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Teekay Offshore Partners L.P. 20-F 2009 Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F/A
(Mark One)
OR
For the fiscal year ended December 31, 2007
OR
OR
Date of event requiring this shell company report
For the transition period from to
Commission file number 1-33198
TEEKAY OFFSHORE PARTNERS L.P.
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant’s Name into English) Republic of The Marshall Islands
(Jurisdiction of incorporation or organization) 4th floor, Belvedere Building, 69 Pitts Bay Road, Hamilton, HM 08, Bermuda
(Address of principal executive offices) Roy Spires
4th floor, Belvedere Building, 69 Pitts Bay Road, Hamilton, HM 08, Bermuda Telephone: (441) 298-2530 Fax: (441) 292-3931 (Contact Information for Company Contact Person) Securities registered or to be registered pursuant to Section 12(b) of the Act.
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common
stock as of the close of the period covered by the annual report.
9,800,000 Common Units
9,800,000 Subordinated Units Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes o No þ
If this report is an annual or transition report, indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in
Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark which basis of accounting the registrant has used to prepare the financial
statements included in this filing:
If “Other” has been checked in response to the previous question, indicate by check mark which
financial statement item the registrant has elected to follow:
Item 17
o
Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
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EXPLANATORY NOTE
Teekay Offshore Partners L.P. (generally referred to herein as the Partnership, Teekay Offshore
Partners Predecessor, the Predecessor, we, our or us) is filing this Annual Report on Form 20-F/A
for the year ended December 31, 2007 (this Amendment or this 2007 Form 20-F/A Report) to amend our
Annual Report on Form 20-F for the year ended December 31, 2007 (the Original Filing) that was
filed with the Securities and Exchange Commission (or SEC) on April 11, 2008.
In August 2008, we commenced a review of our application of Statement of Financial Accounting
Standards (or SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended. Although we believe that our derivative transactions were consistent with our risk
management policies and that our overall risk management policies continue to be sound, based on
our review we concluded that certain of our derivative instruments did not qualify for hedge
accounting treatment under SFAS No. 133. Certain of our hedge documentation, in respect of our
assessment of effectiveness and measurement of ineffectiveness of our derivative instruments for
accounting purposes, was not in accordance with the technical requirements of SFAS No. 133 for
the years ended December 31, 2003 to 2007.
Accordingly, although we believe each of these derivative instruments were and continue to be
effective economic hedges, for accounting purposes we should have reflected changes in fair
value of these derivative instruments as increases or decreases to our net income (loss) on our
consolidated statements of income (loss), instead of being reflected as increases or decreases
to accumulated other comprehensive income (loss), a component of partners’/owner’s equity on our
consolidated balance sheets and statements of changes in partners’/owner’s equity.
The change in accounting for our derivative transactions does not affect the economics of the
derivative transactions.
We have also restated certain other items primarily related to accounting for the
non-controlling interest in one of our 50% owned subsidiaries and adjusting amounts related to
deferred income taxes and the fair value of derivative instruments at December 31, 2007.
The changes in accounting for these transactions do not affect or our cash flows, liquidity, or
cash distributions to partners.
In connection with assessing the potential impact of SFAS No. 141(R), which replaces SFAS No.
141, Business Combinations, and is effective for fiscal years beginning after December 15, 2008,
we re-assessed our accounting treatment for interests in vessels we purchased from Teekay
Corporation (Teekay) subsequent to our initial public offering in December 2006. We have
historically treated the acquisition of the interests in these vessels as asset acquisitions,
not business acquisitions. If the acquisitions were deemed to be business acquisitions, the
acquisitions would have been accounted for in a manner similar to the pooling of interest method
whereby our consolidated financial statements prior to the date the interests in these vessels
were acquired by us would be retroactively adjusted to include the results of these acquired
vessels (referred to herein as the Dropdown Predecessor) from the date that we and the acquired
vessels were both under the common control of Teekay and had begun operations. Although
substantially all of the value relating to these transactions is attributable to the vessels and
associated contracts, we have now determined that the acquisitions should have been accounted
for as business acquisitions under United States generally accepted accounting principles (or
GAAP).
The impact of the retroactive Dropdown Predecessor adjustments does not affect our limited
partners’ interest in net income, earnings per unit, or cash distributions to partners. However,
the impact of the retroactive Dropdown Predecessor adjustments has resulted in an increase in
previously reported net income for the years ended December 31, 2007, 2006, 2005, 2004 and 2003.
(c) Discontinued Operations
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
we have reclassified the operations of Navion Shipping Ltd., a subsidiary of Teekay Offshore
Partners Predecessor, as discontinued operations effective July 1, 2006 with retroactive
restatement for prior comparative periods. Prior to our initial public offering, on July 1,
2006, Teekay Offshore Partners Predecessor sold Navion Shipping Ltd. to a subsidiary of Teekay.
At the time of the sale, all of Teekay Offshore Partners Predecessor’s chartered-in conventional
tankers were chartered-in by Navion Shipping Ltd. and subsequently time chartered to a
subsidiary of Teekay. Although after the sale of Navion Shipping Ltd. we continue to own a fleet
of conventional tankers, which operate under long-term fixed-rate time-charter contracts, the
operations and cash flows of Navion Shipping Ltd. should have been eliminated from our ongoing
operations as a result of the sale and we do not have any significant continuing involvement in
the operations of the disposed component. Therefore, we have reclassified the operations of
Navion Shipping Ltd. as discontinued operations for all periods prior to its disposition on July
1, 2006.
The change in presentation of the results of Navion Shipping Ltd. to discontinued operations
does not affect total assets, total partners’ equity, net income, earnings per unit or cash
distributions to partners for any period.
In the preparation of the combined consolidated financial statements of the Predecessor for the
period prior to the Partnership’s initial public offering, general and administrative expenses
were allocated from Teekay to the Predecessor based on the Predecessor’s proportionate share of
Teekay’s total ship-operating (calendar) days for each of the periods presented. During 2005 and
2006, a portion of the general and administrative expense allocation included accrued costs
relating to a long-term share-based incentive plan (the Vision Incentive Plan or VIP) for senior
management. During 2005, Teekay had accrued and expensed a portion of the VIP without
consideration of certain vesting provisions as required under GAAP. Upon transition to SFAS 123R
on January 1, 2006, Teekay was required to account for the VIP based on the fair value of the
award as the VIP has a share priced-based component. However, Teekay continued to calculate
compensation expense for the VIP under the methodology it had followed in 2005 as Teekay did not
identify the VIP as within the scope of SFAS 123R. As a result, we have restated the general and
administrative expenses allocation for the periods before our initial public offering.
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Because this change in general and administrative expenses is the result of a change in an
allocation of cost from Teekay to the Predecessor for the period prior to the Partnership’s
initial public offering, this restatement will have no affect on the Partnership’s equity,
liabilities or expenses for any period subsequent to the initial public offering.
As a result of the conclusions described above, we are restating in this 2007 Form 20-F/A our
historical balance sheets as of December 31, 2007 and 2006, our statements of income (loss), cash
flows and changes in partners’/owner’s equity for the years ended 2007, 2006 and 2005 and selected
financial data as of and for the years ended December 31, 2007, 2006, 2005, 2004 and 2003.
The following table sets forth a reconciliation of previously reported and restated net income
(loss) and owner’s equity as of the date and for the periods shown (in thousands of US dollars):
Note 18 of the notes to the consolidated financial statements included in this 2007 Form 20-F/A
Report reflects the changes to our consolidated financial statements as a result of our restatement
and provides additional information about the restatement.
We have also restated in this 2007 Form 20-F/A our General Partner’s historical balance sheet as of
December 31, 2007. Note 15 of the notes to the General Partner’s consolidated financial statement
included in this 2007 Form 20-F/A Report reflects the changes to its consolidated balance sheet as
a result of our restatement and provides additional information about the restatement.
Management also has determined that there were control deficiencies relating to the preparation of
hedge documentation and the accounting for certain non-routine, complex financial arrangements,
which gave rise in part to this restatement, constituted material weaknesses in our internal
control over financial reporting. We believe, as of the date of this filing, that we have fully
remediated the material weaknesses in our internal control over financial reporting. Please read
Item 15. “Controls and Procedures” for additional discussion.
For the convenience of the reader, this 2007 Form 20-F/A Report sets forth the Original Filing in
its entirety, although we are only restating portions of Items 3, 4, 5, 7, 11, 15, 18 and 19
affected by the amended financial information. This 2007 Form 20-F/A Report includes
currently-dated certifications from our Chief Executive Officer and Chief Financial Officer, as
required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, as well as the currently dated
consent of our independent registered public accounting firm. The changes we have made are a result
of and reflect the restatement described herein; no other information in the Original Filing has
been updated.
Except for the amended or restated information described above, this 2007 Form 20-F/A Report
continues to speak as of the date of the Original Filing. Other events occurring after the filing
of the Original Filing or other disclosures necessary to reflect subsequent events have been or
will be addressed in other reports filed with or furnished to the SEC subsequent to the date of the
Original Filing.
Because this 2007 Form 20-F/A Report restates all of the pertinent financial data for the affected
periods, we do not intend to amend our previously-filed Annual Reports on Form 20-F or previously
furnished Reports on Form 6-K for periods ended prior to December 31, 2007. As a result, the reader
should not rely on the prior filings, but should rely upon the restated financial statements,
reports of our independent registered public accounting firm and related financial information for
affected periods contained in this 2007 Form 20-F/A Report.
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TEEKAY OFFSHORE PARTNERS L.P.
INDEX TO REPORT ON FORM 20-F/A
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PART I
This Annual Report should be read in conjunction with the consolidated financial statements and
accompanying notes included in this report.
In addition to historical information, this Annual Report contains forward-looking statements that
involve risks and uncertainties. Such forward-looking statements relate to future events and our
operations, objectives, expectations, performance, financial condition and intentions. When used in
this Annual Report, the words “expect,” “intend,” “plan,” “believe,” “anticipate,” “estimate” and
variations of such words and similar expressions are intended to identify forward-looking
statements. Forward-looking statements in this Annual Report include, in particular, statements
regarding:
Forward-looking statements include, without limitation, any statement that may predict, forecast,
indicate or imply future results, performance or achievements, and may contain the words believe,
anticipate, expect, estimate, project, will be, will continue, will likely result, or words or
phrases of similar meanings. These statements are necessarily estimates reflecting the judgment of
senior management, involve known and unknown risks and are based upon a number of assumptions and
estimates that are inherently subject to significant uncertainties and contingencies, many of which
are beyond our control. Actual results may differ materially from those expressed or implied by
such forward-looking statements. Important factors that could cause actual results to differ
materially include, but are not limited to, those factors discussed below in Item 3: Key
Information—Risk Factors and other factors detailed from time to time in other reports we file with
the SEC.
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We do not intend to revise any forward-looking statements in order to reflect any change in our
expectations or events or circumstances that may subsequently arise. You should carefully review
and consider the various disclosures included in this Annual Report and in our other filings made
with the SEC that attempt to advise interested parties of the risks and factors that may affect our
business, prospects and results of operations.
Item 1. Identity of Directors, Senior Management and Advisors
The information included in Item 1 in the Original Filing has not been updated for information or
events occurring after the date of the Original Filing and has not been updated to reflect the
passage of time since the date of the Original Filing.
Not applicable.
Item 2. Offer Statistics and Expected Timetable
The information included in Item 2 in the Original Filing has not been updated for information or
events occurring after the date of the Original Filing and has not been updated to reflect the
passage of time since the date of the Original Filing.
Not applicable.
Item 3. Key Information
Selected Financial Data (Restated)
The following tables present, in each case for the periods and as of the dates indicated, summary:
Prior to the closing of our initial public offering of common units on December 19, 2006, Teekay
Corporation transferred eight Aframax conventional crude oil tankers to a subsidiary of Norsk
Teekay Holdings Ltd. (or Norsk Teekay) and one FSO unit to Teekay Offshore Australia Trust. Teekay
Corporation then transferred to Teekay Offshore Operating L.P. (or OPCO) all of the outstanding
interests of four wholly-owned subsidiaries — Norsk Teekay, Teekay Nordic Holdings Inc., Teekay
Offshore Australia Trust and Pattani Spirit L.L.C. These four wholly-owned subsidiaries, which
include the eight Aframax conventional crude oil tankers and the FSO unit, are collectively
referred to as Teekay Offshore Partners Predecessor or the Predecessor.
The summary historical financial and operating data has been prepared on the following basis:
Our initial public offering and certain other transactions that occurred during 2006 and 2007 have
affected our historical performance or will affect our future performance. As a result, the
following tables should be read together with, and are qualified in their entirety by reference to,
(a) “Item 5. Operating and Financial Review and Prospects,” included herein, and (b) the historical
consolidated financial statements and the accompanying notes and the Report of Independent
Registered Public Accounting Firm therein (which are included herein), with respect to the
consolidated financial statements for the years ended December 31, 2007, 2006, and 2005 aggregated
as follows:
Year ended December 31, 2007
Year ended December 31, 2006
Year ended December 31, 2005
The information presented in the following tables and related footnotes have been adjusted to
reflect the restatement of our financial results which is described in the Explanatory Note above.
A reconciliation of our previously reported consolidated financial statements to our restated
consolidated financial statements as at December 31, 2007 and 2006 and for the years ended December
31, 2007, 2006 and 2005 is included in Note 18 of the notes to our consolidated financial
statements. A reconciliation of our previously reported consolidated financial information to our
restated consolidated financial information as at December 31, 2005, 2004 and 2003 and for the
years ended December 31, 2004 and 2003 follows the table below.
Our consolidated financial statements are prepared in accordance with United States generally
accepted accounting principles (or GAAP).
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EBITDA should not be considered an alternative to net income, operating income, cash flow from
operating activities or any other measure of financial performance or liquidity presented in
accordance with GAAP. EBITDA excludes some, but not all, items that affect net income
and operating income, and these measures may vary among other companies. Therefore, EBITDA as
presented below may not be comparable to similarly titled measures of other companies.
EBITDA also includes the following items:
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RISK FACTORS
Except for the changes in percentages of our consolidated voyage revenues from continuing
operations generated from Teekay Corporation, Petrobras Transporte S.A. and StatoilHydro ASA, the
information included in Item 3 — Risk Factors in the Original Filing has not been updated for
information or events occurring after the date of the Original Filing and has not been updated to
reflect the passage of time since the date of the Original Filing.
Our cash flow depends substantially on OPCO’s ability to make distributions to its partners,
including us.
Until July 2007, our partnership interest in OPCO represented our only cash generating asset. We
still derive a substantial majority of our cash flow from OPCO’s distributions to us as one of its
partners. The amount of cash OPCO can distribute to its partners principally depends upon the
amount of cash it generates from its operations, which may fluctuate from quarter to quarter based
on, among other things:
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The actual amount of cash OPCO has available for distribution also depends on other factors
such as:
OPCO’s limited partnership agreement provides that it distributes its available cash (as defined in
the partnership agreement) to its partners on a quarterly basis. OPCO’s available cash includes
cash on hand less any reserves that may be appropriate for operating its business. The amount of
OPCO’s quarterly distributions, including the amount of cash reserves not distributed, is
determined by the Board of Directors of our general partner on our behalf.
The amount of cash OPCO generates from operations may differ materially from its profit or loss for
the period, which will be affected by non-cash items. As a result of this and the other factors
mentioned above, OPCO may make cash distributions during periods when it records losses and may not
make cash distributions during periods when it records net income.
We may not have sufficient cash from operations to enable us to pay the minimum quarterly
distribution on our common units or to maintain or increase distributions.
The source of our earnings and cash flow consists nearly exclusively of cash distributions from our
subsidiaries, primarily OPCO. Therefore, the amount of distributions we are able to make to our
unitholders will fluctuate based on the level of distributions made to us by our subsidiaries.
Neither OPCO nor any other subsidiaries may make quarterly distributions at a level that will
permit us to make distributions to our common unitholders at the minimum quarterly distribution
level set forth in our partnership agreement or to maintain or increase our quarterly distributions
in the future. In addition, while we would expect to increase or decrease distributions to our
unitholders if our subsidiaries increase or decrease distributions to us, the timing and amount of
any such increased or decreased distributions will not necessarily be comparable to the timing and
amount of the increase or decrease in distributions made by our subsidiaries to us.
Our ability to distribute to our unitholders any cash we may receive from our subsidiaries is or
may be limited by a number of factors, including, among others:
Many of these factors will reduce the amount of cash we may otherwise have available for
distribution. We may not be able to pay distributions, and any distributions we do make may not be
at or above our minimum quarterly distribution. The actual amount of cash that is available for
distribution to our unitholders will depend on several factors, many of which are beyond the
control of us or our general partner.
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.
Our cash distribution policy, which is consistent with our partnership agreement, requires us to
distribute all of our available cash (as defined in our partnership agreement) each quarter.
Accordingly, our growth may not be as fast as businesses that reinvest their available cash to
expand ongoing operations.
OPCO’s cash distribution policy requires it to distribute all of its available cash each quarter.
In determining the amount of cash available for distribution by OPCO, the Board of Directors of our
general partner, in making the determination on our behalf, will approve the amount of cash
reserves to set aside by OPCO, including reserves for future maintenance capital expenditures,
working capital and other matters. OPCO also relies upon external financing sources, including
commercial borrowings, to fund its capital expenditures. Accordingly, to the extent OPCO does not
have sufficient cash reserves or is unable to obtain financing, its cash distribution policy may
significantly impair its ability to meet its financial needs or to grow.
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We must make substantial capital expenditures to maintain the operating capacity of our fleet,
which will reduce 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.
We must make substantial capital expenditures to maintain, over the long term, the operating
capacity of our fleet. We intend to continue to expand our fleet, which would increase the level of
our maintenance capital expenditures. Maintenance capital expenditures include capital expenditures
associated with drydocking a vessel, modifying an existing vessel or acquiring a new vessel to the
extent these expenditures are incurred to maintain the operating capacity of our fleet. These
expenditures could increase as a result of changes in:
In addition, actual maintenance capital expenditures vary significantly from quarter to quarter
based on the number of vessels drydocked during that quarter. Significant maintenance capital
expenditures reduce the amount of cash that OPCO has available to distribute to us and that we have
available for distribution to our unitholders.
Our partnership agreement requires our general partner to deduct our estimated, rather than actual,
maintenance capital expenditures from operating surplus each quarter in an effort to reduce
fluctuations in operating surplus (as defined in our partnership agreement). The amount of
estimated maintenance capital expenditures deducted from operating surplus is subject to review and
change by the conflicts committee of our general partner at least once a year. In years when
estimated maintenance capital expenditures are higher than actual maintenance capital expenditures,
the amount of cash available for distribution to unitholders is lower than if actual maintenance
capital expenditures were deducted from operating surplus. If our general partner underestimates
the appropriate level of estimated maintenance capital expenditures, we may have less cash
available for distribution in future periods when actual capital expenditures begin to exceed our
previous estimates.
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.
We make substantial capital expenditures to increase the size of our fleet. In 2007, we purchased
from Teekay Corporation its interests in two shuttle tankers and one FSO unit. Teekay Corporation
is obligated to offer us its interests in additional vessels. Please read Item 4: Information on
the Partnership—Overview, History and Development, for information about these recent and potential
acquisitions.
Currently, the total delivered cost for a shuttle tanker is approximately $60 to $150 million, the
cost of converting an existing tanker to an FSO unit is approximately $20 to $50 million and an
FPSO unit is approximately $100 million to $1.5 billion, although actual costs vary significantly
depending on the market price charged by shipyards, the size and specifications of the vessel,
governmental regulations and maritime self-regulatory organization standards.
We and Teekay Corporation regularly evaluate and pursue opportunities to provide marine
transportation services for new or expanding offshore projects. Teekay Corporation currently is
seeking to provide transportation services for several offshore projects. Under an omnibus
agreement that we have entered into in connection with our initial public offering, Teekay
Corporation is required to offer to us, within 365 days of their deliveries, certain shuttle
tankers, FSO units and FPSO units Teekay Corporation may acquire. Neither we nor Teekay Corporation
may be awarded charters or contracts of affreightment relating to any of the projects we pursue or
it pursues, and we may choose not to purchase the vessels Teekay Corporation is required to offer
to us under the omnibus agreement. If we obtain from Teekay Corporation any offshore project, we
will incur significant capital expenditures to build the offshore vessels needed to fulfill the
project requirements.
We generally are required to make installment payments on newbuildings prior to their delivery. We
typically must pay between 10% to 20% of the purchase price of a shuttle tanker upon signing the
purchase contract, even though delivery of the completed vessel will not occur until much later
(approximately three to four years from the time the order is placed). If we finance these
acquisition costs by issuing debt or equity securities, we will increase the aggregate amount of
interest or minimum quarterly distributions we must make prior to generating cash from the
operation of the newbuilding.
To fund the remaining portion of existing or future capital expenditures, we will be required to
use cash from operations or incur borrowings or raise capital through the sale of debt or
additional equity securities. Use of cash from operations will reduce cash available for
distribution to unitholders. Our ability to obtain bank financing or to access the capital markets
for future offerings may be limited by our financial condition at the time of any such financing or
offering as well as by adverse market conditions resulting from, among other things, general
economic conditions and contingencies and uncertainties that are beyond our control. Our failure to
obtain the funds for future capital expenditures could have a material adverse effect on our
business, results of operations and financial condition and on our ability to make cash
distributions. Even if we are successful in obtaining necessary funds, the terms of such financings
could limit our ability to pay cash distributions to unitholders. In addition, incurring additional
debt may significantly increase our interest expense and financial leverage, and issuing additional
equity securities may result in significant unitholder dilution and would increase the aggregate
amount of cash required to meet our minimum quarterly distribution to unitholders, which could have
a material adverse effect on our ability to make cash distributions.
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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.
If we are awarded contracts for additional offshore projects, our consolidated debt may
significantly increase. As at December 31, 2007, our total debt was $1,517.5 million and we had the
ability to borrow an additional $165.5 million under our revolving credit facilities, subject to
limitations in the credit facilities. We may incur additional debt under these or future credit
facilities. Our level of debt could have important consequences to us, including:
Our ability to service our debt will depend upon, among other things, our future financial and
operating performance, which will be affected by prevailing economic conditions and financial,
business, regulatory and other factors, some of which are beyond our control. If our operating
results are not sufficient to service our current or future indebtedness, we will be forced to take
actions such as reducing distributions, reducing or delaying our business activities, acquisitions,
investments or capital expenditures, selling assets, restructuring or refinancing our debt, or
seeking additional equity capital or bankruptcy protection. We may not be able to effect any of
these remedies on satisfactory terms, or at all.
Financing agreements containing operating and financial restrictions may restrict our business and
financing activities.
