F-1 1 o31998fv1.htm FORM F-1 Form F-1
 

As filed with the Securities and Exchange Commission on December 4, 2006
Registration No. 333-          
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
TEEKAY OFFSHORE PARTNERS L.P.
(Exact name of Registrant as specified in its charter)
 
         
Republic of the Marshall Islands   4400   Not Applicable
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)
Bayside House, Bayside Executive Park
West Bay Street and Blake Road
P.O. Box AP-59212
Nassau, Commonwealth of the Bahamas
(242) 502-8820
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Watson, Farley & Williams (New York) LLP
Attention: Daniel C. Rodgers
100 Park Avenue, 31st Floor
New York, New York 10017
(212) 922-2200
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
Copies to:
     
David Matheson
Christopher Hall
Perkins Coie LLP
1120 N.W. Couch Street, 10th Floor
Portland, Oregon 97209
(503) 727-2000
  Alan Baden
Catherine Gallagher
Vinson & Elkins L.L.P.
666 Fifth Avenue, 26th Floor
New York, NY 10103
(212) 237-0000
 
     Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.
 
     If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    o
     If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o
     If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o
     If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o
 
CALCULATION OF REGISTRATION FEE
               
               
               
      Proposed Maximum     Amount of  
Title of Each Class of     Aggregate Offering     Registration  
Securities To be Registered     Price(1)(2)     Fee  
               
Common units, representing limited partner interests
    $169,050,000     $18,089  
               
               
(1)  Includes common units issuable upon exercise of the underwriters’ over-allotment option.
 
(2)  Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o).
 
     The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
 
 


 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED DECEMBER 4, 2006
PROSPECTUS
7,000,000 Common Units
Representing Limited Partner Interests
(TEEKAY OFFSHORE PARTNERS LOGO)
Teekay Offshore Partners L.P.
$              per common unit
 
    We are selling 7,000,000 common units. We have granted the underwriters an option to purchase up to 1,050,000 additional common units to cover over-allotments, if any.
    We are a Marshall Islands limited partnership recently formed by Teekay Shipping Corporation, a leading provider of marine services to the global oil and natural gas industries, as part of its strategy to expand its operations in the offshore oil marine transportation, processing and storage sectors. Immediately following this offering, we will own a 26.0% interest in and control Teekay Offshore Operating L.P., a Marshall Islands limited partnership (or OPCO), which will own substantially all of the offshore oil transportation and storage assets of Teekay Shipping Corporation. Although we are organized as a partnership, we have elected to be taxed as a corporation solely for U.S. federal income tax purposes. This is the initial public offering of our common units. We currently expect the initial public offering price to be between $19.00 and $21.00 per common unit. Our common units have been approved for listing on the New York Stock Exchange, subject to official notice of issuance, under the symbol “TOO.”
 
Investing in our common units involves risks. Please read “Risk Factors” beginning on page 18.
    These risks include the following:
       •  Because our partnership interest in OPCO currently represents our only cash-generating asset, our cash flow initially will depend completely on OPCO’s ability to make distributions to its partners, including us.
 
       •  We may not have sufficient cash from operations to enable us to pay the minimum quarterly distribution on our common units.
 
       •  OPCO must make substantial capital expenditures to maintain and expand the operating capacity of its fleet, which will reduce our cash available for distribution.
 
       •  OPCO’s substantial debt levels may limit its or our flexibility in obtaining additional financing, pursuing other business opportunities and our paying distributions to you.
 
       •  OPCO derives a substantial majority of its revenues from a limited number of customers, and the loss of any such customer could result in a significant loss of revenues and cash flow.
 
       •  We depend on Teekay Shipping Corporation to assist us and OPCO in operating our businesses and competing in our markets.
 
       •  Our growth depends on continued growth in demand for offshore oil transportation, processing and storage services.
 
       •  Because payments under OPCO’s contracts of affreightment are based on the volume of oil it transports, the utilization of OPCO’s shuttle tanker fleet and the success of its shuttle tanker business depends upon continued production from existing or new oil fields it services, which is beyond our or OPCO’s control and generally declines naturally over time.
 
       •  Teekay Shipping Corporation and its affiliates may engage in competition with OPCO and us.
 
       •  Our general partner and its affiliates have conflicts of interest and limited fiduciary duties, which may permit them to favor their own interests to your detriment.
 
       •  Our general partner, which is owned and controlled by Teekay Shipping Corporation, makes all decisions on our behalf, subject to the limited voting rights of our common unitholders.
 
       •  Even if public unitholders are dissatisfied, they cannot initially remove our general partner without Teekay Shipping Corporation’s consent.
 
       •  You will experience immediate and substantial dilution of $15.72 per common unit.
 
       •  Our general partner has a call right that may require you to sell your common units at an undesirable time or price.
 
       •  We will be subject to taxes, which will reduce our cash available for distribution to you.
    Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
                 
    Per Common Unit   Total
         
Public Offering Price
  $       $    
Underwriting Discount(1)
  $       $    
Proceeds to Teekay Offshore Partners L.P. (before expenses)
  $       $    
 
(1)  Excludes structuring fee of $       .
      The underwriters expect to deliver the common units to purchasers on or about                    , 2006.
 
Citigroup Merrill Lynch & Co.
 
Morgan Stanley A.G. Edwards Deutsche Bank Securities Raymond James
Simmons & Company DnB NOR Markets Fortis Securities
           International
The date of this prospectus is                     , 2006.


 

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    F-1  
APPENDIX A Form of First Amended and Restated Agreement of Limited Partnership of Teekay Offshore Partners L.P. 
    A-1  
APPENDIX B Glossary of Terms
    B-1  
 
      You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date.

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SUMMARY
      This summary highlights information contained elsewhere in this prospectus. Unless we otherwise specify, all information and data in this prospectus about our business and fleet refer to the business and fleet that will be contributed to us as of the closing of this offering. You should read the entire prospectus carefully, including the historical and pro forma financial statements and the notes to those financial statements. The information presented in this prospectus assumes (a) an initial public offering price of $20.00 per unit and (b) unless otherwise noted, that the underwriters’ over-allotment option is not exercised. You should read “Risk Factors” for information about important factors that you should consider before buying the common units.
      All references in this prospectus to “our,” “we,” “us” and “the Partnership” refer to Teekay Offshore Partners L.P. and its subsidiaries, including Teekay Offshore Operating L.P. (or OPCO). All references in this prospectus to “OPCO” when used in a historical context refer to OPCO’s predecessor companies and their subsidiaries, and when used in the present tense or prospectively refer to OPCO and its subsidiaries, collectively, or to OPCO individually, as the context may require. Please read Note 1 to the audited combined consolidated financial statements of Teekay Offshore Partners Predecessor included elsewhere in this prospectus for a description of OPCO’s predecessor companies. Upon the completion of this offering, Teekay Offshore Partners L.P. will own a 25.99% limited partner interest in OPCO as well as the 0.01% general partner interest in OPCO through its ownership of OPCO’s general partner, Teekay Offshore Operating GP L.L.C. References in this prospectus to “Teekay Shipping Corporation” refer, depending upon the context, to Teekay Shipping Corporation and/or any one or more of its subsidiaries. References in this prospectus to “our general partner” refer to Teekay Offshore GP L.L.C. References to “Petrojarl ASA” refer to Petrojarl ASA, which was renamed Teekay Petrojarl ASA on December 1, 2006. We include a glossary of some of the terms used in this prospectus in Appendix B. Unless otherwise indicated, all references to “dollars” and “$” in this prospectus are to, and amounts are presented in, U.S. Dollars.
Teekay Offshore Partners L.P.
      We are an international provider of marine transportation and storage services to the offshore oil industry. We were formed in August 2006 by Teekay Shipping 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 Shipping Corporation and our controlled affiliates to pursue growth opportunities in this market. Upon the closing of this offering, Teekay Shipping Corporation will own a 65.0% interest in us, including a 2.0% general partner interest through our general partner, which Teekay Shipping Corporation owns and controls.
      Upon the closing of this offering, we will 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 will control OPCO through our ownership of its general partner, and Teekay Shipping Corporation will own the remaining 74.0% interest in OPCO.
      In addition to OPCO’s activities, we intend to expand our marine transportation and storage services to include floating production, storage and offloading (or FPSO) units, which produce and process oil offshore in addition to providing storage and offtake.
      OPCO’s fleet currently consists of:
  •  Shuttle Tankers — 36 shuttle tankers, 24 of which are owned fully or jointly and 12 of which are chartered-in, and all of which operate under contracts of affreightment for various offshore oil fields or under fixed-rate time charter or bareboat charter contracts for specific oil field installations. The majority of the contract of affreightment volumes are life-of-field, which, according to data provided by Wood MacKenzie Ltd., have a weighted-average remaining life of 16 years. The time charters and bareboat charters have an average remaining contract term of approximately 6 years.
        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 and positioning systems that allow the vessels to load cargo safely and reliably

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from oil field installations, even in harsh weather conditions. Demand for shuttle tanker services is projected to grow significantly due to expected growth in worldwide offshore crude oil production, particularly in deep water and remote areas. According to Douglas-Westwood Ltd., worldwide oil transported via shuttle tankers is expected to increase from approximately 3.3 million barrels per day in 2006 to approximately 4.5 million barrels per day in 2015.
  •  FSO Units — 4 FSO units, all of which are owned and operate under fixed-rate contracts with an average remaining term of approximately 5 years. An FSO unit provides on-site storage for an oil field installation that has no storage facilities or that requires supplemental storage. According to International Maritime Associates (or IMA), over the next five years the world FSO fleet will increase from 86 to between 117 and 127 units.
 
  •  Conventional Oil Tankers — 9 Aframax-class conventional crude oil tankers, all of which are owned and operate under fixed-rate time charters with Teekay Shipping Corporation with an average remaining term of approximately 8 years.
      In June 2006, Teekay Shipping Corporation entered into an agreement with Petrojarl ASA to form a joint venture company called Teekay Petrojarl Offshore through which the joint venture partners have agreed to exclusively pursue new opportunities involving FPSO and FSO units. Petrojarl ASA is one of the largest independent FPSO operators and deployed the first FPSO in the North Sea in 1986. Pursuant to an omnibus agreement we will enter into upon the closing of this offering, Teekay Shipping Corporation will offer to us its interest in certain future FPSO and FSO projects under the joint venture agreement. On October 18, 2006, Teekay Shipping Corporation completed a tender offer for the outstanding shares of Petrojarl ASA, resulting in Teekay Shipping Corporation owning a majority of, and having the ability to control, Petrojarl. Demand for FPSO units is projected to grow significantly due to expected growth in worldwide crude oil production, particularly in deep waters and remote areas. According to IMA, over the next five years the world FPSO fleet will increase from 111 units to between 198 and 209 units.
      Under the omnibus agreement, Teekay Shipping Corporation also will be obligated to offer to us prior to the end of the second quarter of 2008 the opportunity to acquire two shuttle tankers and one FSO unit currently undergoing conversion from conventional oil tankers or being upgraded. The two shuttle tankers will operate under 13-year bareboat charters and the FSO unit will operate under a 7-year time charter. Teekay Shipping Corporation will also be obligated to offer to us under the omnibus agreement certain other shuttle tankers, FSO units and FPSO units it may acquire in the future.
      Teekay Shipping Corporation formed OPCO in September 2006 and has subsequently transferred to it a majority of OPCO’s operating assets. These transactions and additional transactions relating to OPCO that will occur prior to or at the closing of this offering and described in this prospectus will affect OPCO’s results compared to the historical results of its predecessors. The most significant of these changes are described in this prospectus under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Items You Should Consider When Evaluating Our Historical Financial Performance and Assessing Our Future Prospects.”
Business Opportunities
      We believe the following industry dynamics create a favorable environment to expand our business:
  •  Growing offshore oil production. The following trends forecasted by Douglas-Westwood Ltd. should support continued growth in the offshore sector:
  •  offshore oil production will grow from approximately 33% of global oil production in 2005 to approximately 37% by 2015;
 
  •  deepwater oil production will increase from approximately 3 million barrels per day in 2005, or 12% of offshore production, to over 8 million barrels per day in 2015, or approximately 25% of offshore production; and
 
  •  after 2010, all growth in global offshore oil production will be from deep waters.
  We believe this forecasted growth in deepwater offshore oil production will increase demand for shuttle tankers and FPSO units compared to pipelines or fixed production platforms, which may not be economical or technically feasible in deep waters and remote areas.

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  •  Increased outsourcing of offshore services. We believe there is a growing trend among major oil companies to outsource to independent contractors offshore transportation, processing and storage functions. We also believe there is a growing number of smaller oil companies entering the offshore sector, as oil demand and prices drive future exploration and production. Smaller oil companies generally outsource their offshore service requirements due to capital expenditure constraints and lack of in-house expertise. These smaller companies primarily focus on marginal or remote projects, which favor the employment of shuttle tankers, FSO units and FPSO units.
 
  •  Customer demand for dependable and integrated solutions. Many offshore projects, particularly those located in deep water or remote locations, require a combination of the types of offshore services OPCO provides. Major oil companies are highly selective in their choice of contractors to provide these services due to the high level of capital investment and the need for uninterrupted production from the oil fields. We believe we can bundle services and offer a reliable, integrated “one-stop-shop” solution for customers in the offshore sector.
      We can provide no assurance, however, that the industry dynamics described above will continue or that we will be able to expand our business.
Competitive Strengths
      We believe that we are well positioned to execute our business strategies successfully because of the following competitive strengths:
  •  Leading position in the shuttle tanker sector. OPCO is the world’s largest owner and operator of shuttle tankers, as it owned or operated 36 of the 58 vessels in the world shuttle tanker fleet as at November 1, 2006. OPCO’s large fleet size ensures that it can provide comprehensive coverage of charterers’ requirements and provides opportunities to enhance the efficiency of operations and increase fleet utilization.
 
  •  Offshore operational expertise and enhanced growth opportunities through our relationship with Teekay Shipping Corporation. Teekay Shipping Corporation has achieved a global brand name in the shipping industry and the offshore market, developed an extensive network of long-standing relationships with major oil companies and earned a reputation for reliability, safety and excellence. We expect to benefit from Teekay Shipping Corporation’s over 25-year history of providing shuttle tanker and offshore services to customers through access to its personnel, pursuant to services agreements, and its competitiveness in bidding for new projects. Additionally, we expect to benefit from improved leverage with leading shipyards during periods of vessel production constraints and from Teekay Shipping Corporation’s control of and joint venture with Petrojarl ASA and our rights to participate in certain Petrojarl FPSO projects under the omnibus agreement.
 
  •  Cash flow stability from contracts with leading energy companies. We benefit from stability in cash flows due to the long-term, fixed-rate contracts underlying most of OPCO’s business. OPCO is able to secure long-term contracts because its services are an integrated part of offshore oil field projects and a critical part of the logistics chain of the fields.
 
  •  Disciplined vessel acquisition strategy and successful project execution. OPCO’s fleet has been built through successful new project tenders and acquisitions, and this strategy has contributed significantly to its leading position in the shuttle tanker market.
 
  •  Financial flexibility to pursue acquisitions and other expansion opportunities. We believe our financial flexibility will provide us with acquisition and expansion opportunities. OPCO has access to approximately $1.6 billion under credit facilities for working capital and acquisition purposes, approximately $300 million of which we anticipate will be undrawn.
Business Strategies
      Our primary business objective is to increase distributions per unit by executing the following strategies:
  •  Expand global operations in high growth regions. As offshore exploration and production activity continues to accelerate worldwide, we will seek to continue to expand shuttle tanker and FSO unit operations into growing offshore markets such as Brazil and Australia. In addition, we intend to

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  pursue opportunities in new markets such as Arctic Russia, Eastern Canada, the Gulf of Mexico, Asia and Africa.
 
  •  Pursue opportunities in the FPSO sector. We believe Teekay Shipping Corporation’s control of and joint venture with Petrojarl ASA will enable us to competitively pursue FPSO projects anywhere in the world by combining Petrojarl’s engineering and operational expertise with Teekay Shipping Corporation’s global marketing organization and extensive customer and shipyard relationships.
 
  •  Acquire additional vessels on long-term fixed-rate contracts. We intend to continue acquiring shuttle tankers and FSO units with long-term contracts, rather than ordering vessels on a speculative basis, and we intend to follow this same practice in acquiring FPSO units. We also anticipate growing by acquiring additional limited partner interests in OPCO that Teekay Shipping Corporation may offer us in the future.
 
  •  Provide superior customer service by maintaining high reliability, safety, environmental and quality standards. Energy companies seek transportation partners that have a reputation for high reliability, safety, environmental and quality standards. We intend to leverage OPCO’s and Teekay Shipping Corporation’s operational expertise and customer relationships to further expand a sustainable competitive advantage with consistent delivery of superior customer service.
 
  •  Manage the conventional tanker fleet to provide stable cash flows. The terms for OPCO’s existing long-term conventional tanker charters are 5 to 12 years. We believe the fixed-rate time charters for these tankers will provide stable cash flows during their terms and a source of funding for expanding offshore operations.
Risk Factors
      An investment in our common units involves risks associated with our business, our partnership structure and the tax characteristics of our common units. Those risks are described under the caption “Risk Factors” immediately following this summary beginning on page 18.
The Transactions
      We were recently formed as a Marshall Islands limited partnership to hold an interest in OPCO and its subsidiaries, which own and operate a fleet of shuttle tankers, FSO units and conventional oil tankers, and to hold interests in other entities through which we may expand our business.
      Prior to the closing of this offering, Teekay Shipping Corporation and OPCO have entered, or will enter, into transactions by which, among other things, OPCO will acquire its fleet of 36 shuttle tankers, four FSO units and nine Aframax-class conventional tankers. In addition, in October 2006 OPCO amended an existing credit facility to provide for borrowings of up to $455 million and entered into a new $940 million revolving credit facility. Prior to the closing, OPCO will pay a dividend to Teekay Shipping Corporation in an amount sufficient to decrease OPCO’s cash balance to $90.0 million, which dividend would have been $154.1 million as of June 30, 2006 and which we anticipate will be approximately $160 million based on our estimated cash balance at the closing of this offering. For a description of these transactions, please read Notes 1 and 3 to our pro forma consolidated financial statements included elsewhere in this prospectus.
      At or prior to the closing of this offering, the following transactions will occur to transfer to us a 26.0% interest in OPCO and effect the public offering of our common units:
  •  Teekay Shipping Corporation will transfer to us a 25.99% limited partner interest in OPCO and will transfer to us its 100% interest in Teekay Offshore Operating GP L.L.C., which holds a 0.01% general partner interest in OPCO;
 
  •  we will issue to Teekay Shipping Corporation 2,800,000 common units and 9,800,000 subordinated units, representing a 63.0% limited partner interest in us, and non-interest bearing promissory notes with an aggregate principal amount approximating the net proceeds of this offering (the TSC Notes);
 
  •  we will issue to Teekay Offshore GP L.L.C., a wholly owned subsidiary of Teekay Shipping Corporation, the 2.0% general partner interest in us and all of our incentive distribution rights,

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  which will entitle our general partner to increasing percentages of the cash we distribute in excess of $0.4025 per unit per quarter; and
 
  •  we will issue 7,000,000 common units to the public in this offering, representing a 35.0% limited partner interest in us, and will use the net proceeds of this offering, estimated at $127.8 million, to repay the TSC Notes. Please read “Use of Proceeds.”
      In addition, at or prior to the closing of this offering:
  •  we will enter into an omnibus agreement with Teekay Shipping Corporation, our general partner and others governing, among other things:
  •  when we and Teekay Shipping Corporation may compete with each other; and
 
  •  certain rights of first offer on shuttle tankers, FSO units, FPSO units and conventional oil tankers;
  •  we, OPCO and operating subsidiaries of OPCO will enter into various services agreements with certain subsidiaries of Teekay Shipping Corporation pursuant to which those subsidiaries will agree to provide to us and OPCO administrative services and to OPCO’s operating subsidiaries strategic consulting, advisory, ship management, technical and/or administrative services; and
 
  •  operating subsidiaries of OPCO will enter into fixed-rate time-charter contracts with Teekay Shipping Corporation pursuant to which Teekay Shipping Corporation will charter OPCO’s nine conventional oil tankers for initial terms ranging from approximately 5 to 12 years, with an average term of approximately 8 years.
      For further details on our agreements with Teekay Shipping Corporation and OPCO’s credit facilities, please read “Certain Relationships and Related Party Transactions” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Credit Facilities.”
Holding Company Structure
      We are a holding entity and will conduct our operations and business through controlled affiliates, as is common with publicly traded limited partnerships, to maximize operational flexibility. Initially, we will conduct all of our operations through OPCO and its subsidiaries. We intend to conduct additional operations in the future through wholly owned subsidiaries.

