integrated Framework
 Vancouver, Canada
    
    /s/ Ernst & Young LLPApril 30, 2010
    
    Chartered Accountants
  F - 1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 TEEKAY OFFSHORE PARTNERS L.P.
 Partnerships COSO criteria
      Vancouver, Canada
    
    /s/ Ernst & Young LLPApril 30, 2010
    
    Chartered Accountants
  F - 2




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)
 
 CONSOLIDATED STATEMENTS OF INCOME (LOSS)
 (in thousands of U.S. dollars, except unit and per unit data)
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31, 2009
    
    
    December 31, 2008
    
    
    December 31, 2007$
    
    
    $
    
    
    $REVENUES(including $148,319, $190,536, and $154,605 from related
parties for 2009, 2008, and 2007, respectively  notes 11a, 11b,
11c, 11q and 11u)
    
    
    821,856
    
    
    
    968,908
    
    
    
    878,656OPERATING EXPENSESVoyage expenses
    
    
    111,026
    
    
    
    225,029
    
    
    
    151,637Vessel operating expenses (including $544, ($782) and ($4,800)
from related parties for 2009, 2008 and 2007, respectively  notes
11l, 11n, 11r,and 11v, note 12)
    
    
    233,261
    
    
    
    224,235
    
    
    
    187,403Time-charter hire expense (including $3,416 and $240 from related
parties for 2009 and 2008, respectively  note 11t)
    
    
    117,202
    
    
    
    132,234
    
    
    
    150,463Depreciation and amortization
    
    
    166,350
    
    
    
    158,533
    
    
    
    142,029General and administrative (including $45,770, $58,362, and
$63,718 for 2009, 2008 and 2007, respectively, from related
parties  notes 11d, 11e, 11f, 11g, 11jand 11v, note 12)
    
    
    58,016
    
    
    
    69,519
    
    
    
    70,278Goodwill impairment charge (note 4)
    
    
    
    
    
    
    127,403
    
    
    
    Restructuring charge (note 9)
    
    
    5,008
    
    
    
    
    
    
    
    Total operating expenses
    
    
    690,863
    
    
    
    936,953
    
    
    
    701,810Income from vessel operations
    
    
    130,993
    
    
    
    31,955
    
    
    
    176,846OTHER ITEMSInterest expense (including $9,313, $16,704 and $25,819 from
related parties for 2009, 2008 and 2007, respectively,  notes
11s and 11v, note 6)
    
    
    (43,319
    )
    
    
    (85,169
    )
    
    
    (111,120
    )Interest income
    
    
    1,236
    
    
    
    4,157
    
    
    
    6,062Realized and unrealized gains (losses) on non-designated
derivatives (including $6,842, ($37,244), and ($7,153) for 2009,
2008 and 2007, respectively, from related parties  note 11v,
note 12)
    
    
    53,560
    
    
    
    (188,782
    )
    
    
    (46,542
    )Foreign currency exchange (loss) gain (note 12)
    
    
    (6,151
    )
    
    
    4,293
    
    
    
    (9,760
    )Other income  net (note 10)
    
    
    8,918
    
    
    
    11,929
    
    
    
    10,398Total other items
    
    
    14,244
    
    
    
    (253,572
    )
    
    
    (150,962
    )Income (loss) before income tax (expense) recovery
    
    
    145,237
    
    
    
    (221,617
    )
    
    
    25,884Income tax (expense) recovery (note 13)
    
    
    (12,638
    )
    
    
    62,344
    
    
    
    (1,481
    )Net income (loss)
    
    
    132,599
    
    
    
    (159,273
    )
    
    
    24,403Non-controlling interest in net income
    
    
    57,490
    
    
    
    10,863
    
    
    
    37,573Dropdown predecessors interest in net income (loss) (note 1)
    
    
    11,378
    
    
    
    (151,169
    )
    
    
    (15,828
    )General partners interest in net income
    
    
    2,523
    
    
    
    8,918
    
    
    
    733Limited partners interest in net income (loss)
    
    
    61,208
    
    
    
    (27,885
    )
    
    
    1,925Limited partners interest in net income (loss) per unit (note 16):- Common unit (basic and diluted)
    
    
    1.85
    
    
    
    (0.65
    )
    
    
    0.13- Subordinated unit (basic and diluted)
    
    
    1.80
    
    
    
    (0.92
    )
    
    
    0.13- Total unit (basic and diluted)
    
    
    1.84
    
    
    
    (0.76
    )
    
    
    0.13Weighted average number of units outstanding:- Common units (basic and diluted)
    
    
    23,476,438
    
    
    
    15,461,202
    
    
    
    9,800,000- Subordinated units (basic and diluted)
    
    
    9,800,000
    
    
    
    9,800,000
    
    
    
    9,800,000- Total units (basic and diluted)
    
    
    33,276,438
    
    
    
    25,261,202
    
    
    
    19,600,000
 The accompanying notes are an integral part of the consolidated financial statements.
  F - 3




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands of U.S. dollars)
 As at
    
    
    As atDecember 31, 2009
    
    
    December 31, 2008$
    
    
    $ASSETSCurrentCash and cash equivalents (note 6)
    
    
    101,747
    
    
    
    132,348Accounts receivable
    
    
    66,976
    
    
    
    51,306Net investment in direct financing leases  current (note 7)
    
    
    20,641
    
    
    
    22,941Prepaid expenses
    
    
    33,936
    
    
    
    27,129Due from affiliates (note 11w)
    
    
    17,673
    
    
    
    10,110Current portion of derivative instruments (note 12)
    
    
    6,152
    
    
    
    Other current assets
    
    
    1,399
    
    
    
    2,585Total current assets
    
    
    248,524
    
    
    
    246,419Vessels and equipment(notes 6 and 7)At cost, less accumulated depreciation of $993,330 (December 31, 2008  $836,087)
    
    
    1,917,248
    
    
    
    2,028,150Net investment in direct financing leases (note 7)
    
    
    35,620
    
    
    
    55,710Derivative instruments (note 12)
    
    
    2,195
    
    
    
    Other assets
    
    
    20,226
    
    
    
    18,728Intangible assets  net (note 4)
    
    
    36,885
    
    
    
    46,004Goodwill (note 4)
    
    
    127,113
    
    
    
    127,113Total assets
    
    
    2,387,811
    
    
    
    2,522,124LIABILITIES AND PARTNERS EQUITYCurrentAccounts payable
    
    
    13,984
    
    
    
    12,545Accrued liabilities (note 5)
    
    
    59,714
    
    
    
    52,984Due to affiliates (note 11w)
    
    
    39,876
    
    
    
    8,715Current portion of derivative instruments (note 12)
    
    
    31,852
    
    
    
    66,135Current portion of long-term debt (note 6)
    
    
    108,159
    
    
    
    125,503Due to joint venture partners
    
    
    
    
    
    
    21,019Total current liabilities
    
    
    253,585
    
    
    
    286,901Long-term debt (including a loan due to parent of $60,000 as at
December 31, 2009) (note 6)
    
    
    1,627,455
    
    
    
    1,711,711Deferred income tax (note 13)
    
    
    16,481
    
    
    
    12,648Derivative instruments (note 12)
    
    
    38,327
    
    
    
    174,355Other long-term liabilities
    
    
    18,439
    
    
    
    25,316Total liabilities
    
    
    1,954,287
    
    
    
    2,210,931Commitments and contingencies (notes 6, 7, 12 and 14)Total equityPartners equity
    
    
    213,065
    
    
    
    117,910Non-controlling interest
    
    
    219,692
    
    
    
    201,383Dropdown predecessor equity
    
    
    
    
    
    
    13,811Accumulated other comprehensive income (loss)
    
    
    767
    
    
    
    (21,911
    )Total equity
    
    
    433,524
    
    
    