The operating and financial restrictions and covenants in our financing arrangements and any future
financing agreements for us could adversely affect our ability to finance future operations or
capital needs or to engage, expand or pursue our business activities. For example, the arrangements
may restrict our or OPCO’s ability to:
In addition, two revolving credit facilities require OPCO to maintain a minimum liquidity (cash,
cash equivalents and undrawn committed revolving credit lines with at least six months of maturity)
of $75.0 million, with aggregate liquidity of not less than 5.0% of the total consolidated debt of
OPCO and its subsidiaries. Another revolving credit facility is guaranteed by Teekay Corporation
and requires Teekay Corporation to maintain the greater of a minimum liquidity of at least
$50.0 million and 5.0% of its total consolidated debt. Teekay Corporation’s, OPCO’s or our ability
to comply with covenants and restrictions contained in debt instruments may be affected by events
beyond their, its or our control, including prevailing economic, financial and industry conditions.
If market or other economic conditions deteriorate, compliance with these covenants may be
impaired. If restrictions, covenants, ratios or tests in the financing agreements are breached, a
significant portion of the obligations may become immediately due and payable, and the lenders’
commitment to make further loans may terminate. Neither Teekay Corporation, OPCO nor we might have,
or be able to obtain, sufficient funds to make these accelerated payments. In addition, obligations
under our credit facilities are secured by certain vessels, and if we are unable to repay debt
under the credit facilities, the lenders could seek to foreclose on those assets.
Restrictions in our debt agreements may prevent OPCO or us from paying distributions.
The payment of principal and interest on our debt reduces cash available for distribution to us and
on our units. In addition, our and OPCO’s financing agreements prohibit the payment of
distributions upon the occurrence of the following events, among others:
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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 have derived, and we believe we will continue to derive, a substantial majority of revenues and
cash flow from a limited number of customers. StatoilHydro ASA, Teekay Corporation and Petrobras
Transporte S.A. accounted for approximately 39%, 20% and 13%, respectively, of consolidated voyage
revenues from continuing operations during 2007. Teekay Corporation and StatoilHydro ASA accounted
for approximately 12% and 30%, respectively, of consolidated voyage revenues from continuing
operations during 2006. StatoilHydro ASA accounted for approximately 30% of consolidated voyage
revenues from continuing operations during 2005. No other customer accounted for 10% or more of
revenues from continuing operations during any of these periods.
If we lose a key customer, we may be unable to obtain replacement long-term charters or contracts
of affreightment and may become subject, with respect to any shuttle tankers redeployed on
conventional oil tanker trades, to the volatile spot market, which is highly competitive and
subject to significant price fluctuations. If a customer exercises its right under some charters to
purchase the vessel, we may be unable to acquire an adequate replacement vessel. Any replacement
newbuilding would not generate revenues during its construction and we may be unable to charter any
replacement vessel on terms as favorable to us as those of the terminated charter.
The loss of any of our significant customers could have a material adverse effect on our business,
results of operations and financial condition and our ability to make cash distributions.
We depend on Teekay Corporation to assist us in operating our businesses and competing in our
markets.
We, OPCO and operating subsidiaries of us and OPCO have entered into various services agreements
with certain subsidiaries of Teekay Corporation pursuant to which those subsidiaries will provide
to us and OPCO all of our and OPCO’s administrative services and to the operating subsidiaries
substantially all of their managerial, operational and administrative services (including vessel
maintenance, crewing, purchasing, shipyard supervision, insurance and financial services) and other
technical and advisory services. Our operational success and ability to execute our growth strategy
depends significantly upon the satisfactory performance of these services by the Teekay Corporation
subsidiaries. Our business will be harmed if such subsidiaries fail to perform these services
satisfactorily or if they stop providing these services to us, OPCO or the operating subsidiaries.
Our ability to compete for offshore oil marine transportation, processing and storage projects and
to enter into new charters or contracts of affreightment and expand our customer relationships
depends largely on our ability to leverage our relationship with Teekay Corporation and its
reputation and relationships in the shipping industry. If Teekay Corporation suffers material
damage to its reputation or relationships, it may harm our or OPCO’s ability to:
If our ability to do any of the things described above is impaired, it could have a material
adverse effect on our business, results of operations and financial condition and our ability to
make cash distributions.
Our operating subsidiaries may also contract with certain subsidiaries of Teekay Corporation for
the Teekay Corporation subsidiaries to have newbuildings constructed or existing vessels converted
on behalf of the operating subsidiaries and to incur the construction-related financing. The
operating subsidiaries would purchase the vessels on or after delivery based on an agreed-upon
price. None of our operating subsidiaries currently has this type of arrangement with Teekay
Corporation or any of its affiliates.
Our growth depends on continued growth in demand for offshore oil transportation, processing and
storage services.
Our growth strategy focuses on expansion in the shuttle tanker, FSO and FPSO sectors. Accordingly,
our growth depends on continued growth in world and regional demand for these offshore services,
which could be negatively affected by a number of factors, such as:
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Reduced demand for offshore marine transportation, processing or storage services would have a
material adverse effect on our future growth and could harm our business, results of operations and
financial condition.
Because payments under our contracts of affreightment are based on the volume of oil transported,
utilization of our shuttle tanker fleet and the success of our shuttle tanker business depends upon
continued production from existing or new oil fields it services, which is beyond our control and
generally declines naturally over time. Any decrease in the volume of oil transported under
contracts of affreightment could adversely affect our business and operating results.
A majority of our shuttle tankers operate under contracts of affreightment. Payments under these
contracts of affreightment are based upon the volume of oil transported, which depends upon the
level of oil production at the fields we service under the contracts. Oil production levels are
affected by several factors, all of which are beyond our control, including: geologic factors,
including general declines in production that occur naturally over time; the rate of technical
developments in extracting oil and related infrastructure and implementation costs; and operator
decisions based on revenue compared to costs from continued operations. Factors that may affect an
operator’s decision to initiate or continue production include: changes in oil prices; capital
budget limitations; the availability of necessary drilling and other governmental permits; the
availability of qualified personnel and equipment; the quality of drilling prospects in the area;
and regulatory changes. In addition, the volume of oil transported may be adversely affected by
extended repairs to oil field installations or suspensions of field operations as a result of oil
spills or otherwise.
The rate of oil production at fields we service may decline from existing or future levels, and may
be terminated. If such a reduction or termination occurs, the spot market rates, if any, in the
conventional oil tanker trades at which we may be able to redeploy the affected shuttle tankers may
be lower than the rates previously earned by the vessels under the contracts of affreightment,
which would reduce our results of operations and ability to make cash distributions.
The duration of many of our shuttle tanker and FSO contracts is the life of the relevant oil field
or is subject to extension by the field operator or vessel charterer. If the oil field no longer
produces oil or is abandoned or the contract term is not extended, we will no longer generate
revenue under the related contract and will need to seek to redeploy affected vessels.
Many of our shuttle tanker contracts have a “life-of-field” duration, which means that the contract
continues until oil production at the field ceases. If production terminates for any reason, we no
longer will generate revenue under the related contract. Other shuttle tanker and FSO contracts
under which our vessels operate are subject to extensions beyond their initial term. The likelihood
of these contracts being extended may be negatively affected by reductions in oil field reserves,
low oil prices generally or other factors. If we are unable to promptly redeploy any affected
vessels at rates at least equal to those under the contracts, if at all, our operating results will
be harmed. Any potential redeployment may not be under long-term contracts, which may affect the
stability of our cash flow and our ability to make cash distributions.
The results of our shuttle tanker operations in the North Sea are subject to seasonal fluctuations.
Due to harsh winter weather conditions, oil field operators in the North Sea typically schedule oil
platform and other infrastructure repairs and maintenance during the summer months. Because the
North Sea is our primary existing offshore oil market, this seasonal repair and maintenance
activity contributes to quarter-to-quarter volatility in our results of operations, as oil
production typically is lower in the second and third quarters in this region compared with
production in the first and fourth quarters. Because a significant portion of our North Sea shuttle
tankers operate under contracts of affreightment, under which revenue is based on the volume of oil
transported, the results of these shuttle tanker operations in the North Sea under these contracts
generally reflect this seasonal production pattern. When we redeploy affected shuttle tankers as
conventional oil tankers while platform maintenance and repairs are conducted, the overall
financial results for the North Sea shuttle tanker operations may be negatively affected as the
rates in the conventional oil tanker markets at times may be lower than contract of affreightment
rates. In addition, we seek to coordinate some of the general drydocking schedule of our fleet with
this seasonality, which may result in lower revenues and increased drydocking expenses during the
summer months.
Our growth depends on our ability to expand relationships with existing customers and obtain new
customers, for which we will face substantial competition.
One of our principal objectives is to enter into additional long-term, fixed-rate time charters and
contracts of affreightment. The process of obtaining new long-term time charters and contracts of
affreightment is highly competitive and generally involves an intensive screening process and
competitive bids, and often extends for several months. Shuttle tanker, FSO and FPSO contracts are
awarded based upon a variety of factors relating to the vessel operator, including:
We expect substantial competition for providing services for potential shuttle tanker, FSO and FPSO
projects from a number of experienced companies, including state-sponsored entities. OPCO’s Aframax
conventional tanker business also faces substantial competition from major oil companies,
independent owners and operators and other sized tankers. Many of our competitors have
significantly greater financial resources than do we, OPCO or Teekay Corporation, which also may
compete with us. We anticipate that an increasing number of marine transportation companies —
including many with strong reputations and extensive resources and experience — will enter the FSO
and FPSO sectors. This increased competition may cause greater price competition for charters. As a
result of these factors, we may be unable to expand our relationships with existing customers or to
obtain new customers on a profitable basis, if at all, which would have a material adverse effect
on our business, results of operations and financial condition and our ability to make cash
distributions.
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Delays in deliveries of newbuilding vessels or of conversions of existing vessels could harm our
operating results.
The delivery of any newbuildings or vessel conversions we may order could be delayed, which would
delay our receipt of revenues under the charters or other contracts related to the vessels. In
addition, under some charters we may enter into that are related to a newbuilding or conversion, if
our delivery of the newbuilding or converted vessel to our customer is delayed, we may be required
to pay liquidated damages during the delay. For prolonged delays, the customer may terminate the
charter and, in addition to the resulting loss of revenues, we may be responsible for substantial
liquidated damages.
The completion and delivery of newbuildings or vessel conversions could be delayed because of:
If delivery of a vessel is materially delayed, it could adversely affect our results of operations
and financial condition and our ability to make cash distributions.
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.
Our ability to recharter OPCO’s conventional oil tankers following expiration of existing
time-charter contracts commencing in 2011 and the rates payable upon any renewal or replacement
charters will depend upon, among other things, the state of the conventional tanker market.
Conventional oil tanker trades are highly competitive and have experienced significant fluctuations
in charter rates based on, among other things, oil and vessel demand. For example, an oversupply of
conventional oil tankers can significantly reduce their charter rates. There also exists some
volatility in charter rates for shuttle tankers and FSO and FPSO units.
Six of OPCO’s fixed-term charters and eleven contracts of affreightment (representing approximately
6% of OPCO’s aggregate contract of affreightment volumes) are scheduled to expire prior to December
31, 2008. If, upon expiration or termination of these or other contracts, long-term recharter rates
are lower than existing rates, our earnings and cash flow under any new contracts could be
adversely affected.
Over time, the value of our vessels may decline, which could adversely affect our operating
results.
Vessel values for shuttle tankers, conventional oil tankers and FSO and FPSO units can fluctuate
substantially over time due to a number of different factors, including:
If operation of a vessel is not profitable, or if we cannot re-deploy a vessel at attractive rates
upon termination of a time charter or contract of affreightment, rather than continue to incur
costs to maintain and finance the vessel, we may seek to dispose of it. Our inability to dispose of
the vessel at a reasonable value could result in a loss on its sale and adversely affect our
results of operations and financial condition. Further, if we determine at any time that a
vessel’s future useful life and earnings require us to impair its value on our financial
statements, we may need to recognize a significant charge against our earnings.
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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.
Our growth strategy includes selectively acquiring existing shuttle tankers and FSO and FPSO units
or businesses that own or operate these types of vessels. Historically, there have been very few
purchases of existing vessels and businesses in the FSO and FPSO segments. Factors that may
contribute to a limited number of acquisition opportunities for FSO units and FPSO units in the
near term include the relatively small number of independent FSO and FPSO fleet owners. In
addition, competition from other companies, many of which have significantly greater financial
resources than do we or Teekay Corporation, could reduce our acquisition opportunities or cause us
to pay higher prices.
Any acquisition of a vessel or business may not be profitable at or after the time of acquisition
and may not generate cash flow sufficient to justify the investment. In addition, our acquisition
growth strategy exposes us to risks that may harm our business, financial condition and operating
results, including risks that we may:
Unlike newbuildings, existing vessels typically do not carry warranties as to their condition.
While we generally inspect existing vessels prior to purchase, such an inspection would normally
not provide us with as much knowledge of a vessel’s condition as we would possess if it had been
built for us and operated by us during its life. Repairs and maintenance costs for existing vessels
are difficult to predict and may be substantially higher than for vessels we have operated since
they were built. These costs could decrease our cash flow and reduce our liquidity.
Terrorist attacks, increased hostilities or war could lead to further economic instability,
increased costs and disruption of business.
Terrorist attacks, and the current conflicts in Iraq and Afghanistan and other current and future
conflicts, may adversely affect our business, operating results, financial condition, and ability
to raise capital and future growth. Continuing hostilities in the Middle East may lead to
additional armed conflicts or to further acts of terrorism and civil disturbance in the United
States or elsewhere, which may contribute further to economic instability and disruption of oil
production and distribution, which could result in reduced demand for our services.
In addition, oil facilities, shipyards, vessels, pipelines and oil fields could be targets of
future terrorist attacks. Any such attacks could lead to, among other things, bodily injury or loss
of life, vessel or other property damage, increased vessel operational costs, including insurance
costs, and the inability to transport oil to or from certain locations. Terrorist attacks, war or
other events beyond our control that adversely affect the distribution, production or
transportation of oil to be shipped by us could entitle customers to terminate the charters and
impact the use of shuttle tankers under contracts of affreightment, which would harm our cash flow
and business.
Our substantial operations outside the United States expose us to political, governmental and
economic instability, which could harm our operations.
Because our operations are primarily conducted outside of the United States, they may be affected
by economic, political and governmental conditions in the countries where we engage in business or
where our vessels are registered. Any disruption caused by these factors could harm our business,
including by reducing the levels of oil exploration, development and production activities in these
areas. We derive some of our revenues from shipping oil from politically unstable regions.
Conflicts in these regions have included attacks on ships and other efforts to disrupt shipping.
Hostilities or other political instability in regions where we operate or where we may operate
could have a material adverse effect on the growth of our business, results of operations and
financial condition and ability to make cash distributions. In addition, tariffs, trade embargoes
and other economic sanctions by the United States or other countries against countries in Southeast
Asia or elsewhere as a result of terrorist attacks, hostilities or otherwise may limit trading
activities with those countries, which could also harm our business and ability to make cash
distributions. Finally, a government could requisition one or more of our vessels, which is most
likely during war or national emergency. Any such requisition would cause a loss of the vessel and
could harm our cash flow and financial results.
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.
Vessels and their cargoes and oil production facilities we service are at risk of being damaged or
lost because of events such as:
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Our shuttle tanker fleet primarily operates in the North Sea. Harsh weather conditions in this
region (or other regions in which our vessels operate) may increase the risk of collisions, oil
spills, or mechanical failures.
An accident involving any of our vessels could result in any of the following:
Any of these results could have a material adverse effect on our business, financial condition and
operating results. In addition, any damage to, or environmental contamination involving, oil
production facilities serviced could suspend that service and result in loss of revenues.
Insurance may be insufficient to cover losses that may occur to our property or result from our
operations.
The operation of shuttle tankers, conventional oil tankers and FSO and FPSO units is inherently
risky. All risks may not be adequately insured against, and any particular claim may not be paid by
insurance. In addition, substantially all of our vessels are not insured against loss of revenues
resulting from vessel off-hire time, based on the cost of this insurance compared to our off-hire
experience. Any significant off-hire time of our vessels could harm our business, operating results
and financial condition. Any claims relating to our operations covered by insurance would be
subject to deductibles, and since it is possible that a large number of claims may be brought, the
aggregate amount of these deductibles could be material. Certain insurance coverage is maintained
through mutual protection and indemnity associations, and as a member of such associations we may
be required to make additional payments over and above budgeted premiums if member claims exceed
association reserves.
We may be unable to procure adequate insurance coverage at commercially reasonable rates in the
future. For example, more stringent environmental regulations have led in the past to increased
costs for, and in the future may result in the lack of availability
of, insurance against risks of environmental damage or pollution. A catastrophic oil spill or marine disaster could exceed the
insurance coverage, which could harm our business, financial condition and operating results. Any
uninsured or underinsured loss could harm our business and financial condition. In addition, the
insurance may be voidable by the insurers as a result of certain actions, such as vessels failing
to maintain certification with applicable maritime self-regulatory organizations.
Changes in the insurance markets attributable to terrorist attacks may also make certain types of
insurance more difficult to obtain. In addition, the insurance that may be available may be
significantly more expensive than existing coverage.
We may experience operational problems with vessels that reduce revenue and increase costs.
Shuttle tankers are complex and their operation is technically challenging. To the extent we
acquire FPSO units, this complexity and challenge will increase. Marine transportation operations
are subject to mechanical risks and problems. Operational problems may lead to loss of revenue or
higher than anticipated operating expenses or require additional capital expenditures. Any of these
results could harm our business, financial condition and operating results.
The offshore shipping and storage industry is subject to substantial environmental and other
regulations, which may significantly limit operations or increase expenses.
Our operations are affected by extensive and changing international, national and local
environmental protection laws, regulations, treaties and conventions in force in international
waters, the jurisdictional waters of the countries in which our vessels operate, as well as the
countries of our vessels’ registration, including those governing oil spills, discharges to air and
water, and the handling and disposal of hazardous substances and wastes. Many of these requirements
are designed to reduce the risk of oil spills and other pollution. In addition, we believe that the
heightened environmental, quality and security concerns of insurance underwriters, regulators and
charterers will lead to additional regulatory requirements, including enhanced risk assessment and
security requirements and greater inspection and safety requirements on vessels. We expect to incur
substantial expenses in complying with these laws and regulations, including expenses for vessel
modifications and changes in operating procedures.
These requirements can affect the resale value or useful lives of our vessels, require a reduction
in cargo capacity, ship modifications or operational changes or restrictions, lead to decreased
availability of insurance coverage for environmental matters or result in the denial of access to
certain jurisdictional waters or ports, or detention in, certain ports. Under local, national and
foreign laws, as well as international treaties and conventions, we could incur material
liabilities, including cleanup obligations, in the event that there is a release of petroleum or
other hazardous substances from our vessels or otherwise in connection with our operations. We
could also become subject to personal injury or property damage claims relating to the release of
or exposure to hazardous materials associated with our operations. In addition, failure to comply
with applicable laws and regulations may result in administrative and civil penalties, criminal
sanctions or the suspension or termination of our operations, including, in certain instances,
seizure or detention of our vessels.
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The United States Oil Pollution Act of 1990 (or OPA 90), for instance, allows for potentially
unlimited liability for owners, operators and bareboat charterers for oil pollution and related
damages in U.S. waters, which include the U.S. territorial sea and the 200-nautical mile exclusive
economic zone around the United States, without regard to fault of such owners, operators and
bareboat charterers. OPA 90 expressly permits individual states to impose their own liability
regimes with regard to hazardous materials and oil pollution incidents occurring within their
boundaries. Coastal states in the United States have enacted pollution prevention liability and
response laws, many providing for unlimited liability. Similarly, the International Convention on
Civil Liability for Oil Pollution Damage, 1969, as amended, which has been adopted by many
countries outside of the United States, imposes liability for oil pollution in international
waters. In addition, in complying with OPA 90, regulations of the International Maritime
Organization (or IMO), European Union directives and other existing laws and regulations and those
that may be adopted, ship-owners may incur significant additional costs in meeting new maintenance
and inspection requirements, in developing contingency arrangements for potential spills and in
obtaining insurance coverage.
Various jurisdictions are considering regulating the management of ballast water to prevent the
introduction of non-indigenous species considered to be invasive. For example, the United States
Clean Water Act prohibits the discharge of oil or hazardous substances in U.S. navigable waters and
imposes strict liability in the form of penalties for unauthorized discharges. Certain exemptions
promulgated by the Environmental Protection Agency (or EPA) under the Clean Water Act allow vessels
in U.S. ports to discharge certain substances, including ballast water, without obtaining a permit
to do so. However, a U.S. district court has invalidated the exemption. If the EPA does not
successfully appeal the district court decision, we may be subject to ballast water treatment
obligations that could increase the costs of operating in the United States.
In addition to international regulations affecting oil tankers generally, countries having
jurisdiction over North Sea areas also impose regulatory requirements applicable to operations in
those areas. Operators of North Sea oil fields impose further requirements. As a result, we must
make significant expenditures for sophisticated equipment, reporting and redundancy systems on our
shuttle tankers. Additional regulations and requirements may be adopted or imposed that could limit
our ability to do business or further increase the cost of doing business in the North Sea or other
regions in which we operate or may operate in the future.
Exposure to currency exchange rate fluctuations results in fluctuations in cash flows and operating
results.
We currently are paid partly in Norwegian Kroners under some of our time-charters and contracts of
affreightment. In addition, we, OPCO and our and its operating subsidiaries have entered into
services agreements with certain subsidiaries of Teekay Corporation pursuant to which those
subsidiaries provide to us and OPCO administrative services and to our and OPCO’s operating
subsidiaries managerial, operational and administrative services. Under the services agreements,
the applicable subsidiaries of Teekay Corporation are paid in U.S. dollars for reasonable direct
and indirect expenses incurred in providing the services. A substantial majority of those expenses
are in Norwegian Kroners. The Teekay Corporation subsidiaries are paid under the services
agreements based on a fixed U.S. Dollar/Norwegian Kroner exchange rate until December 31, 2008.
Thereafter, the exchange rate is not fixed, which may result in increased payments under the
services agreements if the strength of the U.S. Dollar declines relative to the Norwegian Kroner.
The redeployment risk of FPSO units is high given their lack of alternative uses and significant
costs.
FPSO units are specialized vessels that have very limited alternative uses and high fixed costs. If
we acquire FPSO units and they are not, as a result of contract termination or otherwise, subject
to a long-term profitable contract, we may be required to bid for projects at unattractive rates in
order to reduce our losses relating to the vessels.
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.