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Organizational Structure After the Transactions
      The following diagram depicts our organizational structure after giving effect to the transactions described above:
         
Public Common Units
    35.0 %
Teekay Shipping Corporation’s Common Units
    14.0  
Teekay Shipping Corporation’s Subordinated Units
    49.0  
Teekay Shipping Corporation’s General Partner Interest
    2.0  
       
      100.0 %
       
(GRAPH)

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Management of Teekay Offshore Partners L.P.
      Our general partner, Teekay Offshore GP L.L.C., a Marshall Islands limited liability company, will manage our operations and activities. The Chief Executive Officer and Chief Financial Officer and three of the directors of Teekay Offshore GP L.L.C. also serve as executive officers or directors of Teekay Shipping Corporation and of the general partner of Teekay LNG Partners L.P. (NYSE: TGP). For more information about these individuals, please read “Management — Directors and Executive Officers of Teekay Offshore GP L.L.C.”
      Our wholly owned subsidiary, Teekay Offshore Operating GP L.L.C., the general partner of OPCO, will manage OPCO’s operations and activities. The board of directors of 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. Certain directors and officers of our general partner also serve as directors or executive officers of OPCO’s general partner. The partnership agreement of OPCO will provide that certain actions relating to OPCO must be approved by the board of directors of our general partner on our behalf. These actions will include, among other things, establishing maintenance capital and other cash reserves and the determination of the amount of quarterly distributions by OPCO to its partners, including us. Please read “Certain Relationships and Related Party Transactions — OPCO Partnership Agreement and Teekay Offshore Operating GP L.L.C. Limited Liability Company Agreement.”
      Unlike shareholders in a publicly traded corporation, our unitholders will not be entitled to elect our general partner or its directors.
      Our general partner will not receive any management fee or other compensation in connection with its management of our business, but it will be entitled to be reimbursed for all direct and indirect expenses incurred on our behalf. Our general partner will also be entitled to distributions on its general partner interest and, if specified requirements are met, on its incentive distribution rights. Please read “Certain Relationships and Related Party Transactions” and “Management — Reimbursement of Expenses of Our General Partner.”
      We, OPCO and operating subsidiaries of OPCO will enter into various services agreements with certain subsidiaries of Teekay Shipping Corporation pursuant to which those subsidiaries will provide to us and OPCO all of our and OPCO’s administrative services and to OPCO’s operating subsidiaries substantially all of their strategic consulting, advisory, ship management, technical and/or administrative services. Please read “Certain Relationships and Related Party Transactions — Advisory and Administrative Services Agreements.”
Principal Executive Offices and Internet Address; SEC Filing Requirements
      Our principal executive offices are located at Bayside House, Bayside Executive Park, West Bay Street and Blake Road, Nassau, Commonwealth of The Bahamas, and our phone number is (242) 502-8820. Our website is located at http://www.teekayoffshore.com. We expect to make our periodic reports and other information filed with or furnished to the SEC available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website, including Teekay Shipping Corporation’s website, is not incorporated by reference into this prospectus and does not constitute a part of this prospectus. Please see “Where You Can Find More Information” for an explanation of our reporting requirements as a foreign private issuer.
Summary of Conflicts of Interest and Fiduciary Duties
      Teekay Offshore GP L.L.C., our general partner, has a legal duty to manage us in a manner beneficial to our unitholders. This legal duty is commonly referred to as a “fiduciary” duty. However, because Teekay Offshore GP L.L.C. is owned by Teekay Shipping Corporation, the officers and directors of Teekay Offshore GP L.L.C. also have fiduciary duties to manage the business of Teekay Offshore GP L.L.C. in a manner beneficial to Teekay Shipping Corporation. In addition:
  •  the Chief Executive Officer and Chief Financial Officer and three of the directors of Teekay Offshore GP L.L.C. also serve as executive officers or directors of Teekay Shipping Corporation

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  and of the general partner of Teekay LNG Partners L.P. and as the executive officers and directors of OPCO’s general partner;
 
  •  Teekay Shipping Corporation and its other affiliates may engage in competition with us; and
 
  •  we have entered into arrangements, and may enter into additional arrangements, with Teekay Shipping Corporation and certain of its subsidiaries relating to the chartering of certain vessels, the provision of certain services and other matters.
Please read “Management” and “Certain Relationships and Related Party Transactions.”
      The general partner of OPCO has a fiduciary duty to manage OPCO in a manner beneficial to us, as the general partner’s owner, and to OPCO’s limited partners, including us and Teekay Shipping Corporation. Our general partner’s board of directors will appoint the directors of OPCO’s general partner. The board of directors of our general partner, which includes some of the directors and executive officers of Teekay Shipping Corporation, may resolve any conflict between the interests of us and our unitholders and Teekay Shipping Corporation and its affiliates, 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.
      As a result of these relationships, conflicts of interest may arise in the future between us and our unitholders, on the one hand, and Teekay Shipping Corporation and its other affiliates, including our general partner and OPCO, on the other hand. For a more detailed description of the conflicts of interest and fiduciary duties of our general partner, please read “Conflicts of Interest and Fiduciary Duties.”
      In addition, our partnership agreement contains provisions that reduce the standards to which our general partner would otherwise be held under Marshall Islands law. For example, our partnership agreement limits the liability and reduces the fiduciary duties of our general partner to our unitholders. Our partnership agreement also restricts the remedies available to unitholders. By purchasing a common unit, you are agreeing to the modified standard of fiduciary duties and to certain actions that may be taken by our general partner, all as set forth in the partnership agreement. Please read “Conflicts of Interest and Fiduciary Duties” for a description of the fiduciary duties that would otherwise be imposed on our general partner under Marshall Islands law, the material modifications of those duties contained in our partnership agreement and certain legal rights and remedies available to our unitholders under Marshall Islands law.
      For a description of other relationships we have with our affiliates, please read “Certain Relationships and Related Party Transactions.”

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The Offering
Common units offered to the public 7,000,000 common units.

8,050,000 common units if the underwriters exercise their over-allotment option in full.
 
Units outstanding after this offering 9,800,000 common units and 9,800,000 subordinated units, each representing a 49.0% limited partner interest in us.
 
Use of proceeds We intend to use the net proceeds of this offering to repay non-interest bearing promissory notes we will issue to Teekay Shipping Corporation as partial consideration for our acquisition of our 26.0% interest in OPCO.
 
The net proceeds from any exercise of the underwriters’ over-allotment option will be used to redeem common units from Teekay Shipping Corporation equal to the number of units for which the underwriters exercise their over-allotment option.
 
Cash distributions We intend to make minimum quarterly distributions of $0.35 per common unit to the extent we have sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to our general partner in reimbursement for all expenses incurred by it on our behalf. In general, we will pay any cash distributions we make each quarter in the following manner:
 
• first, 98.0% to the holders of common units and 2.0% to our general partner, until each common unit has received a minimum quarterly distribution of $0.35 plus any arrearages from prior quarters;
 
• second, 98.0% to the holders of subordinated units and 2.0% to our general partner, until each subordinated unit has received a minimum quarterly distribution of $0.35; and
 
• third, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unit has received an aggregate distribution of $0.4025.
 
If cash distributions exceed $0.4025 per unit in a quarter, our general partner will receive increasing percentages, up to 50.0% (including its 2.0% general partner interest), of the cash we distribute in excess of that amount. We refer to these distributions as “incentive distributions.”
 
We must distribute all of our cash on hand at the end of each quarter, less reserves established by our general partner to provide for the proper conduct of our business, to comply with any applicable debt instruments or to provide funds for future distributions. We refer to this cash as “available cash,” and we define its meaning in our partnership agreement and in the glossary of terms attached as Appendix B. The amount of available cash may be greater than or less than the aggregate amount of the minimum quarterly distributions to be distributed on all units.
 
The amount of available cash we need to pay the minimum quarterly distributions for four quarters on our common units, subordinated units and the 2.0% general partner interest to be outstanding immediately after this offering is $28.0 million.

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We believe, based on the estimates contained in and the assumptions listed under “Our Cash Distribution Policy and Restrictions on Distributions — Pro Forma and Forecasted Cash Available for Distribution” and “— Summary of Significant Policies and Forecast Assumptions,” that we will have sufficient cash available for distributions to enable us to pay 100.0% of the minimum quarterly distribution of $0.35 per unit on all of our common and subordinated units for each full quarter through December 31, 2007.
 
Our pro forma cash available generated during 2005 and the twelve months ended June 30, 2006 would have been sufficient to allow us to pay 100.0% of the minimum quarterly distributions on our common units and 98.8% and 67.4%, respectively, of the minimum quarterly distributions on our subordinated units during those periods. Please read “Our Cash Distribution Policy and Restrictions on Distributions — Pro Forma and Forecasted Cash Available for Distribution.”
 
Subordinated units Teekay Shipping Corporation will initially own all of our subordinated units. The principal difference between our common units and subordinated units is that in any quarter during the subordination period, holders of the subordinated units are entitled to receive the minimum quarterly distribution of $0.35 per unit only after the common units have received the minimum quarterly distribution plus any cumulative arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units will not accrue arrearages. The subordination period generally will end if we have earned and paid at least $1.40 on each outstanding unit and the corresponding distribution on the 2.0% general partner interest for any three consecutive four- quarter periods ending on or after December 31, 2009. The subordination period may also end prior to December 31, 2009, if certain financial tests are met as described below.
 
When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, and the common units will no longer be entitled to arrearages.
 
Early conversion of subordinated units If we have earned and paid at least $2.10 (150.0% of the annualized minimum quarterly distribution) on each outstanding unit for any four-quarter period ending on or before the date of determination, the subordinated units will convert into common units. Please read “How We Make Cash Distributions — Subordination Period.”
 
Issuance of additional units Our partnership agreement allows us to issue an unlimited number of units without the consent of our unitholders.
 
Limited voting rights Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, you will have only limited voting rights on matters affecting our business. You will have no right to elect our general partner or the directors of our general partner on an annual or other continuing basis. Our general partner may not be removed except by a vote of the holders of at least 662/3% of the outstanding units, including any units owned by our general partner and its affiliates, voting

10


 

together as a single class. Upon consummation of this offering, Teekay Shipping Corporation will own an aggregate of approximately 64.3% of our common and subordinated units (approximately 58.9% if the underwriters exercise their option to purchase additional common units in full). This initially will give Teekay Shipping Corporation the ability to prevent removal of our general partner. Please read “The Partnership Agreement — Voting Rights.”
 
Call right If at any time our general partner and its affiliates own more than 80.0% of the outstanding common units, our general partner has the right, but not the obligation, to purchase all, but not less than all, of the remaining common units at a price equal to the greater of (x) the average of the daily closing prices of the common units over the 20 trading days preceding the date three days before notice of exercise of the call right is first mailed and (y) the highest price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed. Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon the exercise of this limited call right.
 
U.S. federal income tax
considerations
Although we are organized as a partnership, we have elected to be taxed as a corporation solely for U.S. federal income tax purposes. We believe that, under current U.S. federal income tax law, some portion of the distributions you receive from us will constitute dividends, and if you are an individual citizen or resident of the United States or a U.S. estate or trust and meet certain holding period requirements, such dividends are expected to be taxable as “qualified dividend income” currently subject to a maximum 15.0% U.S. federal income tax rate. Other distributions will be treated first as a non-taxable return of capital to the extent of your tax basis in your common units and, thereafter, as capital gain. We estimate that if you hold the common units that you purchase in this offering through the period ending December 31, 2009, the distributions you receive, on a cumulative basis, that will constitute dividends for U.S. federal income tax purposes will be approximately 70.0% of the total cash distributions you receive for that period. Please read “Material U.S. Federal Income Tax Considerations — United States Federal Income Taxation of U.S. Holders — Ratio of Dividend Income to Distributions” for the basis and assumptions for this estimate. Please also read “Risk Factors — Tax Risks” for a discussion of proposed legislation regarding qualified dividend income.
 
Exchange listing Our common units have been approved for listing on the New York Stock Exchange, subject to official notice of issuance, under the symbol “TOO.”

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Summary Historical and Pro Forma Financial and Operating Data
      The following table presents, in each case for the periods and as at the dates indicated, summary:
  •  historical financial and operating data of Teekay Offshore Partners Predecessor; and
 
  •  pro forma financial and operating data of Teekay Offshore Partners L.P.
      The summary historical financial and operating data has been prepared on the following basis:
  •  the historical financial and operating data of Teekay Offshore Partners Predecessor as at and for the years ended December 31, 2001, 2002 and 2003 are derived from the unaudited combined consolidated financial statements of Teekay Offshore Partners Predecessor, which are not included in this prospectus;
 
  •  the historical financial and operating data of Teekay Offshore Partners Predecessor as at and for the years ended December 31, 2004 and 2005 are derived from the audited combined consolidated financial statements of Teekay Offshore Partners Predecessor included elsewhere in this prospectus; and
 
  •  the historical financial and operating data of Teekay Offshore Partners Predecessor as at and for the six months ended June 30, 2005 and June 30, 2006 are derived from the unaudited combined consolidated financial statements of Teekay Offshore Partners Predecessor, which, other than the unaudited combined balance sheet as at June 30, 2005, are included elsewhere in this prospectus.
      The unaudited pro forma financial data of Teekay Offshore Partners L.P. presented for the year ended December 31, 2005 and as at and for the six months ended June 30, 2006 are derived from our unaudited pro forma consolidated financial statements included elsewhere in this prospectus. The pro forma income statement data for the year ended December 31, 2005 and for the six months ended June 30, 2006 assumes this offering and related transactions occurred on January 1, 2005. The pro forma balance sheet data assumes this offering and related transactions occurred on June 30, 2006. A more complete explanation of the pro forma data can be found in our unaudited pro forma consolidated financial statements.
      Net voyage revenues (i.e. voyage revenues less voyage expenses) for Teekay Offshore Partners Predecessor for 2005, the six months ended June 30, 2005 and the six months ended June 30, 2006 were $733.0 million, $367.9 million and $338.4 million, respectively. The decrease in net voyage revenues from the first half of 2005 to the first half of 2006 was primarily due to:
  •  A decrease of $17.3 million from the conventional oil tanker segment. During the first six months of 2006, the average number of chartered-in conventional tankers was lower than the same period in 2005. All chartered-in conventional tankers were operated by Navion Shipping Ltd. On July 1, 2006, OPCO transferred Navion Shipping Ltd. to Teekay Shipping Corporation.
 
  •  A decrease of $12.2 million from the shuttle tanker segment, primarily due to the sale of two older shuttle tankers in March and October 2005 and a decrease from shuttle tankers servicing contracts of affreightment. In 2006, annual seasonal maintenance of North Sea oil field facilities primarily occurred in the second quarter instead of the third quarter, as is typical and as occurred in 2005. The annual maintenance season results in a decline in oil production on certain oil fields in the North Sea at which OPCO’s shuttle tankers are employed under contracts of affreightment.
      Net income for Teekay Offshore Partners Predecessor for 2005 and the six months ended June 30, 2005 was $84.7 million and $69.2 million, respectively. Teekay Offshore Partners Predecessor incurred a loss of $16.8 million for the six months ended June 30, 2006. The change from net income to a net loss from the first half of 2005 to the first half of 2006 was primarily due to:
  •  A decrease in revenues as stated above.
 
  •  Foreign exchange loss of $18.7 million in the first six months of 2006 compared to foreign exchange gain of $25.7 million for the same period in 2005. OPCO’s foreign currency exchange gains and losses, substantially all of which have been unrealized, are due primarily to the period-end revaluation of Norwegian Kroner-denominated advances from affiliates. Prior to the closing of this offering, OPCO’s debt will be in U.S. Dollars, which we believe will reduce the fluctuations in operating results from foreign exchange gains and losses.

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  •  Income tax expense of $7.8 million in the first six months of 2006 compared to an income tax recovery of $15.8 million for the same period in 2005.
      Although results for the third quarter ended September 30, 2006 are not yet available, we expect higher net income than for the second quarter ended June 30, 2006, primarily due to higher revenues from our shuttle tanker segment and a small gain from the sale of an older shuttle tanker. Higher revenues expected in our shuttle tanker segment in the third quarter are primarily due to higher utilization of the shuttle tanker fleet as a result of the completion during the second quarter of seasonal maintenance of certain North Sea offshore oil facilities. In addition, time charter rates on certain shuttle tankers increased as a result of recent contract renewals at higher rates. We are not aware of any material events that occurred in the third quarter that we believe will have an adverse impact on the third quarter financial results or that change our forecast for the year ending December 31, 2007.
      The following table includes two financial measures, net voyage revenues and EBITDA, which we use in our business and are not calculated or presented in accordance with GAAP. We explain these measures and reconcile them to their most directly comparable financial measures calculated and presented in accordance with GAAP in “— Non-GAAP Financial Measures” below.

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      The following table should be read together with, and is qualified in its entirety by reference to, the historical combined consolidated and unaudited pro forma consolidated financial statements and the accompanying notes included elsewhere in this prospectus. The table should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
                                                                           
    Historical   Pro Forma
         
        Six    
        Months       Six
        Ended   Year   Months
    Years Ended December 31,   June 30,   Ended   Ended
            December 31,   June 30,
    2001   2002   2003   2004   2005   2005   2006   2005   2006
                                     
    (unaudited)   (audited)   (unaudited)   (unaudited)
                 
    (in thousands, except per unit and fleet data)
Income Statement Data:
                                                                       
Voyage revenues
    $137,258       $156,745       $747,383       $986,504       $807,548       $400,315       $386,724       $678,888       $349,299  
                                                       
Operating expenses:
                                                                       
 
Voyage expenses(1)
    7,447       8,894       146,893       118,819       74,543       32,400       48,344       93,935       60,186  
 
Vessel operating expenses(2)
    31,617       42,395       87,507       105,595       104,475       52,900       52,954       114,843       57,545  
 
Time-charter hire expenses
                235,976       372,449       373,536       176,276       165,935       145,423       76,288  
 
Depreciation and amortization
    45,167       49,579       93,269       118,460       107,542       55,620       51,331       116,922       56,138  
 
General and administrative
    10,424       11,733       33,968       65,819       85,856       37,838       43,469       61,546       32,265  
 
Vessel and equipment writedowns and (gain) loss on sale of vessels
                63       (3,725 )     2,820       5,369       1,845       (9,423 )     (305 )
 
Restructuring charge
                            955             453       955       453  
                                                       
Total operating expenses
    94,655       112,601       597,676       777,417       749,727       360,403       364,331       524,201       282,570  
                                                       
Income from vessel operations
    42,603       44,144       149,707       209,087       57,821       39,912       22,393       154,687       66,729  
Interest expense
    (31,090 )     (28,136 )     (46,872 )     (43,957 )     (39,791 )     (20,100 )     (24,504 )     (73,458 )     (36,961 )
Interest income
    999       549       1,278       2,459       4,605       2,271       3,291       5,265       3,834  
Equity income (loss) from joint ventures
    2,634       4,597       5,047       6,162       5,199       2,573       3,191       (971 )     (49 )
Gain (loss) on sale of marketable securities
    (1,415 )     (1,227 )     517       94,222                                
Foreign currency exchange gain (loss)(3)
    3,685       (35,121 )     (17,821 )     (37,910 )     34,178       25,730       (18,688 )     9,281       (4,339 )
Income tax recovery (expense)
    (4,963 )     (8,116 )     (30,035 )     (28,188 )     13,873       15,786       (7,762 )     13,873       (7,762 )
Other — net
    2,923       1,313       4,455       14,064       9,091       3,694       5,694       5,689       5,694  
Non-controlling interest
    (2,345 )     (1,212 )     (2,763 )     (2,167 )     (229 )     (692 )     (414 )     (87,248 )     (21,541 )
                                                       
Net income (loss)
    $13,031       $(23,209 )     $63,513       $213,772       $84,747       $69,174       $(16,799 )     $27,118       $5,605  
                                                       
Pro forma net income per common unit (basic and diluted)(4)
                                                            $1.40       $0.56  
 
Balance Sheet Data (at end of period):
                                                                       
Cash and marketable securities
    $32,605       $39,754       $160,957       $143,729       $128,986       $119,495       $133,962               $90,000  
Vessels and equipment(5)
    709,787       725,263       1,431,947       1,427,481       1,300,064       1,346,328       1,260,765               1,528,480  
Total assets
    878,816       1,002,452       2,037,855       2,040,642       1,884,017       1,913,756       1,866,330               2,038,218  
Total debt(6)
    456,761       673,074       1,354,392       1,210,998       991,855       1,045,094       971,992               1,317,314  
Non-controlling interest(7)
    13,199       14,412       15,525       14,276       11,859       14,597       11,770               437,450  
Total owner’s/partners’ equity
    369,287       262,835       529,794       659,212       740,379       727,052       727,801               138,405  
 
Cash Flow Data:
                                                                       
Net cash provided by (used in):
                                                                       
 
Operating activities
    $34,054       $12,110       $227,297       $242,592       $152,687       $81,232       $48,705                  
 
Financing activities
    298,471       151,340       731,329       (69,710 )     (201,554 )     (153,647 )     (42,602 )                
 
Investing activities
    (299,920 )     (156,301 )     (837,423 )     (190,110 )     34,124       48,182       (1,127 )                
 
Other Financial Data:
                                                                       
Net voyage revenues
    $129,811       $147,851       $600,490       $867,685       $733,005       $367,915       $338,380       $584,953       $289,113  
EBITDA(8)
    93,252       62,073       232,411       401,918       213,602       126,837       63,507       198,360       102,632  
Capital expenditures:
                                                                       
 
Expenditures for vessels and equipment
    128,297       56,017       146,279       170,630       24,760       7,116       5,054       23,675       5,054  
 
Expenditures for drydocking
    4,774       9,038       11,980       9,174       8,906       2,679       3,780       8,906       3,780  
 
Fleet Data:
                                                                       
Average number of shuttle tankers(9)
    8.7       11.1       30.5       37.9       35.8       35.9       35.1       37.9       37.2  
Average number of conventional tankers(9)
    7.1       7.0       27.4       40.7       41.2       40.2       34.3       10.5       10.0  
Average number of FSO units(9)
    1.7       2.0       2.2       3.0       3.0       3.0       3.0       3.0       3.0  

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(1)  Voyage expenses are all expenses unique to a particular voyage, including any bunker fuel expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and commissions.
 