    311,193Total liabilities and equity
    
    
    2,387,811
    
    
    
    2,522,124
 The accompanying notes are an integral part of the consolidated financial statements.
  F - 4




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands of U.S. dollars)
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31, 2009
    
    
    December 31, 2008
    
    
    December 31, 2007$
    
    
    $
    
    
    $Cash and cash equivalents provided by (used for)OPERATING ACTIVITIESNet income (loss)
    
    
    132,599
    
    
    
    (159,273
    )
    
    
    24,403Non-cash items:Unrealized (gain) loss on derivative instruments (note 12)
    
    
    (110,177
    )
    
    
    172,273
    
    
    
    55,446Depreciation and amortization
    
    
    166,350
    
    
    
    158,533
    
    
    
    142,029Deferred income tax expense (recovery)
    
    
    8,246
    
    
    
    (63,096
    )
    
    
    1,481Goodwill impairment charge
    
    
    
    
    
    
    127,403
    
    
    
    Foreign currency exchange loss (gain) and other
    
    
    2,159
    
    
    
    (17,373
    )
    
    
    (238
    )Change in non-cash working capital items related to operating activities (note 15)
    
    
    10,900
    
    
    
    15,619
    
    
    
    (24,871
    )Expenditures for drydocking
    
    
    (41,864
    )
    
    
    (29,075
    )
    
    
    (49,053
    )Net operating cash flow
    
    
    168,213
    
    
    
    205,011
    
    
    
    149,197FINANCING ACTIVITIESProceeds from issuance of long-term debt
    
    
    279,575
    
    
    
    259,255
    
    
    
    321,769Scheduled repayments of long-term debt
    
    
    (34,948
    )
    
    
    (73,331
    )
    
    
    (17,328
    )Prepayments of long-term debt
    
    
    (426,090
    )
    
    
    (138,085
    )
    
    
    (152,000
    )Net advances to affiliates
    
    
    
    
    
    
    (46,544
    )
    
    
    (42,935
    )Repayments of joint venture partner advances
    
    
    (21,532
    )
    
    
    
    
    
    
    Joint venture partner advances
    
    
    477
    
    
    
    17,485
    
    
    
    Equity contribution from joint venture partner
    
    
    4,772
    
    
    
    5,200
    
    
    
    Contribution of capital from Teekay Corporation to Dropdown Predecessor relating
to Petrojarl Varg (note 11v)
    
    
    110,386
    
    
    
    73,068
    
    
    
    (50,468
    )Purchase of Petrojarl Vargfrom Teekay Corporation (note 11v)
    
    
    (100,000
    )
    
    
    
    
    
    
    Proceeds from equity offering
    
    
    109,227
    
    
    
    216,837
    
    
    
    Expenses of equity offering
    
    
    (5,100
    )
    
    
    (6,192
    )
    
    
    (2,793
    )Distribution to Teekay Corporation relating to purchase of SPT Explorer L.L.C.
and SPT Navigator L.L.C. (note 11q)
    
    
    
    
    
    
    (16,661
    )
    
    
    Distribution to Teekay Corporation relating to purchase of Dampier LLC (note 11j)
    
    
    
    
    
    
    
    
    
    
    (30,253
    )Excess purchase price over the contributed basis of a 25% interest in Teekay
Offshore Operating L.P. (note 11p)
    
    
    
    
    
    
    (91,562
    )
    
    
    Distribution to Teekay Corporation relating to purchase of Navion Bergen L.L.C.
(note 11i)
    
    
    
    
    
    
    
    
    
    
    (48,800
    )Excess of purchase price over the contributed basis of a 50% interest in Navion
Gothenburg L.L.C. (note 11i)
    
    
    
    
    
    
    
    
    
    
    (6,358
    )Cash distributions paid by subsidiaries to non-controlling interest
    
    
    (61,065
    )
    
    
    (71,976
    )
    
    
    (78,107
    )Cash distributions paid by the Partnership
    
    
    (60,452
    )
    
    
    (42,226
    )
    
    
    (22,700
    )Other
    
    
    (5,089
    )
    
    
    (1,500
    )
    
    
    268Net financing cash flow
    
    
    (209,839
    )
    
    
    83,768
    
    
    
    (129,705
    )INVESTING ACTIVITIESExpenditures for vessels and equipment
    
    
    (11,365
    )
    
    
    (57,858
    )
    
    
    (20,997
    )Proceeds from sale of vessels and equipment
    
    
    
    
    
    
    
    
    
    
    3,225Investment in direct financing lease assets
    
    
    (579
    )
    
    
    (536
    )
    
    
    (8,378
    )Direct financing lease payments received
    
    
    22,969
    
    
    
    22,352
    
    
    
    21,677Purchase of a 25% interest in Teekay Offshore Operating L.P (note 11p)
    
    
    
    
    
    
    (115,066
    )
    
    
    Purchase of 35% of Petrojarl Vargby Teekay Corporation (note 11v)
    
    
    
    
    
    
    (134,183
    )
    
    
    Purchase of a 50% interest in Navion Gothenburg L.L.C. (note 11i)
    
    
    
    
    
    
    
    
    
    
    (10,231
    )Net investing cash flow
    
    
    11,025
    
    
    
    (285,291
    )
    
    
    (14,704
    )(Decrease) increase in cash and cash equivalents
    
    
    (30,601
    )
    
    
    3,488
    
    
    
    4,788Cash and cash equivalents, beginning of the year
    
    
    132,348
    
    
    
    128,860
    
    
    
    124,072Cash and cash equivalents, end of the year
    
    
    101,747
    
    
    
    132,348
    
    
    
    128,860
 (note 15)
 The accompanying notes are an integral part of the consolidated financial statements.
  F - 5




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)
 
 CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY
 (in thousands of U.S. dollars and units)
 AccumulatedPARTNERS EQUITY
    
    
    Other
    
    
    Non-Dropdown
    
    
    Limited Partners
    
    
    General
    
    
    Comprehensive
    
    
    controllingPredecessor
    
    
    Common
    
    
    Subordinated
    
    
    Partner
    
    
    Income (Loss)
    
    
    Interest
    
    
    TotalEquity
    
    
    Units
    
    
    $
    
    
    Units
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $Balance as at December 31, 2006
    
    
    212,634
    
    
    
    9,800
    
    
    
    135,941
    
    
    
    9,800
    
    
    
    2,826
    
    
    
    175
    
    
    
    
    
    
    
    443,448
    
    
    
    795,024Net income
    
    
    (15,828
    )
    
    
    
    
    
    
    1,225
    
    
    
    
    
    
    
    700
    
    
    
    733
    
    
    
    
    
    
    
    37,573
    
    
    
    24,403Other comprehensive income:Unrealized net gain on
qualifying cash flow hedging
instruments (note 12)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    281
    
    
    
    794
    
    
    
    1,075Realized net loss on
qualifying cash flow hedging
instruments (note 12)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    33
    
    
    
    45Pension adjustments, net of
tax of $149 (note 17)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (248
    )
    
    
    (134
    )
    
    
    (382
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,141Contribution of foreign
currency forward contracts
from Teekay Corporation (note
11m)
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    89
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    109Offering costs from public
offering of limited
partnership interests
    
    
    
    
    
    
    
    
    
    
    (93
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (93
    )Net change in parents equity
in Dropdown Predecessor (note
15e)
    
    
    (57,408
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (57,408
    )Purchase of Navion Bergen LLC
and Navion Gothenburg LLC from
Teekay Corporation (note 11i)
    
    
    (29,756
    )
    
    
    
    
    
    
    (3,720
    )
    
    
    
    
    
    
    (20,832
    )
    
    
    (850
    )
    
    
    
    
    
    
    10,078
    
    
    
    (45,080
    )Purchase of Dampier Spirit LLC
from Teekay Corporation (note
11j)
    