A significant portion of Teekay Corporation’s seafarers that crew certain some of our vessels and
Norwegian-based onshore operational staff that provide services to us are employed under collective
bargaining agreements. Teekay Corporation may become subject to additional labor agreements in the
future. Teekay Corporation may suffer labor disruptions if relationships deteriorate with the
seafarers or the unions that represent them. The collective bargaining agreements may not prevent
labor disruptions, particularly when the agreements are being renegotiated. Salaries are typically
renegotiated annually or bi-annually for seafarers and annually for onshore operational staff and
higher compensation levels will increase our costs of operations. Although these negotiations have
not caused labor disruptions in the past, any future labor disruptions could harm our operations
and could have a material adverse effect on our business, results of operations and financial
condition and ability to make cash distributions.
Teekay Corporation may be unable to attract and retain qualified, skilled employees or crew
necessary to operate our business.
Our success depends in large part on Teekay Corporation’s ability to attract and retain highly
skilled and qualified personnel. In crewing our vessels, we require technically skilled employees
with specialized training who can perform physically demanding work. Competition to attract and
retain qualified crew members is intense. We expect crew costs to increase in 2008. If we are not
able to increase our rates to compensate for any crew cost increases, our financial condition and
results of operations may be adversely affected. Any inability we experience in the future to hire,
train and retain a sufficient number of qualified employees could impair our ability to manage,
maintain and grow our business.
Teekay Corporation and its affiliates may engage in competition with us.
Teekay Corporation and its affiliates may engage in competition with us. Pursuant to an omnibus
agreement we entered into in connection with our initial public offering, Teekay Corporation,
Teekay LNG Partners L.P. (NYSE: TGP). and their respective controlled affiliates (other than us,
OPCO and its and our subsidiaries) generally have agreed not to engage in, acquire or invest in any
business that owns, operates or charters (a) dynamically-positioned shuttle tankers (other than
those operating in the conventional oil tanker trade under contracts with a remaining duration of
less than three years, excluding extension options), (b) FSO units or (c) FPSO units (collectively
offshore vessels) without the consent of our general partner. The omnibus agreement, however,
allows Teekay Corporation, Teekay LNG Partners L.P. and any of such controlled affiliates to:
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If we decline the offer to purchase the offshore vessels and time charters described in the
immediately preceding two bullet points, Teekay Corporation or Teekay LNG Partners L.P., as
applicable, may own and operate the offshore vessels, but may not expand that portion of its
business.
In addition, pursuant to the omnibus agreement, Teekay Corporation, Teekay LNG Partners L.P. and
any of their respective controlled affiliates (other than us and our subsidiaries) may:
In addition, Petrojarl has the right to continue to own, operate and charter its four FPSOs and
one shuttle tanker until such time, if ever, Teekay Corporation acquires 100% of Petrojarl. If that
happens, Teekay Corporation will be required to offer to us certain of Petrojarl’s fleet and
Petrojarl’s interests in its joint venture projects with Teekay Corporation. As at March 31, 2008,
Teekay Corporation owned 65% of Petrojarl.
If there is a change of control of Teekay Corporation or of the general partner of Teekay LNG
Partners L.P., the non-competition provisions of the omnibus agreement may terminate, which
termination could have a material adverse effect on our business, results of operations and
financial condition and our ability to make cash distributions.
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.
Teekay Corporation indirectly owns the 2.0% general partner interest and a 57.75% limited partner
interest in us and owns and controls our general partner, which controls us. Although our general
partner has a fiduciary duty to manage us in a manner beneficial to us and our unitholders, the
directors and officers of our general partner have a fiduciary duty to manage our general partner
in a manner beneficial to Teekay Corporation. Furthermore, certain directors and officers of our
general partner are directors or officers of affiliates of our general partner. Conflicts of
interest may arise between Teekay Corporation and its affiliates, including our general partner, on
the one hand, and us and our unitholders, on the other hand. As a result of these conflicts, our
general partner may favor its own interests and the interests of its affiliates over the interests
of our unitholders. These conflicts include, among others, the following situations:
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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.
Conflicts of interest may arise as a result of the relationships between us and our unitholders, on
the one hand, and OPCO, its general partner and its other limited partner, Teekay Corporation, on
the other hand. Teekay Corporation owns a 74.0% limited partner interest in OPCO and controls our
general partner, which appoints the directors of OPCO’s general partner. The directors and officers
of OPCO’s general partner have fiduciary duties to manage OPCO in a manner beneficial to us, as
such general partner’s owner. At the same time, OPCO’s general partner has a fiduciary duty to
manage OPCO in a manner beneficial to OPCO’s limited partners, including Teekay Corporation. The
Board of Directors of our general partner may resolve any such conflict and has broad latitude to
consider the interests of all parties to the conflict. The resolution of these conflicts may not be
in the best interest of us or our unitholders.
For example, conflicts of interest may arise in the following situations:
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.
Our general partner’s officers and directors have fiduciary duties to manage our business in a
manner beneficial to us and our partners. However, the Chief Executive Officer and Chief Financial
Officer and all of the non-independent directors of our general partner also serve as executive
officers or directors of OPCO’s general partner and of Teekay Corporation and the general partner
of Teekay LNG Partners L.P., and, as a result, have fiduciary duties, among others, to manage the
business of OPCO in a manner beneficial to OPCO and its partners, including Teekay Corporation.
Consequently, these officers and directors may encounter situations in which their fiduciary
obligations to OPCO, Teekay Corporation or Teekay LNG Partners L.P., on one hand, and us, on the
other hand, are in conflict. The resolution of these conflicts may not always be in the best
interest of us or our unitholders.
Item 4. Information on the Partnership
Except for the changes in percentages of our consolidated voyage revenues from continuing
operations generated from Teekay Corporation, Petrobras Transporte S.A. and StatoilHydro ASA and
the percentages of our net voyage revenues from continuing operations earned by each of our
segments, the information included in Item 4 in the Original Filing has not been updated for
information or events occurring after the date of the Original Filing and has not been updated to
reflect the passage of time since the date of the Original Filing.
A. Overview, History and Development
Overview and History
We are an international provider of marine transportation and storage services to the offshore oil
industry. We were formed as a Marshall Islands limited partnership in August 2006 by Teekay
Corporation (NYSE: TK), a leading provider of marine services to the global oil and natural gas
industries, to further develop its operations in the offshore market. We plan to leverage the
expertise, relationships and reputation of Teekay Corporation and our controlled affiliates to
pursue growth opportunities in this market. As of December 31, 2007, Teekay Corporation, which owns
and controls our general partner, owned a 57.75% limited partner interest in us.
We own a 26.0% interest in Teekay Offshore Operating L.P. (or OPCO), which owns and operates the
world’s largest fleet of shuttle tankers, in addition to floating storage and offtake (or FSO)
units and double-hull conventional oil tankers. We control OPCO through our ownership of its
general partner, and Teekay Corporation owns the remaining 74.0% interest in OPCO.
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In July 2007, we directly acquired interests in two double-hull shuttle tankers and related
charters. These interests, which we acquired from Teekay Corporation, include a 100% interest in
the 2000-built Navion Bergen and a 50% interest in the 2006-built Navion Gothenburg, together with
their respective 13-year, fixed-rate bareboat charters to a subsidiary of Petrobras Transporte
S.A., the shipping arm of Petroleo Brasileiro S.A.
In October 2007, we also directly acquired from Teekay Corporation one FSO unit, the Dampier
Spirit, which operates under a 7-year fixed-rate, time-charter to Apache Corporation of Australia.
As of December 31, 2007, our fleet consisted of:
We were formed under the laws of the Republic of The Marshall Islands as Teekay Offshore Partners
L.P. and maintain our principal executive headquarters at 4th Floor, Belvedere Building, 69 Pitts
Bay Road, Hamilton, HM 08, Bermuda. Our telephone number at such address is (441) 298-2530. Our
principal operating office is located at Suite 2000, Bentall 5, 550 Burrard Street, Vancouver,
British Columbia, Canada, V6C 2K2. Our telephone number at such address is (604) 683-3529.
Potential Additional Shuttle Tanker, FSO and FPSO Projects
Pursuant to an omnibus agreement we entered into in connection with our initial public offering,
Teekay Corporation is obligated to offer us certain shuttle tankers, FSO units, and FPSO units it
may acquire in the future, provided the vessels are servicing contracts in excess of three years in
length.
Teekay Corporation has ordered four Aframax shuttle tanker newbuildings, which are scheduled to
deliver in 2010 and 2011, for a total delivered cost of approximately $416.9 million. It is
anticipated that these vessels will be offered to us and will be used to service either new
long-term, fixed-rate contracts Teekay Corporation may be awarded prior to delivery or OPCO’s
contracts-of-affreightment in the North Sea.
The omnibus agreement also obligates Teekay Corporation to offer to us (a) its interest in certain
future FPSO and FSO projects it may undertake through its 50%-owned joint venture with Teekay
Petrojarl ASA and (b) if Teekay Corporation obtains 100% ownership of Teekay Petrojarl ASA, the
existing FPSO units owned by Teekay Petrojarl ASA that are servicing contracts in excess of three
years in length. As at March 31, 2008, Teekay Corporation had a 65% ownership interest in Teekay
Petrojarl ASA. Please see Item 5 — Major Unitholders and Related Party Transactions.
B. Business Overview
Shuttle Tanker Segment
A shuttle tanker is a specialized ship designed to transport crude oil and condensates from
offshore oil field installations to onshore terminals and refineries. Shuttle tankers are equipped
with sophisticated loading systems and dynamic positioning systems that allow the vessels to load
cargo safely and reliably from oil field installations, even in harsh weather conditions. Shuttle
tankers were developed in the North Sea as an alternative to pipelines. The first cargo from an
offshore field in the North Sea was shipped in 1977, and the first dynamically-positioned shuttle
tankers were introduced in the early 1980s. Shuttle tankers are often described as “floating
pipelines” because these vessels typically shuttle oil from offshore installations to onshore
facilities in much the same way a pipeline would transport oil along the ocean floor.
Our shuttle tankers are primarily subject to long-term, fixed-rate time-charter contracts for a
specific offshore oil field or under contracts of affreightment for various fields. The number of
voyages performed under these contracts of affreightment normally depends upon the oil production
of each field. Competition for charters is based primarily upon price, availability, the size,
technical sophistication, age and condition of the vessel and the reputation of the vessel’s
manager. Technical sophistication of the vessel is especially important in harsh operating
environments such as the North Sea. Although the size of the world shuttle tanker fleet has been
relatively unchanged in recent years, conventional tankers could be converted into shuttle tankers
by adding specialized equipment to meet customer requirements. Shuttle tanker demand may also be
affected by the possible substitution of sub-sea pipelines to transport oil from offshore
production platforms.
As of December 31, 2007, there were approximately 74 vessels in the world shuttle tanker fleet
(including newbuildings), the majority of which operate in the North Sea. Shuttle tankers also
operate in Brazil, Canada, Russia and Africa. As of December 31, 2007, we owned 26 shuttle tankers
and chartered-in an additional 12 shuttle tankers. Other shuttle tanker owners in the North Sea
include Knutsen OAS Shipping AS, JJ Ugland Group and Penny Ugland, which as of December 31, 2007
controlled fleets of two to ten shuttle tankers each. We believe that we have significant
competitive advantages in the shuttle tanker market as a result of the quality, type and dimensions
of our vessels combined with our market share in the North Sea.
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The following tables provide additional information about our shuttle tankers as of December 31,
2007:
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On the Norwegian continental shelf, regulations have been imposed on the operators of offshore
fields related to vaporized crude oil that is formed and emitted during loading operations and
which is commonly referred to as “VOC.” To assist the oil companies in their efforts to meet the
regulations on VOC emissions from shuttle tankers, OPCO and Teekay Corporation have played an
active role in establishing a unique co-operation among all of the approximately 26 owners of
offshore fields in the Norwegian sector. The purpose of the co-operation is to implement VOC
recovery systems on selected shuttle tankers and to ensure a high degree of VOC recovery at a
minimum cost followed by joint reporting to the authorities. Currently, there are 12 VOC plants
installed aboard shuttle tankers operated or owned by OPCO. The oil companies that participate in
the co-operation have engaged OPCO to undertake the day-to-day administration, technical follow-up
and handling of payments through a dedicated clearing house function.
During 2007, approximately 75% of our net voyage revenues from continuing operations were earned by
the vessels in the shuttle tanker segment, compared to approximately 82% in 2006 and 83% in 2005.
Please read Item 5 — Operating and Financial Review and Prospects: Results of Operations.
Historically, the utilization of shuttle tankers in the North Sea is higher in the winter months,
as favorable weather conditions in the summer months provide opportunities for repairs and
maintenance to our vessels and to the offshore oil platforms. Downtime for repairs and maintenance
generally reduces oil production and, thus, transportation requirements.
Conventional Tanker Segment
Conventional oil tankers are used primarily for transcontinental seaborne transportation of oil.
Conventional oil tankers are operated by both major oil companies (including state-owned companies)
that generally operate captive fleets, and independent operators that charter out their vessels for
voyage or time charter use. Most conventional oil tankers controlled by independent fleet operators
are hired for one or a few voyages at a time at fluctuating market rates based on the existing
tanker supply and demand. These charter rates are extremely sensitive to this balance of supply and
demand, and small changes in tanker utilization have historically led to relatively large changes
in short-term rates. Long-term, fixed-rate charters for crude oil transportation, such as those
applicable to OPCO’s conventional tanker fleet, are less typical in the industry. As used in this
discussion, “conventional” oil tankers exclude those vessels that can carry dry bulk and ore,
tankers that currently are used for storage purposes and shuttle tankers.
Oil tanker demand is a function of several factors, including the location of oil production,
refining and consumption and world oil demand and supply. Tanker demand is based on the amount of
crude oil transported in tankers and the distance over which the oil is transported. The distance
over which oil is transported is determined by seaborne trading and distribution patterns, which
are principally influenced by the relative advantages of the various sources of production and
locations of consumption.
The majority of crude oil tankers range in size from approximately 80,000 to approximately 320,000
dwt. Aframax tankers are the mid-size of the various primary oil tanker types, typically sized from
80,000 to 119,999 dwt. As of December 31, 2007, the world Aframax tanker fleet consisted of
approximately 726 vessels, of which 576 crude tankers and 150 coated tankers are termed
conventional tankers. As of December 31, 2007, there were approximately 287 conventional Aframax
newbuildings on order for delivery through 2011. Delivery of a vessel typically occurs within three
to four years after ordering.
As of December 31, 2007, our Aframax conventional crude oil tankers had an average age of
approximately 11.0 years, compared to the average age of 9.5 years for the world Aframax
conventional tanker fleet. New Aframax tankers generally are expected to have a lifespan of
approximately 25 to 30 years, based on estimated hull fatigue life. However, United States and
international regulations require the phase-out of double-hulled vessels by 25 years. All of our
Aframax tankers are double-hulled.
Because all of the vessels in OPCO’s conventional Aframax fleet are subject to long-term,
fixed-rate charters, we do not expect to compete for deployment of the Aframax vessels until the
first charter is scheduled to end in December 2011. The shuttle tankers in OPCO’s contract of
affreightment fleet may operate in the conventional spot market during downtime or maintenance
periods for oil field installations or otherwise, which provides greater capacity utilization for
the fleet.
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The following table provides additional information about our conventional tankers as of December
31, 2007:
During 2007, approximately 16% of our net voyage revenues from continuing operations were earned by
the vessels in the conventional tanker segment, compared to approximately 12% in 2006 and 10% in
2005. Please read Item 5 — Operating and Financial Review and Prospects: Results of Operations.
FSO Segment
FSO units provide on-site storage for oil field installations that have no storage facilities or
that require supplemental storage. An FSO unit is generally used in combination with a jacked-up
fixed production system, floating production systems that do not have sufficient storage facilities
or as supplemental storage for fixed platform systems, which generally have some on-board storage
capacity. An FSO unit is usually of similar design to a conventional tanker, but has specialized
loading and offtake systems required by field operators or regulators. FSO units are moored to the
seabed at a safe distance from a field installation and receive the cargo from the production
facility via a dedicated loading system. An FSO unit is also equipped with an export system that
transfers cargo to shuttle or conventional tankers. Depending on the selected mooring arrangement
and where they are located, FSO units may or may not have any propulsion systems. FSO units are
usually conversions of older single-hull conventional oil tankers. These conversions, which include
installation of a loading and offtake system and hull refurbishment, can generally extend the
lifespan of a vessel as an FSO unit by up to 20 years over the normal conventional tanker lifespan
of 25 years.
Our FSO units are generally placed on long-term, fixed-rate time charters or bareboat charters as
an integrated part of the field development plan, which provides more stable cash flow to us.
As of December 2007, there were approximately 86 FSO units operating and ten FSO units on order in
the world fleet, and we had five FSO units. The major markets for FSO units are Asia, the Middle
East, West Africa, South America and the North Sea. Our primary competitors in the FSO market are
conventional tanker owners, who have access to tankers available for conversion, and oil field
services companies and oil field engineering and construction companies who compete in the floating
production system market. Competition in the FSO market is primarily based on price, expertise in
FSO operations, management of FSO conversions and relationships with shipyards, as well as the
ability to access vessels for conversion that meet customer specifications.
The following table provides additional information about our FSO units as of December 31, 2007:
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During 2007 approximately 9% of our net voyage revenues from continuing operations were earned by
the vessels in the FSO segment, compared to 6% in 2006 and 7% in 2005. Please read Item 5 —
Operating and Financial Review and Prospects: Results of Operations.
Business Strategies
Our primary business objective is to increase distributions per unit by executing the
following strategies:
Competitive Strengths
We believe that we are well positioned to execute our business strategies because of the following
competitive strengths:
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Customers
We provide marine transportation and storage services to energy and oil service companies or their
affiliates. Our most important customer measured by annual voyage revenue excluding Teekay
Corporation, is StatoilHydro ASA, which is Norway’s largest energy company and one of the world’s
largest producers of crude oil. StatoilHydro created the shuttle tanker industry beginning in the
late 1970s and developed the current operating model in the North Sea. StatoilHydro chose Teekay
Corporation to purchase its shuttle tanker operations in 2003, and Teekay Corporation and we
continue to have a close working relationship with StatoilHydro.
StatoilHydro, Teekay Corporation and Petrobras Transporte S.A. accounted for approximately 39%, 20%
and 13%, respectively, of our consolidated voyage revenues from continuing operations during the
year ended December 31, 2007. Teekay Corporation and StatoilHydro ASA accounted for approximately
12% and 30%, respectively, of consolidated voyage revenues from continuing operations during 2006.
StatoilHydro ASA accounted for approximately 30% of combined consolidated voyage revenues from
continuing operations during 2005. No other customer accounted for 10% or more of revenues during
any of these periods.
Safety, Management of Ship Operations and Administration
Safety and environmental compliance are our top operational priorities. We operate our vessels in a
manner intended to protect the safety and health of our employees, the general public and the
environment. We seek to manage the risks inherent in our business and are committed to eliminating
incidents that threaten the safety and integrity of our vessels. In 2007 Teekay Corporation
introduced a behavior-based safety program called “Safety in Action” to improve the safety culture
in our fleet. We are also committed to reducing our emissions and waste generation.
Key performance indicators facilitate regular monitoring of our operational performance. Targets
are set on an annual basis to drive continuous improvement, and indicators are reviewed monthly to
determine if remedial action is necessary to reach the targets.
Teekay Corporation, through certain of its subsidiaries, assists our operating subsidiaries in
managing their ship operations. Det Norske Veritas, the Norwegian classification society, has
approved Teekay Corporation’s safety management system as complying with the International Safety
Management Code (or ISM Code), the International Standards Organization’s (or ISO) 9001 for Quality
Assurance, ISO 14001 for Environment Management Systems, and Occupational Health and Safety
Advisory Services (or OHSAS) 18001, and this system has been implemented on all our ships.
Australia’s flag administration has approved this safety management system for our
Australian-flagged vessel. As part of Teekay Corporation’s ISM Code compliance, all the vessels’
safety management certificates are being maintained through ongoing internal audits performed by
Teekay Corporation’s certified internal auditors and intermediate external audits performed by Det
Norske Veritas and Australia’s flag administration. Subject to satisfactory completion of these
internal and external audits, certification is valid for five years.
Teekay Corporation provides, through certain of its subsidiaries, expertise in various functions
critical to the operations of our operating subsidiaries. We believe this arrangement affords a
safe, efficient and cost-effective operation. Teekay subsidiaries also provide to us access to
human resources, financial and other administrative functions pursuant to administrative services
agreements.
Critical ship management functions that certain subsidiaries of Teekay Corporation provide to our
operating subsidiaries through the Teekay Marine Services division located in various offices
around the world include:
These functions are supported by onboard and onshore systems for maintenance, inventory, purchasing
and budget management.
In addition, Teekay Corporation’s day-to-day focus on cost control is applied to our operations. In
2003, Teekay Corporation and two other shipping companies established a purchasing alliance, Teekay
Bergesen Worldwide, which leverages the purchasing power of the combined fleets, mainly in such
commodity areas as lube oils, paints and other chemicals. Through our arrangements with Teekay
Corporation, we benefit from this purchasing alliance.
We believe that the generally uniform design of some of our existing and newbuilding vessels and
the adoption of common equipment standards provides operational efficiencies, including with
respect to crew training and vessel management, equipment operation and repair, and spare parts
ordering.
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Risk of Loss, Insurance and Risk Management
The operation of any ocean-going vessel carries an inherent risk of catastrophic marine disasters,
death or injury of persons and property losses caused by adverse weather conditions, mechanical
failures, human error, war, terrorism, piracy and other circumstances or events. The occurrence of
any of these events may result in loss of revenues or increased costs.
We carry hull and machinery (marine and war risks) and protection and indemnity insurance coverage
to protect against most of the accident-related risks involved in the conduct of our business. Hull
and machinery insurance covers loss of or damage to a vessel due to marine perils such as
collisions, grounding and weather. Protection and indemnity insurance indemnifies against other
liabilities incurred while operating vessels, including injury to the crew, third parties, cargo
loss and pollution. The current available amount of our coverage for pollution is $1 billion per
vessel per incident. We also carry insurance policies covering war risks (including piracy and
terrorism).
Under bareboat charters, the customer is responsible to insure the vessel. We believe that current
insurance coverage is adequate to protect against most of the accident-related risks involved in
the conduct of our business and that we maintain appropriate levels of environmental damage and
pollution coverage. However, we cannot assure that all covered risks are adequately insured
against, that any particular claim will be paid or that we will be able to procure adequate
insurance coverage at commercially reasonable rates in the future. More stringent environmental
regulations at times in the past have resulted in increased costs for, and may result in the lack
of availability of, insurance against the risks of environmental damage or pollution. Substantially
all of our vessels are not insured against loss of revenues resulting from vessel off-hire time,
based on the cost of this insurance compared to our off-hire experience.
We use in our operations Teekay Corporation’s thorough risk management program that includes, among
other things, computer-aided risk analysis tools, maintenance and assessment programs, a seafarers
competence training program, seafarers workshops and membership in emergency response
organizations.