(2)  Vessel operating expenses include crewing, repairs and maintenance, insurance, stores, lube oils and communication expenses.
 
(3)  Substantially all of these foreign currency exchange gains and losses were unrealized and not settled in cash. Under U.S. accounting guidelines, all foreign currency-denominated monetary assets and liabilities, such as cash and cash equivalents, accounts receivable, accounts payable, advances from affiliates and deferred income taxes, are revalued and reported based on the prevailing exchange rate at the end of the period. Our primary source for the foreign currency gains and losses is our Norwegian Kroner-denominated advances from affiliates, which totaled $157.6 million at June 30, 2006, $164.6 million at December 31, 2005 and $188.5 million at December 31, 2004.
 
(4)  Please read Note 6 of our unaudited pro forma consolidated financial statements included in this prospectus for a calculation of our pro forma net income per unit.
 
(5)  Vessels and equipment consists of (a) vessels, at cost less accumulated depreciation, (b) vessels under capital leases, at cost less accumulated depreciation, and (c) advances on newbuildings.
 
(6)  Total debt includes long-term debt, capital lease obligations and advances from affiliates.
 
(7)  Historical non-controlling interest represents minority interests of third parties in joint ventures to which OPCO or its subsidiaries were a party. Pro forma non-controlling interest represents these minority interests and the minority interests in OPCO’s five 50%-owned joint ventures that OPCO has consolidated on a pro forma basis, together with Teekay Shipping Corporation’s 74.0% limited partner interest in OPCO.
 
(8)  EBITDA is calculated as net income (loss) before interest, taxes, depreciation and amortization, as set forth in “— Non-GAAP Financial Measures” below, which also includes reconciliations of EBITDA to our most directly comparable GAAP financial measures. EBITDA includes the following items:
                                                                           
    Historical   Pro Forma
         
        Six    
        Months       Six
        Ended   Year   Months
    Years Ended December 31,   June 30,   Ended   Ended
            December 31,   June 30,
    2001   2002   2003   2004   2005   2005   2006   2005   2006
                                     
    (unaudited)   (audited)   (unaudited)   (unaudited)
                 
    (in thousands)
Vessel and equipment writedowns and gain (loss) on sale of vessels
    $—       $—       $(63 )     $3,725       $(2,820 )     $(5,369 )     $(1,845 )     $9,423       $305  
Gain (loss) on sale of marketable securities
    (1,415 )     (1,227 )     517       94,222                                
Foreign currency exchange gain (loss)
    3,685       (35,121 )     (17,821 )     (37,910 )     34,178       25,730       (18,688 )     9,281       (4,339 )
                                                       
  Total     $2,270       $(36,348 )     $(17,367 )     $60,037       $31,358       $20,361       $(20,533 )     $18,704       $(4,034 )
                                                       
(9)  Historical average number of ships consists of the average number of owned (excluding vessels owned by OPCO’s five 50%-owned joint ventures) and chartered-in vessels that were in OPCO’s possession during a period. Pro forma average number of ships consists of the average number of chartered-in and owned vessels (including vessels owned by OPCO’s 50%-owned joint ventures, as OPCO has consolidated the five joint ventures on a pro forma basis) in OPCO’s possession during the pro forma periods.
Non-GAAP Financial Measures
      This discussion presents:
  •  Non-GAAP financial measures included above in “Summary Historical and Pro Forma Financial and Operating Data;” and
 
  •  Reconciliations of these non-GAAP financial measures to our most directly comparable financial measures under GAAP.

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      Net Voyage Revenues. Consistent with general practice in the shipping industry, we use net voyage revenues (defined as voyage revenues less voyage expenses) as a measure of equating revenues generated from voyage charters to revenues generated from time charters, which assists us in making operating decisions about the deployment of vessels and their performance. Under time charters and bareboat charters the charterer typically pays the voyage expenses, whereas under voyage charter contracts and contracts of affreightment the shipowner typically pays the voyage expenses. Some voyage expenses are fixed, and the remainder can be estimated. If OPCO, as the shipowner, pays the voyage expenses, it typically passes the approximate amount of these expenses on to its customers by charging higher rates under the contract or billing the expenses to them. As a result, although voyage revenues from different types of contracts may vary, the net revenues after subtracting voyage expenses, which we refer to as net voyage revenues, are comparable across the different types of contracts. We principally use net voyage revenues, a non-GAAP financial measure, because it provides more meaningful information to us than voyage revenues, the most directly comparable GAAP financial measure. Net voyage revenues are also widely used by investors and analysts in the shipping industry for comparing financial performance between companies in the shipping industry to industry averages.
      The following table reconciles net voyage revenues with voyage revenues:
                                                                         
    Historical   Pro Forma
         
        Six    
        Months       Six
        Ended   Year   Months
    Years Ended December 31,   June 30,   Ended   Ended
            December 31,   June 30,
    2001   2002   2003   2004   2005   2005   2006   2005   2006
                                     
    (unaudited)   (audited)   (unaudited)   (unaudited)
                 
    (in thousands)
Voyage revenues
  $ 137,258     $ 156,745     $ 747,383     $ 986,504     $ 807,548     $ 400,315     $ 386,724     $ 678,888     $ 349,299  
Voyage expenses
    7,447       8,894       146,893       118,819       74,543       32,400       48,344       93,935       60,186  
                                                       
Net voyage revenues
  $ 129,811     $ 147,851     $ 600,490     $ 867,685     $ 733,005     $ 367,915     $ 338,380     $ 584,953     $ 289,113  
                                                       
      EBITDA. Earnings before interest, taxes, depreciation and amortization is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, as discussed below:
  •  Financial and operating performance. EBITDA assists our management and investors by increasing the comparability of the fundamental performance of OPCO and us from period to period and against the fundamental performance of other companies in our industry that provide EBITDA information. This increased comparability is achieved by excluding the potentially disparate effects between periods or companies of interest expense, taxes, depreciation or amortization, which items are affected by various and possibly changing financing methods, capital structure and historical cost basis and which items may significantly affect net income between periods. We believe that including EBITDA as a financial and operating measure benefits investors in (a) selecting between investing in us and other investment alternatives and (b) monitoring the ongoing financial and operational strength and health of OPCO and us in assessing whether to continue to hold common units.
 
  •  Liquidity. EBITDA allows us to assess the ability of assets to generate cash sufficient to service debt, make distributions and undertake capital expenditures. By eliminating the cash flow effect resulting from the existing capitalization of OPCO and other items such as drydocking expenditures, working capital changes and foreign currency exchange gains and losses (which may vary significantly from period to period), EBITDA provides a consistent measure of OPCO’s ability to generate cash over the long term. Management uses this information as a significant factor in determining (a) OPCO’s proper capitalization (including assessing how much debt to incur and whether changes to the capitalization should be made) and (b) whether to undertake material capital expenditures and how to finance them, all in light of existing cash distribution commitments to unitholders. Use of EBITDA as a liquidity measure also permits investors to assess the

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  fundamental ability of OPCO and us to generate cash sufficient to meet cash needs, including distributions on our common units.
      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.
                                                                         
    Historical   Pro Forma
         
        Six Months       Six
        Ended   Year   Months
    Years Ended December 31,   June 30,   Ended   Ended
            December 31,   June 30,
    2001   2002   2003   2004   2005   2005   2006   2005   2006
                                     
    (unaudited)   (audited)   (unaudited)   (unaudited)
                 
    (in thousands)
Reconciliation of “EBITDA” to “Net income (loss)”:
                                                                       
Net income (loss)
    $13,031       $(23,209 )     $63,513       $213,772       $84,747       $69,174       $(16,799 )     $27,118       $5,605  
Depreciation and amortization
    45,167       49,579       93,269       118,460       107,542       55,620       51,331       116,922       56,138  
Interest expense, net
    30,091       27,587       45,594       41,498       35,186       17,829       21,213       68,193       33,127  
Provision (benefit) for income taxes
    4,963       8,116       30,035       28,188       (13,873 )     (15,786 )     7,762       (13,873 )     7,762  
                                                       
EBITDA
    $93,252       $62,073       $232,411       $401,918       $213,602       $126,837       $63,507       $198,360       $102,632  
                                                       
Reconciliation of “EBITDA” to “Net operating cash flow”:
                                                                       
Net operating cash flow
    $34,054       $12,110       $227,297       $242,592       $152,687       $81,232       $48,705       $212,382       $81,895  
Non-controlling interest
    (2,345 )     (1,212 )     (2,763 )     (2,167 )     (229 )     (692 )     (414 )     (87,248 )     (21,541 )
Expenditures for drydocking
    4,774       9,038       11,980       9,174       8,906       2,679       3,780       8,906       3,780  
Interest expense, net
    30,091       27,587       45,594       41,498       35,186       17,829       21,213       66,973       32,516  
Gain (loss) on sale of vessels
                (63 )     3,725       9,423       4,831       305       9,423       305  
Gain (loss) on sale of marketable securities, net of writedowns
    (1,415 )     (1,227 )     (4,393 )     94,222                                
Loss on writedown of vessels and equipment
                            (12,243 )     (10,200 )     (2,150 )            
Write-off of capitalized loan costs
                                              (3,402 )      
Equity income (net of dividends received)
    2,540       2,849       (1,234 )     (1,338 )     2,449       2,573       691       (971 )     (49 )
Change in working capital
    25,341       12,000       (10,602 )     37,709       (22,951 )     (3,918 )     9,870       (22,951 )     9,870  
Foreign currency exchange gain (loss) and other, net
    212       928       (33,405 )     (23,497 )     40,374       32,503       (18,493 )     15,248       (4,144 )
                                                       
EBITDA
    $93,252       $62,073       $232,411       $401,918       $213,602       $126,837       $63,507       $198,360       $102,632  
                                                       

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RISK FACTORS
      Although many of our business risks are comparable to those a corporation engaged in a similar business would face, limited partner interests are inherently different from the capital stock of a corporation. You should carefully consider the following risk factors together with all of the other information included in this prospectus when evaluating an investment in our common units.
      If any of the following risks actually occur, our business, financial condition, operating results or cash flows could be materially adversely affected. In that case, we might not be able to pay distributions on our common units, the trading price of our common units could decline, and you could lose all or part of your investment.
Risks Inherent in Our Business
Because our partnership interest in OPCO currently represents our only cash-generating asset, our cash flow initially will depend completely on OPCO’s ability to make distributions to its partners, including us.
      Our cash flow initially will depend completely on OPCO’s distributions to us as one of its partners. The amount of cash OPCO can distribute to its partners will principally depend upon the amount of cash it generates from its operations, which may fluctuate from quarter to quarter based on, among other things:
  •  the rates its obtains from its charters and contracts of affreightment;
 
  •  the price and level of production of, and demand for, crude oil, particularly the level of production at the offshore oil fields OPCO services under contracts of affreightment;
 
  •  the level of its operating costs, such as the cost of crews and insurance;
 
  •  the number of off-hire days for its fleet and the timing of, and number of days required for, drydocking of its vessels;
 
  •  the rates, if any, at which OPCO may be able to redeploy shuttle tankers in the spot market as conventional oil tankers during any periods of reduced or terminated oil production at fields serviced by contracts of affreightment;
 
  •  delays in the delivery of any newbuildings or vessels undergoing conversion and the beginning of payments under charters relating to those vessels;
 
  •  prevailing global and regional economic and political conditions;
 
  •  currency exchange rate fluctuations; and
 
  •  the effect of governmental regulations and maritime self-regulatory organization standards on the conduct of its business.
      The actual amount of cash OPCO will have available for distribution also will depend on other factors such as:
  •  the level of capital expenditures it makes, including for maintaining vessels or converting existing vessels for other uses and complying with regulations;
 
  •  its debt service requirements and restrictions on distributions contained in its debt instruments;
 
  •  fluctuations in its working capital needs;
 
  •  its ability to make working capital borrowings; and
 
  •  the amount of any cash reserves, including reserves for future maintenance capital expenditures, working capital and other matters, established by the board of directors of our general partner.
      OPCO’s limited partnership agreement provides that it will distribute its available cash 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

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of cash reserves not distributed, will be 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 increase distributions.
      The source of our earnings and cash flow initially will consist exclusively of cash distributions from OPCO. Therefore, the amount of distributions we are able to make to our unitholders will fluctuate, initially, based on the level of distributions made by OPCO to its partners, including us, and, in the future, based on the level of distributions made by OPCO and any subsidiaries through which we later conduct operations. Neither OPCO nor any such operating 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 or to increase our quarterly distributions in the future. In addition, while we would expect to increase or decrease distributions to our unitholders if OPCO increases or decreases 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 OPCO to us.
      Our ability to distribute to our unitholders any cash we may receive from OPCO or any future operating subsidiaries is or may be limited by a number of factors, including, among others:
  •  interest expense and principal payments on any indebtedness we incur;
 
  •  restrictions on distributions contained in any of our current or future debt agreements;
 
  •  fees and expenses of us, our general partner, its affiliates or third parties we are required to reimburse or pay, including expenses we will incur as a result of being a public company; and
 
  •  reserves our general partner believes are prudent for us to maintain for the proper conduct of our business or to provide for future distributions.
      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.
The assumptions underlying our estimate of cash available for distribution that we include in “Our Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and are subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those forecasted.
      Our estimate of cash available for distribution set forth in “Our Cash Distribution Policy and Restrictions on Distributions” includes our estimate of operating results and cash flows for the year ending December 31, 2007. The estimate has been prepared by management and we have not received an opinion or report on it from our or any other independent auditor. The assumptions underlying the estimate are inherently uncertain and are subject to significant business, economic, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those estimated. If we do not achieve the estimated results, we may not be able to pay the full minimum quarterly distribution or any amount on the common units or subordinated units, in which event the market price of the common units may decline materially.
      The amount of available cash we need to pay the minimum quarterly distributions for four quarters on the common units, the subordinated units and the 2.0% general partner interest to be outstanding immediately after this offering is $28.0 million. Pro forma available cash to make distributions generated

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during the year ended December 31, 2005 and the twelve months ended June 30, 2006, would have been sufficient to allow us to pay 100.0% of the minimum quarterly distribution on the common units, but would have allowed us to pay only 98.8% and 67.4%, respectively, of the minimum quarterly distribution on the subordinated units during those periods. For a calculation of our ability to make distributions to unitholders based on our pro forma results for the year ended December 31, 2005 and the twelve months ended June 30, 2006 and for a forecast of our ability to pay the full minimum quarterly distributions on the common units, the subordinated units and the 2.0% general partner interest for the year ending December 31, 2007, please read “Our Cash Distribution Policy and Restrictions on Distributions.”
Our ability to grow may be adversely affected by our cash distribution policy. OPCO’s ability to meet its financial needs and grow may be adversely affected by its cash distribution policy.
      Our cash distribution policy, which is consistent with our partnership agreement, requires us to distribute all of our available cash 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, 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.
OPCO must make substantial capital expenditures to maintain the operating capacity of its 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.
      OPCO must make substantial capital expenditures to maintain, over the long term, the operating capacity of its fleet. We estimate that maintenance capital expenditures for OPCO, which initially is our only operating controlled affiliate and of which we will initially own a 26.0% interest, will average approximately $73.9 million per year, including for replacing current vessels at the end of their useful lives. We intend to expand our fleet through wholly owned subsidiaries, 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:
  •  the cost of labor and materials;
 
  •  customer requirements;
 
  •  increases in fleet size or the cost of replacement vessels;
 
  •  governmental regulations and maritime self-regulatory organization standards relating to safety, security or the environment; and
 
  •  competitive standards.
      In addition, actual maintenance capital expenditures will vary significantly from quarter to quarter based on the number of vessels drydocked during that quarter. Significant maintenance capital expenditures will reduce the amount of cash 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

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operating surplus. The amount of estimated maintenance capital expenditures deducted from operating surplus is subject to review and change by the conflicts committee 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 will be 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 will be required to make substantial capital expenditures to expand the size of our fleet. We generally will be 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 could increase or our unitholders could be diluted.
      We intend to make substantial capital expenditures to increase the size of our fleet. The total delivered cost for a shuttle tanker is approximately $60 to $100 million, an FSO unit is approximately $20 to $50 million and an FPSO unit is approximately $100 million to $1.0 billion, although actual costs will 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 Shipping Corporation regularly evaluate and pursue opportunities to provide marine transportation services for new or expanding offshore projects. Under an omnibus agreement that we will enter into at the closing of this offering, Teekay Shipping Corporation will be required to offer to us, within 365 days of their deliveries, certain shuttle tankers, FSO units and FPSO units Teekay Shipping Corporation may acquire, including two shuttle tankers and one FSO unit currently being converted from conventional oil tankers or being upgraded by Teekay Shipping Corporation. Neither we nor Teekay Shipping 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 Shipping Corporation is required to offer to us under the omnibus agreement. If we obtain from Teekay Shipping Corporation any offshore project, we will need to incur significant capital expenditures to build the offshore vessels needed to fulfill the project requirements. If we choose to purchase the shuttle tankers or FSO or FPSO units Teekay Shipping Corporation will be required to offer to us, we plan to finance the cost either through internally generated funds, debt or equity financings or the issuance to it of equity securities. Please read “Certain Relationships and Related Party Transactions — Omnibus Agreement.”
      We generally will be required to make installment payments on newbuildings prior to their delivery. We typically must pay 20.0% 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 two to three years from the order). 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 these and other 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

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meet our minimum quarterly distribution to unitholders, which could have a material adverse effect on our ability to make cash distributions.
OPCO’s substantial debt levels may limit its or our flexibility in obtaining additional financing, pursuing other business opportunities and paying distributions to you.
      Assuming we had completed this offering and the related transactions on June 30, 2006, our consolidated debt would have been $1.3 billion, all of which relates to OPCO. If we are awarded contracts for additional offshore projects, our consolidated debt and capital lease obligations may significantly increase. Following this offering, we and OPCO will continue to have the ability to incur additional debt, including approximately $300 million of borrowings available under OPCO’s revolving credit facilities, subject to limitations in the credit facilities. Our level of debt could have important consequences to us, including the following:
  •  our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be impaired or such financing may not be available on favorable terms;
 
  •  we will need a substantial portion of our cash flow to make principal and interest payments on our debt, reducing the funds that would otherwise be available for operations, future business opportunities and distributions to unitholders;
 
  •  our debt level will make us more vulnerable than our competitors with less debt to competitive pressures or a downturn in our business or the economy generally; and
 
  •  our debt level may limit our flexibility in responding to changing business and economic conditions.
      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 OPCO’s and our business and financing activities.
      The operating and financial restrictions and covenants in OPCO’s financing arrangements and any future financing agreements for OPCO or us could adversely affect its and our ability to finance future operations or capital needs or to engage, expand or pursue our business activities. For example, the arrangements may restrict OPCO’s or our ability to:
  •  incur or guarantee indebtedness;
 
  •  change ownership or structure, including mergers, consolidations, liquidations and dissolutions;
 
  •  make dividends or distributions;
 
  •  make certain negative pledges and grant certain liens;
 
  •  sell, transfer, assign or convey assets;
 
  •  make certain investments; and
 
  •  enter into a new line of business.
      In addition, OPCO’s credit facilities require OPCO to maintain a minimum liquidity (cash, cash equivalents and undrawn committed revolving credit lines) of $75.0 million, with aggregate liquidity of not less than 5.0% of the total consolidated debt of OPCO and its subsidiaries. OPCO’s or our ability to comply with covenants and restrictions contained in debt instruments may be affected by events beyond its or our control, including prevailing economic, financial and industry conditions. If market or other

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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 OPCO nor we might have, or be able to obtain, sufficient funds to make these accelerated payments. In addition, obligations under OPCO’s credit facilities are secured by certain of its vessels, and if it is unable to repay debt under the credit facilities, the lenders could seek to foreclose on those assets. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Liquidity and Capital Resources — Covenants and Other Restrictions in Our Financing Agreements” and “— Credit Facilities.”
Restrictions in OPCO’s debt agreements may prevent it or us from paying distributions.
      The payment of principal and interest on OPCO’s debt will reduce cash available for distribution to us and on our units. In addition, we anticipate that OPCO’s financing agreements will prohibit the payment of distributions upon the occurrence of the following events, among others:
  •  failure to pay any principal, interest, fees, expenses or other amounts when due;
 