    
    (16,397
    )
    
    
    
    
    
    
    (2,029
    )
    
    
    
    
    
    
    (11,363
    )
    
    
    (464
    )
    
    
    
    
    
    
    
    
    
    
    (30,253
    )Contribution of interest rate
swap agreement from Teekay
Corporation (note 11k)
    
    
    
    
    
    
    
    
    
    
    (373
    )
    
    
    
    
    
    
    (2,092
    )
    
    
    (85
    )
    
    
    
    
    
    
    318
    
    
    
    (2,232
    )Cash distributions
    
    
    
    
    
    
    
    
    
    
    (11,123
    )
    
    
    
    
    
    
    (11,123
    )
    
    
    (454
    )
    
    
    
    
    
    
    (78,107
    )
    
    
    (100,807
    )Balance as at December 31, 2007
    
    
    93,245
    
    
    
    9,800
    
    
    
    119,844
    
    
    
    9,800
    
    
    
    (41,795
    )
    
    
    (941
    )
    
    
    45
    
    
    
    414,003
    
    
    
    584,401Net loss
    
    
    (151,169
    )
    
    
    
    
    
    
    (19,049
    )
    
    
    
    
    
    
    (8,836
    )
    
    
    8,918
    
    
    
    
    
    
    
    10,863
    
    
    
    (159,273
    )Other comprehensive loss:Unrealized net gain on
qualifying cash flow hedging
instruments, net of tax of
$1,017 (note 12)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,824
    )
    
    
    (16,862
    )
    
    
    (39,686
    )Realized net loss on
qualifying cash flow hedging
instruments, net of tax of
($317) (note 12)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,722
    
    
    
    352
    
    
    
    3,074Pension adjustments, net of
tax of $1,044 (note 17)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,686
    )
    
    
    
    
    
    
    (2,686
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (198,571
    )Purchase of a 25% interest in
Teekay Offshore Operating L.P.
from Teekay Corporation (note
11p)
    
    
    
    
    
    
    
    
    
    
    (30,025
    )
    
    
    
    
    
    
    (58,846
    )
    
    
    (3,657
    )
    
    
    966
    
    
    
    (115,065
    )
    
    
    (206,627
    )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
    
    
    
    
    
    
    
    
    
    
    
    210,645Net change in parents equity
in Dropdown Predecessor (note
15e)
    
    
    73,068
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (134
    )
    
    
    (25,132
    )
    
    
    47,802Purchase of SPT Explorer
L.L.C. and SPT Navigator
L.L.C. from Teekay
Corporation (note 11q)
    
    
    (1,333
    )
    
    
    
    
    
    
    (5,231
    )
    
    
    
    
    
    
    (10,253
    )
    
    
    (638
    )
    
    
    
    
    
    
    
    
    
    
    (17,455
    )Equity contribution from joint
venture partner
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,200
    
    
    
    5,200Cash distributions
    
    
    
    
    
    
    
    
    
    
    (25,201
    )
    
    
    
    
    
    
    (16,170
    )
    
    
    (855
    )
    
    
    
    
    
    
    (71,976
    )
    
    
    (114,202
    )Balance as at December 31, 2008
    
    
    13,811
    
    
    
    20,425
    
    
    
    246,646
    
    
    
    9,800
    
    
    
    (135,900
    )
    
    
    7,164
    
    
    
    (21,911
    )
    
    
    201,383
    
    
    
    311,193
 The accompanying notes are an integral part of the consolidated financial statements.
  F - 6




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)
CONSOLIDATED STATEMENTS OF CHANGES TOTAL EQUITY
(in thousands of U.S. dollars and units)
 AccumulatedPARTNERS EQUITY
    
    
    Other
    
    
    Non-Dropdown
    
    
    Limited Partners
    
    
    General
    
    
    Comprehensive
    
    
    controllingPredecessor
    
    
    Common
    
    
    Subordinated
    
    
    Partner
    
    
    Income (Loss)
    
    
    Interest
    
    
    TotalEquity
    
    
    Units
    
    
    $
    
    
    Units
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $Balance as at December 31, 2008
    
    
    13,811
    
    
    
    20,425
    
    
    
    246,646
    
    
    
    9,800
    
    
    
    (135,900
    )
    
    
    7,164
    
    
    
    (21,911
    )
    
    
    201,383
    
    
    
    311,193Net income (note 16)
    
    
    11,378
    
    
    
    
    
    
    
    43,546
    
    
    
    
    
    
    
    17,662
    
    
    
    2,523
    
    
    
    
    
    
    
    57,490
    
    
    
    132,599Other comprehensive income:Unrealized net gain on
qualifying cash flow hedging
instruments, net of tax of
($580) (note 12)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,728
    
    
    
    12,717
    
    
    
    27,445Realized net loss on
qualifying cash flow hedging
instruments, net of tax of
($207) (note 12)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,107
    
    
    
    4,395
    
    
    
    9,502Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    169,546Contribution of capital from
Teekay Corporation to Dropdown
Predecessor relating to
Petrojarl Varg (note 11v)
    
    
    110,386
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110,386Net liabilities of Dropdown
Predecessor relating to
Petrojarl Vargretained by
Teekay Corporation on dropdown
(note 11v)
    
    
    172,174
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,843
    
    
    
    
    
    
    
    175,017Purchase of Petrojarl Varg
from Teekay Corporation (note
11v)
    
    
    (307,749
    )
    
    
    
    
    
    
    (3,934
    )
    
    
    
    
    
    
    (7,712
    )
    
    
    (605
    )
    
    
    
    
    
    
    
    
    
    
    (320,000
    )Proceeds from follow-on public
offering, net of offering
costs (note 2)
    
    
    
    
    
    
    7,475
    
    
    
    101,942
    
    
    
    
    
    
    
    
    
    
    
    2,185
    
    
    
    
    
    
    
    
    
    
    
    104,127Equity contribution from joint
venture partner
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,772
    
    
    
    4,772Cash distributions
    
    
    
    
    
    
    
    
    
    
    (40,129
    )
    
    
    
    
    
    
    (17,640
    )
    
    
    (2,683
    )
    
    
    
    
    
    
    (61,065
    )
    
    
    (121,517
    )Balance as at December 31, 2009
    
    
    
    
    
    
    27,900
    
    
    
    348,071
    
    
    
    9,800
    
    
    
    (143,590
    )
    
    
    8,584
    
    
    
    767
    
    
    
    219,692
    
    
    
    433,524
 The accompanying notes are an integral part of the consolidated financial statements.
  F - 7




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 1.
    
    Summary of Significant Accounting Policies
 Basis of presentation
 Partnership OPCO
 FASB Business Combinations
 Navion Bergen Navion Gothenburg FSO Dampier Spirit SPT Explorer SPT Navigator FPSO Petrojarl Varg Dropdown Predecessor Navion Bergen Navion
Gothenburg Dampier Spirit SPT Explorer) SPT Navigator) Petrojarl Varg
   Petrojarl Varg Varg Credit Facilities Petrojarl Vargs Petrojarl Vargs Petrojarl Varg
  F - 8




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Contd)
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)
 Petrojarl Varg Petrojarl Varg Petrojarl Varg Petrojarl Varg Petrojarl Varg Petrojarl Varg Petrojarl Varg
 Petrojarl
Varg
  GAAP
   Foreign currency
  Operating revenues and expenses
    F - 9




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 Cash and cash equivalents
  Accounts receivable and allowance for doubtful accounts
  Vessels and equipment
      Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31, 2009
    
    
    December 31, 2008
    
    
    December 31, 2007$
    
    
    $
    
    
    $Balance at beginning of year
    
    
    76,619
    
    
    
    71,910
    
    
    
    39,875Cost incurred for drydocking
    
    
    34,974
    
    
    
    26,944
    
    
    
    46,847Drydock amortization
    
    
    (25,459
    )
    