Classification, Audits and Inspections
All of our shuttle tankers and conventional oil tankers have been “classed” by one of the major
classification societies: Det Norske Veritas, Lloyd’s Register of Shipping or the American Bureau
of Shipping. Although FSO and FPSO units are not required to be “classed”, each of our FSO units
has been inspected and certified as such. The classification society certifies that the vessel has
been built and maintained in accordance with its rules and complies with applicable rules and
regulations of the country of registry, although for some vessels this latter certification is
obtained directly from the relevant flag state authorities. Each vessel is inspected by a
classification society surveyor annually, with either the second or third annual inspection being a
more detailed survey (an Intermediate Survey) and the fifth annual inspection being the most
comprehensive survey (a Special Survey). The inspection cycle resumes after each Special Survey.
Vessels may be required to be drydocked at each Intermediate and Special Survey for inspection of
the underwater area and fittings. However, many of our vessels have qualified with their respective
classification societies for drydocking every five years and are no longer subject to the
Intermediate Survey drydocking process. To qualify, the resiliency of the underwater coatings of
each vessel was enhanced and the hull was marked to accommodate underwater inspections by divers.
In addition to classification inspections:
In addition to third-party audits and inspections, our seafarers regularly inspect their vessels
and perform much of the necessary routine maintenance. Shore-based operational and technical
specialists also inspect the vessels at least twice a year for conformity with established
criteria. Upon completion of each inspection, recommendations are made for improving the overall
condition of the vessel and its maintenance, safety and crew welfare. All recommendations are
monitored until they are completed. The objective of these inspections are to:
To achieve the vessel structural integrity objective, we use a comprehensive “Structural Integrity
Management System” developed by Teekay Corporation. This system is designed to monitor the
condition of the vessels closely and to ensure that structural strength and integrity are
maintained throughout a vessel’s life.
Teekay Corporation, which assists us in managing our ship operations through its subsidiaries, has
obtained approval for its safety management system as being in compliance with the ISM Code. To
maintain compliance, the system is audited regularly by either the vessels’ flag state or, when
nominated by the flag state, a classification society. Certification is valid for five years
subject to satisfactorily completing internal and external audits.
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Regulations
General
Our business and the operation of our vessels are significantly affected by international
conventions and national, state and local laws and regulations in the jurisdictions in which our
vessels operate, as well as in the country or countries of their registration. Because these
conventions, laws and regulations change frequently, we cannot predict the ultimate cost of
compliance or their impact on the resale price or useful life of the vessels. Additional
conventions, laws and regulations may be adopted that could limit our ability to do business or
increase the cost of doing business and that may materially adversely affect operations. We are
required by various governmental and quasi-governmental agencies to obtain permits, licenses and
certificates with respect to our operations. Subject to the discussion below and to the fact that
the kinds of permits, licenses and certificates required for the operations of the vessels we own
will depend on a number of factors, we believe that we will be able to continue to obtain all
permits, licenses and certificates material to the conduct of operations.
We believe that the heightened environmental and quality concerns of insurance underwriters,
regulators and charterers will generally lead to greater inspection and safety requirements on all
vessels in the oil tanker markets and will accelerate the scrapping of older vessels throughout
these markets.
Regulation — International Maritime Organization (or IMO)
The IMO is the United Nation’s agency for maritime safety. IMO regulations include the
International Convention for Safety of Life at Sea (or SOLAS), including amendments to SOLAS
implementing the International Security Code for Ports and Ships (or ISPS), the ISM Code, the
International Convention on Prevention of Pollution from Ships (or the MARPOL Convention), the
International Convention on Civil Liability for Oil Pollution Damage of 1969, the International
Convention on Load Lines of 1966. The IMO Marine Safety Committee has also published guidelines for
vessels with dynamic positioning (DP) systems, which would apply to shuttle tankers and DP-assisted
FSO units and FPSO units. SOLAS provides rules for the construction of and equipment required for
commercial vessels and includes regulations for safe operation. Flag states which have ratified the
convention and the treaty generally employ the classification societies, which have incorporated
SOLAS requirements into their class rules, to undertake surveys to confirm compliance.
SOLAS and other IMO regulations concerning safety, including those relating to treaties on training
of shipboard personnel, lifesaving appliances, radio equipment and the global maritime distress and
safety system, are applicable to our operations. Non-compliance with IMO regulations, including
SOLAS, the ISM Code, ISPS and the specific requirements for shuttle tankers, FSO units and FPSO
units under the NPD (Norway) and HSE (United Kingdom) regulations, may subject us to increased
liability or penalties, may lead to decreases in available insurance coverage for affected vessels
and may result in the denial of access to or detention in some ports. For example, the Coast Guard
and European Union authorities have indicated that vessels not in compliance with the ISM Code will
be prohibited from trading in U.S. and European Union ports.
The ISM Code requires vessel operators to obtain a safety management certification for each vessel
they manage, evidencing the shipowner’s compliance with requirements of the ISM Code relating to
the development and maintenance of an extensive “Safety Management System.” Such a system includes,
among other things, the adoption of a safety and environmental protection policy setting forth
instructions and procedures for safe operation and describing procedures for dealing with
emergencies. Each of the existing vessels in our fleet currently is ISM Code-certified, and we
expect to obtain safety management certificates for each newbuilding upon delivery.
Under IMO regulations an oil tanker must be of double-hull construction, be of a mid-deck design
with double-side construction or be of another approved design ensuring the same level of
protection against oil pollution in the event that such tanker:
In December 2003, the IMO revised its regulations relating to the prevention of pollution from oil
tankers. These regulations, which became effective April 5, 2005, accelerate the mandatory
phase-out of single-hull tankers and impose a more rigorous inspection regime for older tankers.
All of our shuttle and conventional oil tankers are double-hulled and were delivered after July 6,
1996, so those tankers will not be affected directly by these IMO regulations.
Shuttle Tanker, FSO Unit and FPSO Unit Regulation
Our shuttle tankers primarily operate in the North Sea. In addition to the regulations imposed by
the IMO, countries having jurisdiction over North Sea areas impose regulatory requirements in
connection with operations in those areas, including HSE in the United Kingdom and NPD in Norway.
These regulatory requirements, together with additional requirements imposed by operators in North
Sea oil fields, require that we make further expenditures for sophisticated equipment, reporting
and redundancy systems on the shuttle tankers and for the training of seagoing staff. Additional
regulations and requirements may be adopted or imposed that could limit our ability to do business
or further increase the cost of doing business in the North Sea. In Brazil, Petrobras serves in a
regulatory capacity and has adopted standards similar to those in the North Sea.
Environmental Regulations — The United States Regulations
The United States has enacted an extensive regulatory and liability regime for the protection and
cleanup of the environment from oil spills, including discharges of oil cargoes, bunker fuels or
lubricants, primarily through the Oil Pollution Act of 1990 (or OPA 90) and the Comprehensive
Environmental Response, Compensation and Liability Act (or CERCLA). OPA 90 affects all owners,
bareboat charterers and operators whose vessels trade to the United States or its territories or
possessions or whose vessels operate in United States waters, which include the U.S. territorial
sea and 200-mile exclusive economic zone around the United States.
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Under OPA 90, vessel owners, operators and bareboat charterers are “responsible parties” and are
jointly, severally and strictly liable (unless the spill results solely from the act or omission of
a third party, an act of God or an act of war and the responsible party reports the incident and
reasonably cooperates with the appropriate authorities) for all containment and clean-up costs and
other damages arising from discharges or threatened discharges of oil from their vessels. These
other damages are defined broadly to include:
OPA 90 limits the liability of responsible parties. Effective as of October 9, 2006, the limit for
double-hulled tank vessels was increased to the greater of $1,900 per gross ton or $16 million per
double-hulled tanker per incident, subject to adjustment for inflation. These limits of liability
would not apply if the incident were proximately caused by violation of applicable U.S. federal
safety, construction or operating regulations, including IMO conventions to which the United States
is a signatory, or by the responsible party’s gross negligence or willful misconduct, or if the
responsible party fails or refuses to report the incident or to cooperate and assist in connection
with the oil removal activities. In addition, CERCLA, which applies to the discharge of hazardous
substances (other than oil) whether on land or at sea, contains a similar liability regime and
provides for cleanup, removal and natural resource damages. Liability under CERCLA is limited to
the greater of $300 per gross ton or $5 million, unless the incident is caused by gross negligence,
willful misconduct, or a violation of certain regulations, in which case liability is unlimited. We
currently maintain for each vessel pollution liability coverage in the maximum coverage amount of
$1 billion per incident. A catastrophic spill could exceed the coverage available, which could harm
our business, financial condition and results of operations.
Under OPA 90, with limited exceptions, all newly built or converted tankers delivered after January
1, 1994 and operating in U.S. waters must be built with double-hulls. All of our existing tankers
are, and all of our newbuildings will be, double-hulled.
In December 1994, the U.S. Coast Guard (or Coast Guard) implemented regulations requiring evidence
of financial responsibility in the amount of $1,500 per gross ton for tankers, coupling the
then-applicable OPA limitation on liability of $1,200 per gross ton with the CERCLA liability limit
of $300 per gross ton. The financial responsibility limits have not been increased to comport with
the amended statutory limits of OPA. However, the Coast Guard has issued a notice of policy change
indicating its intention to change the financial responsibility regulations accordingly. Under the
regulations, such evidence of financial responsibility may be demonstrated by insurance, surety
bond, self-insurance, guaranty or an alternate method subject to agency approval. Under OPA 90, an
owner or operator of a fleet of vessels is required only to demonstrate evidence of financial
responsibility in an amount sufficient to cover the tanker in the fleet having the greatest maximum
limited liability under OPA 90 and CERCLA.
The Coast Guard’s regulations concerning certificates of financial responsibility (or COFR)
provide, in accordance with OPA 90, that claimants may bring suit directly against an insurer or
guarantor that furnishes COFR. In addition, in the event that such insurer or guarantor is sued
directly, it is prohibited from asserting any contractual defense that it may have had against the
responsible party and is limited to asserting those defenses available to the responsible party and
the defense that the incident was caused by the willful misconduct of the responsible party.
Certain organizations, which had typically provided COFR under pre-OPA 90 laws, including the major
protection and indemnity organizations have declined to furnish evidence of insurance for vessel
owners and operators if they are subject to direct actions or required to waive insurance policy
defenses. The Coast Guard has indicated that it intends to propose a rule that would increase the
required amount of such COFRs to $2,200 per gross ton to reflect the higher limits on liability
imposed by OPA 90, as described above.
The Coast Guard’s financial responsibility regulations may also be satisfied by evidence of surety
bond, guaranty or by self-insurance. Under the self-insurance provisions, the ship-owner or
operator must have a net worth and working capital, measured in assets located in the United States
against liabilities located anywhere in the world, that exceeds the applicable amount of financial
responsibility. We have complied with the Coast Guard regulations by obtaining financial guarantees
from a third-party. If other vessels in our fleet trade into the United States in the future, we
expect to obtain additional guarantees from third-party insurers or to provide guarantees through
self-insurance.
OPA 90 and CERCLA permit individual states to impose their own liability regimes with regard to oil
or hazardous substance pollution incidents occurring within their boundaries if the state’s
regulations are equally or more stringent, and some states have enacted legislation providing for
unlimited strict liability for spills. Several coastal states, including California, Washington and
Alaska, require state specific COFR and vessel response plans. We intend to comply with all
applicable state regulations in the ports where our vessels call.
Owners or operators of tank vessels operating in United States waters are required to file vessel
response plans with the Coast Guard, and their tank vessels are required to operate in compliance
with their Coast Guard approved plans. Such response plans must, among other things:
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We have filed vessel response plans with the Coast Guard for the vessels we own and have received
approval of such plans for all vessels in our fleet to operate in United States waters. In
addition, we conduct regular oil spill response drills in accordance with the guidelines set out in
OPA 90. The Coast Guard has announced it intends to propose similar regulations requiring certain
vessels to prepare response plans for the release of hazardous substances.
Environmental Regulation — Other Environmental Initiatives
Although the United States is not a party, many countries have ratified and follow the liability
scheme adopted by the IMO and set out in the International Convention on Civil Liability for Oil
Pollution Damage, 1969, as amended (or CLC), and the Convention for the Establishment of an
International Fund for Oil Pollution of 1971, as amended. Under these conventions, which are
applicable to vessels that carry persistent oil as cargo, a vessel’s registered owner is strictly
liable for pollution damage caused in the territorial waters of a contracting state by discharge of
persistent oil, subject to certain complete defenses. Many of the countries that have ratified the
CLC have increased the liability limits through a 1992 Protocol to the CLC. The liability limits in
the countries that have ratified this Protocol are currently approximately $7.4 million plus
approximately $1,040 per gross registered tonne above 5,000 gross tonnes with an approximate
maximum of $148 million per vessel and the exact amount tied to a unit of account which varies
according to a basket of currencies. The right to limit liability is forfeited under the CLC when
the spill is caused by the owner’s actual fault or privity and, under the 1992 Protocol, when the
spill is caused by the owner’s intentional or reckless conduct. Vessels trading to contracting
states must provide evidence of insurance covering the limited liability of the owner. In
jurisdictions where the CLC has not been adopted, various legislative schemes or common law govern,
and liability is imposed either on the basis of fault or in a manner similar to the CLC.
In September 1997, the IMO adopted Annex VI to the International Convention for the Prevention of
Pollution from Ships (or Annex VI) to address air pollution from ships. Annex VI, which became
effective in May 2005, sets limits on sulfur oxide and nitrogen oxide emissions from ship exhausts
and prohibit deliberate emissions of ozone depleting substances, such as halons,
chlorofluorocarbons, emissions of volatile compounds from cargo tanks and prohibition of shipboard
incineration of specific substances. Annex VI also includes a global cap on the sulfur content of
fuel oil and allows for special areas to be established with more stringent controls on sulfur
emissions. We plan to operate our vessels in compliance with Annex VI. Additional or new
conventions, laws and regulations may be adopted that could adversely affect our ability to manage
our ships.
In addition, the IMO, various countries and states, such as Australia, the United States and the
State of California, and various regulators, such as port authorities, the U.S. Coast Guard and the
U.S. Environmental Protection Agency, have either adopted legislation or regulations, or are
separately considering the adoption of legislation or regulations, aimed at regulating the
discharge of ballast water and the discharge of bunkers as potential pollutants, and requiring the
installation on ocean-going vessels of pollution prevention equipment such as oily water separators
and bilge alarms.
The United States Clean Water Act prohibits the discharge of oil or hazardous substances in U.S.
navigable waters and imposes strict liability in the form of penalties for unauthorized discharges.
The Clean Water Act also imposes substantial liability for the costs of removal, remediation and
damages and complements the remedies available under OPA 90 and CERCLA discussed above. Pursuant to
regulations promulgated by the EPA in the early 1970s, the discharge of sewage and effluent from
properly functioning marine engines was exempted from the permit requirements of the National
Pollution Discharge Elimination System. This exemption allowed vessels in U.S. ports to discharge
certain substances, including ballast water, without obtaining a permit to do so. However, on
March 30, 2005, a U.S. District Court for the Northern District of California granted summary
judgment to certain environmental groups and U.S. states that had challenged the EPA regulations,
arguing that the EPA exceeded its authority in promulgating them. On September 18, 2006, the U.S.
District Court in that action issued an order invalidating the exemption in EPA’s regulations for
all discharges incidental to the normal operation of a vessel as of September 30, 2008, and
directing EPA to develop a system for regulating all discharges from vessels by that date.
The EPA has appealed this decision. Oral arguments on this appeal were heard by the Ninth Circuit
Court of Appeals on August 14, 2007. No decision has yet been issued. If the exemption is repealed,
we would be subject to the Clean Water Act permit requirements that could include ballast water
treatment obligations that could increase the costs of operating in the United States. For example,
this ruling could require the installation of equipment on our vessels to treat ballast water
before it is discharged, require the implementation of other port facility disposal arrangements or
procedures at potentially substantial cost, and otherwise restrict our vessels traffic in U.S.
waters.
In Norway, the Norwegian Pollution Control Authority requires the installation of volatile organic
compound emissions (or VOC equipment) on most shuttle tankers serving the Norwegian continental
shelf. Oil companies bear the cost to install and operate the VOC equipment onboard the shuttle
tankers.
Vessel Security Regulation
The ISPS was adopted by the IMO in December 2002 in the wake of heightened concern over worldwide
terrorism and became effective on July 1, 2004. The objective of ISPS is to enhance maritime
security by detecting security threats to ships and ports and by requiring the development of
security plans and other measures designed to prevent such threats. The United States implemented
ISPS with the adoption of the Maritime Transportation Security Act of 2002 (or MTSA), which
requires vessels entering U.S. waters to obtain certification of plans to respond to emergency
incidents there, including identification of persons authorized to implement the plans. Each of the
existing vessels in our fleet currently complies with the requirements of ISPS and MTSA.
C. Organizational Structure
Our sole general partner is Teekay Offshore GP L.L.C., which is a wholly owned subsidiary of Teekay
Corporation. Teekay Corporation also controls its public subsidiaries Teekay LNG Partners L.P.
(NYSE: TGP) and Teekay Tankers Ltd. (NYSE: TNK).
Please read Exhibit 8.1 to this Annual Report for a list of our significant subsidiaries as of
December 31, 2007
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D. Properties
Other than our vessels and VOC plants mentioned above, we do not have any material property.
E. Taxation of the Partnership
United States Taxation
This discussion is based upon provisions of the U.S. Internal Revenue Code of 1986, as amended (or
the Code) as in effect on the date of this Annual Report, existing final and temporary regulations
thereunder (or Treasury Regulations), and current administrative rulings and court decisions, as in
effect on the date of this Annual Report, all of which are subject to change, possibly with
retroactive effect. Changes in these authorities may cause the tax consequences to vary
substantially from the consequences described below. The following discussion is for general
information purposes only and does not purport to be a comprehensive description of all of the
U.S. federal income tax considerations applicable to us.
Election to be Taxed as a Corporation. We have elected to be taxed as a corporation for
U.S. federal income tax purposes. As such, we are subject to U.S. federal income tax on our income
to the extent it is from U.S. sources or otherwise is effectively connected with the conduct of a
trade or business in the United States as discussed below.
Taxation of Operating Income. We expect that substantially all of our gross income will be
attributable to the transportation of crude oil and related products. For this purpose, gross
income attributable to transportation (or Transportation Income) includes income derived from, or
in connection with, the use (or hiring or leasing for use) of a vessel to transport cargo, or the
performance of services directly related to the use of any vessel to transport cargo, and thus
includes both time charter or bareboat charter income.
Transportation Income that is attributable to transportation that begins or ends, but that does not
both begin and end, in the United States (or U.S. Source International Transportation Income) will
be considered to be 50.0% derived from sources within the United States. Transportation Income
attributable to transportation that both begins and ends in the United States (or U.S. Source
Domestic Transportation Income) will be considered to be 100.0% derived from sources within the
United States. Transportation Income attributable to transportation exclusively between
non-U.S. destinations will be considered to be 100% derived from sources outside the United States.
Transportation Income derived from sources outside the United States generally will not be subject
to U.S. federal income tax.
Based on our current operations, we expect substantially all of our Transportation Income to be
from sources outside the United States and not subject to U.S. federal income tax. However, certain
of our activities could give rise to U.S. Source International Transportation Income, and future
expansion of our operations could result in an increase in the amount of U.S. Source International
Transportation Income, as well as give rise to U.S. Source Domestic Transportation Income, all of
which could be subject to U.S. federal income taxation, unless the exemption from U.S. taxation
under Section 883 of the Code (or the Section 883 Exemption) applies.
The Section 883 Exemption. In general, the Section 883 Exemption provides that if a
non-U.S. corporation satisfies the requirements of Section 883 of the Code and the Treasury
Regulations thereunder (or the Section 883 Regulations), it will not be subject to the net basis
and branch taxes or 4.0% gross basis tax described below on its U.S. Source International
Transportation Income. The Section 883 Exemption only applies to U.S. Source International
Transportation Income. As discussed below, we believe that under our current ownership structure,
the Section 883 Exemption will apply and we will not be taxed on our U.S. Source International
Transportation Income. The Section 883 Exemption does not apply to U.S. Source Domestic
Transportation Income.
A non-U.S. corporation will qualify for the Section 883 Exemption if it is organized in a
jurisdiction outside the United States that grants an equivalent exemption from tax to corporations
organized in the United States (or an Equivalent Exemption), it meets one of three ownership tests
(or the Ownership Test) described in the Final Section 883 Regulations and it meets certain
substantiation, reporting and other requirements.
We are organized under the laws of the Republic of the Marshall Islands. The U.S. Treasury
Department has recognized the Republic of the Marshall Islands as a jurisdiction that grants an
Equivalent Exemption. Consequently, our U.S. Source International Transportation Income (including
for this purpose, any such income earned by our subsidiaries that have properly elected to be
treated as partnerships or disregarded as entities separate from us for U.S. federal income tax
purposes) will be exempt from U.S. federal income taxation provided we meet the Ownership Test
described in the Final Section 883 Regulations. We believe that we should satisfy the Ownership
Test based upon the ownership of more than 50% of the value of us by Teekay Corporation. However,
the determination of whether we satisfy the Ownership Test at any given time depends upon a
multitude of factors, including Teekay Corporation’s ownership of us, whether Teekay Corporation’s
stock is publicly traded, the concentration of ownership of Teekay Corporation’s own stock and the
satisfaction of various substantiation and documentation requirements. There can be no assurance
that we will satisfy these requirements at any given time and thus that our U.S. Source
International Shipping Income would be exempt from U.S. federal income taxation by reason of
Section 883 in any of our taxable years.
The Net Basis Tax and Branch Profits Tax. If we earn U.S. Source International Transportation
Income and the Section 883 Exemption does not apply, such income may be treated as effectively
connected with the conduct of a trade or business in the United States (or Effectively Connected
Income) if we have a fixed place of business in the United States and substantially all of our
U.S. Source International Transportation Income is attributable to regularly scheduled
transportation or, in the case of bareboat charter income, is attributable to a fixed placed of
business in the United States. Based on our current operations, none of our potential U.S. Source
International Transportation Income is attributable to regularly scheduled transportation or is
received pursuant to bareboat charters. As a result, we do not anticipate that any of our
U.S. Source International Transportation Income will be treated as Effectively Connected Income.
However, there is no assurance that we will not earn income pursuant to regularly scheduled
transportation or bareboat charters attributable to a fixed place of business in the United States
in the future, which would result in such income being treated as Effectively Connected Income.
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U.S. Source Domestic Transportation Income generally is treated as Effectively Connected Income.
Any income we earn that is treated as Effectively Connected Income would be subject to U.S. federal
corporate income tax (the highest statutory rate is currently 35.0%). In addition, if we earn
income that is treated as Effectively Connected Income, a 30.0% branch profits tax imposed under
Section 884 of the Code generally would apply to such income, and a branch interest tax could be
imposed on certain interest paid or deemed paid by us.