  •  failure to notify the lenders of any material oil spill or discharge of hazardous material, or of any action or claim related thereto;
 
  •  breach or lapse of any insurance with respect to the vessels;
 
  •  breach of certain financial covenants;
 
  •  failure to observe any other agreement, security instrument, obligation or covenant beyond specified cure periods in certain cases;
 
  •  default under other indebtedness;
 
  •  bankruptcy or insolvency events;
 
  •  failure of any representation or warranty to be materially correct;
 
  •  a change of control, as defined in the applicable agreement; and
 
  •  a material adverse effect, as defined in the applicable agreement, occurs.
      For more information regarding these financing arrangements, please read “Management’s Discussion and Analysis of Financial Conditions and Results of Operations — Liquidity and Capital Resources.”
Net voyage revenues for Teekay Offshore Partners Predecessor declined for the first half of 2006 compared to the first half of 2005.
      Teekay Offshore Partners Predecessor generated net voyage revenues (i.e. voyage revenues less voyage expenses) of $733.0 million during the year ended December 31, 2005. Its net voyage revenues for the six months ended June 30, 2006 declined to $338.4 million from $367.9 million for the six months ended June 30, 2005, primarily as a result of:
  •  a decrease in the number of chartered-in conventional oil tankers held by an entity that OPCO sold to Teekay Shipping Corporation on July 1, 2006; and
 
  •  reduced volumes transported under contracts of affreightment during the second quarter of 2006 due to earlier-than-normal annual maintenance of certain North Sea oil field facilities, which typically occurs in the third quarter.
If net voyage revenues were to continue to decline, it could adversely affect our ability to make cash distributions.
OPCO derives a substantial majority of its 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.
      OPCO has derived, and we believe it will continue to derive, a substantial majority of revenues and cash flow from a limited number of customers. Teekay Shipping Corporation and Statoil ASA accounted for approximately 27% and 26%, respectively, of combined consolidated voyage revenues during the six

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months ended June 30, 2006, approximately 31% and 23%, respectively, of combined consolidated voyage revenues during 2005, and approximately 40% and 19%, respectively, of combined consolidated voyage revenues during 2004. No other customer accounted for 10% or more of revenues during any of these periods. Assuming we had completed this offering and the related transactions on January 1, 2005, these two customers would have accounted for approximately 19% and 29%, respectively, of consolidated voyage revenues during the six months ended June 30, 2006 and approximately 18% and 27%, respectively, during 2005.
      If OPCO loses a key customer, it 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, OPCO may be unable to acquire an adequate replacement vessel. Any replacement newbuilding would not generate revenues during its construction and OPCO may be unable to charter any replacement vessel on terms as favorable to it as those of the terminated charter.
      The loss of any of OPCO’s 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 will depend on Teekay Shipping Corporation to assist us and OPCO in operating our businesses and competing in our markets. In the past, OPCO generally fulfilled its own managerial, operational and administrative needs.
      We, OPCO and operating subsidiaries of OPCO will, and any of our future operating subsidiaries may, enter into various services agreements with certain subsidiaries of Teekay Shipping 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 will depend significantly upon the satisfactory performance of these services by the Teekay Shipping 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 its operating subsidiaries. Prior to this offering, OPCO generally fulfilled its own managerial, operational and administrative needs, but relied upon affiliates of Teekay Shipping Corporation to provide technical services. Following this offering, OPCO’s operating subsidiaries will provide technical and voyage management services for their conventional Aframax tankers, but will rely on certain subsidiaries of Teekay Shipping Corporation for substantially all other services.
      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 will depend largely on our ability to leverage our relationship with Teekay Shipping Corporation and its reputation and relationships in the shipping industry. If Teekay Shipping Corporation suffers material damage to its reputation or relationships, it may harm our or OPCO’s ability to:
  •  renew existing charters and contracts of affreightment upon their expiration;
 
  •  obtain new charters and contracts of affreightment;
 
  •  successfully interact with shipyards during periods of shipyard construction constraints;
 
  •  obtain financing on commercially acceptable terms; or
 
  •  maintain satisfactory relationships with suppliers and other third parties.
      If our or OPCO’s 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.

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      OPCO’s operating subsidiaries and any of our future operating subsidiaries may also contract with certain subsidiaries of Teekay Shipping Corporation for the Teekay Shipping 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. OPCO’s operating subsidiaries do not currently have this type of arrangement with Teekay Shipping 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:
  •  decreases in the actual or projected price of oil, which could lead to a reduction in or termination of production of oil at certain fields we service or a reduction in exploration for or development of new offshore oil fields;
 
  •  increases in the production of oil in areas linked by pipelines to consuming areas, the extension of existing, or the development of new, pipeline systems in markets we may serve, or the conversion of existing non-oil pipelines to oil pipelines in those markets;
 
  •  decreases in the consumption of oil due to increases in its price relative to other energy sources, other factors making consumption of oil less attractive or energy conservation measures;
 
  •  availability of new, alternative energy sources; and
 
  •  negative global or regional economic or political conditions, particularly in oil consuming regions, which could reduce energy consumption or its growth.
      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 OPCO’s contracts of affreightment are based on the volume of oil it transports, OPCO’s utilization of its shuttle tanker fleet and the success of its shuttle tanker business depends upon continued production from existing or new oil fields it services, which is beyond our or OPCO’s control and generally declines naturally over time. Any decrease in the volume of oil OPCO transports under contracts of affreightment could adversely affect our business and operating results.
      A majority of OPCO’s shuttle tankers operate under contracts of affreightment. Payments under these contracts of affreightment are based upon the volume of oil OPCO transports, which depends upon the level of oil production at the fields OPCO services under the contracts. Oil production levels are affected by several factors, all of which are beyond our or OPCO’s 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 OPCO transports 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 OPCO services 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 OPCO may be able to redeploy the affected shuttle tankers may be

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lower than the rates previously earned by the vessels under the contracts of affreightment, which would reduce its and our results of operations and ability to make cash distributions.
The duration of many of OPCO’s 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, OPCO will no longer generate revenue under the related contract and will need to seek to redeploy affected vessels.
      Many of OPCO’s 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, OPCO no longer will generate revenue under the related contract. Other shuttle tanker and FSO contracts under which OPCO’s 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 OPCO is unable to promptly redeploy any affected vessels at rates at least equal to those under the contracts, if at all, its and our operating results will be harmed. Any potential redeployment may not be under long-term contracts, which may affect the stability of OPCO’s and our cash flow and ability to make cash distributions.
The results of OPCO’s 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 OPCO’s 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 OPCO redeploys affected shuttle tankers as conventional oil tankers while platform maintenance and repairs are conducted, the overall financial results for its 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, OPCO seeks to coordinate some of the general drydocking schedule of its 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:
  •  industry relationships and reputation for customer service and safety;
 
  •  experience and quality of ship operations;
 
  •  quality, experience and technical capability of the crew;
 
  •  relationships with shipyards and the ability to get suitable berths;
 
  •  construction management experience, including the ability to obtain on-time delivery of new vessels according to customer specifications;
 
  •  willingness to accept operational risks pursuant to the charter, such as allowing termination of the charter for force majeure events; and
 
  •  competitiveness of the bid in terms of overall price.

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      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 Shipping 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.
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 additional, substantial liquidated damages.
      The completion and delivery of newbuildings or vessel conversions could be delayed because of:
  •  quality or engineering problems, the risk of which may be increased with FPSO units due to their technical complexity;
 
  •  changes in governmental regulations or maritime self-regulatory organization standards;
 
  •  work stoppages or other labor disturbances at the shipyard;
 
  •  bankruptcy or other financial crisis of the shipbuilder;
 
  •  a backlog of orders at the shipyard;
 
  •  political or economic disturbances;
 
  •  weather interference or catastrophic event, such as a major earthquake or fire;
 
  •  requests for changes to the original vessel specifications;
 
  •  shortages of or delays in the receipt of necessary construction materials, such as steel;
 
  •  inability to finance the construction or conversion of the vessels; or
 
  •  inability to obtain requisite permits or approvals.
      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.

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      Six of OPCO’s fixed-term charters and eleven contracts of affreightment (representing approximately 10% 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, vessel values may fluctuate substantially and, if these values are lower at a time when we are or OPCO is attempting to dispose of vessels, we or OPCO may incur a loss.
      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:
  •  prevailing economic conditions in oil and energy markets;
 
  •  a substantial or extended decline in demand for oil;
 
  •  increases in the supply of vessel capacity; and
 
  •  the cost of retrofitting or modifying existing vessels, as a result of technological advances in vessel design or equipment, changes in applicable environmental or other regulations or standards, or otherwise.
      If a charter or contract of affreightment terminates, we or OPCO may be unable to re-deploy the affected vessels at attractive rates and, rather than continue to incur costs to maintain and finance them, may seek to dispose of them. Inability to dispose of vessels at a reasonable value could result in a loss on their sale and adversely affect our or OPCO’s results of operations and financial condition.
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 Shipping 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:
  •  fail to realize anticipated benefits, such as new customer relationships, cost-savings or cash flow enhancements;
 
  •  be unable to hire, train or retain qualified shore and seafaring personnel to manage and operate our growing business and fleet;
 
  •  decrease our liquidity by using a significant portion of available cash or borrowing capacity to finance acquisitions;
 
  •  significantly increase our interest expense or financial leverage if we incur additional debt to finance acquisitions;
 
  •  incur or assume unanticipated liabilities, losses or costs associated with the business or vessels acquired; or
 
  •  incur other significant charges, such as impairment of goodwill or other intangible assets, asset devaluation or restructuring charges.

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      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, such as the attacks that occurred in the United States on September 11, 2001, and the current conflicts in Iraq and Afghanistan and other current and future conflicts, may adversely affect our or OPCO’s business, operating results, financial condition, 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 or OPCO’s 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 or OPCO’s cash flow and business.
Operations outside the United States expose us and OPCO to political, governmental and economic instability, which could harm our and its operations.
      Because OPCO’s operations are primarily conducted outside of the United States, they may be affected by economic, political and governmental conditions in the countries where it engages in business or where its vessels are registered. Any disruption caused by these factors could harm its or our business, including by reducing the levels of oil exploration, development and production activities in these areas. OPCO derives some of its revenues from shipping oil from politically unstable regions. Conflicts in these regions have included attacks on ships and other efforts to disrupt shipping. In addition, vessels trading in some of these regions have been subject, in limited instances, to piracy. Hostilities or other political instability in regions where OPCO operates or where we or OPCO may operate could have a material adverse effect on the growth of our or its 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 or OPCO’s 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 OPCO’s vessels operate. An incident involving significant loss of product or environmental contamination by any of its vessels could harm its and our reputation and business.
      Vessels and their cargoes and oil production facilities OPCO services are at risk of being damaged or lost because of events such as:
  •  marine disasters;
 
  •  bad weather;

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  •  mechanical failures;
 
  •  grounding, capsizing, fire, explosions and collisions;
 
  •  piracy;
 
  •  human error; and
 
  •  war and terrorism.
      OPCO’s shuttle tanker fleet primarily operates in the North Sea. Harsh weather conditions in this or other regions in which it operates or we or it in the future may operate may increase the risk of collisions, oil spills, or mechanical failures.
      An accident involving any of our or OPCO’s vessels could result in any of the following:
  •  death or injury to persons, loss of property or damage to the environment and natural resources;
 
  •  delays in the delivery of cargo;
 
  •  loss of revenues from charters or contracts of affreightment;
 
  •  liabilities or costs to recover any spilled oil or other petroleum products and to restore the eco-system where the spill occurred;
 
  •  governmental fines, penalties or restrictions on conducting business;
 
  •  higher insurance rates; and
 
  •  damage to our and OPCO’s reputation and customer relationships generally.
      Any of these results could have a material adverse effect on our and OPCO’s 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. For example, in the first quarter of 2005, three oil fields in the North Sea temporarily shut down as a result of a gas leakage and equipment problems of third parties, which resulted in a decrease in our net voyage revenues during the shutdown.
Insurance may be insufficient to cover losses that may occur to our or OPCO’s property or result from our or its 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 OPCO’s vessels are not insured against loss of revenues resulting from vessel off-hire time, based on the cost of this insurance compared to OPCO’s off-hire experience. Any claims 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 OPCO or we may be required to make additional payments over and above budgeted premiums if member claims exceed association reserves.
      We or OPCO 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 or OPCO’s business, financial condition and operating results. Any uninsured or underinsured loss could harm our or OPCO’s 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.

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      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 or OPCO 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 or OPCO’s 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.
      OPCO’s operations are affected by extensive and changing environmental protection laws and other regulations and international conventions, including those relating to equipping and operating offshore vessels and vessel safety. OPCO has incurred, and expects to continue to incur, substantial expenses in complying with these laws and regulations, including expenses for vessel modifications and changes in operating procedures. Additional laws and regulations may be adopted that could limit our or OPCO’s ability to do business or further increase costs, which could harm our or OPCO’s business. 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 operations. We may become subject to additional laws and regulations if we enter new markets or trades.
      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, OPCO must make significant expenditures for sophisticated equipment, reporting and redundancy systems on its shuttle tankers. Additional regulations and requirements may be adopted or imposed that could limit OPCO’s or our ability to do business or further increase the cost of doing business in the North Sea or other regions in which OPCO now or we or OPCO in the future may operate.
      The United States Oil Pollution Act of 1990 (or OPA 90) also has increased expenses in the industry. OPA 90 provides for potentially unlimited joint, several, and strict liability for owners, operators and demise or 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. OPA 90 applies to discharges of any oil from a vessel, including discharges of oil tanker cargoes and discharges of fuel and lubricants from an oil tanker. To comply with OPA 90, vessel owners generally incur increased costs in meeting additional maintenance and inspection requirements, in developing contingency arrangements for potential spills and in obtaining required insurance coverage. OPA 90 contains financial responsibility requirements for vessels operating in U.S. waters and requires vessel owners and operators to establish and maintain with the U.S. Coast Guard evidence of insurance or of qualification as a self-insurer or other acceptable evidence of financial responsibility sufficient to meet certain potential liabilities under OPA 90 and the U.S. Comprehensive Environmental Response, Compensation and Liability Act (or CERCLA), which imposes similar liabilities upon owners, operators and bareboat charterers of vessels from which a discharge of “hazardous substances” (other than oil) occurs. Under OPA 90 and CERCLA, owners, operators and bareboat charterers are jointly and severally strictly liable for costs of cleanup and damages resulting from a discharge or threatened discharge within U.S. waters. This means we and OPCO may be subject to liability even if not negligent or at fault. OPA 90 and CERCLA do not preclude claimants from seeking damages resulting from the discharge of oil and hazardous substances under other applicable law, including maritime tort law.
      Many states in the United States bordering on a navigable waterway have enacted legislation providing for potentially unlimited strict liability without regard to fault for the discharge of pollutants

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within their waters. An oil spill or other event could result in significant liability, including fines, penalties, criminal liability and costs for natural resource damages. The potential for these releases could increase to the extent we increase our operations in U.S. waters.
      In addition, we believe that the heightened environmental, quality and security concerns of insurance underwriters, regulators and charterers will generally lead to additional regulatory requirements, including enhanced risk assessment and security requirements and greater inspection and safety requirements on all vessels in the oil tanker markets.
      These requirements are likely to add incremental costs to our and OPCO’s operations and the failure to fulfill these requirements may affect the ability of our and OPCO’s vessels to obtain and, possibly, collect on insurance or to obtain the required certificates for entry into the different ports where OPCO operates.
      Our and OPCO’s business is indirectly affected by price controls, tax and accounting regimes and other regulations that apply to the oil industry generally and offshore exploration, development and production activities specifically. New regulations that restrict any of these activities could decrease demand for services and have a material adverse effect on our or OPCO’s business, financial condition and operating results.
Exposure to currency exchange rate fluctuations will result in fluctuations in cash flows and operating results.
      OPCO currently is paid in Norwegian Kroners under three charters and contracts of affreightment. In addition, we, OPCO and its operating subsidiaries will enter into services agreements with certain subsidiaries of Teekay Shipping Corporation pursuant to which those subsidiaries will provide to us and OPCO administrative services and to OPCO’s operating subsidiaries managerial, operational and administrative services. Under the services agreements, the applicable subsidiaries of Teekay Shipping 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 Shipping 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.
Our lack of experience in FPSO operations and reliance on Petrojarl ASA could affect our ability to enter and operate in the FPSO sector.
      We have no experience providing FPSO offshore services, which are technically complicated. Teekay Shipping Corporation has entered into a joint venture agreement with Petrojarl ASA, which Teekay Shipping Corporation controls, that focuses on pursuing new projects involving FPSO units and FSO units. Pursuant to the omnibus agreement to be entered into upon the closing of this offering, Teekay Shipping Corporation will be required to offer to us its interest in certain FPSO projects under the joint venture agreement. Please read “Certain Relationships and Related Party Transaction — Omnibus Agreement” and “— Joint Venture with Petrojarl ASA.” We would rely on Petrojarl ASA’s expertise to enter the FPSO sector through any of these opportunities. If Petrojarl ASA was unable or unwilling to provide engineering and other services to the joint venture or us, it would materially and adversely affect our ability to operate in the FPSO sector.
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.

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We have no history operating as a separate publicly traded entity and will incur increased costs as a result of being a publicly traded limited partnership.
      We have no history operating as a separate publicly traded entity. As a publicly traded limited partnership, we will be required to comply with the SEC’s reporting requirements and with corporate governance and related requirements of the Sarbanes-Oxley Act, the SEC and the securities exchange on which our common units will be listed. We will incur significant legal, accounting and other expenses in complying with these and other applicable regulations. We anticipate that our incremental general and administrative expenses as a publicly traded limited partnership will be approximately $1.5 million annually, and will include costs associated with annual reports to unitholders, tax return preparation, investor relations, registrar and transfer agent’s fees, incremental director and officer liability insurance costs and officer and director compensation.
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 Shipping Corporation’s seafarers that crew certain OPCO vessels and Norwegian-based onshore operational staff that provide services to us, OPCO and its operating subsidiaries are employed under collective bargaining agreements. Teekay Shipping Corporation may be subject to additional labor agreements in the future. Teekay Shipping Corporation may be subject to 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. Although these negotiations have not caused labor disruptions in the past, any future labor disruptions could harm our or OPCO’s operations and could have a material adverse effect on our or its business, results of operations and financial condition and ability to make cash distributions.
Risks Inherent in an Investment in Us
Teekay Shipping Corporation and its affiliates may engage in competition with OPCO and us.
      Teekay Shipping Corporation and its affiliates may engage in competition with us. Pursuant to the omnibus agreement, Teekay Shipping Corporation, Teekay LNG Partners L.P. and their respective controlled affiliates (other than us, OPCO and its and our subsidiaries) generally will agree 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 Shipping Corporation, Teekay LNG Partners L.P. and any of such controlled affiliates to:
  •  own, operate and charter offshore vessels if the remaining duration of the time charter or contract of affreightment for the vessel, excluding any extension options, is less than three years;
 
  •  own, operate and charter offshore vessels and related time charters or contracts of affreightment acquired as part of a business or package of assets if a majority of the value of the total assets or business acquired is not attributable to the offshore vessels and related contracts, as determined in good faith by Teekay Shipping Corporation’s board of directors or the conflicts committee of the board of directors of Teekay LNG Partners’ general partner, as applicable; however, if at any time Teekay Shipping Corporation or Teekay LNG Partners completes such an acquisition, it must, within 365 days of the closing of the transaction, offer to sell the offshore vessels and related contracts to us for their fair market value plus any additional tax or other similar costs to Teekay Shipping Corporation or Teekay LNG Partners that would be required to transfer the vessels and contracts to us separately from the acquired business or package of assets; or
 
  •  own, operate and charter offshore vessels and related time charters and contracts of affreightment that relate to a tender, bid or award for a proposed offshore project that Teekay Shipping

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  Corporation or any of its subsidiaries has submitted or received or hereafter submits or receives; however, at least 365 days after the delivery date of any such offshore vessel, Teekay Shipping Corporation must offer to sell the vessel and related time charter or contract of affreightment to us, with the vessel valued (a) for newbuildings originally contracted by Teekay Shipping Corporation, at its “fully-built-up cost” (which represents the aggregate expenditures incurred (or to be incurred prior to delivery to us) by Teekay Shipping Corporation to acquire, construct and/or convert and bring such offshore vessel to the condition and location necessary for our intended use, plus project development costs for completed projects and projects that were not completed but, if completed, would have been subject to an offer to us) and (b) for any other vessels, Teekay Shipping Corporation’s cost to acquire a newbuilding from a third party or the fair market value of an existing vessel, as applicable, plus in each case any subsequent expenditures that would be included in the “fully-built-up cost” of converting the vessel prior to delivery to us.