    
    (22,235
    )
    
    
    (14,812
    )Balance at end of year
    
    
    86,134
    
    
    
    76,619
    
    
    
    71,910
  Direct financing leases
 VOC equipment
  F - 10




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data or unless otherwise indicated)
 Debt issuance costs
  Goodwill and intangible assets
   Derivative instruments
    Derivatives and Hedging
 Employee pension plans
  Income taxes
   F - 11




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
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)
  Adoption of new accounting pronouncements
 Business Combinations
 Consolidation
  Year EndedDecember 31, 2009$Net income
    
    
    132,599Pro forma non-controlling interest in net income
    
    
    53,612Pro forma limited partners interest in net income
    
    
    65,009Pro forma limited partners interest in net income per unit:Common unit (basic and diluted)
    
    
    1.97Subordinated unit (basic and diluted)
    
    
    1.92Total unit (basic and diluted)
    
    
    1.95
 Fair Value Measurements
and Disclosures,
 Derivatives and Hedging,
 Earnings Per Share, EPU MLPs IDRs
  F - 12




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
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)
 Intangibles  Goodwill
and Other,
 Investments  Equity
Method and Joint Ventures,
 Financial Instruments,
 Subsequent Events,
 SEC
 Fair Value Measurements
and Disclosures,
 2.
    
    Public Offerings
 OPCO
  Note 19(b)).
 3.
    
    Segment Reporting
    F - 13




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
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
    
    Year Ended
    
    Year Ended(U.S. dollars in millions)
    
    December 31, 2009
    
    December 31, 2008
    
    December 31, 2007StatoilHydro ASA (1) (2)
    
    $248.5 or 30%
    
    $320.7 or 33%
    
    $309.6 or 35%Teekay Corporation (3)
    
    $148.3 or 18%
    
    $181.9 or 19%
    
    $154.6 or 18%Petrobras Transporte S.A (1) (2)
    
    $119.1 or 15%
    
    $115.7 or 12%
    
    $100.8 or 12%Talisman Energy Inc(4)
    
    $100.0 or 12%
    
    $96.4 or 10%
    
    $93.5 or 11%
 
 (1)
    
    Shuttle tanker segment.(2)
    
    Statoil ASA and Petrobras Transporte S.A. are international oil companies.(3)
    
    Shuttle tanker, conventional tanker and FSO segments.(4)
    
    FPSO segment.
  Shuttle
    
    
    ConventionalTanker
    
    
    Tanker
    
    
    FSO
    
    
    FPSOSegment
    
    
    Segment
    
    
    Segment
    
    
    Segment
    
    
    TotalYear Ended December 31, 2009
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $Revenues
    
    
    534,464
    
    
    
    124,659
    
    
    
    62,706
    
    
    
    100,027
    
    
    
    821,856Voyage expenses
    
    
    85,197
    
    
    
    24,494
    
    
    
    1,335
    
    
    
    
    
    
    
    111,026Vessel operating expenses
    
    
    140,751
    
    
    
    23,503
    
    
    
    26,569
    
    
    
    42,438
    
    
    
    233,261Time charter hire expense
    
    
    117,202
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    117,202Depreciation and amortization
    
    
    98,013
    
    
    
    24,042
    
    
    
    21,763
    
    
    
    22,532
    
    
    
    166,350General and administrative (1)
    
    
    43,808
    
    
    
    5,396
    
    
    
    3,097
    
    
    
    5,715
    
    
    
    58,016Restructuring charge
    
    
    4,734
    
    
    
    274
    
    
    
    
    
    
    
    
    
    
    
    5,008Income from vessel operations
    
    
    44,759
    
    
    
    46,950
    
    
    
    9,942
    
    
    
    29,342
    
    
    
    130,993Expenditures for vessels and equipment (2)
    
    
    10,341
    
    
    
    1,024
    
    
    
    
    
    
    
    
    
    
    
    11,365Expenditures for drydock
    
    
    29,822
    
    
    
    1,644
    
    
    
    3,508
    
    
    
    
    
    
    
    34,974
 Shuttle
    
    
    ConventionalTanker
    
    
    Tanker
    
    
    FSO
    
    
    FPSOSegment
    
    
    Segment
    
    
    Segment
    
    
    Segment
    
    
    TotalYear Ended December 31, 2008
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $Revenues
    
    
    650,896
    
    
    
    153,200
    
    
    
    68,396
    
    
    
    96,416
    
    
    
    968,908Voyage expenses
    
    
    169,578
    
    
    
    53,722
    
    
    
    1,729
    
    
    
    
    
    
    
    225,029Vessel operating expenses
    
    
    130,033
    
    
    
    25,156
    
    
    
    26,845
    
    
    
    42,201
    
    
    
    224,235Time charter hire expense
    
    
    132,234
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    132,234Depreciation and amortization
    
    
    91,846
    
    
    
    22,901
    
    
    
    23,690
    
    
    
    20,096
    
    
    
    158,533General and administrative (1)
    
    
    50,102
    
    
    
    8,674
    
    
    
    3,560
    
    
    
    7,183
    
    
    
    69,519Goodwill impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    127,403
    
    
    
    127,403Income (loss) from vessel operations
    
    
    77,103
    
    
    
    42,747
    
    
    
    12,572
    
    
    
    (100,467
    )
    
    
    31,955Expenditures for vessels and equipment (2)
    
    
    53,231
    
    
    
    3,648
    
    
    
    979
    
    
    
    
    
    
    
    57,858Expenditures for drydock
    
    
    20,574
    
    
    
    7,355
    
    
    
    (985
    )
    
    
    
    
    
    
    26,944
  F - 14




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
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)
 Shuttle
    
    
    ConventionalTanker
    
    
    Tanker
    
    
    FSO
    
    
    FPSOSegment
    
    
    Segment
    
    
    Segment
    
    
    Segment
    
    
    TotalYear Ended December 31, 2007
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $Revenues
    
    
    590,611
    
    
    
    135,922
    
    
    
    58,670
    
    
    
    93,453
    
    
    
    878,656Voyage expenses
    
    
    114,157
    
    
    
    36,594
    
    
    
    886
    
    
    
    
    
    
    
    151,637Vessel operating expenses
    
    
    104,128
    
    
    
    24,175
    
    
    
    21,676
    
    
    
    37,424
    
    
    
    187,403Time charter hire expense
    
    
    150,463
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,463Depreciation and amortization
    
    
    86,502
    
    
    
    21,324
    
    
    
    16,544
    
    
    
    17,659
    
    
    
    142,029General and administrative (1)
    
    
    50,835
    
    
    
    7,828
    
    
    
    3,800
    
    
    
    7,815
    
    
    
    70,278Income from vessel operations
    
    
    84,526
    
    
    
    46,001
    
    
    
    15,764
    
    
    
    30,555
    
    
    
    176,846Expenditures for vessels and equipment (2)
    
    
    18,189
    
    
    
    1,998
    
    
    
    11,041
    
    
    
    
    
    
    
    31,228Expenditures for drydock
    
    
    27,622
    
    
    
    9,235
    
    
    
    9,990
    
    
    
    
    
    
    
    46,847
 
 (1)
    
    Includes direct general and administrative expenses and indirect general and
administrative expenses (allocated to each segment based on estimated use of corporate
resources).(2)
    
    Excludes non-cash investing activities (see Note 15).
  December 31, 2009
    
    
    December 31, 2008
    
    
    December 31, 2007$
    
    
    $
    
    
    $Shuttle tanker segment
    
    
    1,516,988
    
    
    
    1,584,473
    
    
    
    1,653,690Conventional tanker segment
    
    
    317,690
    
    
    
    332,705
    
    
    
    264,665FSO segment
    
    
    103,622
    
    
    
    116,789
    
    
    
    128,626FPSO segment
    
    
    324,912
    
    
    
    341,172
    
    
    
    368,819UnallocatedCash and cash equivalents
    
    
    101,747
    
    
    
    132,348
    
    
    
    128,860Accounts receivable and other assets
    
    
    22,852
    
    
    
    14,637
    
    
    
    15,700Consolidated total assets
    
    
    2,387,811
    
    
    
    2,522,124
    
    
    
    2,560,360
 4.
    