On the sale of a vessel that has produced Effectively Connected Income, we could be subject to the
net basis corporate income tax and to the 30.0% branch profits tax with respect to our gain not in
excess of certain prior deductions for depreciation that reduced Effectively Connected Income.
Otherwise, we would not be subject to U.S. federal income tax with respect to gain realized on the
sale of a vessel, provided the sale is considered to occur outside of the United States under
U.S. federal income tax principles.
The 4.0% Gross Basis Tax. If the Section 883 Exemption does not apply and the net basis tax does
not apply, we would be subject to a 4.0% U.S. federal income tax on the U.S. source portion of our
gross U.S. Source International Transportation Income, without benefit of deductions.
Marshall Islands Taxation
Because we and our controlled affiliates do not, and we do not expect that we and our controlled
affiliates will, conduct business or operations in the Republic of The Marshall Islands, neither we
nor our controlled affiliates are subject to income, capital gains, profits or other taxation under
current Marshall Islands law. As a result, distributions by OPCO or other controlled affiliates to
us are not subject to Marshall Islands taxation.
Norway Taxation
The following discussion is based upon the current tax laws of the Kingdom of Norway and
regulations, the Norwegian tax administrative practice and judicial decisions thereunder, all as in
effect as of the date of this Annual Report and subject to possible change on a retroactive basis.
The following discussion is for general information purposes only and does not purport to be a
comprehensive description of all of the Norwegian income tax considerations applicable to us.
Our Norwegian subsidiaries are subject to taxation in Norway on their income regardless of where
the income is derived. The generally applicable Norwegian income tax rate is 28.0%.
Taxation of Norwegian Subsidiaries Engaged in Business Activities. All of our Norwegian
subsidiaries are subject to normal Norwegian taxation. Generally, a Norwegian resident company is
taxed on its income realized for tax purposes. The starting point for calculating taxable income is
the company’s income as shown on its annual accounts, calculated under generally accepted
accounting principles and as adjusted for tax purposes. Gross income will include capital gains,
interest, dividends from certain corporations and foreign exchange gains.
The Norwegian companies also are taxed on any gains resulting from the sale of depreciable assets.
The gain on these assets is taken into income for Norwegian tax purposes at a rate of 20.0% per
year on a declining balance basis.
Norway does not allow consolidation of the income of companies in a corporate group for Norwegian
tax purposes. However, a group of companies that is ultimately owned more than 90.0% by a single
company can transfer its Norwegian taxable income to another Norwegian resident company in the
group by making a transfer to the other company (this is referred to as making a “group
contribution”). The ultimate parent in the corporate group can be a foreign company.
Group contributions are deductible for the contributing company for tax purposes and are included
in the taxable income of the receiving company in the income year in which the contribution is
made. Group contributions are subject to the same rules as dividend distributions under the
Norwegian Companies Act. In other words, group contributions are restricted to the amount that is
available to distribute as dividends for corporate law purposes.
Taxation of Dividends. Generally, dividends received by a Norwegian resident company are exempt
from Norwegian taxation. The exemption does not apply to dividends from companies resident outside
the European Economic Area if (a) the country of residence is a low-tax country or (b) the
ownership of shares in the distributing company is considered to be a “portfolio investment” (i.e.
less than 10.0% share ownership or less than two years continuous ownership period). Dividends not
exempt from Norwegian taxation are subject to the general 28.0% income tax rate when received by
the Norwegian resident company. We believe that dividends received by our Norwegian subsidiaries
will not be subject to Norwegian tax.
Correction Income Tax. Our Norwegian subsidiaries may be subject to a tax, called correction income
tax, on their dividend distributions. Norwegian correction tax is levied if a dividend distribution
leads to the company’s balance sheet equity at year end being lower than the company’s paid-in
share capital (including share premium), plus a calculated amount equal to 72.0% of the net
positive temporary timing differences between the company’s book values and tax values.
As a result, correction tax is effectively levied if dividend distributions result in the company’s
financial statement equity for accounting purposes being reduced below its equity calculated for
tax purposes (i.e. when dividends are paid out of accounting earnings that have not been subject to
taxation in Norway). In addition to dividend distributions, correction tax may also be levied on
the partial liquidation of the share capital of the company or if the company makes group
contributions that are in excess of taxable income for the year.
Taxation of Interest Paid by Norwegian Entities. Norway does not levy any tax or withholding tax on
interest paid by a Norwegian resident company to a company that is not resident in Norway (provided
that the interest rate and the debt/equity ratio are based on arms-length principles). Therefore,
any interest paid by our Norwegian subsidiaries to companies that are not resident in Norway will
not be subject to Norwegian withholding tax.
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Taxation on Distributions by Norwegian Entities. Norway levies a 25.0% withholding tax on
non-residents of Norway that receive dividends from a Norwegian resident company. However, if the
recipient of the dividend is resident in a country that has an income tax treaty with Norway or
that is a member of the European Economic Area, the Norwegian withholding tax may be reduced or
eliminated. We believe that distributions by our Norwegian subsidiaries will be subject to a
reduced amount of Norwegian withholding tax or not be subject to Norwegian withholding tax.
Luxembourg Taxation
The following discussion is based upon the current tax laws of Luxembourg and regulations, the
Luxembourg tax administrative practice and judicial decisions thereunder, all as in effect as of
the date of this Annual Report and subject to possible change on a retroactive basis. The following
discussion is for general information purposes only and does not purport to be a comprehensive
description of all of the Luxembourg income tax considerations applicable to us.
Our operating subsidiary, Teekay Offshore Partners L.P. owns all of the shares of Norsk Teekay
Holdings Ltd. (or Norsk Teekay), a Marshall Islands company. Norsk Teekay owns all of the shares of
Teekay European Holdings S.a.r.l. (or TEHS), a Luxembourg company. TEHS owns all of the shares of
Teekay Netherlands European Holdings BV (or Teekay Netherlands), a Netherlands company.
TEHS was primarily capitalized with a discounted loan from Norsk Teekay (the proceeds of which TEHS
used to purchase shares in Norsk Teekay, which were immediately then contributed to Teekay
Netherlands), which we believe were compliant with the Luxembourg thin capitalization threshold and
a fixed interest loan from OPCO. Its only significant assets are shares of Teekay Netherlands and a
fixed interest loan to Navion Offshore Loading AS (or NOL).
TEHS is considered a Luxembourg resident company subject to taxation in Luxembourg on its income
regardless of where the income is derived. The generally applicable Luxembourg income tax rate is
approximately 30%.
Taxation of Interest Income. TEHS’ loans to NOL generate interest income. However, this interest
income is substantially offset by interest expense on the loan made by OPCO to TEHS. Accordingly,
at TEHS’ current level of indebtedness and provided that TEHS does not bear any foreign exchange
risk, TEHS should earn a minimum level of net interest income equal to 0.09375% or less of the loan
balance to NOL, an immaterial amount that will be subject to taxation in Luxembourg. The net
interest income generated from the loans to NOL can also, to the extent the interest due on the
discounted loan from Norsk Teekay exceeds any dividend income from Teekay Netherlands during the
same year be offset by interest expense on TEHS’ discounted loan payable to Norsk Teekay. The
deduction of interest expense on the discounted loan is subject to recapture in the future, as
discussed below.
Taxation of Potential Foreign Currency Exchange Net Gain. TEHS holds it accounts in Euros, while
the loan to NOL is denominated in Norwegian Kroners. Regardless whether they are realized or
unrealized, foreign currency exchange gains are fully taxable in Luxembourg to the extent they are
reflected in the accounts (under Luxembourg GAAP). Foreign currency exchange losses are in
principle deductible from the taxable base of TEHS under the same conditions. We minimized such
foreign exchange exposure by having the loan from OPCO also Norwegian Kroner denominated and with
the exact same terms and conditions (same principal amount and same effective date and maturity
save for a differential in the interest rates leading to the small net interest income noted above)
as the loan to NOL. Accordingly, we believe that the foreign exchange net gain on the loan from
OPCO and on the loan to NOL should be minimized in Luxembourg.
Taxation of Interest Payments. Luxembourg does not levy a withholding tax on interest paid to
non-residents of Luxembourg, such as Norsk Teekay and OPCO, unless the interest represents a right
to participate in profits of the interest-paying entity and the debt has certain other
characteristics or the interest payment relates to the portion of debt used to acquire share
capital, and the debt exceeds a Luxembourg “thin capitalization” threshold, or the interest rate is
not regarded to be at arm’s length. We believe that the interest paid by TEHS on the types of loans
made to it by Norsk Teekay and OPCO does not represent a right to participate in its profits and is
consistent with Luxembourg transfer pricing rules. Furthermore, we have capitalized TEHS to meet
the “thin capitalization” threshold. Accordingly, we believe that interest payments made by TEHS to
Norsk Teekay and OPCO are not subject to Luxembourg withholding tax.
Taxation of Dividends and Capital Gains. Pursuant to Luxembourg law, dividends received by TEHS
from Teekay Netherlands and capital gains realized on any disposal of shares of Teekay Netherlands
generally are exempt from Luxembourg taxation if the following requirements are met:
TEHS meets the ownership threshold and has owned the shares in Teekay Netherlands for at least
12 months. In addition, assuming that Teekay Netherlands is a resident of the Netherlands for Dutch
tax purposes and is fully subject to the Dutch general corporate tax regime (even if it has
subsidiaries that may be subject to special shipping regimes), we believe that Teekay Netherlands
is covered by the European Union Parent-Subsidiary Directive. Therefore, we believe that any
dividend received on or any capital gain resulting from the disposition of the shares of Teekay
Netherlands will be exempt from taxation in Luxembourg.
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Notwithstanding this exemption, Luxembourg law does not permit the deduction of interest expense on
loans used to purchase shares eligible for the dividend and capital gain exemption noted above, to
the extent of the dividend received. Similarly, capital gains, although generally eligible for the
exemption discussed above, are subject to Luxembourg taxation to the extent of any such related
interest expense that has been deducted from TEHS’ taxable income (such as the net interest income
on loans to NOL), in the year of disposal and for any previous year the shares have been held.
We intend to operate TEHS such that it will not dispose of its shares in Teekay Netherlands.
Accordingly, we believe that TEHS will not be subject to Luxembourg dividend or capital gains
taxation, and, even if it were, it would only be affected to the extent of the recapture of
interest deductions discussed above.
Taxation of TEHS Dividends. Luxembourg levies a 15% withholding tax on dividends paid by a
Luxembourg company to a non-EU resident, absent an Income Tax Treaty, which would apply to
dividends paid by TEHS to Norsk Teekay. However, we currently do not expect to cause TEHS to pay
dividends, but to distribute all of its available cash through the payment of interest and
principal on its loans owing to Norsk Teekay and/or OPCO. In addition, under current Luxembourg tax
rules, it is possible to releverage the Luxembourg operations with new debt, which would allow a
new Luxco to continue to distribute all of its available cash through payments of interest and
principal on the new debt.
Net Wealth Tax. Luxembourg companies are also subject to a net wealth tax, which normally is based
on the company’s net asset value. Capital stock held by a company that qualifies for the dividend
and capital gains exemption discussed above are excluded from net asset value in calculating this
tax. Liabilities related to shareholdings excluded from the net wealth tax are not deductible from
other assets subject to the net wealth tax. Furthermore, cash amounts held on January 1 with
respect to the payments of interest or dividends to TEHS are subject to the net wealth tax. The
cash balance on the last closed financial statements is generally used to determine the cash
amount. Because the shares of Teekay Netherlands and the discounted loan from Norsk Teekay should
be excluded from the net asset value according to the above, and taking into account that the loan
to NOL should be offset by corresponding loan from OPCO, Luxco should be required to pay a nominal
amount of Luxembourg net wealth tax.
Netherlands Taxation
The following discussion is based upon the current tax laws of the Kingdom of the Netherlands and
regulations, the Dutch tax administrative practice and judicial decisions thereunder, all as in
effect as of the date of this Annual Report and subject to possible change on a retroactive basis.
The following discussion is for general information purposes only and does not purport to be a
comprehensive description of all of the Dutch income tax considerations applicable to us.
Teekay Netherlands is capitalized solely with equity from TEHS. Its only significant asset are the
shares of Norsk Teekay AS, which is an intermediate holding company and is the direct or indirect
parent of various operating subsidiaries in Norway and Singapore, including Teekay Norway AS, NOL
and Teekay Offshore Loading Pte Ltd.
Taxation of Dividends and Capital Gains. Pursuant to Dutch law, dividends received by Teekay
Netherlands from Norsk Teekay AS and capital gains realized on any disposal of the shares of Norsk
Teekay AS generally will be exempt from Dutch taxation (the participation exemption) if the
following conditions are met:
Since Norsk Teekay AS is an intermediate holding company that fulfills a key position between the
activities of its parent companies and the activities of operational subsidiaries, the shares in
Norsk Teekay AS are not deemed to be held as a portfolio investment. However, shares are deemed to
be held as a portfolio investment if the subsidiary is mainly involved in passive group financing.
If the activities of the subsidiaries of Teekay Netherlands consist mostly (more than 50.0%) of
direct or indirect financing of related entities, or the financing of business assets of those
entities, including providing for the use or right to use those assets, the shares of the
subsidiaries will be considered a portfolio investment.
Teekay Netherlands meets the ownership threshold, and we currently expect that Teekay Netherlands
will maintain its 100.0% ownership interest in Norsk Teekay AS for the foreseeable future. In
addition, assuming that Norsk Teekay AS is a resident of Norway for Norwegian tax purposes, we
expect Norsk Teekay AS to be fully subject to the Norwegian general corporate tax regime. In
addition, we expect that the shares of Norsk Teekay AS will not be held as stock in trade or as a
portfolio investment. Therefore, we believe that any dividend received on or any capital gain
resulting from the disposition of the shares of Norsk Teekay AS should be exempt from taxation in
the Netherlands.
Capital losses on a disposition of the shares of Norsk Teekay AS will not be tax deductible.
Taxation of Teekay Netherlands Dividends. In general, the Netherlands levies a 25.0% withholding
tax on dividends paid by a Dutch company. The withholding tax is reduced to zero if the dividend is
paid by Teekay Netherlands to TEHS, if TEHS meets the conditions of the European Union
Parent-Subsidiary Directive. The Directive requires that TEHS hold at least 10.0% of the shares of
Teekay Netherlands for at least one year before the dividend distribution. TEHS has owned the
shares of Teekay Netherlands for at least 12 months. We currently expect that TEHS will maintain
its 100.0% ownership interest in Teekay Netherlands for the foreseeable future. Therefore, we
believe that Dutch withholding tax will not apply to dividends paid by Teekay Netherlands to TEHS.
In addition, TEHS should not be liable to Dutch corporate income tax with regards to the dividends
received.
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2007 Tax Reform in the Netherlands. On November 28, 2006 the Dutch parliament passed the Corporate
Income Tax 2007 Bill, which became effective on January 1, 2007. This new legislation affects the
participation exemption. Under the new law, the requirements for the participation exemption
include;
Whether or not a shareholder’s interest in a company is a “portfolio investment” is determined by
the consolidated assets of that company. If the consolidated assets are predominantly free
portfolio investments or consist predominantly of assets used for group financing activities, the
shares would in principle be considered a portfolio investment. Accordingly, the assessment of the
activities of the subsidiaries (active or passive) would remain very significant. If the
“activities test” were not met, the participation exemption would not apply to that entity, unless
the profits of the entity were subjected to an adequate profit tax. The taxation would be
considered adequate if the profits are taxed against an effective tax rate of at least 10.0% over a
taxable base determined according to Dutch standards.
Singapore Taxation
Taxation of Singapore Companies Operating Ships in International Traffic. OPCO has one subsidiary
that is incorporated and tax resident in Singapore for Singapore tax purposes, Teekay Navion
Offshore Loading Pte. Ltd. (or TNOL).
Taxation of Charter Income from Non-Singapore-Registered Ships. In respect of the charter income
that TNOL earns from its non-Singapore-registered ships, they are currently exempt from Singapore
tax under a tax incentive being enjoyed by TNOL. TNOL was conferred the Singapore Approved
International Shipping (or AIS) status with effect from January 1, 2005. The AIS status was granted
for an initial period of 10 years subject to a review at the end of the fifth year to ensure that
TNOL has complied with the qualifying conditions of the incentive. At the end of the first
10 years, TNOL can apply for a further 10-year extension of the incentive.
Under Section 13F of the Singapore Income Tax Act and the terms of the AIS incentive approval
letter from the Maritime Port Authority of Singapore (or MPA) dated January 2005, the types of
income that would qualify for tax exemption include:
The AIS status awarded to TNOL is subject to TNOL meeting and continuing to meet the following
conditions:
TNOL intends to operate such that substantially all of its charter income will be exempt from
Singapore tax under the AIS incentive. It also intends to operate and charter out all of its
non-Singapore-registered ships in international waters outside the limits of the port of Singapore.
On this basis, it expects that all of its income from the charter of its non-Singapore-registered
ships should be exempt from Singapore tax under Section 13F of the Singapore Income Tax Act.
Taxation of Investment Income. Any investment income earned by TNOL would be subject to the normal
corporate tax rules. With respect to the interest income earned from deposits placed outside
Singapore, the interest will be taxable in Singapore at the prevailing corporate tax rate
(currently 18.0%) when received or deemed received in Singapore.
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Taxation of Ship Management Income. In addition to the above, since October 2006 TNOL has provided
ship management services to related and third party companies. Income from such activities does not
qualify for exemption under the AIS incentive. Accordingly, the income derived from these
activities is subject to tax at the prevailing corporate tax rate of 18.0%.
Australian Taxation
The following discussion is based upon the current tax laws of Australia and regulations, the
Australian tax administrative practice and judicial decisions thereunder, all as in effect as of
the date of this Annual Report and subject to possible change on a retroactive basis. The following
discussion is for general information purposes only and does not purport to be a comprehensive
description of all Australian income tax considerations applicable to us. This discussion only
considers Australia income tax.
Teekay Offshore Australia Trust (or the “Trust"), which owns and operates the Karratha Spirit
vessel in Australian waters, is treated as a company for Australian tax purposes. OPCO is the
beneficiary of the Trust.
As a beneficiary of the Trust, OPCO is subject to Australian tax on the taxable income of the Trust
derived from Australian sources. Since the Trust only operates one asset, the Karratha Spirit, it
is expected that all taxable income of the Trust has an Australian source.
Since, however, OPCO is not a resident of Australia, the trustee of the Trust is required to pay
the Australian tax due, on behalf of OPCO (the non-resident beneficiary). This is at 30.0% of the
taxable income of the Trust.
The Trust is required to file an Australian tax return disclosing the taxable income related to the
Trust and receives a credit for the tax paid by the trustee. Hence, no further Australian income
tax should be due by the Trust. Generally, the Trust will be taxable on its income attributable to
its operations in Australia calculated under generally accepted accounting principles, as adjusted
for tax purposes. Gross income will include capital gains, interest and realized foreign exchange
gains and losses. Trusts are subject to capital gains on the disposition of different classes of
assets, including those which are used to carry on a business in Australia, and land and buildings
situated in Australia. Capital gains can be offset by any capital losses incurred in the current
year, in addition to any carried forward capital losses. Net capital gains generated by a trust are
taxed at the general corporate rate of 30.0%.
Generally, a Trust is allowed to deduct the expenses it incurs in a taxation year, to the extent
the expenses are incurred to earn the Australian sourced income. The Australian operations of the
Trust is partly financed by debt. As such, to the extent the interest expense is allocable to the
Australian sourced income it should generate interest deductions, subject to thin capitalization
restrictions.
Teekay Australia Offshore Holdings Pty Ltd. (or “TAOH”) was incorporated in July of 2007 and is
owned directly by the Partnership. TAOH is the sole member of Dampier Spirit LLC, which owns and
operates the Dampier Spirit vessel in Australian waters. Together, TAOH and Dampier Spirit LLC
form a tax consolidated group for Australian tax reporting purposes. The consolidated group is
taxed as a regular Australian company and is subject to Australian domestic tax law. The
consolidated group is taxed on its consolidated taxable income at the Australian corporate tax rate
of 30% and is required to file an Australian tax return.
Thin capitalization measures apply which limit the deductibility of interest expenditure incurred
by non-residents carrying on a business in Australia. The measures apply to the total debt of the
Australian operations of multinational groups such that interest deductions are denied to the
extent that borrowings exceed a safe harbor ratio or, alternatively, an arm’s length debt amount
(as so calculated under the provisions of the Australian income tax legislation). Broadly, the safe
harbor maximum amount of Australian debt for the Australian operations of a non-resident is 75.0%
of the accounting book value of the assets of the Australian operation after being reduced by
non-debt liabilities (calculated on an average basis).
Taxation of Interest Paid in Respect of the Australian Operations. Australia levies withholding tax
on interest paid to a non-resident where the interest relates to Australian operations. Therefore,
any interest paid to non-residents will be subject to Australian withholding tax. Withholding tax
is levied on payments of interest made to non residents, regardless of whether the interest
deduction is allowed pursuant to other provisions of the Australian tax legislation. The
withholding tax rate on interest is generally 10.0%, with the exception of certain interest
payments to U.S. and U.K. resident financial institutions, whereby the rate is reduced to 0.0%.
Item 4A. Unresolved Staff Comments
Not applicable.
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. The information below has been adjusted solely to
reflect the impact of the restatement on our financial results which is more fully described in
Note 18 of the notes to the consolidated financial statements contained in this report and to
include the section entitled “Restatement of Previously Issued Financial Statements” below and does
not reflect any subsequent information or events occurring after the date of the Original Filing or
update any disclosure herein to reflect the passage of time since the date of the Original Filing.
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Restatement of Previously Issued Financial Statements
Please read Note 18 of the notes to the consolidated financial statements for a more detailed
discussion of our restated results and the basis for them. The following table sets forth a
reconciliation of previously reported and restated net income (loss) for the periods shown (in
thousands of US dollars):
Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
We are an international provider of marine transportation and storage services to the offshore oil
industry. We were formed in August 2006 by Teekay Corporation, a leading provider of marine
services to the global oil and natural gas industries, to further develop its operations in the
offshore market. Our growth strategy focuses on expanding our fleet of shuttle tankers and FSO
units under long-term, fixed-rate time charters. We intend to continue our practice of acquiring
shuttle tankers and FSO units as needed for approved projects only after the long-term charters for
the projects have been awarded to us, rather than ordering vessels on a speculative basis. We
intend to follow this same practice in acquiring FPSO units, which produce and process oil offshore
in addition to providing storage and offloading capabilities. We seek to capitalize on
opportunities emerging from the global expansion of the offshore transportation, storage and
production sectors by selectively targeting long-term, fixed-rate time charters. We may enter into
joint ventures and partnerships with companies that may provide increased access to these
opportunities or may engage in vessel or business acquisitions. We plan to leverage the expertise,
relationships and reputation of Teekay Corporation and its affiliates to pursue these growth
opportunities in the offshore sectors and may consider other opportunities to which our competitive
strengths are well suited. We view our conventional tanker fleet primarily as a source of stable
cash flow as we seek to expand our offshore operations.