      If we decline the offer to purchase the offshore vessels and time charters described in the immediately preceding two bullet points, Teekay Shipping Corporation or Teekay LNG Partners, 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 Shipping Corporation, Teekay LNG Partners and any of their respective controlled affiliates (other than us, OPCO and its and our subsidiaries) may:
  •  acquire, operate and charter offshore vessels and related time charters and contracts of affreightment if our general partner has previously advised Teekay Shipping Corporation or Teekay LNG Partners that our general partner’s board of directors has elected, with the approval of its conflicts committee, not to cause us or our controlled affiliates to acquire or operate the vessels and related time charters and contracts of affreightment;
 
  •  acquire up to a 9.9% equity ownership, voting or profit participation interest in any publicly-traded company engages in, acquires or invests in any business that owns, operates or charters offshore vessels and related time charters and contracts of affreightment;
 
  •  provide ship management services relating to owning, operating or chartering offshore vessels and related time charters and contracts of affreightment; or
 
  •  own a limited partner interest in OPCO or own shares of Petrojarl ASA.
      In addition, Petrojarl ASA has the right to continue to own, operate and charter its four FPSOs and one shuttle tanker until such time, if ever, Teekay Shipping Corporation acquires 100% of Petrojarl ASA. If that happens, Teekay Shipping Corporation will be required to offer to us certain of Petrojarl ASA’s fleet and Petrojarl ASA’s interests in its joint venture projects with Teekay Shipping Corporation.
      If there is a change of control of Teekay Shipping Corporation or of the general partner of Teekay LNG Partners, 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. Please read “Certain Relationships and Related Party Transactions — Omnibus Agreement.”
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 your detriment.
      Following this offering, Teekay Shipping Corporation will indirectly own the 2.0% general partner interest and a 63.0% limited partner interest in us and will own and control 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 Shipping Corporation. Furthermore, certain directors and officers of our general partner may be directors or officers of affiliates of our general partner. Conflicts of interest may arise between Teekay Shipping 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

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partner may favor its own interests and the interests of its affiliates over the interests of our unitholders. Please read “— Our partnership agreement limits our general partner’s fiduciary duties to unitholders and restricts the remedies available to unitholders for actions taken by our general partner.” These conflicts include, among others, the following situations:
  •  neither our partnership agreement nor any other agreement requires Teekay Shipping Corporation or its affiliates (other than our general partner) to pursue a business strategy that favors us or utilizes our assets, and Teekay Shipping Corporation’s officers and directors have a fiduciary duty to make decisions in the best interests of the stockholders of Teekay Shipping Corporation, which may be contrary to our interests;
 
  •  the Chief Executive Officer and Chief Financial Officer and three of the directors of our general partner also serve as executive officers or directors of Teekay Shipping Corporation and the general partner of Teekay LNG Partners L.P.;
 
  •  our general partner is allowed to take into account the interests of parties other than us, such as Teekay Shipping Corporation, in resolving conflicts of interest, which has the effect of limiting its fiduciary duty to our unitholders;
 
  •  our general partner has limited its liability and reduced its fiduciary duties under the laws of the Marshall Islands, while also restricting the remedies available to our unitholders and, as a result of purchasing common units, unitholders are treated as having agreed to the modified standard of fiduciary duties and to certain actions that may be taken by our general partner, all as set forth in our partnership agreement;
 
  •  our general partner determines the amount and timing of our asset purchases and sales, capital expenditures, borrowings, issuances of additional partnership securities and reserves, each of which can affect the amount of cash that is available for distribution to our unitholders;
 
  •  in some instances, our general partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make a distribution on the subordinated units or to make incentive distributions or to accelerate the expiration of the subordination period;
 
  •  our general partner determines which costs incurred by it and its affiliates are reimbursable by us;
 
  •  our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us on terms that are fair and reasonable or entering into additional contractual arrangements with any of these entities on our behalf;
 
  •  our general partner intends to limit its liability regarding our contractual and other obligations;
 
  •  our general partner may exercise its right to call and purchase common units if it and its affiliates own more than 80.0% of our common units;
 
  •  our general partner controls the enforcement of obligations owed to us by it and its affiliates; and
 
  •  our general partner decides whether to retain separate counsel, accountants or others to perform services for us.
      Please read “Certain Relationships and Related Party Transactions,” “Conflicts of Interest and Fiduciary Duties” and “The Partnership Agreement.”
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 Shipping 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 Shipping Corporation, on the other hand. Teekay Shipping Corporation owns a 74.0% limited partner interest in OPCO and controls

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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 Shipping 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 always be in the best interest of us or our unitholders.
      For example, conflicts of interest may arise in the following situations:
  •  the allocation of shared overhead expenses to OPCO and us;
 
  •  the interpretation and enforcement of contractual obligations between us and our affiliates, on the one hand, and OPCO or its subsidiaries, on the other hand;
 
  •  the determination and timing of the amount of cash to be distributed to OPCO’s partners and the amount of cash to be reserved for the future conduct of OPCO’s business;
 
  •  the decision as to whether OPCO should make asset or business acquisitions or dispositions, and on what terms;
 
  •  the determination or the amount and timing of OPCO’s capital expenditures;
 
  •  the determination of whether OPCO should use cash on hand, borrow or issue equity to raise cash to finance maintenance or expansion capital projects, repay indebtedness, meet working capital needs or otherwise; and
 
  •  any decision we make to engage in business activities independent of, or in competition with, OPCO.
The fiduciary duties of the officers and directors of our general partner may conflict with those of the officers and directors of OPCO’s general partner.
      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 Shipping 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 Shipping Corporation. Consequently, these officers and directors may encounter situations in which their fiduciary obligations to OPCO, Teekay Shipping 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. For a more detailed description of the conflicts of interest involving our general partner, please read “Conflicts of Interest and Fiduciary Duties.”
Our partnership agreement limits our general partner’s fiduciary duties to our unitholders and restricts the remedies available to unitholders for actions taken by our general partner.
      Our partnership agreement contains provisions that reduce the standards to which our general partner would otherwise be held by Marshall Islands law. For example, our partnership agreement:
  •  permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner. Where our partnership agreement permits, our general partner may consider only the interests and factors that it desires, and in such cases it has no duty or obligation to give any consideration to any interest of, or factors affecting us, our affiliates or our unitholders. Decisions made by our general partner in its individual capacity will be made by its sole owner, Teekay Shipping Corporation, and not by the board of directors of our general partner. Examples include the exercise of its call right, its voting rights with respect to the units it owns, its registration rights and its determination whether to consent to any merger or consolidation of the partnership;

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  •  provides that our general partner is entitled to make other decisions in “good faith” if it reasonably believes that the decision is in our best interests;
 
  •  generally provides that affiliated transactions and resolutions of conflicts of interest not approved by the conflicts committee of the board of directors of our general partner and not involving a vote of unitholders must be on terms no less favorable to us than those generally being provided to or available from unrelated third parties or be “fair and reasonable” to us and that, in determining whether a transaction or resolution is “fair and reasonable,” our general partner may consider the totality of the relationships between the parties involved, including other transactions that may be particularly favorable or advantageous to us; and
 
  •  provides that our general partner and its officers and directors will not be liable for monetary damages to us or our limited partners for any acts or omissions unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that the general partner or those other persons acted in bad faith or engaged in fraud, willful misconduct or gross negligence.
      In order to become a limited partner of our partnership, a common unitholder is required to agree to be bound by the provisions in the partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Fiduciary Duties — Fiduciary Duties.”
Fees and cost reimbursements, which our general partner will determine for services provided to us, will be substantial and will reduce our cash available for distribution to you.
      Prior to making any distribution on the common units, we or OPCO will pay fees for services provided to us, OPCO and its operating subsidiaries by certain subsidiaries of Teekay Shipping Corporation, and we will reimburse our general partner for all expenses it incurs on our behalf. These fees will be negotiated on our behalf by our general partner, and our general partner will also determine the amounts it is reimbursed. These fees and expenses will include all costs incurred in providing certain administrative services to us and OPCO and certain advisory, ship management, technical and administrative services to OPCO’s operating subsidiaries, including services rendered to us pursuant to the agreements described below under “Certain Relationships and Related Party Transactions — Advisory and Administrative Services Agreements.” The payment of fees to Teekay Shipping Corporation and reimbursement of expenses to our general partner could adversely affect our ability to pay cash distributions to you.
Our general partner, which is owned and controlled by Teekay Shipping Corporation, makes all decisions on our behalf, subject to the limited voting rights of our common unitholders. Even if public unitholders are dissatisfied, they cannot initially remove our general partner without Teekay Shipping Corporation’s consent.
      Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Unitholders did not elect our general partner or its board of directors and will have no right to elect our general partner or its board of directors on an annual or other continuing basis. Teekay Shipping Corporation, which owns and controls our general partner, appoints our general partner’s board of directors, which in turn appoints the board of directors of OPCO’s general partner. Our general partner makes all decisions on our behalf. If the unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. As a result of these limitations, the price at which the common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.
      The unitholders will be unable initially to remove our general partner without its consent because our general partner and its affiliates will own sufficient units upon completion of this offering to be able to prevent its removal. The vote of the holders of at least 662/3% of all outstanding units, voting together as a single class, is required to remove our general partner. Following the closing of this offering, Teekay

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Shipping Corporation will own 64.3% of the units. Also, if our general partner is removed without “cause” during the subordination period and no units held by our general partner and Teekay Shipping Corporation are voted in favor of that removal, all remaining subordinated units will automatically convert into common units and any existing arrearages on the common units will be extinguished. A removal of our general partner under these circumstances would adversely affect the common units by prematurely eliminating their distribution and liquidation preference over the subordinated units, which would otherwise have continued until we had met certain distribution and performance tests. “Cause” is narrowly defined to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding our general partner liable for actual fraud or willful or wanton misconduct in its capacity as our general partner. Cause does not include most cases of charges of poor management of the business.
      Furthermore, unitholders’ voting rights are further restricted by our partnership agreement provision providing that any units held by a person that owns 20.0% or more of any class of units then outstanding, other than our general partner, its affiliates, their transferees, and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot vote on any matter. Our partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.
The control of our general partner may be transferred to a third party without unitholder consent.
      Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders. In addition, our partnership agreement does not restrict the ability of the members of our general partner from transferring their respective membership interests in our general partner to a third party. In the event of any such transfer, the new members of our general partner would be in a position to replace the board of directors and officers of our general partner with their own choices and to control the decisions taken by the board of directors and officers.
If we cease to control OPCO, we may be deemed to be an investment company under the Investment Company Act of 1940.
      If we cease to manage and control OPCO and are deemed to be an investment company under the Investment Company Act of 1940 because of our ownership of OPCO partnership interests, we would either have to register as an investment company under the Investment Company Act, obtain exemptive relief from the U.S. Securities and Exchange Commission or modify our organizational structure or our contract rights to fall outside the definition of an investment company. Registering as an investment company could, among other things, materially limit our ability to engage in transactions with affiliates, including the purchase and sale of certain securities or other property to or from our affiliates, restrict our ability to borrow funds or engage in other transactions involving leverage, and require us to add additional directors who are independent of us or our affiliates.
You will experience immediate and substantial dilution of $15.72 per common unit.
      The assumed initial public offering price of $20.00 per common unit exceeds pro forma net tangible book value of $4.28 per common unit. Based on an assumed initial public offering price of $20.00 per unit, you will incur immediate and substantial dilution of $15.72 per common unit. This dilution results primarily because the assets contributed by our general partner and its affiliates are recorded at their historical cost, and not their fair value, in accordance with GAAP. Please read “Dilution.”
We may issue additional equity securities without your approval, which would dilute your ownership interests.
      Our general partner, without the approval of our unitholders, may cause us to issue an unlimited number of additional units or other equity securities.

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      The issuance by us of additional common units or other equity securities will have the following effects:
  •  our unitholders’ proportionate ownership interest in us will decrease;
 
  •  the amount of cash available for distribution on each unit may decrease;
 
  •  because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment of the minimum quarterly distribution will be borne by our common unitholders will increase;
 
  •  the relative voting strength of each previously outstanding unit may be diminished; and
 
  •  the market price of the common units may decline.
In establishing cash reserves, our general partner may reduce the amount of cash available for distribution to you.
      OPCO’s partnership agreement provides that the board of directors of our general partner, on our behalf, will approve the amount of reserves from OPCO’s cash flow that will be retained by OPCO to fund its future operating expenditures. Our partnership agreement requires our general partner to deduct from our operating surplus cash reserves that it determines are necessary to fund our future operating expenditures. These reserves will affect the amount of cash available for distribution by OPCO to us and by us to our unitholders. In addition, our general partner may establish reserves for distributions on the subordinated units, but only if those reserves will not prevent us from distributing the full minimum quarterly distribution, plus any arrearages, on the common units for the following four quarters. As described above in “Risks Inherent in Our Business — OPCO must make substantial capital expenditures to maintain the operating capacity of its 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,” our partnership agreement requires our general partner each quarter to deduct from operating surplus estimated maintenance capital expenditures, as opposed to actual expenditures, which could reduce the amount of available cash for distribution.
Our general partner has a call right that may require you to sell your common units at an undesirable time or price.
      If at any time our general partner and its affiliates own more than 80.0% of the common units, our general partner will have the right, which it may assign to any of its affiliates or to us, but not the obligation, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than their then-current market price as determined in accordance with our partnership agreement. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. For additional information about the call right, please read “The Partnership Agreement — Call Right.”
      At the completion of this offering and assuming no exercise of the underwriters’ over-allotment option, Teekay Shipping Corporation, an affiliate of our general partner, will own approximately 28.6% of the common units. At the end of the subordination period, assuming no additional issuances of common units, no exercise of the underwriters’ over-allotment option and conversion of our subordinated units into common units, Teekay Shipping Corporation will own approximately 64.3% of the common units. Teekay Shipping Corporation may acquire additional common units from us in connection with future transactions or through open-market or negotiated purchases.
Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units.
      Our partnership agreement restricts unitholders’ voting rights by providing that any units held by a person that owns 20.0% or more of any class of units then outstanding, other than our general partner, its

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affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot vote on any matter. The partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.
You may not have limited liability if a court finds that unitholder action constitutes control of our business.
      As a limited partner in a partnership organized under the laws of the Marshall Islands, you could be held liable for our obligations to the same extent as a general partner if you participate in the “control” of our business. Our general partner generally has unlimited liability for the obligations of the partnership, such as its debts and environmental liabilities, except for those contractual obligations of the partnership that are expressly made without recourse to our general partner. In addition, the Marshall Islands Limited Partnership Act (or the Marshall Islands Act) provides that a unitholder may be liable to us for the amount of a distribution for a period of three years from the date of the distribution, as described below under “Unitholders may have liability to repay distributions.” In addition, the limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some jurisdictions in which we do business. Please read “The Partnership Agreement — Limited Liability” for a discussion of the implications of the limitations on liability to a unitholder.
We can borrow money to pay distributions, which would reduce the amount of credit available to operate our business.
      Our partnership agreement will allow us to make working capital borrowings to pay distributions. Accordingly, we can make distributions on all our units even though cash generated by our operations may not be sufficient to pay such distributions. Any working capital borrowings by us to make distributions will reduce the amount of working capital borrowings we can make for operating our business. For more information, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Credit Facilities.”
Increases in interest rates may cause the market price of our common units to decline.
      An increase in interest rates may cause a corresponding decline in demand for equity investments in general, and in particular for yield-based equity investments such as our common units. Any such increase in interest rates or reduction in demand for our common units resulting from other relatively more attractive investment opportunities may cause the trading price of our common units to decline.
There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop. The price of our common units may fluctuate significantly, and you could lose all or part of your investment.
      Prior to this offering, there has been no public market for our common units. After this offering, there will be only 7,000,000 publicly traded common units. We do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. You may not be able to resell your common units at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.
Unitholders may have liability to repay distributions.
      Unitholders may have to repay amounts wrongfully distributed to them. Under the Marshall Islands Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets. Marshall Islands law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of the

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distribution that it violated Marshall Islands law will be liable to the limited partnership for the distribution amount. Purchasers of units who become limited partners are liable for the obligations of the transferring limited partner to make contributions to the partnership that are known to the purchaser at the time it became a limited partner and for unknown obligations if the liabilities could be determined from the partnership agreement. Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.
We have been organized as a limited partnership under the laws of the Republic of The Marshall Islands, which does not have a well-developed body of partnership law.
      Our partnership affairs are governed by our partnership agreement and by the Marshall Islands Act. The provisions of the Marshall Islands Act resemble provisions of the limited partnership laws of a number of states in the United States, most notably Delaware. The Marshall Islands Act also provides that it is to be applied and construed to make it uniform with the Delaware Revised Uniform Limited Partnership Act and, so long as it does not conflict with the Marshall Islands Act or decisions of the Marshall Islands Courts, interpreted according to the non-statutory law (or case law) of the courts of the State of Delaware. There have been, however, few, if any, court cases in the Marshall Islands interpreting the Marshall Islands Act, in contrast to Delaware, which has a fairly well-developed body of case law interpreting its limited partnership statute. Accordingly, we cannot predict whether Marshall Islands courts would reach the same conclusions as Delaware courts. For example, the rights of our unitholders and the fiduciary responsibilities of our general partner under Marshall Islands law are not as clearly established as under judicial precedent in existence in Delaware. As a result, unitholders may have more difficulty in protecting their interests in the face of actions by our general partner and its officers and directors than would unitholders of a limited partnership formed in the United States.
Because we are organized under the laws of the Marshall Islands, it may be difficult to serve us with legal process or enforce judgments against us, our directors or our management.
      We are organized under the laws of the Marshall Islands, and all of our assets are located outside of the United States. Our business is operated primarily from our offices in the Bahamas, Norway and Singapore. In addition, our general partner is a Marshall Islands limited liability company and a majority of its directors and officers are non-residents of the United States, and all or a substantial portion of the assets of these non-residents are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States if you believe that your rights have been infringed under securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Marshall Islands and of other jurisdictions may prevent or restrict you from enforcing a judgment against our assets or the assets of our general partner or its directors and officers. For more information regarding the relevant laws of the Marshall Islands, please read “Service of Process and Enforcement of Civil Liabilities.”
Tax Risks
      In addition to the following risk factors, you should read “Business — Taxation of the Partnership,” “Material U.S. Federal Income Tax Considerations” and “Non-United States Tax Considerations” for a more complete discussion of the expected material U.S. federal and non-U.S. income tax considerations relating to us and the ownership and disposition of common units.
U.S. tax authorities could treat us as a “passive foreign investment company,” which could have adverse U.S. federal income tax consequences to U.S. holders.
      A foreign entity taxed as a corporation for U.S. federal income tax purposes will be treated as a “passive foreign investment company” (or PFIC), for U.S. federal income tax purposes if at least 75.0% of its gross income for any taxable year consists of certain types of “passive income,” or at least 50.0% of the

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average value of the entity’s assets produce or are held for the production of those types of “passive income.” For purposes of these tests, “passive income” includes dividends, interest, and gains from the sale or exchange of investment property and rents and royalties other than rents and royalties that are received from unrelated parties in connection with the active conduct of a trade or business. For purposes of these tests, income derived from the performance of services does not constitute “passive income.” U.S. shareholders of a PFIC are subject to a disadvantageous U.S. federal income tax regime with respect to the income derived by the PFIC, the distributions they receive from the PFIC, and the gain, if any, they derive from the sale or other disposition of their shares in the PFIC.
      While there are legal uncertainties involved in this determination, our counsel, Perkins Coie LLP, is of the opinion that we should not be a PFIC based on certain assumptions made by them as well as certain representations we made to them regarding the composition of our assets, the source of our income, and the nature of our operations following this offering. However, no assurance can be given that the U.S. Internal Revenue Service will accept this position or that we would not constitute a PFIC for any future taxable year if there were to be changes in our assets, income or operations.
The preferential tax rates applicable to qualified dividend income are temporary, and the enactment of proposed legislation could affect whether dividends paid by us constitute qualified dividend income eligible for the preferential rate.
      Certain of our distributions may be treated as qualified dividend income eligible for preferential rates of U.S. federal income tax to U.S. individual unitholders (and certain other U.S. unitholders). In the absence of legislation extending the term for these preferential tax rates, all dividends received by such U.S. taxpayers in tax years beginning on January 1, 2011 or later will be taxed at ordinary graduated tax rates. Please read “Material U.S. Federal Income Tax Considerations — United States Federal Income Taxation of U.S. Holders — Distributions.”
      In addition, proposed legislation would deny the preferential rate of U.S. federal income tax currently imposed on qualified dividend income with respect to dividends received from a non-U.S. corporation, unless the non-U.S. corporation either is eligible for benefits of a comprehensive income tax treaty with the United States or is created or organized under the laws of a foreign country which has a comprehensive income tax system. Because the Marshall Islands has not entered into a comprehensive income tax treaty with the United States and imposes only limited taxes on entities organized under its laws, it is unlikely that we could satisfy either of these requirements. Consequently, if this legislation were enacted the preferential tax rates of federal income tax discussed under “Material U.S. Federal Income Tax Considerations — United States Federal Income Taxation of U.S. Holders — Distributions” may no longer be applicable to distributions received from us. As of the date hereof, it is not possible to predict with any certainty whether the proposed legislation will be enacted.
We will be subject to taxes, which will reduce our cash available for distribution to you.
      Some of our subsidiaries will be subject to tax in the jurisdictions in which they are organized or operate, reducing the amount of cash available for distribution. In computing our tax obligation in these jurisdictions, we are required to take various tax accounting and reporting positions on matters that are not entirely free from doubt and for which we have not received rulings from the governing authorities. We cannot assure you that upon review of these positions the applicable authorities will agree with our positions. A successful challenge by a tax authority could result in additional tax imposed on our subsidiaries, further reducing the cash available for distribution. In addition, changes in our operations or ownership could result in additional tax being imposed on us, OPCO or our or its subsidiaries in jurisdictions in which operations are conducted. For example, if Teekay Shipping Corporation holds less than 50.0% of the value of our units in the future, our U.S. source income may become subject to taxation under Section 883 of the U.S. Internal Revenue Code. Please read “Business — Taxation of the Partnership.”