    Goodwill and Intangible Assets
 a)
    
    Goodwill
  December 31, 2009
    
    
    December 31, 2008
    
    
    December 31, 2007$
    
    
    $
    
    
    $Balance at beginning of year (1)
    
    
    127,113
    
    
    
    209,470
    
    
    
    213,876Goodwill acquired
    
    
    
    
    
    
    49,174
    
    
    
    Reduction of deferred tax valuation allowance
    
    
    
    
    
    
    (4,128
    )
    
    
    (4,406
    )Goodwill impairment (2)
    
    
    
    
    
    
    (127,403
    )
    
    
    Balance at end of year (1)
    
    
    127,113
    
    
    
    127,113
    
    
    
    209,470
 (1)
    
    The carrying amount of goodwill for the shuttle tanker segment was $127.1 million as at
December 31, 2009, 2008, and 2007 and January 1, 2007. The carrying amount of goodwill for
the FPSO segment was $82.4 million as at December 31, 2007 and $86.8 million as at January
1, 2007.(2)
    
    During the fourth quarter of 2008, sufficient indicators of impairment existed,
including a significant and sustained decline in Teekay Corporations market capitalization
below book value, deteriorating market conditions and tightening credit markets, such that
the parent of the Dropdown Predecessor performed an interim goodwill impairment test as of
December 31, 2008.
   F - 15




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
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)
 b)
    
    Intangible Assets
  Gross Carrying
    
    
    Accumulated
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    Amount$
    
    
    $
    
    
    $Contracts of affreightment (shuttle tanker segment)
    
    
    124,250
    
    
    
    (88,016
    )
    
    
    36,234Time-charter contracts (FPSO segment)
    
    
    353
    
    
    
    (92
    )
    
    
    261Other intangible assets (FPSO segment)
    
    
    390
    
    
    
    
    
    
    
    390124,993
    
    
    
    (88,108
    )
    
    
    36,885
  Gross Carrying
    
    
    Accumulated
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    Amount$
    
    
    $
    
    
    $Contracts of affreightment (shuttle tanker segment)
    
    
    124,250
    
    
    
    (78,960
    )
    
    
    45,290Time-charter contracts (FPSO segment)
    
    
    353
    
    
    
    (29
    )
    
    
    324Other intangible assets (FPSO segment)
    
    
    390
    
    
    
    
    
    
    
    390124,993
    
    
    
    (78,989
    )
    
    
    46,004
  5.
    
    Accrued Liabilities
 December 31, 2009
    
    
    December 31, 2008$
    
    
    $Voyage and vessel
    
    
    45,963
    
    
    
    38,988Interest
    
    
    11,559
    
    
    
    11,994Payroll and benefits
    
    
    2,192
    
    
    
    2,00259,714
    
    
    
    52,984
 6.
    
    Long-Term Debt
 December 31, 2009
    
    
    December 31, 2008$
    
    
    $U.S. Dollar-denominated Revolving Credit Facilities due through 2018
    
    
    1,406,974
    
    
    
    1,314,264U.S. Dollar-denominated Term Loan Due to Parent
    
    
    60,000
    
    
    
    U.S. Dollar-denominated Debt allocated from Parent of Dropdown Predecessor
    
    
    
    
    
    
    270,778U.S. Dollar-denominated Term Loans due through 2017
    
    
    268,640
    
    
    
    252,1721,735,614
    
    
    
    1,837,214Less current portion
    
    
    108,159
    
    
    
    125,503Total
    
    
    1,627,455
    
    
    
    1,711,711
 OPCO
   F - 16




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
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)
 Petrojarl Varg
     7.
    
    Leases
 Charters-out
   Direct Financing Lease
  Charters-in
  8.
    
    Fair Value of Measurements
  Cash and cash equivalents
 Due to / from affiliates
 Long-term debt
 Due to joint venture partners and Due to parent
  F - 17




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
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)
 Derivative instruments
      December 31, 2009
    
    
    December 31, 2008Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueFair Value
    
    Asset
    
    
    Asset
    
    
    Asset
    
    
    AssetHierarchy
    
    (Liability)
    
    
    (Liability)
    
    
    (Liability)
    
    
    (Liability)Level(1)
    
    $
    
    
    $
    
    
    $
    
    
    $Cash and cash equivalentsCash and cash equivalents
    
    
    
    
    101,747
    
    
    
    101,747
    
    
    
    132,348
    
    
    
    132,348Due from affiliate (note 11w)
    
    
    
    
    17,673
    
    
    
    17,673
    
    
    
    10,110
    
    
    
    10,110Due to affiliate (note 11w)
    
    
    
    
    (39,876
    )
    
    
    (39,876
    )
    
    
    (8,715
    )
    
    
    (8,715
    )Long-term debt
    
    
    
    
    (1,675,614
    )
    
    
    (1,559,210
    )
    
    
    (1,837,214
    )
    
    
    (1,747,386
    )Loan due to Parent
    
    
    
    
    (60,000
    )
    
    
    (60,000
    )
    
    
    
    
    
    
    Due to joint venture partners
    
    
    
    
    
    
    
    
    
    
    
    
    (21,019
    )
    
    
    (21,019
    )Derivative instruments (note 12)Interest rate swap agreements(2)
    
    Level 2
    
    
    (76,072
    )
    
    
    (76,072
    )
    
    
    (202,479
    )
    
    
    (202,479
    )Foreign currency forward contracts
    
    Level 2
    
    
    6,192
    
    
    
    6,192
    
    
    
    (41,424
    )
    
    
    (41,424
    )
 
 (1)
    
    The fair value hierarchy level is only applicable to each financial instrument on the
consolidated balance sheets that are recorded at fair value on a recurring basis.(2)
    
    The fair value of the Partnerships interest rate swap agreements includes $8.0 million
of accrued interest as at December 31, 2009 ($3.4 million at December 31, 2008), which is
recorded in accrued liabilities on the balance sheet.
  9.
    
    Restructuring Charge
  10.
    
    Other Income  Net
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31, 2009
    
    
    December 31, 2008
    
    
    December 31, 2007$
    
    
    $
    
    
    $Volatile organic compound
emissions plant lease
income (note 7)
    
    
    6,970
    
    
    
    9,727
    
    
    
    10,960Miscellaneous
    
    
    1,948
    
    
    
    2,202
    
    
    
    (562
    )Other income  net
    
    
    8,918
    
    
    
    11,929
    
    
    
    10,398
 11.
    