SIGNIFICANT DEVELOPMENTS
Our Initial Public Offering
On December 19, 2006, we completed our initial public offering of 8.05 million common units at a
price of $21.00 per unit. The net proceeds from the offering were $155.2 million. The offering
included 1.05 million common units sold to the underwriters in connection with the exercise of
their over-allotment option. We used the net proceeds to repay a $134.6 million promissory note to
Teekay Corporation and to redeem 1.05 million common units from Teekay Corporation for $20.6
million.
Prior to the closing of this offering, Teekay Corporation contributed entities owning and operating
a fleet of shuttle tankers, FSO units and Aframax conventional crude oil tankers to Teekay Offshore
Operating L.P. (or OPCO). Upon the closing of our initial public offering, we acquired from Teekay
Corporation a 26.0% interest in OPCO. Teekay Corporation owns the remaining 74.0% interest in OPCO.
Prior to June 30, 2007, our 26.0% interest in OPCO represented our only cash-generating asset. The
results prior to our initial public offering discussed below are the results of the entities that
were contributed to OPCO, which we refer to collectively as “Teekay Offshore Partners Predecessor”.
The entities contributed to OPCO do not own some of the assets and operations they owned during the
year ended December 31, 2007. References in this Item 5 — Management’s Discussion and Analysis of
Financial Condition and Results of Operations to “OPCO” refer to Teekay Offshore Partners
Predecessor for periods prior to December 19, 2006 and to OPCO and its subsidiaries for periods on
or after December 19, 2006.
Acquisition of Vessels in 2007
In July 2007, we directly acquired interests in two double-hull shuttle tankers and related
charters for a total cost of approximately $159.1 million, including assumption of debt of $93.7
million. These interests, which we acquired from Teekay Corporation, include a 100% interest in the
2000-built Navion Bergen and a 50% interest in the 2006-built Navion Gothenburg, together with
their respective 13-year, fixed-rate bareboat charters to a subsidiary of Petrobras Transporte
S.A., the shipping arm of Petroleo Brasileiro S.A.
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On October 1, 2007, we directly acquired one FSO unit, the Dampier Spirit, for a total cost of
approximately $30.3 million. The Dampier Spirit operates under a 7-year fixed-rate, time-charter
to Apache Corporation of Australia.
The Partnership accounts for the acquisition of vessels as business combinations between entities
under common control.
Potential Additional Shuttle Tanker, FSO and FPSO Projects
Pursuant to an omnibus agreement we entered into in connection with our initial public offering,
Teekay Corporation is obligated to offer us certain shuttle tankers, FSO units, and FPSO units it
may acquire in the future, provided the vessels are servicing contracts in excess of three years in
length.
Teekay Corporation has ordered four Aframax shuttle tanker newbuildings, which are scheduled to
deliver in 2010 and 2011, for a total delivered cost of approximately $416.9 million. It is
anticipated that these vessels will be offered to us and will be used to service either new
long-term, fixed-rate contracts Teekay Corporation may be awarded prior to delivery or OPCO’s
contracts-of-affreightment in the North Sea.
The omnibus agreement also obligates Teekay Corporation to offer to us (a) its interest in certain
future FPSO and FSO projects it may undertake through its 50%-owned joint venture with Teekay
Petrojarl ASA and (b) if Teekay Corporation obtains 100% ownership of Teekay Petrojarl ASA, the
existing FPSO units owned by Teekay Petrojarl ASA that are servicing contracts in excess of three
years in length. As at March 31, 2008, Teekay Corporation had a 65% ownership interest in Teekay
Petrojarl ASA.
Our Contracts of Affreightment and Charters
We generate revenues by charging customers for the transportation and storage of their crude oil
using our vessels. Historically, these services generally have been provided under the following
basic types of contractual relationships:
The table below illustrates the primary distinctions among these types of charters and contracts:
Important Financial and Operational Terms and Concepts
We use a variety of financial and operational terms and concepts. These include the following:
Voyage Revenues. Voyage revenues primarily include revenues from contracts of affreightment, time
charters, bareboat charters and voyage charters. Voyage revenues are affected by hire rates and the
number of days a vessel operates. Voyage revenues are also affected by the mix of business between
contracts of affreightment, time charters, bareboat charters and voyage charters. Hire rates for
voyage charters are more volatile, as they are typically tied to prevailing market rates at the
time of a voyage.
Voyage Expenses. 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. Voyage expenses are typically paid by the customer under time charters and bareboat
charters and by the shipowner under voyage charters and contracts of affreightment. When we pay
voyage expenses, they typically are added to the hire rates at an approximate cost.
Net Voyage Revenues. Net voyage revenues represent voyage revenues less voyage expenses incurred by
us. Because the amount of voyage expenses we incur for a particular charter depends upon the type
of charter, we use net voyage revenues to improve the comparability between periods of reported
revenues that are generated by the different types of charters. We principally use net voyage
revenues, a non-GAAP financial measure, because it provides more meaningful information to us about
the deployment of our vessels and their performance than voyage revenues, the most directly
comparable financial measure under accounting principles generally accepted in the United States
(or GAAP).
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Vessel Operating Expenses. Under all types of charters except for bareboat charters, the shipowner
is responsible for vessel operating expenses, which include crewing, repairs and maintenance,
insurance, stores, lube oils and communication expenses. The two largest components of our vessel
operating expenses are crews and repairs and maintenance.
Expenses for repairs and maintenance tend to fluctuate from period to period because most repairs
and maintenance typically occur during periodic drydockings. Please read “Drydocking” below. We
expect these expenses to increase as the fleet matures and expands, particularly to the extent we
acquire vessels directly through our wholly owned subsidiaries rather than through OPCO.
Time Charter Hire Expenses. Time charter hire expenses represent the cost to charter-in a vessel
for a fixed period of time.
Income from Vessel Operations. To assist us in evaluating operations by segment, we sometimes
analyze the income we receive from each segment after deducting operating expenses, but prior to
the deduction of interest expense, taxes, foreign currency exchange gains and losses and other
income and losses.
Drydocking. We must periodically drydock our shuttle tankers and conventional oil tankers for
inspection, repairs and maintenance and any modifications to comply with industry certification or
governmental requirements. We may drydock FSO units if we desire to qualify them for shipping
classification. Generally, each shuttle tanker and conventional oil tanker is drydocked every two
and a half to five years, depending upon the type of vessel and its age. We capitalize a
substantial portion of the costs incurred during drydocking and amortize those costs on a
straight-line basis from the completion of a drydocking to the estimated completion of the next
drydocking. We expense as incurred costs for routine repairs and maintenance performed during
drydocking that do not improve or extend the useful lives of the assets. The number of drydockings
undertaken in a given period and the nature of the work performed determine the level of drydocking
expenditures.
Depreciation and Amortization. Depreciation and amortization expense typically consists of:
Revenue Days. Revenue days are the total number of calendar days our vessels were in our possession
during a period, less the total number of off-hire days during the period associated with major
repairs, or drydockings. Consequently, revenue days represent the total number of days available
for the vessel to earn revenue. Idle days, which are days when the vessel is available to earn
revenue, yet is not employed, are included in revenue days. We use revenue days to show changes in
net voyage revenues between periods.
Calendar-Ship-Days. Calendar-ship-days are equal to the total number of calendar days that our
vessels were in our possession during a period. We use calendar-ship-days primarily to highlight
changes in vessel operating expenses, time charter hire expense and depreciation and amortization.
For periods prior to our initial public offering in December 2006, calendar-ship days are based on
OPCO’s owned and chartered-in fleet, excluding vessels owned by OPCO’s five 50% owned subsidiaries.
For periods on or after our initial public offering, calendar-ship days are based on our and OPCO’s
owned and chartered-in fleet, including vessels owned by our 50% owned subsidiaries, as OPCO
obtained control of five of these subsidiaries as of December 1, 2006, and we purchased a 50%
interest in one subsidiary in July 2007.
VOC Equipment. We assemble, install, operate and lease equipment that reduces volatile organic
compound emissions (or VOC equipment) during loading, transportation and storage of oil and oil
products. Leasing of the VOC equipment is accounted for as a direct financing lease, with lease
payments received being allocated between the net investment in the lease and other income using
the effective interest method so as to produce a constant periodic rate of return over the lease
term.
Items You Should Consider When Evaluating Our Results
You should consider the following factors when evaluating our historical financial performance and
assessing our future prospects:
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We manage our business and analyze and report our results of operations on the basis of three
business segments: the shuttle tanker segment, the conventional tanker segment and the FSO segment.
Year Ended December 31, 2007 versus Year Ended December 31, 2006
Shuttle Tanker Segment
Our shuttle tanker fleet consists of 38 vessels that operate under fixed-rate contracts of
affreightment, time charters and bareboat charters. Of the 38 shuttle tankers, 24 are owned by OPCO
(including 5 through 50% owned subsidiaries), 12 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 following table presents our shuttle tanker segment’s operating results for the years ended
December 31, 2007 and 2006, and compares its net voyage revenues (which is a non-GAAP financial
measure) for the years ended December 31, 2007 and 2006 to voyage revenues, the most directly
comparable GAAP financial measure, for the same periods. The following table also provides a
summary of the changes in calendar-ship-days by owned and chartered-in vessels for our shuttle
tanker segment:
The average size of our owned shuttle tanker fleet increased for 2007 compared to 2006, primarily
due to:
partially offset by
The average size of our chartered-in shuttle tanker fleet decreased in 2007 compared to 2006,
primarily due to:
Net Voyage Revenues. Net voyage revenues increased for 2007 from 2006, primarily due to:
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partially offset by
Vessel Operating Expenses. Vessel operating expenses increased for 2007 from 2006, primarily due
to:
partially offset by
Time-Charter Hire Expense. Time-charter hire expense decreased for 2007 from 2006, primarily due to
the decrease in the average number of vessels chartered-in.
Depreciation and Amortization. Depreciation and amortization expense increased for 2007 from 2006,
primarily due to:
partially offset by
Gain on sale of vessels equipment — net of writedowns. Gain on sale of vessels and equipment — net
of writedowns for 2006 was a net gain of $4.8 million, which was comprised primarily of:
partially offset by
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Conventional Tanker Segment
OPCO owns nine Aframax conventional crude oil tankers, all of which operate under fixed-rate time
charters with Teekay Corporation.
The following table presents our conventional tanker segment’s operating results for the years
ended December 31, 2007 and 2006, and compares its net voyage revenues (which is a non-GAAP
financial measure) for the years ended December 31, 2007 and 2006 to voyage revenues, the most
directly comparable GAAP financial measure, for the same periods. The following table also provides
a summary of the changes in calendar-ship-days for our conventional tanker segment:
The average size of the conventional crude oil tanker fleet decreased for 2007 compared to 2006,
primarily due to the 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 Voyage Revenues. Net voyage revenues increased for 2007 from 2006, primarily due to higher hire
rates earned by the nine owned Aframax conventional tankers on time charters with a subsidiary of
Teekay Corporation (please read “— Items You Should Consider When Evaluating Our Results — Our
financial results of operations reflect different time charter terms for OPCO’s nine conventional
tankers”).
Vessel Operating Expenses. Vessel operating expenses increased for 2007 from 2006, primarily due to
an increase in salaries for crew and officers as a result of general wage escalations and an
increase in services and repairs and maintenance. In addition, one of the nine owned Aframax
conventional tankers was employed by Teekay Corporation during 2006 on a short-term
bareboat-charter under which the customer was responsible for vessel operating expenses, and was
employed during 2007 on a time-charter contract under which we are responsible for vessel operating
expenses.
Depreciation and Amortization. Depreciation and amortization expense increased slightly for 2007
from 2006, primarily due to an increase from the amortization of drydock costs incurred during
2007, partially offset by a $1.3 million decrease due to the transfer of the Navion Saga to the FSO
segment in early May 2007.
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FSO Segment
We own five FSO units that operate under fixed-rate time charters or fixed-rate bareboat charters.
FSO units provide an on-site storage solution to oil field installations that have no oil storage
facilities or that require supplemental storage.
The following table presents our FSO segment’s operating results for the years ended December 31,
2007 and 2006, and compares its net voyage revenues (which is a non-GAAP financial measure) for the
years ended December 31, 2007 and 2006 to voyage revenues, the most directly comparable GAAP
financial measure, for the same periods. The following table also provides a summary of the changes
in calendar-ship-days for our FSO segment:
During 2006, we were deemed to have operated four FSO units, including the Dampier Spirit as a
result of the inclusion of the Dropdown Predecessor, which we acquired from Teekay Corporation in
October 2007. The Dampier Spirit has been included in our results as if it was acquired on March
15, 1998, when it completed its conversion and began operations as a FSO unit 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.
A fifth FSO unit, the Navion Saga, was included as a conventional crude oil tanker within the
conventional tanker segment until May 2007, when its conversion to an FSO unit was completed and it
commenced operating under a three-year FSO time charter contract. The change in operating results
for the FSO segment from 2006 to 2007 was primarily due to the inclusion of the Navion Saga.
Other Operating Results
General and Administrative Expenses. General and administrative expenses decreased slightly to
$62.4 million for 2007, from $65.2 million for 2006, primarily due to:
partially offset by
Interest Expense. Interest expense increased to $126.3 million for 2007, from $66.1 million for
2006, primarily due to:
partially offset by
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We have not designated our interest rate swaps as hedges for accounting purposes, and as such, the
unrealized changes in fair value of the swaps are reflected in interest expense in our consolidated
statements of income (loss).
Equity Income From Joint Ventures. Equity income from OPCO’s 50% joint ventures was $6.3 million
for 2006. On December 1, 2006, the operating agreements for these joint ventures were amended,
resulting in OPCO obtaining control of these entities and, consequently, OPCO has consolidated
these entities since December 1, 2006.
Foreign Currency Exchange Losses. Foreign currency exchange loss was $11.7 million for 2007
compared to a $66.3 million loss for 2006. In 2006, the foreign currency exchange loss of $66.3
million was primarily due to the revaluation of Norwegian Kroner-denominated advances from
affiliates prior to our initial public offering. These foreign currency exchange losses and gains,
substantially all of which were unrealized, are due primarily to the relevant period-end
revaluation of Norwegian Kroner-denominated monetary assets and liabilities for financial reporting
purposes. Gains reflect a stronger U.S. Dollar against the Kroner on the date of revaluation or
settlement compared to the rate in effect at the beginning of the period. Losses reflect a weaker
U.S. Dollar against the Kroner on the date of revaluation or settlement compared to the rate in
effect at the beginning of the period.
Income Tax Recovery (Expense). Income tax recovery was $10.5 million for 2007 compared to an income
tax expense of $3.4 million for 2006. The $13.9 million increase to income tax recoveries was
primarily due to deferred income tax recoveries resulting from the financial restructuring of our
Norwegian shuttle tanker operations during 2006, partially offset by an increase in deferred income
tax expense relating to unrealized foreign exchange translation gains.
Other Income. Other income for 2007 and 2006 was $10.4 million and $8.7 million, respectively,
which was primarily comprised of leasing income from our VOC equipment.
Net Loss from Discontinued Operations. On July 1, 2006, OPCO sold to Teekay Corporation Navion
Shipping Ltd., which chartered-in approximately 25 conventional tankers since 2004 and subsequently
time-chartered the vessels back to a subsidiary of Teekay Corporation at charter rates that
provided for a 1.25% fixed profit margin (please read “— Items You Should Consider When Evaluating
Our Results — On July 1, 2006, OPCO transferred certain assets to Teekay Corporation that are
included in results of operations prior to that date”). These operations prior to July 1, 2006 were
reported within the conventional tanker segment. Net loss from discontinued operations was $10.5
million for 2006.
Year Ended December 31, 2006 versus Year Ended December 31, 2005
Shuttle Tanker Segment
The following table presents our shuttle tanker segment’s operating results for the years ended
December 31, 2006 and 2005, and compares its net voyage revenues (which is a non-GAAP financial
measure) for the years ended December 31, 2006 and 2005 to voyage revenues, the most directly
comparable GAAP financial measure, for the same periods. The following table also provides a
summary of the changes in calendar-ship-days by owned and chartered-in vessels for our shuttle
tanker segment:
The average size of OPCO’s owned shuttle tanker fleet decreased in 2006 compared to 2005, primarily
the result of:
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The average size of OPCO’s chartered-in shuttle tanker fleet decreased in 2006 compared to 2005,
primarily the result of:
partially offset by
In addition, during March 2005 OPCO sold and leased back an older shuttle tanker. This had the
effect of increasing the average number of chartered-in vessels and decreasing the average number
of owned vessels during 2006 compared to 2005.
Net Voyage Revenues. Net voyage revenues decreased slightly for 2006 from 2005, primarily due to:
partially offset by
Vessel Operating Expenses. Vessel operating expenses increased for 2006 from 2005, primarily due
to:
partially offset by
Time-Charter Hire Expense. Time-charter hire expense decreased for 2006 from 2005, primarily due to
the decrease in the average number of vessels chartered-in;
Depreciation and Amortization. Depreciation and amortization expense decreased for 2006 from 2005,
primarily due to:
partially offset by
Gain on sale of vessels and equipment — net of writedowns. Gain on sale of vessels and equipment -
net of writedowns for 2006 was a net gain of $4.8 million, which was comprised primarily of:
partially offset by
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Gain on sale of vessels — net of writedowns for 2005 was a net loss of $2.8 million, which was
comprised of:
partially offset by
Restructuring Charges. Restructuring charges of $1.0 million in 2005 relate to the closure of our
Sandefjord, Norway office. We incurred no restructuring charges in 2006 in the shuttle tanker
segment.
Conventional Tanker Segment
The following table presents our conventional tanker segment’s operating results for the year ended
December 31, 2006 and 2005, and compares its net voyage revenues (which is a non-GAAP financial
measure) for the years ended December 31, 2006 and 2005 to voyage revenues, the most directly
comparable GAAP financial measure, for the same periods. The following table also provides a
summary of the changes in calendar-ship-days for our conventional tanker segment:
Net Voyage Revenues. Net voyage revenues increased for 2006 from 2005, primarily due to an increase
in the hire rate earned by the nine owned Aframax conventional tankers on time charters with a
subsidiary of Teekay Corporation (please read “— Items You Should Consider When Evaluating Our
Results — Our financial results of operations reflect different time charter terms for OPCO’s nine
conventional tankers”).
Vessel Operating Expenses. Vessel operating expenses decreased for 2006 from 2005, primarily due to
a $2.3 million decrease relating to one of our conventional tankers, which was on a time-charter
contract during 2005 and the first half of 2006 and on a bareboat contract during the second half
of 2006 with a subsidiary of Teekay Corporation.
Depreciation and Amortization. Depreciation and amortization expense increased for 2006 from 2005,
primarily due to an increase of $0.9 million in the amortization of drydock expenditures incurred
during 2006 and 2005.
Restructuring Charges. Restructuring charges of $0.8 million in 2006 relate to the relocation of
certain operational functions to Singapore.
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FSO Segment
The following table presents our FSO segment’s operating results for the year ended December 31,
2006 and 2005, and compares its net voyage revenues (which is a non-GAAP financial measure) for the
years ended December 31, 2006 and 2005 to voyage revenues, the most directly comparable GAAP
financial measure, for the same periods. The following table also provides a summary of the changes
in calendar-ship-days for our FSO segment:
During 2006 and 2005, OPCO was deemed to operate four FSO units, including the Dampier Spirit as a
result of the inclusion of the Dropdown Predecessor, which we acquired from Teekay Corporation in
October 2007. Net voyage revenues decreased for 2006 from 2005, primarily due to a scheduled
drydocking of one of our FSO units during 2006 and due to the Dampier Spirit entering into a new
time-charter contract in April 2006 at a daily rate less than that earned in 2005. Vessel operating
expenses and depreciation and amortization in 2006 remained substantially unchanged from 2005.
Other Operating Results
General and Administrative Expenses. General and administrative expenses increased to $65.2 million
for 2006, from $56.7 million for 2005, primarily due to an increase in costs associated with our
long-term incentive program for management.
Interest Expense. Interest expense increased to $66.1 million for 2006, from $40.0 million for
2005, primarily due to:
partially offset by
We have not designated our interest rate swaps as hedges for accounting purposes, and as such, the
unrealized changes in fair value of the swaps are reflected in interest expense in our consolidated
statements of income (loss).
Interest Income. Interest income increased to $5.4 million for 2006, from $4.6 million for 2005,
primarily due to an increase in interest rates.
Equity Income From Joint Ventures. Equity income from joint ventures increased to $6.3 million for
2006, from $6.0 million for 2005, primarily due to a decrease in repair and maintenance activity on
the shuttle tankers owned by the joint ventures, partially offset by the Consolidation of 50%-Owned
Subsidiaries.
Foreign Currency Exchange Gains (Losses). Foreign currency exchange losses were $66.3 million for
2006, compared to foreign currency exchange gains of $34.2 million for 2005. Historically, OPCO’s
foreign currency exchange gains and losses have been due primarily to period-end revaluations of
Norwegian Kroner-denominated advances from affiliates. In 2006, the foreign currency exchange loss
of $66.3 million was primarily due to the revaluation of Norwegian Kroner-denominated advances from
affiliates prior to our initial public offering. Gains reflect a stronger U.S. Dollar against the
Kroner on the date of revaluation or settlement compared to the rate in effect at the beginning of
the period. Losses reflect a weaker U.S. Dollar against the Kroner on the date of revaluation or
settlement compared to the rate in effect at the beginning of the period. Please
read “— Items You Should Consider When Evaluating Our Results — Our financial results of operations
are affected by fluctuations in currency exchange rates”.
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Income Tax Recovery (Expense). Income tax expense was $3.4 million for 2006, compared to an income
tax recovery of $12.4 million for 2005. This $15.8 million increase in tax expense was primarily
due to a $25.1 million increase in deferred income tax expense relating to unrealized foreign
exchange translation gains (losses) for 2006 and 2005, partially offset by a $4.7 million increase
in deferred income tax recovery from the financial restructuring of our Norwegian shuttle tanker
operations during 2006.
Other Income. Other income for 2006 was $8.7 million, which was primarily comprised of
$11.4 million of leasing income from the VOC equipment, partially offset by a $2.8 million
write-off of unamortized capitalized loan costs from one of OPCO’s revolving credit facilities that
was prepaid and cancelled prior to our initial public offering.