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You may be subject to income tax in one or more non-U.S. countries, including Canada, as a result of owning our common units if, under the laws of any such country, we or OPCO are considered to be carrying on business there. Such laws may require you to file a tax return with and pay taxes to those countries.
      We intend that our affairs and the business of each of our controlled affiliates, including OPCO, will be conducted and operated in a manner that minimizes income taxes imposed upon us and these controlled affiliates or which may be imposed upon you as a result of owning our common units. However, because we are organized as a partnership, there is a risk in some jurisdictions that our activities and the activities of OPCO and our or its subsidiaries may be attributed to our unitholders for tax purposes and, thus, that you will be subject to tax in one or more non-U.S. countries, including Canada, as a result of owning our common units if, under the laws of any such country, we or OPCO are considered to be carrying on business there. Under the Income Tax Act (Canada), our election to be treated as a corporation for U.S. tax purposes has no effect. Therefore, we will continue to be treated as a partnership for Canadian tax purposes. If you are subject to tax in any such country, you may be required to file a tax return with and to pay tax in that country based on your allocable share of our income. We may be required to reduce distributions to you on account of any withholding obligations imposed upon us by that country in respect of such allocation to you. The United States may not allow a tax credit for any foreign income taxes that you directly or indirectly incur.
      We believe we can conduct our and OPCO’s activities in a manner so that our unitholders should not be considered to be carrying on business in Canada solely as a consequence of the acquisition, holding, disposition or redemption of our common units. However, the question of whether either we or any of our controlled affiliates will be treated as carrying on business in any country, including Canada, will largely be a question of fact determined through an analysis of contractual arrangements, including the services agreements we, OPCO and its operating subsidiaries will enter into with subsidiaries of Teekay Shipping Corporation, and the way we and OPCO conduct business or operations, all of which may change over time. Please read “Non-United States Tax Considerations — Canadian Federal Income Tax Considerations.” The laws of Canada or any other foreign country may also change, which could cause the country’s taxing authorities to determine that we or OPCO are carrying on business in such country and are subject to its taxation laws. Any foreign taxes imposed on us, OPCO or any subsidiaries will reduce our cash available for distribution to you.
The ratio of dividend income to distributions on our common units is subject to business, economic and other uncertainties as well as tax reporting positions with which the IRS may disagree, which could result in a higher ratio of dividend income to distributions and adversely affect the value of the common units.
      We estimate that approximately 70.0% of the total cash distributions made to a purchaser of common units in this offering who owns those units from the date of the offering through December 31, 2009 will constitute dividend income. The remaining portion of the distributions will be treated first as a nontaxable return of capital to the extent of the purchaser’s tax basis in its common units and thereafter as capital gains. These estimates are based on certain assumptions which are subject to business, economic, regulatory, competitive and political uncertainties beyond our control. In addition, these estimates are based on current U.S. federal income tax law and tax reporting positions that we will adopt and with which the IRS could disagree. As a result of these uncertainties, these estimates may be incorrect and the actual percentage of total cash distributions that will constitute dividend income could be higher, and any difference could adversely affect the value of the common units. Please read “Material U.S. Federal Income Tax Considerations — United States Federal Income Taxation of U.S. Holders — Ratio of Dividend Income to Distributions.”

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USE OF PROCEEDS
      We expect to receive net proceeds of approximately $127.8 million from the sale of 7,000,000 common units offered by this prospectus, assuming an initial public offering price of $20.00 per unit and after deducting estimated underwriting discounts and commissions and structuring fees and paying estimated offering expenses. We will use the net proceeds from this offering to repay non-interest bearing promissory notes we will issue to Teekay Shipping Corporation prior to the closing of this offering as partial consideration for our acquisition of our 26.0% interest in OPCO. The aggregate principal amount of the notes will approximate the amount of our net proceeds from this offering.
      If the underwriters exercise their over-allotment option, we will use the net proceeds to redeem common units from Teekay Shipping Corporation. The number of units we will redeem will equal the number of units for which the underwriters exercise their over-allotment option.

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CAPITALIZATION
      The following table shows:
  •  our historical capitalization as of June 30, 2006; and
 
  •  our pro forma capitalization as of June 30, 2006, adjusted to reflect the offering of the common units, the application of the net proceeds we receive in this offering in the manner described under “Use of Proceeds” on the preceding page and related formation and contribution transactions. Please read “Summary — The Transactions.”
      This table is derived from and should be read together with the historical combined consolidated financial statements of Teekay Offshore Partners Predecessor and our pro forma consolidated financial statements and the accompanying notes included elsewhere in this prospectus. You should also read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
                       
    As of June 30, 2006
     
    Actual   Pro Forma
         
    (in thousands)
Total cash and cash equivalents(1)(2)(3)
    $133,962       $90,000  
             
Long-term debt, including current portion:
               
 
Advances from affiliates (including accrued interest)(2)
    394,849        
 
Long-term debt(1)(4)
    543,543       1,317,314  
 
Obligation under capital lease(5)
    33,600        
             
   
Total long-term debt
    971,992       1,317,314  
Non-controlling interest(6)
    11,770       437,450  
Equity:
               
 
Owners’/ partners’ equity
    727,801        
 
Held by public:
               
   
Common units
          127,800  
 
Held by the general partner and its affiliates:
               
   
Common units
          2,284  
   
Subordinated units
          7,995  
   
General partner interest
          326  
             
     
Total equity
    727,801       138,405  
             
     
Total capitalization
    $1,711,563       $1,893,169  
             
 
Prior to or at the closing of this offering, OPCO will:
(1)  increase its borrowings under its revolving credit facilities to $1.08 billion (excluding debt relating to its five 50%-owned joint ventures, which as of June 30, 2006 totaled $237.3 million). As at June 30, 2006, the net amount of the additional debt would have been $536.5 million;
 
(2)  repay all of its advances from affiliates;
 
(3)  declare and pay a dividend to Teekay Shipping Corporation in an amount sufficient to decrease OPCO’s outstanding cash balance to approximately $90.0 million. As at June 30, 2006, this amount would have been $154.1 million, although we anticipate the actual amount will be approximately $160 million based on our estimated cash balance at the closing of this offering. To the extent OPCO’s advances from affiliates are settled through ways that do not involve cash, such as conversion to equity or contribution of the advances to OPCO, the amount of the dividend will be increased by a corresponding amount; and
 
(4)  modify its five 50%-owned joint venture agreements such that it will consolidate the debt referred to in note (1) above, which totaled $237.3 million as of June 30, 2006.
 
(5)  In September 2006, OPCO purchased the Fuji Spirit, an Aframax-class conventional crude oil tanker that was financed under a capital lease.
 
(6)  Prior to or at the closing of this offering, we will acquire a 26.0% interest in OPCO (including the 25.99% limited partner interest we will hold directly and the 0.01% general partner interest we will hold through our ownership of OPCO’s sole general partner, Teekay Offshore Operating GP L.L.C.), thus leaving Teekay Shipping Corporation with a 74.0% direct interest in OPCO. As at June 30, 2006, Teekay Shipping Corporation’s 74.0% pro forma share of the net assets of OPCO would have been $393.9 million.

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DILUTION
      Dilution is the amount by which the offering price will exceed the net tangible book value per common unit after this offering. Assuming an initial public offering price of $20.00 per common unit, on a pro forma basis as of June 30, 2006, after giving effect to this offering of common units, the application of the net proceeds in the manner described under “Use of Proceeds” and the formation and contribution transactions related to this offering, our net tangible book value would have been $85.6 million, or $4.28 per common unit. Purchasers of common units in this offering will experience substantial and immediate dilution in net tangible book value per common unit for financial accounting purposes, as illustrated in the following table.
                   
Assumed initial public offering price per common unit
          $ 20.00  
 
Pro forma net tangible book value per common unit before this offering(1)
  $ (3.24 )        
 
Increase in net tangible book value per common unit attributable to purchasers in this offering
    7.52          
             
Less: Pro forma net tangible book value per common unit after this offering(2)
            4.28  
             
Immediate dilution in net tangible book value per common unit to purchasers in this offering
          $ 15.72  
             
 
(1)  Determined by dividing the total number of units (2,800,000 common units, 9,800,000 subordinated units and the 2.0% general partner interest represented by 400,000 general partner units) to be issued to our general partner and its affiliates for their contribution of assets and liabilities to us into the net tangible book value of the contributed assets and liabilities.
 
(2)  Determined by dividing the total number of units (9,800,000 common units, 9,800,000 subordinated units and the 2.0% general partner interest represented by 400,000 general partner units) to be outstanding after this offering into our pro forma net tangible book value, after giving effect to the application of the net proceeds of this offering.
      The following table sets forth the number of units that we will issue and the total consideration contributed to us by our general partner and its affiliates and by the purchasers of common units in this offering upon consummation of the transactions contemplated by this prospectus.
                                   
    Units Acquired   Total Consideration
         
    Number   Percent   Amount   Percent
                 
General partner and its affiliates(1)(2)
    13,000,000       65.0 %   $ 10,605,895       7.0 %
New investors
    7,000,000       35.0       140,000,000       93.0  
                         
 
Total
    20,000,000       100.0 %   $ 150,605,895       100.0 %
                         
 
(1)  Upon the consummation of the transactions contemplated by this prospectus, our general partner and its affiliates will own an aggregate of 2,800,000 common units and 9,800,000 subordinated units and the 2.0% general partner interest represented by 400,000 general partner units.
 
(2)  The assets contributed by our general partner and its affiliates were recorded at historical book value, rather than fair value, in accordance with GAAP. Book value of the consideration provided by our general partner and its affiliates, as of June 30, 2006, was $10.6 million.

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OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS
      You should read the following discussion of our cash distribution policy and restrictions on distributions in conjunction with specific assumptions included in this section. In addition, you should read “Forward-Looking Statements” and “Risk Factors” for information regarding statements that do not relate strictly to historical or current facts and certain risks inherent in our business.
General
Rationale for Our Cash Distribution Policy
      Our cash distribution policy reflects a basic judgment that our unitholders will be better served by our distributing our cash available (after deducting expenses, including estimated maintenance capital expenditures and reserves) rather than retaining it. Because we believe we will generally finance any expansion capital expenditures from external financing sources, we believe that our investors are best served by our distributing all of our available cash. Our cash distribution policy is consistent with the terms of our partnership agreement, which requires that we distribute all of our available cash quarterly (after deducting expenses, including estimated maintenance capital expenditures and reserves).
Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy
      There is no guarantee that unitholders will receive quarterly distributions from us. Our distribution policy is subject to certain restrictions and may be changed at any time, including:
  •  Our unitholders have no contractual or other legal right to receive distributions other than the obligation under our partnership agreement to distribute available cash on a quarterly basis, which is subject to our general partner’s broad discretion to establish reserves and other limitations.
 
  •  The board of directors of OPCO’s general partner, Teekay Offshore Operating GP L.L.C. (subject to approval by the board of directors of our general partner), has authority to establish reserves for the prudent conduct of OPCO’s business. The establishment of these reserves could result in a reduction in cash distributions to you from levels we currently anticipate pursuant to our stated distribution policy.
 
  •  While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including provisions requiring us to make cash distributions contained therein, may be amended. Although during the subordination period, with certain exceptions, our partnership agreement may not be amended without the approval of non-affiliated common unitholders, our partnership agreement can be amended with the approval of a majority of the outstanding common units after the subordination period has ended. At the closing of this offering, Teekay Shipping Corporation will own 28.6% of the outstanding common units and 100.0% of the outstanding subordinated units.
 
  •  Even if our cash distribution policy is not modified or revoked, the amount of distributions we pay under our cash distribution policy and the decision to make any distribution is determined by the board of directors of our general partner, taking into consideration the terms of our partnership agreement.
 
  •  Under Section 51 of the Marshall Islands Limited Partnership Act, we may not make a distribution to you if distribution would cause our liabilities to exceed the fair value of our assets.
 
  •  We may lack sufficient cash to pay distributions to our unitholders due to decreases in net voyage revenues or increases in operating expenses, principal and interest payments on outstanding debt, tax expenses, working capital requirements, maintenance capital expenditures or anticipated cash needs.
 
  •  Our distribution policy will be affected by restrictions on distributions under OPCO’s credit facility agreements, which contain material financial tests and covenants that must be satisfied. These financial tests and covenants are described in this prospectus in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources —

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  Covenants and Other Restrictions in Our Financing Agreements.” Should OPCO be unable to satisfy these restrictions included in the credit agreements or if OPCO is otherwise in default under the credit agreements, it would be prohibited from making cash distributions to us, which would materially hinder our ability to make cash distributions to you, notwithstanding our stated cash distribution policy.
 
  •  If we make distributions out of capital surplus, as opposed to operating surplus, such distributions will constitute a return of capital and will result in a reduction in the minimum quarterly distribution and the target distribution levels. We do not anticipate that we will make any distributions from capital surplus.

      Our ability to make distributions to our unitholders depends on the performance of our controlled affiliates, including OPCO, and their ability to distribute funds to us. Upon the closing of this offering, our interest in OPCO will be our only cash-generating asset. The ability of our controlled affiliates, including OPCO, to make distributions to us may be restricted by, among other things, the provisions of existing and future indebtedness, applicable partnership and limited liability company laws and other laws and regulations.
      We have a limited operating history upon which to rely with respect to whether we will have sufficient cash available for distributions to allow us to pay the minimum quarterly distributions on our common and subordinated units. While we believe, based on our financial forecast and related assumptions, that we will have sufficient cash to enable us to pay the full minimum quarterly distribution on all of our common and subordinated units for the year ending December 31, 2007, we may be unable to pay the full minimum quarterly distribution or any amount on our common units.
Our Ability to Grow Depends on Our and OPCO’s Ability to Access External Expansion Capital
      Because we and OPCO distribute all of our and its available cash, growth may not be as fast as businesses that reinvest their available cash to expand ongoing operations. 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. As a result, to the extent OPCO or we are unable to finance growth externally, the cash distribution policy will significantly impair our or its ability to grow. To the extent we issue additional units in connection with any acquisitions or expansion or investment capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level, which in turn may affect the available cash that we have to distribute on each unit. There are no limitations in our partnership agreement on our ability to issue additional units, including units ranking senior to the common units. The incurrence of additional borrowings or other debt by OPCO or us to finance our growth strategy would result in increased interest expense, which in turn may affect the available cash that OPCO has to distribute to us and that we have to distribute to our unitholders.

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Initial Distribution Rate
      The amount of the minimum quarterly distribution is $0.35 per unit, or $1.40 per unit per year. The amount of available cash from operating surplus, which we also refer to as cash available for distributions, needed to pay the minimum quarterly distribution on all of the common units and subordinated units and the 2.0% general partner interest to be outstanding immediately after this offering for one quarter and for four quarters will be approximately:
                         
    Number of Units   One Quarter   Four Quarters
             
Common units
    9,800,000     $ 3,430,000     $ 13,720,000  
Subordinated units
    9,800,000       3,430,000       13,720,000  
2% general partner interest(1)
    400,000       140,000       560,000  
                   
Total
    20,000,000     $ 7,000,000     $ 28,000,000  
 
(1)  The number of general partner units is determined by multiplying the total number of units deemed to be outstanding (i.e., the total number of common and subordinated units outstanding divided by 98.0%) by the general partner’s 2.0% general partner interest.
      Upon completion of this offering, our general partner will adopt a policy pursuant to which we will pay an initial quarterly distribution of $0.35 per unit for each complete quarter. Beginning with the quarter ending December 31, 2006, we will distribute, within 45 days after the end of each quarter, all of our available cash to unitholders of record on the applicable record date. We will adjust our first distribution for the period from the closing of this offering through December 31, 2006 based on the actual length of the period.
      During the subordination period, before we make any quarterly distributions to subordinated unitholders, our common unitholders are entitled to receive payment of the full minimum quarterly distribution plus any arrearages in distributions from prior quarters. Please read “How We Make Cash Distributions — Subordination Period.” The amount of the minimum quarterly distribution is $0.35 per unit, or $1.40 per unit per year. We cannot guarantee, however, that we will pay the minimum quarterly distribution or any amount on the common units in any quarter.
      Our general partner will be entitled to 2.0% of all distributions that we make prior to our liquidation. The general partner’s initial 2.0% interest in these distributions may be reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us to maintain its initial 2.0% general partner interest. Our general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us to maintain its current general partner interest.
      In the sections that follow, we present in detail the basis for our belief that we will be able to pay our minimum quarterly distribution on all of our common units and on all of our subordinated units for the year ending December 31, 2007. We present two tables, consisting of:
  •  Pro Forma Results of Operations for the year ended December 31, 2005 and the twelve months ended June 30, 2006, and Forecasted Results of Operations for the year ending December 31, 2007.
 
  •  Pro Forma Cash Available for Distribution for the year ended December 31, 2005 and the twelve months ended June 30, 2006, and the Forecasted Cash Available for Distribution for the year ending December 31, 2007.
Pro Forma and Forecasted Results of Operations
      We present below a forecast of the expected results of operations for Teekay Offshore Partners L.P. for the year ending December 31, 2007. We also present the unaudited pro forma consolidated results of operations for the year ended December 31, 2005 and the twelve months ended June 30, 2006. Our forecast presents, to the best of our knowledge and belief, the expected results of operations for Teekay Offshore Partners L.P. for the forecast period.