    Related Party Transactions and Balances
 a)
    
    Nine of OPCOs conventional tankers are employed on long-term time-charter contracts
with a subsidiary of Teekay Corporation. Under the terms of 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 revenues of $114.7 million, $144.5
million and $128.4 million for the years ended December 31, 2009, 2008 and 2007,
respectively.
  F - 18




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
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)
 b)
    
    Two of OPCOs shuttle tankers are employed on long-term bareboat charters with a
subsidiary of Teekay Corporation. Pursuant to these charter contracts, OPCO earned revenues
of $12.4 million, $14.8 million and $14.2 million during the years ended December 31, 2009,
2008 and 2007, respectively.
 c)
    
    Two of OPCOs FSO units are employed on long-term bareboat charters with a subsidiary
of Teekay Corporation. Pursuant to these charter contracts, OPCO earned revenues of $11.2
million, $11.2 million and $12.0 million during the years ended December 31, 2009, 2008 and
2007, respectively.
 d)
    
    A subsidiary of Teekay Corporation has entered into a services agreement with a
subsidiary of OPCO, pursuant to which the subsidiary of OPCO provides the Teekay
Corporation subsidiary with ship management services. Pursuant to this agreement, during
the years ended December 31, 2009, 2008 and 2007, OPCO earned management fees of $3.2
million, $3.3 million and $3.3 million, respectively.
 e)
    
    Eight of OPCOS Aframax conventional oil tankers, two FSO units and the FPSO unit are
managed by subsidiaries of Teekay Corporation. Pursuant to the associated management
services agreements, the Partnership incurred general and administrative expenses of $5.3
million, $3.5 million and $4.5 million during the years ended December 31, 2009, 2008, and
2007, respectively.
 f)
    
    The Partnership, OPCO and certain of OPCOs operating subsidiaries have entered into
services agreements with certain subsidiaries of Teekay Corporation pursuant to which
Teekay Corporation subsidiaries provide the Partnership, OPCO and its operating
subsidiaries with administrative, advisory and technical services and ship management
services. Pursuant to these service agreements, the Partnership incurred $39.7 million,
$50.3 million and $53.0 million, respectively, of these costs during the December 31, 2009,
2008, and 2007, respectively.
 g)
    
    Pursuant to the Partnerships partnership agreement, the Partnership reimburses the
General Partner for all expenses incurred by the General Partner that are necessary or
appropriate for the conduct of the Partnerships business. During the years ended December
31, 2009, 2008 and 2007, the Partnership incurred $0.5 million, $0.6 million and $0.8
million of these costs, respectively.
 h)
    
    The Partnership has entered into an omnibus agreement with Teekay Corporation, Teekay
LNG Partners L.P., the General Partner and others governing, among other things, when the
Partnership, Teekay Corporation and Teekay LNG Partners L.P. may compete with each other
and certain rights of first offering on liquefied natural gas carriers, oil tankers,
shuttle tankers, FSO units and floating production, storage and offloading units.
 i)
    
    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 revolving credit facilities 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.
 j)
    
    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 revolving credit facilities. 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.
 Dampier Spirit
 k)
    
    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 12), to the Partnership for no
consideration and was accounted for as an equity distribution to Teekay Corporation.
 l)
    
    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.
 m)
    
    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.
 n)
    
    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.
 o)
    
    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.
  F - 19




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
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)
 p)
    
    Concurrently with the closing of the Partnerships follow-on offering on June 18, 2008,
the Partnership acquired from Teekay Corporation an additional 25% interest in OPCO for
$205.5 million, thereby increasing the Partnerships ownership interest in OPCO to 51%. The
Partnership financed the acquisition with the net proceeds from the follow-on offering and
a concurrent private placement of common units to Teekay Corporation. See Note 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.
 q)
    
    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.
  r)
    
    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.
 s)
    
    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.
 t)
    
    From December 2008 to June 2009, OPCO entered into a bareboat charter contract to
in-charter one shuttle tanker from a subsidiary of Teekay Corporation. Pursuant to the
charter contract, OPCO incurred time-charter hire expenses of $3.4 million and $0.2 million
during the years ended December 31, 2009 and 2008, respectively.
 u)
    
    During August 2008, two of OPCOs in-chartered shuttle tankers were employed on a
single-voyage charter with a subsidiary of Teekay Corporation. Pursuant to this charter
contract, OPCO earned revenues of $11.3 million for the year ended December 31, 2008.
 v)
    
    On September 10, 2009, the Partnership acquired from Teekay Corporation the Petrojarl
Varg,together with its operations and charter contracts with Talisman Energy, for a
purchase price of $320 million. The purchase price of $320 million is accounted for as an
equity distribution to Teekay Corporation. To the extent the purchase price is greater than
the corresponding book value, the excess is reflected as a reduction in Partners Equity
and the remainder is shown as a reduction in Dropdown Predecessor Equity. The purchase was
financed through vendor financing made available by Teekay Corporation of $220 million. The
remaining $100 million was paid in cash and financed from existing debt facilities. The
$220 million vendor financing from Teekay Corporation was comprised of two tranches. The
senior tranche was a $160 million short-term debt facility bearing interest at LIBOR plus a
margin of 3.25% and was repaid in November 2009. The junior tranche of the vendor financing
was a $60 million unsecured subordinated debt facility bearing interest at 10% per annum
and was repaid in March 2010. For the year ended December 31, 2009, the Partnership
incurred interest expense of $2.9 million in relation to the $220 million vendor financing
from Teekay Corporation. (See Notes 1 and 6).
 Petrojarl Varg
 Petrojarl Varg
 
    
    General and administrative expenses (consisting primarily of salaries, defined
benefit pension plan benefits, and other employee related costs, office rent, legal and
professional fees, and travel and entertainment) of $3.9 million, $6.6 million, and $7.8
million, for the years ended December 31, 2009, 2008 and 2007, respectively, has been
allocated to the Partnership.
 
    
    Interest expense incurred by Teekay Corporation on its credit facilities that were
used to finance the acquisition of the Petrojarl Vargof $6.5 million, $16.7 million and
$24.6 million, respectively, for the years ended December 31, 2009, 2008, and 2007, has
been allocated to the Partnership.
 
    
    Teekay Corporation entered into interest rate swaps to offset increases or decreases
in the variable-rate interest payments of the credit facilities that were used to
finance the acquisition of the Petrojarl Varg. The realized and unrealized gains
(losses) on these interest rate swaps allocated to the Partnership were $6.2 million,
($35.7) million and ($11.2) million, respectively, for the years ended December 31,
2009, 2008 and 2007. These amounts are reflected in the realized and unrealized gains
(losses) on non-designated derivative instruments.
  F - 20




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
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)
 
    
    Teekay Corporation entered into foreign exchange forward contracts into to minimize
the impact from changes in the foreign exchange rate between the Norwegian Kroner and
the US Dollar on operating expenses of the Petrojarl Varg. These foreign exchange
forward contracts have been allocated to the Partnership. For the year ended December
31, 2009, the amount of the gain (loss) allocated to the Partnership was $3.4 million,
of which ($0.5) million is reflected in vessel operating expenses, $0.4 million in
general and administrative expenses, $0.7 million in realized and unrealized gains
(losses) on non-designated derivative instruments and $2.8 million in other
comprehensive income. For the year ended December 31, 2008, a loss of ($5.4) million
was allocated, of which ($0.7) million is reflected in vessel operating expenses, ($0.6)
million in general and administrative expenses, ($1.6) million in realized and
unrealized gains (losses) on non-designated derivative instruments and ($2.5) million in
other comprehensive loss. For the year ended December 31, 2007, a gain of $4.1 million
was allocated, all of which was reflected in realized and unrealized gains (losses) on
non-designated derivative instruments.
 
    
    Teekay Corporation uses a centralized treasury system. As a result, cash and cash
equivalents attributable to the operations of the Petrojarl Varg, prior to the
acquisition of the vessel by the Partnership, were in certain cases, co-mingled with
cash and cash equivalents from other operations of Teekay Corporation. Cash and cash
equivalents in co-mingled bank accounts are not reflected in the balance sheet of the
Dropdown Predecessor. However, any cash transactions from these bank accounts that were
made on behalf of the Dropdown Predecessor are reflected in these financial statements
as increases or decreases in Dropdown Predecessor Equity. The net amount of these equity
contributions were $110.4 million for the period from January 1, 2009 to September 9,
2009 and $73.1 million and ($50.5) million, respectively, for the years ended December
31, 2008 and 2007.
 w)
    
    At December 31, 2009, due from affiliates totaled $17.7 million (December 31, 2008 -
$10.1 million) and due to affiliates totaled $39.9 million (December 31, 2008  $8.7
million). Due to and from affiliates are non-interest bearing and unsecured and are
expected to be settled within the next fiscal year in the normal course of operations.
 12.
    