Other income for 2005 was $9.1 million, which was primarily comprised of $11.0 million of leasing
income from the VOC equipment, partially offset by $1.9 million primarily relating to fees for
early termination of certain ship management contracts.
Net Loss from Discontinued Operations. On July 1, 2006, OPCO sold to Teekay Corporation Navion
Shipping Ltd., which chartered-in approximately 25 conventional tankers since 2004 and subsequently
time-chartered the vessels back to a subsidiary of Teekay Corporation at charter rates that
provided for a 1.25% fixed profit margin (please read “— Items You Should Consider When Evaluating
Our Results — On July 1, 2006, OPCO transferred certain assets to Teekay Corporation that are
included in results of operations prior to that date”). These operations prior to July 1, 2006 were
reported within the conventional tanker segment. Net loss from discontinued operations was $10.7
million and $19.3 million for 2006 and 2005, respectively.
Liquidity and Capital Resources
Liquidity and Cash Needs
As at December 31, 2007, our total cash and cash equivalents were $121.2 million, compared to
$114.0 million at December 31, 2006. Our total liquidity, including cash, cash equivalents and
undrawn long-term borrowings, was $286.7 million as at December 31, 2007, compared to
$429.0 million as at December 31, 2006. The decrease in liquidity was primarily the result of our
purchase of the Navion Bergen LLC and Navion Gothenburg LLC in July 2007 and the Dampier Spirit LLC
in October 2007, the payment of cash distributions by us and OPCO, and expenditures for vessels and
equipment, partially offset by cash generated by our operating activities during 2007.
In addition to distributions on our equity interests, our primary short-term liquidity needs are to
fund general working capital requirements and drydocking expenditures, while our long-term
liquidity needs primarily relate to expansion and investment capital expenditures and maintenance
capital expenditures and debt repayment. Expansion capital expenditures are primarily for the
purchase or construction of vessels to the extent the expenditures increase the operating capacity
of or revenue generated by our fleet, while maintenance capital expenditures primarily consist of
drydocking expenditures and expenditures to replace vessels in order to maintain the operating
capacity of or revenue generated by our fleet. Investment capital expenditures are those capital
expenditures that are neither maintenance capital expenditures nor expansion capital expenditures.
We anticipate that our primary sources of funds for our short-term liquidity needs will be cash
flows from operations. We believe that cash flows from operations will be sufficient to meet our
existing liquidity needs for at least the next 12 months. Generally, our long-term sources of funds
are from cash from operations, long-term bank borrowings and other debt or equity financings, or a
combination thereof. Because we and OPCO distribute all of our and its available cash, we expect
that we and OPCO will rely upon external financing sources, including bank borrowings and the
issuance of debt and equity securities, to fund acquisitions and expansion and investment capital
expenditures, including opportunities we may pursue under the omnibus agreement with Teekay
Corporation and other of its affiliates.
Cash Flows. The following table summarizes our sources and uses of cash for the periods presented:
Operating Cash Flows. Net cash flow from operating activities decreased to $45.8 million in 2007,
from $162.2 million in 2006, primarily reflecting a $73.9 million increase in cash distributions
paid by OPCO to its non-controlling interest owners, a $17.8 million increase in expenditures for
drydocking, and an increase in interest expense resulting from the revolving credit facility we
entered into during the fourth quarter of 2006 as well as from the increase in debt due to our
acquisition of the Navion Bergen and the Dampier Spirit and our 50% interest in the Navion
Gothenburg, partially offset by an increase in cash flows from operations due to an increase in the
hire rate earned by our nine conventional tankers, which are on time charters with a subsidiary of
Teekay Corporation and the inclusion of the results of the Navion Bergen and Navion Gothenburg
since April and July 2007, respectively. Net cash flow from operating activities depends upon the
timing and amount of drydocking expenditures, repairs and maintenance activity, vessel additions
and dispositions, foreign currency rates, changes in interest rates, fluctuations in working
capital balances and spot market hire rates. The number of vessel drydockings tends to be uneven
between years.
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Income Tax Recovery (Expense). Income tax expense was $3.4 million for 2006, compared to an income
tax recovery of $12.4 million for 2005. This $15.8 million increase in tax expense was primarily
due to a $25.1 million increase in deferred income tax expense relating to unrealized foreign
exchange translation gains (losses) for 2006 and 2005, partially offset by a $4.7 million increase
in deferred income tax recovery from the financial restructuring of our Norwegian shuttle tanker
operations during 2006.
Other Income. Other income for 2006 was $8.7 million, which was primarily comprised of $11.4
million of leasing income from the VOC equipment, partially offset by a $2.8 million write-off of
unamortized capitalized loan costs from one of OPCO’s revolving credit facilities that was prepaid
and cancelled prior to our initial public offering.
Other income for 2005 was $9.1 million, which was primarily comprised of $11.0 million of leasing
income from the VOC equipment, partially offset by $1.9 million primarily relating to fees for
early termination of certain ship management contracts.
Net Loss from Discontinued Operations. On July 1, 2006, OPCO sold to Teekay Corporation Navion
Shipping Ltd., which chartered-in approximately 25 conventional tankers since 2004 and subsequently
time-chartered the vessels back to a subsidiary of Teekay Corporation at charter rates that
provided for a 1.25% fixed profit margin (please read “— Items You Should Consider When Evaluating
Our Results — On July 1, 2006, OPCO transferred certain assets to Teekay Corporation that are
included in results of operations prior to that date”). These operations prior to July 1, 2006 were
reported within the conventional tanker segment. Net loss from discontinued operations was $10.7
million and $19.3 million for 2006 and 2005, respectively.
Liquidity and Capital Resources
Liquidity and Cash Needs
As at December 31, 2007, our total cash and cash equivalents were $121.2 million, compared to
$114.0 million at December 31, 2006. Our total liquidity, including cash, cash equivalents and
undrawn long-term borrowings, was $286.7 million as at December 31, 2007, compared to $429.0
million as at December 31, 2006. The decrease in liquidity was primarily the result of our purchase
of the Navion Bergen LLC and Navion Gothenburg LLC in July 2007 and the Dampier Spirit LLC in
October 2007, the payment of cash distributions by us and OPCO, and expenditures for vessels and
equipment, partially offset by cash generated by our operating activities during 2007.
In addition to distributions on our equity interests, our primary short-term liquidity needs are to
fund general working capital requirements and drydocking expenditures, while our long-term
liquidity needs primarily relate to expansion and investment capital expenditures and maintenance
capital expenditures and debt repayment. Expansion capital expenditures are primarily for the
purchase or construction of vessels to the extent the expenditures increase the operating capacity
of or revenue generated by our fleet, while maintenance capital expenditures primarily consist of
drydocking expenditures and expenditures to replace vessels in order to maintain the operating
capacity of or revenue generated by our fleet. Investment capital expenditures are those capital
expenditures that are neither maintenance capital expenditures nor expansion capital expenditures.
We anticipate that our primary sources of funds for our short-term liquidity needs will be cash
flows from operations. We believe that cash flows from operations will be sufficient to meet our
existing liquidity needs for at least the next 12 months. Generally, our long-term sources of funds
are from cash from operations, long-term bank borrowings and other debt or equity financings, or a
combination thereof. Because we and OPCO distribute all of our and its available cash, we expect
that we and OPCO will rely upon external financing sources, including bank borrowings and the
issuance of debt and equity securities, to fund acquisitions and expansion and investment capital
expenditures, including opportunities we may pursue under the omnibus agreement with Teekay
Corporation and other of its affiliates.
Cash Flows. The following table summarizes our sources and uses of cash for the periods presented:
Operating Cash Flows. Net cash flow from operating activities decreased to $45.8 million in 2007,
from $162.2 million in 2006, primarily reflecting a $73.9 million increase in cash distributions
paid by OPCO to its non-controlling interest owners, a $17.8 million increase in expenditures for
drydocking, and an increase in interest expense resulting from the revolving credit facility we
entered into during the fourth quarter of 2006 as well as from the increase in debt due to our
acquisition of the Navion Bergen and the Dampier Spirit and our 50% interest in the Navion
Gothenburg, partially offset by an increase in cash flows from operations due to an increase in the
hire rate earned by our nine conventional tankers, which are on time charters with a subsidiary of
Teekay Corporation and the inclusion of the results of the Navion Bergen and Navion Gothenburg
since April and July 2007, respectively. Net cash flow from operating activities depends upon the
timing and amount of drydocking expenditures, repairs and maintenance activity, vessel additions
and dispositions, foreign currency rates, changes in interest rates, fluctuations in working
capital balances and spot market hire rates. The number of vessel drydockings tends to be uneven
between years.
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Financing Cash Flows. Prior to our initial public offering in December 2006, advances under
revolving credit facilities, advances from Teekay Corporation and net cash flow from operations
were used to finance OPCO’s investments in vessels and equipment and direct financing leases. In
addition, advances under revolving credit facilities were loaned to Teekay Corporation to
temporarily finance vessel construction and for other general corporate purposes. In effect, these
revolving credit facilities previously were used as corporate-related debt of Teekay Corporation.
Net
proceeds from long-term debt, prepayments of long-term debt and net advances to affiliates during
the periods prior to our initial public offering reflect this use. In connection with our initial
public offering, OPCO settled its advances from affiliates.
Scheduled debt repayments were $17.3 million during 2007 compared to $119.9 million during 2006.
Net proceeds from long-term debt of $298.4 million were used primarily to make debt prepayments of
$152.0 million during 2007 and to finance the acquisition of the Navion Bergen and the Dampier
Spirit and our 50% interest in the Navion Gothenburg, which is explained in more detail below. The
amount of the distribution paid to Teekay Corporation relating to the purchase of Navion Bergen
L.L.C., Dampier Spirit L.L.C. and a 50% interest in Navion Gothenburg L.L.C. was $85.4 million and
is reflected as a financing cash flow.
Cash distributions paid during 2007 totaled $22.7 million. Subsequent to December 31, 2007, cash
distributions were declared and paid on February 14, 2008 for the three months ended December 31,
2007 and totaled $8.0 million.
Investing Cash Flows. During 2007, net cash used by investing activities includes the $10.2 million
acquisition from Teekay Corporation of a 50% interest in Navion Gothenburg L.L.C. Since this
ownership interest was purchased from Teekay Corporation, the transaction was between entities
under common control, and has been accounted for at historical cost. Therefore the amount reflected
as cash used in investing activities for this purchase represents the historical cost to Teekay
Corporation. Additionally, net cash used in investing activities includes expenditures of
$21.0 million and $31.1 million during 2007 and 2006, respectively, for vessels and equipment, and
we paid $8.4 million and $13.3 million, respectively, relating to investments in direct financing
leases. During 2007 and 2006, we received $21.7 million and $19.3 million, respectively, in
scheduled repayments from the leasing of our VOC equipment. During 2007 and 2006, we received $3.2
million and $61.7 million, respectively, in proceeds from the sale of certain offshore equipment
and two older shuttle tankers, respectively.
Credit Facilities
As at December 31, 2007, our total debt was $1,517.5 million, compared to $1,303.4 million as at
December 31, 2006. As at December 31, 2007, we had three revolving credit facilities available,
which, as at such date, provided for borrowings of up to $1,371.3 million, of which $165.5 million
was undrawn. As at December 31, 2007, each of our six 50% owned subsidiaries had an outstanding
term loan, which, in aggregate, totaled $311.7 million. The term loans of our 50% owned
subsidiaries reduce in semi-annual payments with varying maturities through 2017. Please read Item
18 — Financial Statements: Note 6 — Long-Term Debt.
Our three revolving credit facilities have the following terms:
Two of the revolving credit facilities contain covenants that require OPCO to maintain the greater
of a minimum liquidity (cash, cash equivalents and undrawn committed revolving credit lines with at
least six months of maturity) of at least $75.0 million and 5.0% of OPCO’s total consolidated debt.
The remaining revolving credit facility is guaranteed by Teekay Corporation and contains covenants
that require Teekay Corporation to maintain the greater of a minimum liquidity of at least
$50.0 million and 5.0% of Teekay Corporation’s total debt which is recourse to Teekay Corporation.
As at December 31, 2007, we, OPCO and Teekay Corporation were in compliance with all of our
covenants under these credit facilities.
The term loans of our 50% owned subsidiaries are collateralized by first-priority mortgages on the
vessels to which the loans relate, together with other related collateral. As at December 31, 2007,
we had guaranteed $103.8 million of these term loans, which represents our 50% share of the
outstanding vessel mortgage debt in five of these 50% owned subsidiaries. The other owner and
Teekay Corporation have guaranteed the remaining $207.9 million.
Interest payments on the revolving credit facilities and term loans are based on LIBOR plus a
margin. At December 31, 2007 and December 31, 2006, the margins ranged between 0.45% and 0.80%.
All of our vessel financings are collateralized by the applicable vessels. The term loans used to
finance the six 50% owned subsidiaries and our three revolving credit facility agreements contain
typical covenants and other restrictions, including those that restrict the relevant subsidiaries
from:
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We conduct our funding and treasury activities within corporate policies designed to minimize
borrowing costs and maximize investment returns while maintaining the safety of the funds and
appropriate levels of liquidity for our purposes. We hold cash and cash equivalents primarily in
U.S. Dollars.
Contractual Obligations and Contingencies
The following table summarizes our long-term contractual obligations as at December 31, 2007:
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have, a current or
future material effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Estimates
We prepare our consolidated financial statements in accordance with GAAP, which require us to make
estimates in the application of our accounting policies based on our best assumptions, judgments
and opinions. Management of our general partner reviews our accounting policies, assumptions,
estimates and judgments on a regular basis to ensure that our consolidated financial statements are
presented fairly and in accordance with GAAP. However, because future events and their effects
cannot be determined with certainty, actual results will differ from our assumptions and estimates,
and such differences could be material. Accounting estimates and assumptions discussed in this
section are those that we consider to be the most critical to an understanding of our financial
statements because they inherently involve significant judgments and uncertainties. For a further
description of our material accounting policies, please read Item 18 — Financial Statements: Note 1
— Summary of Significant Accounting Policies.
Revenue Recognition
Description. We generate a majority of our revenues from voyages servicing contracts of
affreightment and time charters and, to a lesser extent, bareboat charters and spot voyages. Within
the shipping industry, the two methods used to account for voyage revenues and expenses are the
percentage of completion and the completed voyage methods. Most shipping companies, including us,
use the percentage of completion method. For each method, voyages may be calculated on either a
load-to-load or discharge-to-discharge basis. In other words, revenues are recognized ratably
either from the beginning of when product is loaded for one voyage to when it is loaded for another
voyage, or from when product is discharged (unloaded) at the end of one voyage to when it is
discharged after the next voyage. We recognize revenues from time charters and bareboat charters
daily over the term of the charter as the applicable vessel operates under the charter. We do not
recognize revenues during days that the vessel is off-hire.
Judgments and Uncertainties. In applying the percentage of completion method, we believe that in
most cases the discharge-to-discharge basis of calculating voyages more accurately reflects voyage
results than the load-to-load basis. At the time of cargo discharge, we generally have information
about the next load port and expected discharge port, whereas at the time of loading we are
normally less certain what the next load port will be. We use this method of revenue recognition
for all spot voyages. In the case of our shuttle tankers servicing contracts of affreightment, a
voyage commences with tendering of notice of readiness at a field, within the agreed lifting range,
and ends with tendering of notice of readiness at a field for the next lifting. In all cases we do
not begin recognizing voyage revenue for any of our vessels until a charter has been agreed to by
the customer and us, even if the vessel has discharged its cargo and is sailing to the anticipated
load port on its next voyage.
Effect if Actual Results Differ from Assumptions. Our revenues could be overstated or understated
for any given period to the extent actual results are not consistent with our estimates in applying
the percentage of completion method.
Vessel Lives and Impairment
Description. The carrying value of each of our vessels represents its original cost at the time of
delivery or purchase less depreciation or impairment charges. We depreciate our vessels on a
straight-line basis over each vessel’s estimated useful life, less an estimated residual value. The
carrying values of our vessels may not represent their fair market value at any point in time
because the market prices of second-hand vessels tend to fluctuate with changes in charter rates
and the cost of newbuildings. Both charter rates and newbuilding costs tend to be cyclical in
nature. We review vessels and equipment for impairment whenever events or changes in circumstances
indicate the carrying amount of an asset may not be recoverable. We measure the recoverability of
an asset by comparing its carrying amount to future undiscounted cash flows that the asset is
expected to generate over its remaining useful life.
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Judgments and Uncertainties. Depreciation is calculated using an estimated useful life of 25 years
for our vessels, commencing the date the vessel was originally delivered from the shipyard, or a
shorter period if regulations prevent us from operating the vessels for 25 years. In the shipping
industry, the use of a 25-year vessel life has become the prevailing standard. However, the actual
life of a vessel may be different, with a shorter life resulting in an increase in the quarterly
depreciation and potentially resulting in an impairment loss. The estimates and assumptions
regarding expected cash flows require considerable judgment and are based upon existing contracts,
historical experience, financial forecasts and industry trends and conditions. We are not aware of
any indicators of impairments nor any regulatory changes or environmental liabilities that we
anticipate will have a material impact on our current or future operations.
Effect if Actual Results Differ from Assumptions. If we consider a vessel or equipment to be
impaired, we recognize a loss in an amount equal to the excess of the carrying value of the asset
over its fair market value. The new lower cost basis will result in a lower annual depreciation
expense than before the vessel impairment.
Drydocking
Description. We drydock each of our shuttle tankers and conventional oil tankers periodically for
inspection, repairs and maintenance and for any modifications to comply with industry certification
or governmental requirements. We may drydock FSO units if we desire to qualify them for shipping
classification. We capitalize a substantial portion of the costs we incur during drydocking and
amortize those costs on a straight-line basis from the completion of the drydocking to the
estimated completion of the next drydocking. We expense as incurred costs for routine repairs and
maintenance performed during drydocking that do not improve or extend the useful lives of the
assets.
Judgments and Uncertainties. Amortization of capitalized drydock expenditures requires us to
estimate the period of the next drydocking. While we typically drydock each shuttle tanker and
conventional oil tanker every two and a half to five years, we may drydock the vessels at an
earlier date.
Effect if Actual Results Differ from Assumptions. A change in our estimate of the next drydock date
will have a direct effect on our annual amortization of drydocking expenditures.
Goodwill and Intangible Assets
Description. We allocate the cost of acquired companies to the identifiable tangible and intangible
assets and liabilities acquired, with the remaining amount being classified as goodwill. Certain
intangible assets, such as time charters, are amortized over time. Our future operating performance
will be affected by the amortization of intangible assets and potential impairment charges related
to goodwill. Accordingly, the allocation of purchase price to intangible assets and goodwill may
significantly affect our future operating results. Goodwill is not amortized, but reviewed for
impairment annually, or more frequently if impairment indicators arise.
Judgments and Uncertainties. The allocation of the purchase price of acquired companies to
intangible assets and goodwill requires management to make significant estimates and assumptions,
including estimates of future cash flows expected to be generated by the acquired assets and the
appropriate discount rate to value these cash flows. In addition, the process of evaluating the
potential impairment of goodwill and intangible assets is highly subjective and requires
significant judgment at many points during the analysis. The fair value of our reporting units was
estimated based on discounted expected future cash flows using a weighted-average cost of capital
rate. The estimates and assumptions regarding expected cash flows and the appropriate discount
rates require considerable judgment and are based upon existing contracts, historical experience,
financial forecasts and industry trends and conditions.
Effect if Actual Results Differ from Assumptions. In the fourth quarter of 2007, we completed our
annual impairment testing of goodwill using the methodology described above, and determined there
was no impairment. If actual results are not consistent with assumptions and estimates, we may be
exposed to a goodwill impairment charge. As at December 31, 2007 and 2006, the net book value of
goodwill was $127.1 million.
Amortization expense of intangible assets for 2007 and 2006 was $11.1 million and $12.1 million,
respectively. If actual results are not consistent with our estimates used to value our intangible
assets, we may be exposed to an impairment charge and a decrease in the annual amortization expense
of our intangible assets. As at December 31, 2007 and 2006, the net book value of intangible assets
was $55.4 million and $66.4 million, respectively.
Valuation of Derivative Financial Instruments
Description. Our risk management policies permit the use of derivative financial instruments to
manage interest rate and foreign currency fluctuation risks. Changes in fair value of derivative
financial instruments that are not designated as cash flow hedges for accounting purposes are
recognized in earnings. Changes in fair value of derivative financial instruments that are
designated as cash flow hedges for accounting purposes are recorded in other comprehensive income
and are reclassified to earnings when the hedged transaction is reflected in earnings. Ineffective
portions of the hedges are recognized in earnings as they occur. During the life of the hedge, we
formally assess whether each derivative designated as a hedging instrument continues to be highly
effective in offsetting changes in the fair value or cash flows of hedged items. If it is
determined that a hedge has ceased to be highly effective for accounting purposes, we will
discontinue hedge accounting prospectively.
Judgments and Uncertainties. The fair value of our derivative financial instruments is the
estimated amount that we would receive or pay to terminate the agreements in an arm’s length
transaction under normal business conditions at the reporting date, taking into account current
interest rates, foreign exchange rates and the current credit worthiness of ourselves and the
counterparties. Inputs used to determine the fair value of our derivative instruments are
observable either directly or indirectly in active markets.
Effect if Actual Results Differ from Assumptions. If our estimates of fair value are inaccurate,
this could result in a material adjustment to the carrying amount of derivative asset or liability
and consequently the change in fair value for the applicable period that would have been recognized
in earnings or other comprehensive income.
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Recent Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board (or FASB) ratified a consensus opinion
reached by the Emerging Issues Task Force (or EITF) on EITF Issue No. 07-4, Application of the
Two-Class Method under FASB Statement No. 128, Earnings per Share to Master Limited Partnerships
(or EITF Issue No. 07-4). The guidance in EITF Issue No. 07-4 requires incentive distribution
rights in a master limited partnership,
such as ourselves, to be treated as participating securities for the purposes of computing earnings
per share and provides guidance on how earnings should be allocated to the various partnership
interests. EITF Issue No. 07-4 is effective for fiscal years beginning after December 15, 2008. We
are currently evaluating the potential impact, if any, of the
adoption of EITF Issue No. 07-4 on our
consolidated results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 141(R): Business Combinations (or SFAS 141(R)), which
replaces SFAS No. 141, Business Combinations. This statement establishes principles and
requirements for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree
and the goodwill acquired. SFAS 141(R) also establishes disclosure requirements to enable the
evaluation of the nature and financial effects of the business combination. SFAS 141(R) is
effective for fiscal years beginning after December 15, 2008. We are currently evaluating the
potential impact, if any, of the adoption of SFAS 141(R) on our consolidated results of operations
and financial condition.