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      Our forecast reflects our judgment as of the date of this prospectus of conditions we expect to exist and the course of action we expect to take during the year ending December 31, 2007. The assumptions disclosed in Note 3 to the forecast are those that we believe are significant to our forecasted results of operations. We believe that we have a reasonable objective basis for those assumptions listed in Note 3 to the forecast. We believe our actual results of operations will approximate those reflected in our forecast, but we can give no assurance that our forecasted results will be achieved. There will likely be differences between our forecast and the actual results and those differences could be material. Our and OPCO’s operations are subject to numerous risks that are beyond our control. If the forecast is not achieved, we may not be able to pay cash distributions on our common units at the initial distribution rate stated in our cash distribution policy or at all.
      Our forecast of our results of operations is a forward-looking statement and should be read together with the historical combined consolidated financial statements of Teekay Offshore Partners Predecessor and the accompanying notes included elsewhere in this prospectus and together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The forecast has been prepared by and is the responsibility of the management of our general partner.
      Neither Ernst & Young LLP, our independent registered public accounting firm, nor any other independent registered public accounting firm have compiled, examined or performed any procedures with respect to the forecasted financial information or pro forma information for the twelve months ended June 30, 2006 contained herein, nor have they expressed any opinion or given any other form of assurance on such information or its achievability, and they assume no responsibility for, and disclaim any association with, such forecasted and pro forma financial information. Ernst & Young LLP’s reports included in this prospectus relate to historical financial information of Teekay Offshore Partners Predecessor, Teekay Offshore Partners L.P. and Teekay Offshore GP L.L.C. Those reports do not extend to the tables and the related forecasted and pro forma financial information contained in this section and should not be read to do so.
      When considering our financial forecast, you should keep in mind the risk factors and other cautionary statements included under the heading “Risk Factors” elsewhere in this prospectus. Any of the risks discussed in this prospectus could cause our actual results of operations to vary significantly from the financial forecast.
      We are providing the financial forecast to supplement the historical combined consolidated financial statements of Teekay Offshore Partners Predecessor and our pro forma combined consolidated financial statements in support of our belief that we will have sufficient cash available to allow us to pay cash distributions on all of our outstanding common and subordinated units for each quarter in the year ending December 31, 2007 at our stated initial distribution rate. Please read “Note 3. Summary of Significant Forecast Assumptions” for further information as to the assumptions we have made for the financial forecast.
      We do not undertake any obligation to release publicly the results of any future revisions we may make to the financial forecast or to update the financial forecast to reflect events or circumstances after the date of this prospectus. Therefore, we caution you not to place undue reliance on this information.
      The unaudited pro forma consolidated results of operations for the year ended December 31, 2005 and the twelve months ended June 30, 2006 are presented to illustrate the assumed effects of:
  •  our acquisition from Teekay Shipping Corporation of a 26.0% interest in OPCO, including a 25.99% limited partner interest held directly by us and the 0.01% general partner interest held by us through our ownership of Teekay Offshore Operating GP L.L.C., OPCO’s sole general partner;
 
  •  Teekay Shipping Corporation’s transfer to OPCO of all of the outstanding interests of Norsk Teekay Holdings Ltd., Teekay Nordic Holdings Inc., Teekay Offshore Australia Trust and Pattani Spirit L.L.C. (the OPCO Operating Subsidiaries);

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  •  OPCO’s entry into new fixed-rate time-charter contracts with Teekay Shipping Corporation for nine of OPCO’s Aframax-class conventional crude oil tankers;
 
  •  OPCO’s transfer to Teekay Shipping Corporation of all chartered-in conventional crude oil and product tankers in Navion Shipping Ltd. (a subsidiary of Norsk Teekay), a 1987-built shuttle tanker (the Nordic Trym), OPCO’s single anchor loading equipment, a 1992-built chartered-in shuttle tanker (the Borga) and a 50.0% interest in Alta Shipping S.A., which has no material assets (collectively, the Non-OPCO Assets);
 
  •  OPCO’s purchase of the Fuji Spirit, an Aframax-class conventional crude oil tanker financed under a capital lease until its purchase by OPCO in September 2006;
 
  •  OPCO’s entry into amended operating agreements for its five 50%-owned joint ventures whereby OPCO will have unilateral control of each joint venture, which will require OPCO to consolidate the joint ventures in accordance with GAAP;
 
  •  OPCO’s incurrence of additional debt to increase its outstanding debt to $1.08 billion (excluding debt relating to the five joint ventures, which totaled $237.3 million as at June 30, 2006);
 
  •  Teekay Shipping Corporation’s contribution to OPCO of interest rate swaps with a notional principal amount of $1.09 billion, a weighted-average fixed interest rate of 5.5% (including the margin OPCO pays on its floating-rate debt) and a weighted-average remaining term of 9.7 years;
 
  •  OPCO’s repayment of all of its advances from affiliates;
 
  •  OPCO’s declaration and payment of a dividend to Teekay Shipping Corporation in an amount sufficient to decrease OPCO’s outstanding cash balance to $90.0 million;
 
  •  the completion of this offering; and
 
  •  the use of the net proceeds of this offering to repay non-interest bearing promissory notes we will issue to Teekay Shipping Corporation, as described in “Use of Proceeds.”
      The pro forma data included herein is not indicative of forecasted financial results nor does it represent comparable results of operations.
      The unaudited pro forma consolidated results of operations for the year ended December 31, 2005 are based on the audited historical combined consolidated financial statements of Teekay Offshore Partners Predecessor included elsewhere in this prospectus, as adjusted to illustrate the estimated pro forma effects of the transactions described above. These unaudited pro forma consolidated financial statements should be read together with “Selected Historical and Pro Forma Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the combined consolidated financial statements of Teekay Offshore Partners Predecessor and the notes to those statements included elsewhere in this prospectus. The unaudited pro forma consolidated results of operations for the twelve months ended June 30, 2006 are based in part on the unaudited historical combined financial statements of Teekay Offshore Partners Predecessor, which are not included in this prospectus, as adjusted to illustrate the estimated pro forma effects of the transactions described above.

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TEEKAY OFFSHORE PARTNERS L.P.
PRO FORMA AND FORECASTED RESULTS OF OPERATIONS
                             
    Consolidated    
    Pro Forma   Forecast
         
    Year   Twelve Months   Year
    Ended   Ended   Ending
    December 31,   June 30,   December 31,
    2005   2006   2007
             
    (unaudited)
     
    (in thousands, except for per unit amounts)
Voyage revenues
    $678,888       $688,666       $749,312  
                   
Operating expenses:
                       
Voyage expenses
    93,935       112,866       146,739  
Vessel operating expenses
    114,843       113,977       124,038  
Time-charter hire expense
    145,423       152,797       146,418  
Depreciation and amortization
    116,922       113,473       115,647  
General and administrative
    61,546       65,779       64,615  
Gain of sale of vessels
    (9,423 )     (4,897 )      
Restructuring charge
    955       1,408        
                   
Total operating expenses
    524,201       555,403       597,457  
                   
Income from vessel operations
    154,687       133,263       151,855  
Other items:
                       
Interest expense
    (73,458 )     (74,953 )     (73,245 )
Interest income
    5,265       6,590       3,600  
Foreign currency exchange gain (loss)
    9,281       (5,137 )      
Income tax recovery (expense)
    13,873       (9,675 )     4,000  
Other — net
    4,718       10,663       10,917  
                   
Income before non-controlling interest
    114,366       60,751       97,127  
Non-controlling interest
    (87,248 )     (47,494 )     (74,997 )
                   
Net income
    $27,118       $13,257       $22,130  
                   
General partner’s interest in net income
    $542       $265       $443  
Limited partners’ interest:
                       
 
Net income
    $26,576       $12,992       $21,687  
 
Net income per:
                       
   
- Common unit (basic and diluted)
    $1.40       $1.33       $1.40  
   
- Subordinated unit (basic and diluted)
    $1.31       $—       $0.81  
   
- Unit (basic and diluted)
    $1.36       $0.66       $1.11  
Please read the accompanying summary of significant accounting policies and forecast assumptions.

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Summary of Significant Accounting Policies and Forecast Assumptions
Note 1. Basis of Presentation
      The accompanying financial forecast and related notes of Teekay Offshore Partners L.P. present the forecasted results of operations of Teekay Offshore Partners L.P. for the year ending December 31, 2007, based on the assumption that, as of the closing of this offering, we will acquire a 26.0% interest in OPCO, including a 25.99% limited partner interest held directly by us and a 0.01% general partner interest held through our ownership of Teekay Offshore Operating GP L.L.C., OPCO’s sole general partner. Upon the closing of this offering, we will issue common units and subordinated units, representing limited partner interests to Teekay Shipping Corporation, and our 2.0% general partner interest and incentive distribution rights to our general partner, Teekay Offshore GP L.L.C., a wholly owned subsidiary of Teekay Shipping Corporation. We will issue to investors common units, representing limited partner interests, pursuant to this offering. The accompanying financial forecast is presented in accordance with the guidelines established by the American Institute of Certified Public Accountants.
      In constructing the unaudited pro forma consolidated results of operations for the year ended December 31, 2005 and for the twelve months ended June 30, 2006, we used the historical combined consolidated results of operations for Teekay Offshore Partners Predecessor for those periods and adjusted such results of operations as described in “— Pro Forma and Forecasted Results of Operations” above.
Note 2: Summary of Significant Accounting Policies
      Organization. We are a Marshall Islands limited partnership formed on August 31, 2006 to acquire from Teekay Shipping Corporation a 26.0% interest in OPCO. Our general partner is Teekay Offshore GP L.L.C., a wholly owned subsidiary of Teekay Shipping Corporation.
      Principles of Consolidation. This financial forecast includes our accounts and those of our wholly owned subsidiaries and partially-owned subsidiaries we control, including OPCO. All intercompany transactions and balances have been eliminated in consolidation.
      Use of Estimates. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
      Reporting Currency. The financial forecast is stated in U.S. Dollars because we operate in international shipping markets that typically utilize the U.S. Dollar as the functional currency. Transactions involving other currencies during a period are converted into U.S. Dollars using the exchange rates in effect at the time of the transactions. At the balance sheet dates, monetary assets and liabilities that are denominated in currencies other than the U.S. Dollar are translated to reflect the period-end exchange rates. Resulting gains or losses are reflected in our consolidated statements of income.
      Revenue Recognition. 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 revenue during days that the vessel is off-hire. All voyage revenues from voyage charters are recognized on a percentage of completion method. We use a discharge-to-discharge basis in determining percentage of completion for all spot voyages, and voyages servicing contracts of affreightment, whereby we recognize revenue ratably from when product is discharged (unloaded) at the end of one voyage to when it is discharged after the next voyage. We do not begin recognizing voyage revenue 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. Shuttle tanker voyages servicing contracts of affreightment with offshore oil fields commence with tendering of notice of readiness at a field, within the agreed lifting range, and end with tendering of notice of readiness at a field for the next lifting.
      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

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commissions. Voyage expenses are typically paid by the customer under time charters and bareboat charters and by the shipowner under contracts of affreightment and voyage charters. Voyage expenses are recognized when incurred.
      Vessel Operating Expenses. Vessel operating expenses, which include crewing, repairs and maintenance, insurance, stores, lube oils and communication expenses, are typically paid by the shipowner other than under bareboat charters, where the customer typically pays these expenses. The two largest components of vessel operating expenses are crews and repairs and maintenance. Vessel operating expenses are recognized when incurred.
      Cash and Cash Equivalents. We classify all highly liquid investments with a maturity date of three months or less when purchased as cash and cash equivalents.
      Vessels and Equipment. All pre-delivery costs incurred during the construction of newbuildings are capitalized, including interest, supervision and technical costs. The acquisition cost and all costs incurred to restore used vessels purchased to the standard required to properly service customers are capitalized. Vessels are depreciated to their estimated residual value. Depreciation is calculated on a straight-line basis over a vessel’s useful life. Depreciation is calculated using an estimated useful life of 25 years for our vessels, from the date the vessel was originally delivered from the shipyard or a shorter period if regulations are expected to prevent us from operating the vessels for 25 years. Depreciation and amortization includes depreciation on all owned vessels and vessels accounted for as capital leases.
      Generally, we drydock each shuttle tanker and conventional oil tanker every two and a half to five years. 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 a drydocking to the estimated completion of the next drydocking. We expense costs related to routine repairs and maintenance incurred during drydocking that do not improve or extend the useful lives of the assets. When significant drydocking expenditures occur prior to the expiration of this period, we expense the remaining unamortized balance of the original drydocking cost in the month of the subsequent drydocking.
      We assess vessels and equipment for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. We measure recoverability of an asset by comparing its carrying amount to future undiscounted cash flows that the asset is expected to generate over its expected remaining useful life. If we consider a vessel or equipment to be impaired, we recognize impairment in an amount equal to the excess of the carrying value of the asset over its fair market value.
      Direct Financing Leases. 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.
      Loan Costs. Loan costs, including fees, commissions and legal expenses associated with the loans, are presented as other assets and capitalized and amortized on a straight-line basis over the term of the relevant loan. Amortization of loan costs is included in interest expense.
      Derivative Instruments. We utilize derivative financial instruments to reduce interest rate risks. We do not hold or issue derivative financial instruments for trading purposes. Statement of Financial Accounting Standards (or SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, which was amended in June 2000 by SFAS No. 138 and in May 2003 by SFAS No. 149, establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Derivatives that are not hedges or are not designated as hedges are adjusted to fair value through income. If the derivative is a hedge, depending upon the nature of the hedge, changes in the fair value of the derivatives are either offset against the fair value of assets, liabilities or firm commitments through income, or recognized in other comprehensive income until the hedged item

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is recognized in income. The ineffective portion of a derivative’s change in fair value is immediately recognized into income.
      Goodwill and Intangible Assets. Goodwill is not amortized, but reviewed for impairment annually or more frequently as impairment indicators arise. Intangible assets with finite lives are amortized over their useful lives. Intangible assets, which consist of contracts of affreightment acquired as part of the purchase of Navion AS (or Navion) in April 2003, are amortized over their respective lives, with the amount amortized each year being weighted based on the projected revenue to be earned under the contracts.
      Income Taxes. OPCO’s Norwegian subsidiaries and Australian ship-owning subsidiary are subject to income taxes. We account for such taxes using the liability method pursuant to SFAS No. 109, “Accounting for Income Taxes.”
Note 3: Summary of Significant Forecast Assumptions
      Vessel Deliveries and Vessel Sales. The forecast reflects or assumes, as appropriate, the following changes in OPCO’s fleet:
  •  the sale of two older shuttle tankers in March and October 2005 (collectively, the 2005 Shuttle Tanker Dispositions);
 
  •  the sale of an older shuttle tanker in July 2006 (the 2006 Shuttle Tanker Disposition);
 
  •  the sale and lease back of an older shuttle tanker in March 2005;
 
  •  the sale of a 2000-built liquid petroleum gas carrier (the Dania Spirit) to a subsidiary of Teekay Shipping Corporation in June 2005 (or the 2005 Conventional Tanker Disposition); and
 
  •  the conversion of the Navion Saga, a Suezmax-class conventional crude oil tanker, to an FSO unit and the subsequent commencement of a three-year FSO time-charter contract beginning in the second quarter of 2007.
      Foreign Currency. Although OPCO operates in international shipping markets, which typically utilize the U.S. Dollar as the functional currency, a small portion of OPCO’s voyage revenues are denominated in Norwegian Kroner. For purposes of this forecast, we have assumed an exchange rate of 1 U.S. Dollar to 6.425 Kroner for the year ending December 31, 2007. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Items You Should Consider When Evaluating Our Historical Performance and Assessing Our Future Prospects.”
      Net Voyage Revenues. Consistent with general practice in the shipping industry, we use net voyage revenues (defined as voyage revenues less voyage expenses) as a measure of equating revenues generated from voyage charters to revenues generated from time charters, which assists us in making operating decisions about the deployment of vessels and their performance. Under time-charter and bareboat charter contracts, the charterer typically pays the voyage expenses, whereas under voyage charter contracts and contracts of affreightment the shipowner typically pays the voyage expenses. Some voyage expenses are fixed, and the remainder can be estimated. If OPCO, as the shipowner, pays the voyage expenses, it typically passes the approximate amount of these expenses on to customers by charging higher rates under the contract or billing the expenses to them. As a result, although voyage revenues from different types of contracts may vary, the net revenues after subtracting voyage expenses, which we refer to as net voyage revenues, are comparable across the different types of contracts. We principally use net voyage revenues, a non-GAAP financial measure, because it provides more meaningful information to us than voyage revenues, the most directly comparable GAAP financial measure. Net voyage revenues are also widely used by investors and analysts in the shipping industry for comparing financial performance between companies in the shipping industry to industry averages.
      Forecasted net voyage revenues for the year ending December 31, 2007 is approximately $17.6 million greater than the pro forma results for the year ended December 31, 2005, primarily as a result of an increase from new and renewed shuttle tanker and FSO unit time charters and bareboat charters at higher

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rates, which occurred in the ordinary course of business and were the result of negotiations between the relevant parties. This forecasted increase in net voyage revenues is partially offset by the 2005 Shuttle Tanker Dispositions, the 2005 Conventional Tanker Disposition, the 2006 Shuttle Disposition and the redelivery of one chartered-in vessel back to its owner in April 2006.
      Forecasted net voyage revenues for the year ending December 31, 2007 is approximately $26.8 million greater than the pro forma results for the twelve months ended June 30, 2006, primarily as a result of an increase in new and renewed shuttle tanker and FSO unit time charters and bareboat charters at higher rates. In addition, during the first half of 2006, our pro forma results included earlier annual seasonal maintenance on certain North Sea oil fields compared to 2005. As a result, the pro forma results for the twelve months ended June 30, 2006 had two maintenance seasons in the twelve-month period, whereas the other twelve month periods have the usual one maintenance season as described below. The forecasted increase in net voyage revenues is partially offset by the 2006 Shuttle Disposition and redelivery of one chartered-in vessel back to its owner in April 2006.
      Due to the harsh winter weather conditions, oil field operators in the North Sea typically schedule oil platform and other infrastructure repairs and maintenance during the summer, typically in the third quarter. Because a significant portion of OPCO’s North Sea shuttle tankers operate under contracts of affreightment, under which revenue is based on volume of oil transported, the results of the shuttle tanker operations in the North Sea under these contracts generally reflect this seasonal production pattern. The affected shuttle tankers are typically redeployed as conventional oil tankers during maintenance season; the rates in the conventional market may be higher or lower than the fixed-rates under the contracts of affreightment.
      The forecast is based upon estimated average daily hire rates and the total number of days OPCO’s vessels are expected to be on-hire during the year ending December 31, 2007. In determining this we have assumed that off-hire for owned vessels will be similar to levels of off-hire for 2005 and the first six months of 2006 and that shuttle tankers servicing contracts of affreightment will be utilized at levels similar to those for 2005 and the first six months of 2006. These assumptions include expected off-hire due to scheduled drydockings. The amount of actual off-hire time depends upon, among other things, the time a vessel spends in drydocking for repairs, maintenance or inspection, equipment breakdowns or delays due to accidents, crewing strikes, certain vessel detentions or similar problems as well as failure to maintain the vessel in compliance with its specifications and contractual standards or to provide the required crew.
      Average daily hire rates for each vessel are derived from OPCO’s contracts of affreightment, time charters and bareboat charters. The average daily hire rate is equal to the voyage revenues earned by a vessel during a given period, divided by the total number of days the vessel is not off-hire.
      Vessel Operating Expenses. Forecasted vessel operating expenses for the year ending December 31, 2007 is approximately $9.2 million and $10.1 million greater than the pro forma results for the year ended December 31, 2005 and the twelve months ended June 30, 2006, respectively, primarily as a result of an increase in operating expenses from the conversion of the Navion Saga to an FSO unit, which has higher operating costs on average compared to a conventional tanker, and an increase in crew and officers’ salaries due to changes in crew composition and general wage escalations. These forecasted increases are partially offset by decreases in operating expenses from the 2005 Shuttle Tanker Dispositions, the 2005 Conventional Tanker Disposition and the 2006 Shuttle Disposition.
      Some of the more significant vessel operating expenses include crewing and other labor and related costs, repairs and maintenance and insurance costs. Upon the closing of this offering, all of OPCO’s seafaring employees will become employees of other Teekay Shipping Corporation subsidiaries and OPCO’s operating subsidiaries will enter into services agreements with Teekay Shipping Corporation subsidiaries by which the Teekay Shipping Corporation subsidiaries will provide crewing and other vessel operation services. Please read “Certain Relationships and Related Party Transactions — Advisory and Administrative Services Agreements.” Labor and related costs for purposes of this forecast are based upon estimated payments under these services agreements, historical experience and contractual unionized wage rates. Insurance costs are estimated based upon anticipated premiums.

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      Time-Charter Hire Expense. Our forecast for the year ending December 31, 2007 assumes that we will charter-in an average of 11.7 shuttle tankers during this period. Our forecast for the number of chartered-in vessels and the average rate per day is primarily based upon existing time-charter contracts. Forecasted time-charter hire expense for the year ending December 31, 2007 is approximately $1.0 million greater than the pro forma results for the year ended December 31, 2005, primarily due to estimated annual rate escalations, partially offset by an estimated 13% decrease in the average number of vessels chartered-in. Forecasted time-charter hire expense for the year ending December 31, 2007 is approximately $6.4 million less than the pro forma results for the twelve months ended June 30, 2006 due to an estimated 20% decrease in the average number of vessels chartered-in, partially offset by estimated annual rate escalations.
      Depreciation and Amortization. Forecasted depreciation for the year ending December 31, 2007 is approximately $1.3 million less than the pro forma results for the year ended December 31, 2005, primarily as a result of a decrease in depreciation from the 2005 Shuttle Tanker Dispositions and the 2005 Conventional Tanker Disposition and a decrease in amortization from the expiration in 2005 of two of our contracts of affreightment, partially offset by a forecasted increase in depreciation of the costs to convert the Navion Saga to an FSO unit, vessel upgrades and an increase in amortization of drydock expenditures. Forecasted depreciation and amortization for the year ending December 31, 2007 is approximately $2.2 million greater than the pro forma results for the twelve months ended June 30, 2006, primarily due to an increase in the forecasted depreciation as previously mentioned, partially offset by a decrease in depreciation from the 2006 Shuttle Disposition.
      Our forecast for depreciation expense assumes that no vessels are purchased or sold during the year ending December 31, 2007. Depreciation is calculated on a straight-line basis over a vessel’s useful life, which we estimate to be 25 years. The value of contracts of affreightment acquired is being amortized over their respective lives, with the amount amortized each year being weighted based on the projected revenue to be earned under the contracts.
      General and Administrative Expenses. Forecasted general and administrative expenses for the year ending December 31, 2007 is approximately $3.1 million greater than the pro forma results for the year ended December 31, 2005, primarily as a result of a forecasted increase in total shore-staff compensation and an estimated $1.5 million increase for public-company costs, reimbursements to our general partner and payments to certain subsidiaries of Teekay Shipping Corporation for administrative and certain other services to be provided to us, OPCO and its operating subsidiaries under services agreements to be entered into upon the closing of this offering. Forecasted general and administrative expenses for the year ending December 31, 2007 is approximately $1.1 million less than the pro forma results for the twelve months ended June 30, 2006, primarily as a result of forecasted decreases in shore-staff incentive compensation, substantially offset by the estimated increase for public-company costs, reimbursements to our general partner and payments to certain subsidiaries of Teekay Shipping Corporation for administrative and certain other services.
      Interest Expense. Forecasted interest expense for the year ending December 31, 2007 is approximately $0.2 million and $1.7 million less than the pro forma results for the year ended December 31, 2005 and the twelve months ended June 30, 2006, respectively, primarily as a result of a lower outstanding average debt balance under revolving credit facilities and term loans during the year ending December 31, 2007. This forecasted decrease is partially offset by a forecasted increase in interest expense from an estimated increase in the floating interest rates on term loans. Our forecast for the year ending December 31, 2007 assumes an average revolving credit facility balance outstanding of $1.03 billion with an estimated weighted-average interest rate of 5.5% per annum, which rate is based upon the average effective interest rate on the revolving credit facilities after giving effect to existing interest rate swap agreements. Our forecast for the year ending December 31, 2007 assumes an average outstanding term loan balance of $218.8 million with an estimated weighted average interest rate of 6.25% per annum, which rate is based upon an estimated LIBOR rate of 5.75% plus the applicable margins under the term loans.