    Derivative Instruments and Hedging Activities
  Foreign Exchange Risk
   Fair Value / CarryingContract Amount in
    
    
    Amount of Asset (Liability)
    
    
    Average
    
    
    Expected MaturityForeign Currency
    
    
    (thousands of U.S. Dollars)
    
    
    Forward
    
    
    2010
    
    
    2011(thousands)
    
    
    Hedge
    
    
    Non-hedge
    
    
    Rate(1)
    
    
    (in thousands of U.S. Dollars)Norwegian Kroner
    
    
    694,000
    
    
    
    5,934
    
    
    
    (18
    )
    
    
    6.15
    
    
    
    96,585
    
    
    
    16,343British Pound
    
    
    53
    
    
    
    (15
    )
    
    
    
    
    
    
    0.53
    
    
    
    99
    
    
    
    Euro
    
    
    19,622
    
    
    
    636
    
    
    
    (345
    )
    
    
    0.71
    
    
    
    24,611
    
    
    
    3,194$
    6,555
    
    
    $
    (363
    )
    
    
    
    
    
    $
    121,295
    
    
    $
    19,537
 (1)
    
    Average forward rate represents the contracted amount of foreign currency one U.S. Dollar
will buy.
 Interest Rate Risk
   F - 21




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
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)
  Fair Value /
    
    
    Weighted-Carrying
    
    
    AverageInterest
    
    Principal
    
    
    Amount of
    
    
    Remaining
    
    
    Fixed InterestRate
    
    Amount
    
    
    Liability(3)
    
    
    Term
    
    
    RateIndex
    
    $
    
    
    $
    
    
    (Years)
    
    
    (%)(1)U.S. Dollar-denominated interest rate swaps
    
    LIBOR
    
    
    500,000
    
    
    
    34,995
    
    
    
    9.4
    
    
    
    4.2U.S. Dollar-denominated interest rate
swaps(2)
    
    LIBOR
    
    
    714,692
    
    
    
    41,077
    
    
    
    7.2
    
    
    
    3.71,214,692
    
    
    
    76,072
 (1)
    
    Excludes the margin the Partnership pays on its variable-rate debt, which as at
December 31, 2009, ranged from 0.45% and 3.25%.(2)
    
    Principal amount reduces quarterly or semi-annually.(3)
    
    The fair value of the Partnerships interest rate swap agreements includes $8.0 million
of accrued interest which is recorded in accrued liabilities on the balance sheet.
 Tabular disclosure
  Effective PortionAmount of gainrecognized in Other
    
    Loss reclassified from Accumulated OtherComprehensive
    
    Comprehensive Income
    
    
    Ineffective PortionIncome
    
    
    
    Amount
    
    
    
    
    Amount of gain($)
    
    Location
    
    ($)
    
    
    Location
    
    ($)28,025
    
    Vessel operating expenses
    
    
    (6,775
    )
    
    Vessel operating expenses
    
    
    2,492General and administrative
    
    
    (2,934
    )
    
    General and administrative
    
    
    3,383
   Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31, 2009
    
    
    December 31, 2008
    
    
    December 31, 2007$
    
    
    $
    
    
    $Realized losses relating to:Interest rate swaps
    
    
    (46,546
    )
    
    
    (19,663
    )
    
    
    6,379Foreign currency forward contract
    
    
    (4,196
    )
    
    
    1,972
    
    
    
    2,296(50,742
    )
    
    
    (17,691
    )
    
    
    8,675Unrealized gains relating to:Interest rate swaps
    
    
    99,740
    
    
    
    (163,291
    )
    
    
    (57,357
    )Foreign currency forward contracts
    
    
    4,562
    
    
    
    (7,800
    )
    
    
    2,140104,302
    
    
    
    (171,091
    )
    
    
    (55,217
    )Total realized and unrealized gains
on non-designated derivative
instruments
    
    
    53,560
    
    
    
    (188,782
    )
    
    
    (46,542
    )
    F - 22




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
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.
    
    Income Taxes
  December 31, 2009
    
    
    December 31, 2008$
    
    
    $Deferred tax assets:Tax losses carried forward(1)
    
    
    64,023
    
    
    
    62,068Provisions
    
    
    514
    
    
    
    2,536Derivative instruments
    
    
    
    
    
    
    2,234Unfavorable contract
    
    
    
    
    
    
    1,206Total deferred tax assets:
    
    
    64,537
    
    
    
    68,044Deferred tax liabilities:Vessels and equipment
    
    
    48,690
    
    
    
    62,856Long-term debt
    
    
    29,599
    
    
    
    11,505Other
    
    
    2,729
    
    
    
    Total deferred tax liabilities
    
    
    81,018
    
    
    
    74,361Net deferred tax liabilities (2)
    
    
    16,481
    
    
    
    6,317Current portion
    
    
    
    
    
    
    Long-term portion of net deferred tax liabilities
    
    
    16,481
    
    
    
    6,317Disclosed in:Other assets
    
    
    
    
    
    
    6,331Deferred income tax
    
    
    (16,481
    )
    
    
    (12,648
    )Net deferred tax liabilities
    
    
    (16,481
    )
    
    
    (6,317
    )
 (1)
    
    The net operating loss carryforwards of $227.6 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, 2009
    
    
    December 31, 2008
    
    
    December 31, 2007$
    
    
    $
    
    
    $Current  Foreign
    
    
    (4,392
    )
    
    
    (752
    )
    
    
    Deferred  Foreign
    
    
    (8,246
    )
    
    
    63,096
    
    
    
    (1,481
    )Income tax (expense) recovery
    
    
    (12,638
    )
    
    
    62,344
    
    
    
    (1,481
    )
  Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31, 2009
    
    
    December 31, 2008
    
    
    December 31, 2007$
    
    
    $
    
    
    $Net income (loss) before taxes
    
    
    145,237
    
    
    
    (221,617
    )
    
    
    25,884Net income (loss) not subject to taxes
    
    
    280,553
    
    
    
    (470,065
    )
    
    
    176,944Net income (loss) subject to taxes
    
    
    (135,316
    )
    
    
    248,448
    
    
    
    (151,060
    )At applicable statutory tax rates
    
    
    (43,247
    )
    
    
    61,227
    
    
    
    (49,775
    )Permanent differences and adjustments related to currency differences
    
    
    55,885
    
    
    
    (123,571
    )
    
    
    51,256Tax expense (recovery) related to current year
    
    
    12,638
    
    
    
    (62,344
    )
    
    
    1,481
  F - 23




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
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
    
    
    Year Ended
    
    
    Year EndedDecember 31, 2009
    
    
    December 31, 2008
    
    
    December 31, 2007Balance of unrecognized tax benefits as at January 1,
    
    
    
    
    
    
    
    
    
    
    Increases for positions related to prior years
    
    
    5,049
    
    
    
    
    
    
    
    Increases for positions related to the current year
    
    
    467
    
    
    
    
    
    
    
    Balance of unrecognized tax benefits as at December 31,
    
    
    5,516
    
    
    
    
    
    
    
    
   14.
    
    Commitments and Contingencies
  15.
    