In December 2007, the FASB issued SFAS No. 160: Non-controlling Interests in Consolidated Financial
Statements, an Amendment of Accounting Research Bulletin No. 51 (or SFAS 160). This statement
establishes accounting and reporting standards for ownership interests in subsidiaries held by
parties other than the parent, the amount of consolidated net income attributable to the parent and
to the non-controlling interest, changes in a parent’s ownership interest, and the valuation of
retained non-controlling equity investments when a subsidiary is deconsolidated. SFAS 160 also
establishes disclosure requirements that clearly identify and distinguish between the interests of
the parent and the interests of the non-controlling owners. SFAS 160 is effective for fiscal years
beginning after December 15, 2008. We are currently evaluating the potential impact, if any, of the
adoption of SFAS 160 on our consolidated results of operations and financial condition.
In February 2007, the FASB issued SFAS No. 159: The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of SFAS No. 115 (or SFAS 159). This statement permits
entities to choose to measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. SFAS 159 is effective for fiscal years
beginning after November 15, 2007.
In September 2006, the FASB issued SFAS No. 157: Fair Value Measurements (or SFAS 157). This
statement defines fair value, establishes a framework for measuring fair value in GAAP, and expands
disclosures about fair value measurements. This statement applies under other accounting
pronouncements that require or permit fair value measurements, and accordingly, does not require
any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November
15, 2007. In February 2008, the FASB delayed for one year the effective date of adoption with
respect to certain non-financial assets and liabilities.
Item 6. Directors, Senior Management and Employees
The information included in Item 6 in the Original Filing has not been updated
for information or
events occurring after the date of the Original Filing and has not
been updated to reflect the passage of time since the date of the Original Filing.
A. Directors and Senior Management
Management of Teekay Offshore Partners L.P.
Teekay Offshore GP L.L.C., our general partner, manages our operations and activities. Unitholders
are not entitled to elect the directors of our general partner or directly or indirectly
participate in our management or operation.
Our general partner owes a fiduciary duty to our unitholders. Our general partner is liable, as
general partner, for all of our debts (to the extent not paid from our assets), except for
indebtedness or other obligations that are expressly non-recourse to it. Whenever possible, our
general partner intends to cause us to incur indebtedness or other obligations that are
non-recourse to it.
The directors of our general partner oversee our operations. The day-to-day affairs of our business
are managed by the officers of our general partner and key employees of certain of our controlled
affiliates, including OPCO. Employees of certain subsidiaries of Teekay Corporation provide
assistance to us and OPCO pursuant to services agreements. Please see Item 7- Major Unitholders and
Related Party transactions.
The Chief Executive Officer and Chief Financial Officer of our general partner, Peter Evensen,
allocates his time between managing our business and affairs and the business and affairs of Teekay
Corporation and its subsidiaries Teekay LNG Partners L.P. (NYSE: TGP) (or Teekay LNG) and Teekay
Tankers Ltd. (NYSE: TNK) (or Teekay Tankers). Mr. Evensen is the Executive Vice President and Chief
Strategy Officer of Teekay Corporation, and the Chief Executive Officer and Chief Financial Officer
of Teekay LNG’s general partner, and the Executive Vice President of Teekay Tankers. The amount of
time Mr. Evensen allocates among our business and the businesses of Teekay Corporation, Teekay LNG
and Teekay Tankers varies from time to time depending on various circumstances and needs of the
businesses, such as the relative levels of strategic activities of the businesses. We believe
Mr. Evensen devotes sufficient time to our business and affairs as is necessary for their proper
conduct.
Teekay Offshore Operating GP L.L.C., the general partner of OPCO, manages OPCO’s operations and
activities. The Board of Directors of Teekay Offshore GP L.L.C., our general partner, has the
authority to appoint and elect the directors of Teekay Offshore Operating GP L.L.C., who in turn
appoint the officers of Teekay Offshore Operating GP L.L.C. Some of the directors and officers of
our general partner also serve as directors or executive officers of OPCO’s general partner. Any
amendment to OPCO’s partnership agreement or to the limited liability company agreement of OPCO’s
general partner must be approved by the conflicts committee of the Board of Directors of our
general partner, Teekay Offshore GP L.L.C. Other actions affecting OPCO, including, among other
things, the amount of its cash reserves, must be approved by our general partner’s Board of
Directors on our behalf.
Officers of our general partner and those individuals providing services to us, OPCO or our
subsidiaries may face a conflict regarding the allocation of their time between our business and
the other business interests of Teekay Corporation or its other affiliates. Our general partner
intends to seek to cause its officers to devote as much time to the management of our business and
affairs as is necessary for the proper conduct of our business and affairs.
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Directors and Executive Officers of Teekay Offshore GP L.L.C.
The following table provides information about the directors and executive officers of our general
partner, Teekay Offshore GP L.L.C. Directors are elected for one-year terms. The business address
of each of our directors and executive officers listed below is c/o 4th Floor, Belvedere Building,
69 Pitts Bay Road, Hamilton, HM 08, Bermuda. Ages of the directors are as of December 31, 2007.
Certain biographical information about each of these individuals is set forth below.
C. Sean Day has served as Chairman of Teekay Offshore GP L.L.C. and of Teekay Offshore Operating GP
L.L.C. since they were formed in August and September 2006, respectively. Mr. Day has served as
Chairman of Teekay Corporation’s Board of Directors since 1999. From 1989 to 1999, he was President
and Chief Executive Officer of Navios Corporation, a large bulk shipping company based in Stamford,
Connecticut. Prior to Navios, Mr. Day held a number of senior management positions in the shipping
and finance industries. Mr. Day has served as the Chairman of Teekay GP L.L.C., the general partner
of Teekay LNG, and of Teekay Tankers since they were formed in November 2004 and October 2007,
respectively. Mr. Day also serves as the Chairman of Compass Diversified Trust and as a director of
Kirby Corporation.
Bjorn Moller has served as the Vice Chairman of Teekay Offshore GP L.L.C. and of Teekay Offshore
Operating GP L.L.C. since they were formed in August and September 2006, respectively. Mr. Moller
is the President and Chief Executive Officer of Teekay Corporation and has held those positions
since April 1998. Mr. Moller has over 25 years’ experience in the shipping industry and has served
in senior management positions with Teekay Corporation for more than 15 years. He has headed its
overall operations since January 1997, following his promotion to the position of Chief Operating
Officer. Prior to this, Mr. Moller headed Teekay Corporation’s global chartering operations and
business development activities. Mr. Moller has also served as the Vice Chairman of Teekay GP
L.L.C. and as the Chief Executive Officer and as a director of Teekay Tankers since they were
formed in November 2004 and October 2007, respectively. In December 2006, he was appointed Chairman
of the International Tankers Owners Pollution Federation.
Peter Evensen has served as the Chief Executive Officer and Chief Financial Officer and as a
Director of Teekay Offshore GP L.L.C. and of Teekay Offshore Operating GP L.L.C. since they were
formed in August and September 2006, respectively. Mr. Evensen is also the Executive Vice President
and Chief Strategy Officer of Teekay Corporation. He joined Teekay Corporation in May 2003 as
Senior Vice President, Treasurer and Chief Financial Officer. He served as Executive Vice President
and Chief Financial Officer of Teekay Corporation from February 2004 until he was appointed to his
current role in November 2006. Mr. Evensen has also served as Chief Executive Officer and Chief
Financial Officer of Teekay GP L.L.C. since it was formed in November 2004, as a director of Teekay
GP L.L.C. since January 2005, and as the Executive Vice President and as a Director of Teekay
Tankers since it was formed in October 2007. Mr. Evensen has over 20 years’ experience in banking
and shipping finance. Prior to joining Teekay Corporation, Mr. Evensen was Managing Director and
Head of Global Shipping at J.P. Morgan Securities Inc. and worked in other senior positions for its
predecessor firms. His international industry experience includes positions in New York, London and
Oslo.
David L. Lemmon has served as a Director of Teekay Offshore GP L.L.C. since December 2006. Mr.
Lemmon currently serves on the Board of Directors of Kirby Corporation and Deltic Timber
Corporation, positions he has held since April 2006 and February 2007, respectively. He also served
on the Board of Directors of Pacific Energy Partners, L.P. from 2002 through 2006. Mr. Lemmon was
President and Chief Executive Officer of Colonial Pipeline Company from 1997 until his retirement
from that company in March 2006. Prior to joining Colonial Pipeline Company, he served as President
of Amoco Pipeline Company.
Carl Mikael L.L. von Mentzer has served as a Director of Teekay Offshore GP L.L.C. since December
2006. Mr. von Menzer has over 30 years’ experience in the shipbuilding and offshore oil industries.
Since 1998, Mr. von Mentzer has served as a non-executive director of Concordia Maritime AB in
Gothenburg, Sweden and since 2002 has served as its Deputy Chairman of its Board of Directors.
Prior to this, Mr. von Mentzer served in executive positions with various shipping and offshore oil
companies, including Gotaverken Ardenal AB and Safe Partners AB in Gothenburg, Sweden and OAG Ltd.
in Aberdeen, Scotland. He has also previously served as a director for Northern Offshore Ltd., in
Oslo, Norway, and GVA Consultants in Gothenburg, Sweden.
John J. Peacock has served as a Director of Teekay Offshore GP L.L.C. since December 2006. Mr.
Peacock is currently a director of the Fednav Group of companies, a Canadian ocean-going dry-bulk
shipowning and chartering group. He was the President, Chief Operating Officer, Executive
Vice-President and director of Fednav Limited from 1998 until February 2007. Mr. Peacock joined
Fednav Limited in 1979 as its Treasurer, and in 1984 became Vice President, Finance. He has over 40
years’ accounting experience. Prior to joining the Fednav Group, Mr. Peacock was a partner with
Clarkson Gordon (now Ernst & Young) in Montreal, Canada.
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Directors and Executive Officers of Teekay Offshore Operating GP L.L.C.
The following table provides information about the directors and executive officers of Teekay
Offshore Operating GP L.L.C., the general partner of OPCO. Directors are appointed for one-year
terms. The business address of each director and executive officer of Teekay Offshore Operating GP
L.L.C. listed below is c/o 4th Floor, Belvedere Building, 69 Pitts Bay Road, Hamilton, HM 08,
Bermuda. Ages of the directors are as of December 31, 2007.
As described above, the directors and executive officers of Teekay Offshore Operating GP L.L.C.
also serve as directors or executive officers of Teekay Offshore GP L.L.C. The business experience
of these individuals is included above.
B. Compensation
Reimbursement of Expenses of Our General Partner
Our general partner does not receive any management fee or other compensation for managing us. Our
general partner and its other affiliates are reimbursed for expenses incurred on our behalf. These
expenses include all expenses necessary or appropriate for the conduct of our business and
allocable to us, as determined by our general partner. During 2007, we reimbursed our general
partner for $0.8 million in expenses that it incurred on our behalf during the year. Our general
partner did not incur any of such expenses during 2006.
Executive Compensation
We and our general partner were formed in August 2006. OPCO’s general partner was formed in
September 2006. Neither our general partner nor OPCO’s general partner paid any compensation to its
directors or officers or accrued any obligations with respect to management incentive or retirement
benefits for the directors and officers prior to our initial public offering in December 2006.
Because Peter Evensen, the Chief Executive Officer and Chief Financial Officer of our general
partner and of OPCO’s general partner, is an employee of a subsidiary of Teekay Corporation, his
compensation (other than any awards under the long-term incentive plan described below) is set and
paid by the Teekay Corporation subsidiary, and we reimburse the Teekay Corporation subsidiary for
time he spends on our partnership matters. Please read Item 7. Major Unitholders and Related Party
Transactions.
Compensation of Directors
Officers of our general partner or Teekay Corporation who also serve as directors of our general
partner or OPCO’s general partner do not receive additional compensation for their service as
directors. During 2007, each non-management director received compensation for attending meetings
of the Board of Directors, as well as committee meetings. Non-management directors received a
director fee of $30,000 for the year and common units with an aggregate maximum value of
approximately $15,000 for the year. The Chairman received an additional annual fee of $85,000,
members of the audit and conflicts committees each received a committee fee of $5,000 for the year,
and the chairs of the audit committee and conflicts committee received an additional fee of $5,000
for the year for serving in that role. In addition, each director was reimbursed for out-of-pocket
expenses in connection with attending meetings of the Board of Directors or committees. Each
director is fully indemnified by us for actions associated with being a director to the extent
permitted under Marshall Islands law.
During 2007, the four non-employee directors received, in the aggregate, $245,000 in director and
committee fees and reimbursement of $84,687 of their out-of-pocket expenses from us relating to
their board service. We reimbursed our general partner for these expenses as they were incurred for
the conduct of our business. In March 2007, our general partner’s Board of Directors granted to
each of the four non-employee directors 714 units at $21.00 per unit. During December 2007, the
Board authorized the award by us to each of the four non-employee directors of common units with a
value of approximately $15,000 for the 2008 year. These common units were purchased by us in the
open market during the first quarter of 2008.
2006 Long-Term Incentive Plan
Our general partner adopted the Teekay Offshore Partners L.P. 2006 Long-Term Incentive Plan for
employees and directors of and consultants to our general partner and employees and directors of
and consultants to its affiliates, who perform services for us. The plan provides for the award of
restricted units, phantom units, unit options, unit appreciation rights and other unit or
cash-based awards. Other than the previously mentioned 2,856 common units awarded to our general
partner’s non-employee directors, we did not make any awards in 2007 under the 2006 Long-Term
Incentive Plan.
C. Board Practices
Teekay Offshore GP L.L.C., our general partner, manages our operations and activities. Unitholders
are not entitled to elect the directors of our general partner or directly or indirectly
participate in our management or operation.
Our general partner’s Board of Directors (or the Board) currently consists of six members.
Directors are appointed to serve until their successors are appointed or until they resign or are
removed.
There are no service contracts between us and any of our directors providing for benefits upon
termination of their employment or service.
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The Board has the following three committees: Audit Committee, Conflicts Committee, and Corporate
Governance Committee. The membership of these committees and the function of each of the committees
are described below. Each of the committees is currently comprised solely of independent members,
except for the Corporate Governance Committee, and operates under a written charter adopted by the
Board, other than the Conflicts Committee. The committee charters for the Audit Committee, the
Conflicts Committee and the Corporate Governance Committee are available under “Other
Information—Partnership Governance” in the Investor Centre of our web site at
www.teekayoffshore.com. During 2007, the Board held five meetings. Each director attended all Board
meetings and all applicable committee meetings.
Audit Committee. The Audit Committee of our general partner is composed of three or more directors,
each of whom must meet the independence standards of the NYSE, the SEC and any other applicable
laws and regulations governing independence from time to time. This committee is currently
comprised of directors John J. Peacock (Chair), David L. Lemmon and Carl Mikael L.L. von Mentzer.
All members of the committee are financially literate and the Board has determined that Mr. Lemmon
qualifies as an audit committee financial expert.
The Audit Committee assists the Board in fulfilling its responsibilities for general oversight of:
Conflicts Committee. The Conflicts Committee of our general partner is composed of the same
directors constituting the Audit Committee, being David L. Lemmon (Chair), John J. Peacock, and
Carl Mikael L.L. von Mentzer. The members of the Conflicts Committee may not be officers or
employees of our general partner or directors, officers or employees of its affiliates, and must
meet the heightened NYSE and SEC director independence standards applicable to audit committee
membership and certain other requirements.
The Conflicts Committee:
Any matters approved by the Conflicts Committee will be conclusively deemed to be fair and
reasonable to us, approved by all of our partners, and not a breach by our general partner of any
duties it may owe us or our unitholders. The Board is not obligated to seek approval of the
Conflicts Committee on any matter, and may determine the resolution of any conflict of interest
itself.
Corporate Governance Committee. The Corporate Governance Committee of our general partner is
composed of at least two directors. This committee is currently comprised of directors C. Sean Day
(Chair) and Bjorn Moller.
The Corporate Governance Committee:
D. Employees
Crewing and Staff
As of December 31, 2007, approximately 2,100 seagoing staff served on our vessels and approximately
200 staff served on shore in technical, commercial and administrative roles in various countries.
Certain subsidiaries of Teekay Corporation employ the crews, who serve on the vessels pursuant to
agreements with the subsidiaries, and Teekay Corporation subsidiaries also provide on-shore
advisory, operational and administrative support to our operating subsidiaries pursuant to service
agreements. Please see Item 7- Major Unitholders and Related Party transactions.
Teekay Corporation regards attracting and retaining motivated seagoing personnel as a top priority,
and offers seafarers what we believe are highly competitive employment packages and comprehensive
benefits and opportunities for personal and career development, which relates to a philosophy of
promoting internally.
Teekay Corporation has entered into a Collective Bargaining Agreement with the Philippine
Seafarers’ Union, an affiliate of the International Transport Workers’ Federation (or ITF), and a
Special Agreement with ITF London, which covers substantially all of the officers and seamen that
operate our and OPCO’s Bahamian-flagged vessels. Substantially all officers and seamen for the
Norway-flagged vessels are covered by a collective bargaining agreement with Norwegian unions
(Norwegian Maritime Officers’ Association, Norwegian Union of Marine Engineers and the Norwegian
Seafarers’ Union). We believe Teekay Corporation’s relationships with these labor unions are good.
Our commitment to training is fundamental to the development of the highest caliber of seafarers
for marine operations. Teekay Corporation’s cadet training approach is designed to balance academic
learning with hands-on training at sea. Teekay Corporation has relationships with training
institutions in Canada, Croatia, India, Norway, Philippines, Turkey and the United Kingdom. After
receiving formal instruction at one of these institutions, cadet training continues on board
vessels. Teekay Corporation also has a career development plan that was devised to ensure a
continuous flow of qualified officers who are trained on its vessels and familiarized with its
operational standards, systems and policies. We believe that high-quality crewing and training
policies will play an increasingly important role in distinguishing larger independent shipping
companies that have in-house or affiliate capabilities from smaller companies that must rely on
outside ship managers and crewing agents on the basis of customer service and safety.
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E. Unit Ownership
The following table sets forth certain information regarding beneficial ownership, as of March 15,
2008, of our units by all directors and officers of our general partner as a group. The information
is not necessarily indicative of beneficial ownership for any other purpose. Under SEC rules a
person beneficially owns any units that the person has the right to acquire as of May 14, 2008 (60
days after March 15, 2008) through the exercise of any unit option or other right. Unless otherwise
indicated, each person has sole voting and investment power (or shares such powers with his or her
spouse) with respect to the units set forth in the following table. Information for all persons
listed below is based on information delivered to us.
Item 7. Major Unitholders and Related Party Transactions
Except for certain information below in paragraphs (e), (h), (n) and (o) of “B. Related Party
Transactions,” the information included in Item 7 in the Original Filing has not been updated for
information or events occurring after the date of the Original Filing and has not been updated to
reflect the passage of time since the date of the Original Filing.
A. Major Unitholders
The following table sets forth the beneficial ownership, as of March 15, 2008, of our common and
subordinated units by each person we know to beneficially own more than 5% of the outstanding
common or subordinated units. The number of units beneficially owned by each person is determined
under SEC rules and the information is not necessarily indicative of beneficial ownership for any
other purpose. Under SEC rules a person beneficially owns any units as to which the person has or
shares voting or investment power. In addition, a person beneficially owns any units that the
person or entity has the right to acquire as of May 14, 2008 (60 days after March 15, 2008) through
the exercise of any unit option or other right. Unless otherwise indicated, each unitholder listed
below has sole voting and investment power with respect to the units set forth in the following
table.
Our majority unitholders have the same voting rights as our other unitholders. We are controlled by
Teekay Corporation. We are not aware of any arrangements, the operation of which may at a
subsequent date result in a change in control of us.
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B. Related Party Transactions
Bjorn Moller is the Vice Chairman of Teekay Offshore GP L.L.C., Teekay Offshore Operating GP
L.L.C. and Teekay GP L.L.C. He also is the President and Chief Executive Officer and a
director of Teekay Corporation and the Chief Executive Officer and a director of Teekay
Tankers.
Peter Evensen is the Chief Executive Officer and Chief Financial Officer and a director of
Teekay Offshore GP L.L.C., Teekay Offshore Operating GP L.L.C. and Teekay GP L.L.C. He also
is the Executive Vice President and Chief Strategy Officer of Teekay Corporation and the
Executive Vice President and a director of Teekay Tankers.
Because Mr. Evensen is an employee of a subsidiary of Teekay Corporation, his compensation
(other than any awards under the long-term incentive plan) is set and paid by the Teekay
Corporation subsidiary. Pursuant to our partnership agreement, we have agreed to reimburse
the Teekay Corporation subsidiary for time spent by Mr. Evensen on our management matters as
our Chief Executive Officer and Chief Financial Officer.
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Noncompetition. Under the omnibus agreement, Teekay Corporation and Teekay LNG have agreed,
and have caused their controlled affiliates (other than us) to agree, not to own, operate or
charter “offshore vessels” (i.e. dynamically positioned shuttle tankers (other than those
operating in the conventional oil tanker trade under contracts with a remaining duration of
less that three years, excluding extension options), FSOs and FPSOs). This restriction does
not prevent Teekay Corporation, Teekay LNG or any of their other controlled affiliates from,
among other things:
In addition, unless Teekay Corporation acquires 100% of Teekay Petrojarl, Petrojarl may
continue to own, operate and charter its current fleet. If Teekay Corporation acquires 100%
of Petrojarl, we have certain rights to acquire its offshore vessels as described below.
In addition, under the omnibus agreement we have agreed not to own, operate or charter crude
oil tankers or liquefied natural gas (or LNG) carriers. This restriction does not apply to
any of the Aframax tankers in our current fleet, and the ownership, operation or chartering
of any oil tankers that replace any of those oil tankers in connection with certain events.
In addition, the restriction does not prevent us from, among other things:
Rights of First Offer on Conventional Tankers, LNG Carriers and Offshore Vessels. Under the
omnibus agreement, we have granted to Teekay Corporation and Teekay LNG a 30-day right of
first offer on certain (a) sales, transfers or other dispositions of any of our Aframax
tankers, in the case of Teekay Corporation, or certain LNG carriers in the case of Teekay
LNG, or (b) re-charterings of any of our Aframax tankers or LNG carriers pursuant to a time
charter or contract of affreightment with a term of at least three years if the existing
charter expires or is terminated early. Likewise, each of Teekay Corporation and Teekay LNG
has granted a similar right of first offer to us for any offshore vessels it might own that,
at the time of the proposed offer, is subject to a time charter or contract of affreightment
with a remaining term, excluding extension options, of at least three years. These rights of
first offer do not apply to certain transactions.
We also have the right under the omnibus agreement to purchase, for fair market value,
Petrojarl existing offshore vessels and any of its joint venture interest (in each case to
the extent involving an offshore vessel subject to a time charter or contract of
affreightment with a remaining term of at least three years, excluding extension options) if
Teekay Corporation acquires 100% of Petrojarl. Petrojarl has four FPSOs and one shuttle
tanker.
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