    Supplemental Cash Flow Information
 a)
    
    The changes in non-cash working capital items related to operating activities for the
years ended December 31, 2009, 2008 and 2007 are as follows:
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31, 2009
    
    
    December 31, 2008
    
    
    December 31, 2007$
    
    
    $
    
    
    $Accounts receivable
    
    
    (27,446
    )
    
    
    (4,019
    )
    
    
    (8,534
    )Prepaid expenses and other assets
    
    
    (6,476
    )
    
    
    13,590
    
    
    
    (1,855
    )Accounts payable and accrued liabilities
    
    
    21,224
    
    
    
    4,100
    
    
    
    (5,065
    )Advances from (to) affiliate
    
    
    23,598
    
    
    
    1,948
    
    
    
    (9,417
    )10,900
    
    
    
    15,619
    
    
    
    (24,871
    )
 b)
    
    Cash interest paid (including interest paid by the Dropdown Predecessor and realized
losses on interest rate swaps) during the years ended December 31, 2009, 2008, and 2007
totaled $85.5 million $97.7 million, and $96.7 million, respectively.
 c)
    
    Taxes paid (including taxes paid by the Dropdown Predecessor) during the years ended
December 31, 2009, 2008 and 2007 totaled ($0.4 million), $1.1 million and $1.8 million,
respectively.
 d)
    
    The Partnerships consolidated statement of cash flows for the years ended December 31,
2008 and 2007 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. The acquisition of vessels on commencement of operations has been
treated as a non-cash transaction in the Partnerships consolidated statement of cash
flows. During the years ended December 31, 2008 and 2007, non-cash investing activities for
acquired vessels was $90.5 million and $71.6 million, 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. See note 11v.
  F - 24




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
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)
 16.
    
    Partners Equity and Net Income Per Unit
  Limited Partners Rights
  
    
    Right to receive distribution of available cash within approximately 45 days after the
end of each quarter.
    
    No limited partner shall have any management power over the Partnerships business and
affairs; the general partner shall conduct, direct and manage our activities.
    
    The General Partner may be removed if such removal is approved by unitholders holding
at least 66 2/3% of the outstanding units voting as a single class, including units held
by the General Partner and its affiliates.
 Subordinated Units
   Incentive Distribution Rights
  Quarterly Distribution Target Amount (per unit)
    
    Unitholders
    
    
    General PartnerMinimum quarterly distribution of $0.35
    
    
    98
    %
    
    
    2
    %Up to $0.4025
    
    
    98
    %
    
    
    2
    %Above $0.4025 up to $0.4375
    
    
    85
    %
    
    
    15
    %Above $0.4375 up to $0.525
    
    
    75
    %
    
    
    25
    %Above $0.525
    
    
    50
    %
    
    
    50
    %
   Net Income (Loss) Per Unit
    F - 25




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
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 31,2009
    
    
    2008
    
    
    2007$
    
    
    $
    
    
    $Net income (loss)
    
    
    132,599
    
    
    
    (159,273
    )
    
    
    24,403Non-controlling interest in net income (loss)
    
    
    57,490
    
    
    
    10,863
    
    
    
    37,573Dropdown predecessors interest in net income (loss)
    
    
    11,378
    
    
    
    (151,169
    )
    
    
    (15,828
    )General partners interest in net income (loss)
    
    
    2,523
    
    
    
    176
    
    
    
    54Limited partners interest in net income (loss):Common unit holders
    
    
    43,546
    
    
    
    (10,092
    )
    
    
    1,302Subordinated unit holders
    
    
    17,662
    
    
    
    (9,051
    )
    
    
    1,302Limited partners interest in net income (loss) per unit:Common units (basic and diluted)
    
    
    1.85
    
    
    
    (0.65
    )
    
    
    0.13Subordinated units (basic and diluted)
    
    
    1.80
    
    
    
    (0.92
    )
    
    
    0.13Weighted average number of units outstandingCommon units (basic and diluted)
    
    
    23,476,438
    
    
    
    15,461,202
    
    
    
    9,800,000Subordinated units (basic and diluted)
    
    
    9,800,000
    
    
    
    9,800,000
    
    
    
    9,800,000
  17.
    
    Pension Benefits
 Plans
 December 31, 2008$Change in benefit obligation:Beginning balance
    
    
    7,028Service cost
    
    
    1,105Interest cost
    
    
    315Actuarial loss (gain)
    
    
    3,066Benefit payments
    
    
    (28
    )Exchange rate changes
    
    
    (2,392
    )Ending balance
    
    
    9,094Change in fair value of plan assets:Beginning balance
    
    
    6,056Actual return
    
    
    158Employer contributions
    
    
    993Benefit payments
    
    
    (28
    )Administration expenses
    
    
    (13
    )Exchange rate changes
    
    
    (1,551
    )Ending balance
    
    
    5,615Funded status:Net underfunded status of the plans
    
    
    (3,479
    )Payroll tax on funded status
    
    
    (490
    )Net liability recognized on balance sheet
    
    
    (3,969
    )Amounts recognized in the balance sheets:Other long-term liabilities
    
    
    3,969Accumulated other comprehensive lossNet actuarial losses
    
    
    4,261
  F - 26




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
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$Benefit obligation
    
    
    9,094Fair value of plan assets
    
    
    5,615Accumulated benefit obligation
    
    
    5,757Fair value of plan assets
    
    
    5,615
  Period Ended
    
    
    Year Ended
    
    
    Year EndedSeptember 10, 2009
    
    
    December 31, 2008
    
    
    December 31, 2007$
    
    
    $
    
    
    $Net periodic pension cost:Service cost
    
    
    888
    
    
    
    1,106
    
    
    
    966Interest cost
    
    
    248
    
    
    
    315
    
    
    
    291Expected return on plan assets
    
    
    (247
    )
    
    
    (361
    )
    
    
    (244
    )Administration expenses
    
    
    38
    
    
    
    13
    
    
    
    12Amortization of net actuarial losses
    
    
    105
    
    
    
    
    
    
    
    Payroll tax
    
    
    131
    
    
    
    151
    
    
    
    145Net cost
    
    
    1,163
    
    
    
    1,224
    
    
    
    1,170
   December 31, 2008$Equity investments
    
    
    702Debt securities
    
    
    3,319Money market
    
    
    432Real estate
    
    
    943Other
    
    
    219Total
    
    
    5,615
  December 31, 2008$Discount rates
    
    
    3.80
    %Rate of compensation increase
    
    
    4.00
    %
  F - 27




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##### Table of Contents



TEEKAY OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
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)
  Period Ended
    
    
    Year Ended
    
    
    Year EndedSeptember 10, 2009
    
    
    December 31, 2008
    
    
    December 31, 2007$
    
    
    $
    
    
    $Discount rates
    
    
    3.80
    %
    
    
    3.80
    %
    
    
    4.70
    %Rate of compensation increase
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.50
    %Expected long-term rates of return (1)
    
    
    5.80
    %
    
    
    5.80
    %
    
    
    5.75
    %
 (1)
    
    To the extent the expected return on plan assets varies from the actual return, an
actuarial gain or loss results. The expected long-term rates of return on plan assets
assumptions is based on an estimated weighted average of long-term returns of major asset
classes. In determining asset class returns, the Dropdown Predecessor takes into account
long-term returns of major asset classes, historical performance of plan assets, as well as
the current interest rate environment.
 18.
    
    Accounting Pronouncements Not Yet Adopted
 Consolidations
 Transfers and Services
 Revenue Recognition
 Fair Value Measurements and
Disclosures
 19.
    
    Subsequent events
  a)
    
    All of the Partnerships subordinated units converted into an equal number of common
units as of January 1, 2010 as all the applicable financial tests in the partnership
agreement were met.
 b)
    
    On March 22, 2010, the Partnership completed a public offering of 4.4 million common
units at a price of 19.48 per unit, for gross proceeds of $87.5 million (including the
general partners $1.7 million proportionate capital contribution). The underwriters
concurrently exercised their overallotment option to purchase an additional 660,000 units
on March 22, 2010, providing additional gross proceeds of $13.1 million (including the
general partners $0.3 million proportionate capital contribution). The Partnership used
the total net proceeds from the offering to repay the remaining $60.0 million of the Teekay
Corporation vendor financing from the acquisition of the Petrojarl Vargand to finance a
portion of the acquisition of the Falcon Spirit, a FSO unit, from Teekay Corporation for
$43.4 million on April 1, 2010.
  F - 28