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      Interest Income. Forecasted interest income for the year ending December 31, 2007 is approximately $1.7 million and $3.0 million less than the pro forma results for the year ended December 31, 2005 and the twelve months ended June 30, 2006, respectively, primarily as a result of assumed lower average cash balances outstanding during the year ending December 31, 2007 compared to the year ended December 31, 2005 and the twelve months ended June 30, 2006. Our forecast for the year ending December 31, 2007 assumes an average cash balance outstanding of $90.0 million, and an average rate of return of 4% per annum.
      Income Taxes. Forecasted income tax recovery for the year ending December 31, 2007 is approximately $9.9 million less and $13.7 million greater than the pro forma results for the year ended December 31, 2005 and the twelve months ended June 30, 2006, respectively. The decrease and increase in forecasted income tax recovery are primarily the result of deferred income tax recoveries during the year ended December 31, 2005 and deferred income tax expenses during the twelve months ended June 30, 2006, from unrealized foreign currency exchange losses and gains, respectively, on intercompany loans with certain Norwegian subsidiaries. The majority of these amounts do not have a cash impact. Our forecast assumes a constant foreign exchange rate throughout 2007.
      Other-Net. Forecasted other income for the year ending December 31, 2007 is approximately $6.2 million and $0.3 million greater than the pro forma results for the year ended December 31, 2005 and the twelve months ended June 30, 2006, respectively, primarily as a result of:
  •  a pro forma $3.4 million write-off of capitalized loan costs on January 1, 2005;
 
  •  $2.8 million and $0.9 million of other expenses incurred during the year ended December 31, 2005 and the twelve months ended June 30, 2006, respectively;
      partially offset by
  •  an estimated $0.6 million decrease in the income received from our VOC Equipment during the year ending December 31, 2007 compared to the twelve months ended June 30, 2006.
      Our forecast for the year ending December 31, 2007 consists of $10.9 million of income from VOC Equipment. This amount is based upon amounts to be received from existing lease contracts and amounts expected to be received on VOC Equipment currently being assembled and installed on certain shuttle tankers.
      Non-Controlling Interest. Forecasted non-controlling interest for the year ending December 31, 2007 is approximately $12.3 million less and $27.5 million greater than the pro forma results for the year ended December 31, 2005 and the twelve months ended June 30, 2006, respectively, primarily as a result of a $17.2 million decrease and a $36.4 million increase in income before non-controlling interest, respectively. Our forecast for the year ending December 31, 2007 assumes that OPCO will earn $90.9 million in net income ($67.3 million — non-controlling owner’s portion), OPCO’s five 50%-owned joint venture shuttle tankers will earn $15.4 million in net income ($7.7 million — non-controlling owner’s portion), and OPCO’s one 89%-owned FSO unit will earn $0.6 million net income ($0.1 million — non-controlling owner’s portion), resulting in a total non-controlling interest of $75.0 million.
      Drydocking and Replacement Reserve. Forecasted initial annual maintenance capital expenditures for OPCO’s fleet are $73.9 million per year, which includes $12.2 million for drydocking costs and $61.7 million, including financing costs, for replacing OPCO’s shuttle tankers, FSO units and conventional tankers at the end of their useful lives.

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      Regulatory, Industry and Economic Factors. We forecast for the year ending December 31, 2007 based on the following assumptions related to regulatory, industry and economic factors:
  •  no material nonperformance or credit-related defaults by suppliers, customers or vendors;
 
  •  no new regulation or any interpretation of existing regulations that, in either case, would be materially adverse to our or OPCO’s business.
 
  •  no material accidents, releases, weather-related incidents, unscheduled downtime or similar unanticipated events;
 
  •  no major adverse change in the markets in which OPCO operates resulting from production disruptions, reduced demand for oil or significant changes in the market prices of oil;
 
  •  no material changes to market, regulatory and overall economic conditions; and
 
  •  an annual inflation rate of 2.0% to 3.0%, depending upon the applicable jurisdiction.
Pro Forma and Forecasted Cash Available for Distribution
      If we had completed the transactions contemplated in this prospectus on January 1, 2005 or July 1, 2005 as a publicly-traded partnership, pro forma cash available for distribution generated during the year ended December 31, 2005 and the twelve months ended June 30, 2006 would have been approximately $27.8 million and $23.4 million, respectively. This amount would have been sufficient to make aggregate cash distributions equal to 100.0% of the minimum quarterly distribution of $0.35 per unit per quarter (or $1.40 per unit on an annualized basis) on our common units for the year ended December 31, 2005 and for the twelve months ended June 30, 2006 and 98.8% and 67.4%, respectively, of the minimum quarterly distribution on our subordinated units for those periods.
      The following table illustrates, on a pro forma basis, for the year ended December 31, 2005 and for the twelve months ended June 30, 2006, the amount of cash available for distribution that would have been available for distributions to our unitholders, assuming that this offering and the related transactions had been consummated on January 1, 2005 and July 1, 2005, respectively.
      The table below also sets forth our calculation of forecasted cash available for distribution to our unitholders and general partner based on the Pro Forma and Forecasted Results of Operations set forth above. Based on the financial forecast and related assumptions, we forecast that our cash available for distribution generated during the year ending December 31, 2007 will be approximately $30.9 million. This amount would be sufficient to pay 100.0% of the minimum quarterly distribution of $0.35 per unit on all of our common units and subordinated units for the four quarters ending December 31, 2007.
      You should read “Note 3. Summary of Significant Forecast Assumptions” included as part of the financial forecast for a discussion of the material assumptions underlying our forecast of EBITDA that is included in the table below. Our forecast is based on those material assumptions and reflects our judgment of conditions we expect to exist and the course of action we expect to take. The assumptions disclosed in our financial forecast are those that we believe are significant to generate the forecasted EBITDA. If our estimate is not achieved, we may not be able to pay distributions on the common units at the initial distribution rate of $0.35 per unit per quarter ($1.40 per unit on an annualized basis). Our financial forecast and the forecast of cash available for distribution set forth below have been prepared by our management. Our independent registered public accounting firm has not examined, compiled, or otherwise applied procedures to our financial forecast and the forecast of cash available for distribution set forth below and, accordingly, do not express an opinion or any other form of assurance on it.
      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 calculated in accordance with GAAP.

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      When considering our forecast of cash available for distribution for the year ending December 31, 2007, you should keep in mind the risk factors and other cautionary statements under the heading “Risk Factors” and elsewhere in this prospectus. Any of these factors or the other risks discussed in this prospectus could cause our financial condition and consolidated results of operations to vary significantly from those set forth in the financial forecast and the forecast of cash available for distribution set forth below.
      Although we forecast sufficient available cash to pay the full minimum quarterly distribution on all of our common and subordinated units for the year ending December 31, 2007, OPCO’s new credit facility allows it to make working capital borrowings and to loan the proceeds to us, which we could use to make distributions. This allows us to manage fluctuations in OPCO’s working capital.

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TEEKAY OFFSHORE PARTNERS L.P.
PRO FORMA AND FORECASTED CASH AVAILABLE FOR DISTRIBUTION
                           
    Consolidated Pro Forma   Forecast(1)
         
    Year   Twelve Months   Year
    Ended   Ended   Ending
    December 31,   June 30,   December 31,
    2005   2006   2007
             
    (unaudited)
     
    (dollars in thousands except per unit amounts)
EBITDA(2)
    $198,360       $204,769       $203,423  
 
Adjustments for other non-cash items:
                       
 
Non-controlling interest
    87,248       47,494       74,997  
 
Write-off of capitalized loan costs
    3,402              
 
Foreign currency exchange loss (gain)
    (9,281 )     5,137        
 
Gain on sale of vessels
    (9,423 )     (4,897 )      
                   
      270,306       252,503       278,420  
                   
 
Adjustments for cash items and maintenance capital expenditures reserves:
                       
 
Minority owners share of cash available for distribution from joint ventures
    (15,328 )     (14,351 )     (11,863 )
 
Cash interest expense
    (72,238 )     (73,733 )     (72,285 )
 
Cash interest income
    5,265       6,590       3,600  
 
Cash income tax expense
    (2,762 )     (2,699 )     (1,000 )
 
Public partnership expenses
    1,500       1,500       1,500  
 
Drydocking capital expenditure reserve(3)
    (12,240 )     (12,240 )     (12,240 )
 
Replacement capital expenditure reserve(3)
    (61,680 )     (61,680 )     (61,680 )
                   
Cash available for distribution from OPCO
    112,823       95,890       124,452  
TSC’s 74.0% limited partner share of OPCO’s available cash
    (83,489 )     (70,959 )     (92,094 )
Public partnership expenses
    (1,500 )     (1,500 )     (1,500 )
                   
Cash available for distribution
    $27,834       $23,431       $30,858  
                   
Expected distributions:
                       
Distributions per unit
    $1.40       $1.40       $1.40  
Distributions to our public common unitholders(4)
    9,800       9,800       9,800  
Distributions to TSC — common units(4)
    3,920       3,920       3,920  
Distributions to TSC — subordinated units
    13,720       13,720       13,720  
Distributions to TSC — general partner interest
    560       560       560  
                   
Total distributions(5)
    $28,000       $28,000       $28,000  
                   
Excess (shortfall)
    $(166 )     $(4,569 )     $2,858  
Annualized initial quarterly distribution per unit
    $1.40       $1.40       $1.40  
Aggregate distributions based on annualized minimum quarterly distribution
    $28,000       $28,000       $28,000  
Percent of minimum quarterly distributions payable to common unitholders
    100.0 %     100.0 %     100.0 %
Percent of minimum quarterly distributions payable to subordinated unitholders
    98.8 %     67.4 %     100.0 %

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(1)  The forecasted column is based on the assumptions set forth in “— Pro Forma and Forecasted Results of Operations — Summary of Significant Accounting Policies and Assumptions.”
 
(2)  EBITDA is a non-GAAP financial measure, which we use as it is an important supplemental measure of performance and liquidity. EBITDA means earnings before interest, taxes, depreciation and amortization. This measure is not calculated or presented in accordance with GAAP. We explain this measure below and reconcile it to its most directly comparable financial measures calculated and presented in accordance with GAAP.
      EBITDA is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, to assess:
  •  the financial and operating performance of assets without regard to financing methods, capital structure, income taxes or historical cost basis; and
 
  •  the ability to generate cash sufficient to service debt, make distributions to our unitholders and undertake capital expenditures.
      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. The following table presents a reconciliation of EBITDA to the most directly comparable GAAP financial measures on a pro forma and forecasted basis for each of the periods indicated.
                         
    Consolidated Pro Forma   Forecast
         
    Year   Twelve Months   Year
    Ended   Ended   Ending
    December 31,   June 30,   December 31,
    2005   2006   2007
             
    (unaudited)
     
    (in thousands)
Reconciliation of “EBITDA” to “Net operating cash flow”:
                       
Net operating cash flow
    $212,382       $185,553       $188,146  
Non-controlling interest
    (87,248 )     (47,494 )     (74,997 )
Interest expense, net
    66,973       67,143       68,685  
Change in working capital
    (22,951 )     (9,162 )      
Foreign currency exchange gain (loss) and other, net
    15,248       (5,747 )     1,000  
Gain on sale of vessels
    9,423       4,897        
Expenditures for drydocking
    8,906       10,007       20,589  
Write-off of capitalized loan costs
    (3,402 )            
Equity loss (net of dividends received)
    (971 )     (428 )      
                   
EBITDA
    $198,360       $204,769       $203,423  
                   
(3)  Our partnership agreement requires that an estimate of the maintenance capital expenditures necessary to maintain our asset base be subtracted from operating surplus each quarter, as opposed to amounts actually spent. Because our interest in OPCO will represent our only cash-generating asset upon the closing of this offering, an estimate of its maintenance capital expenditures is more meaningful. The board of directors of our general partner, Teekay Offshore GP L.L.C., will approve the amount of OPCO’s reserves for maintenance capital expenditures and other purposes. Our initial estimated maintenance capital expenditures for OPCO are $73.9 million per year. The amount of estimated maintenance capital expenditures attributable to future drydocking expenses is based on the

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average annual anticipated drydocking over the remaining useful lives of OPCO’s vessels. The actual cost of maintenance capital expenditures, including for drydocking, vessel replacement and other items, will depend on a number of factors, including, among others, prevailing market conditions, charter hire rates and the availability and cost of financing at the time of vessel replacement. We may elect to fund some or all maintenance capital expenditures through the issuance of additional common units, which may be dilutive to existing unitholders. Please read “Risk Factors — Risks Inherent in Our Business — OPCO must make substantial capital expenditures to maintain the operating capacity of its 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.”
 
(4)  Assumes the underwriters’ option to purchase additional common units is not exercised. The net proceeds from any exercise of the underwriters’ option to purchase additional common units will be used to redeem common units from Teekay Shipping Corporation. The number of units redeemed would equal the number of units for which the underwriters exercise their over-allotment option.
 
(5)  Represents the amount required to fund distributions to our unitholders and our general partner for four quarters based upon our minimum quarterly distribution rate of $0.35 per unit.

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HOW WE MAKE CASH DISTRIBUTIONS
Distribution of Available Cash
General
      Within approximately 45 days after the end of each quarter, beginning with the quarter ending December 31, 2006, we will distribute all of our available cash (defined below) to unitholders of record on the applicable record date. We will adjust the minimum quarterly distribution for the period from the closing of this offering through December 31, 2006 based on the actual length of the period.
Available Cash
      We define available cash in the glossary, and it generally means, for each fiscal quarter, all cash on hand at the end of the quarter (including our proportionate share of cash on hand of certain subsidiaries we do not wholly own, including OPCO):
  •  less the amount of cash reserves (including our proportionate share of cash reserves of certain subsidiaries we do not wholly own) established by our general partner to:
  •  provide for the proper conduct of our business (including reserves for future capital expenditures and for anticipated credit needs);
 
  •  comply with applicable law, any debt instruments or other agreements; or
 
  •  provide funds for distributions to our unitholders and to our general partner for any one or more of the next four quarters;
  •  plus all cash on hand (including our proportionate share of cash on hand of certain subsidiaries we do not wholly own) on the date of determination of available cash for the quarter resulting from working capital borrowings made after the end of the quarter. Working capital borrowings are generally borrowings that are made under credit agreements and in all cases are used solely for working capital purposes or to pay distributions to partners.
Intent to Distribute the Minimum Quarterly Distribution
      We intend to distribute to the holders of common units and subordinated units on a quarterly basis at least the minimum quarterly distribution of $0.35 per unit, or $1.40 per unit per year, to the extent we have sufficient cash on hand to pay the distribution after we establish cash reserves and pay fees and expenses. The amount of available cash from operating surplus needed to pay the minimum quarterly distribution for one quarter on all units outstanding immediately after this offering and the related distribution on the 2.0% general partner interest is approximately $7.0 million.
      However, there is no guarantee that we will pay the minimum quarterly distribution on the units in any quarter. Even if our cash distribution policy is not modified or revoked, the amount of distributions paid under our policy and the decision to make any distribution is determined by our general partner, taking into consideration the terms of our partnership agreement. Because our 26.0% interest in OPCO will be our only cash-generating asset upon the closing of this offering, the amount of our distributions to unitholders initially will depend upon distributions by OPCO to us. OPCO will be prohibited from making any distributions to us if it would cause an event of default, or an event of default is existing, under its credit agreements. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Credit Facilities” and “— Covenants and Other Restrictions in Our Financing Agreements” for a discussion of the restrictions to be included in the credit agreements that may restrict OPCO’s ability to make distributions.

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Operating Surplus and Capital Surplus
Overview
      All cash distributed to unitholders will be characterized as either “operating surplus” or “capital surplus.” We treat distributions of available cash from operating surplus differently than distributions of available cash from capital surplus.
Definition of Operating Surplus
      We define operating surplus in the glossary, and for any period it generally means:
  •  $15.0 million; plus
 
  •  all cash receipts (including our proportionate share of cash receipts for certain subsidiaries we do not wholly own, including OPCO) after the closing of this offering, excluding cash from (1) borrowings, other than working capital borrowings, (2) sales of equity and debt securities, (3) sales or other dispositions of assets outside the ordinary course of business, (4) termination of interest rate swap agreements, (5) capital contributions or (6) corporate reorganizations or restructurings; plus
 
  •  working capital borrowings (including our proportionate share of working capital borrowings for certain subsidiaries we do not wholly own) made after the end of a quarter but before the date of determination of operating surplus for the quarter; plus
 
  •  interest paid on debt incurred (including periodic net payments under related interest rate swap agreements) and cash distributions paid on equity securities issued, in each case (and including our proportionate share of such interest and cash distributions paid by certain subsidiaries we do not wholly own), to finance all or any portion of the construction, expansion or improvement of a capital asset such as vessels during the period from such financing until the earlier to occur of the date the capital asset is put into service or the date that it is abandoned or disposed of; plus
 
  •  interest paid on debt incurred (including periodic net payments under related interest rate swap agreements) and cash distributions paid on equity securities issued, in each case (and including our proportionate share of such interest and cash distributions paid by certain subsidiaries we do not wholly own), to pay the construction period interest on debt incurred (including periodic net payments under related interest rate swap agreements), or to pay construction period distributions on equity issued, to finance the construction projects described in the immediately preceding bullet; less
 
  •  all of our operating expenditures (including our proportionate share of operating expenditures by certain subsidiaries we do not wholly own) after the closing of this offering and the repayment of working capital borrowings, but not (1) the repayment of other borrowings, (2) actual maintenance capital expenditures, or expansion capital expenditures or investment capital expenditures, (3) transaction expenses (including taxes) related to interim capital transactions or (4) distributions; less
 
  •  estimated maintenance capital expenditures and the amount of cash reserves (including our proportionate share of cash reserves for certain subsidiaries we do not wholly own) established by our general partner to provide funds for future operating expenditures.
      If a working capital borrowing, which increases operating surplus, is not repaid during the twelve-month period following the borrowing, it will be deemed repaid at the end of such period, thus decreasing operating surplus at such time. When such working capital borrowing is in fact repaid, it will not be treated as a reduction in operating surplus because operating surplus will have been previously reduced by the deemed repayment.
      As described above, operating surplus includes a provision that will enable us, if we choose, to distribute as operating surplus up to $15.0 million of cash we receive in the future from non-operating

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sources, such as asset sales, issuances of securities and long-term borrowing, that would otherwise be distributed as capital surplus. In addition, the effect of including, as described above, certain cash distributions on equity securities or interest payments on debt in operating surplus also would be to increase operating surplus by the amount of any such cash distributions or interest payments. As a result, we may distribute as operating surplus up to the amount of any such cash distributions or interest payments of cash we receive from non-operating sources.
Capital Expenditures
      For purposes of determining operating surplus, maintenance capital expenditures are those capital expenditures required to maintain over the long term the operating capacity of or the revenue generated by capital assets, and expansion capital expenditures are those capital expenditures that increase the operating capacity of or the revenue generated by capital assets. To the extent, however, that capital expenditures associated with acquiring a new vessel increase the revenues or the operating capacity of the fleet, those capital expenditures would be classified as expansion capital expenditures.
      Investment capital expenditures are those capital expenditures that are neither maintenance capital expenditures nor expansion capital expenditures. Investment capital expenditures largely will consist of capital expenditures made for investment purposes.
      Examples of investment capital expenditures include traditional capital expenditures for investment purposes, such as purchases of securities, as well as other capital expenditures that might be made in lieu of such traditional investment capital expenditures, such as the acquisition of a capital asset for investment purposes.
      Examples of maintenance capital expenditures include capital expenditures associated with drydocking a vessel or acquiring a new vessel to the extent such expenditures are incurred to maintain the operating capacity of or the revenue generated by the fleet. Maintenance capital expenditures will also include interest (and related fees) on debt incurred and distributions on equity issued to finance the construction of a replacement vessel and paid during the construction period, which we define as the period beginning on the date of entry into a binding construction contract and ending on the earlier of the date that the replacement vessel commences commercial service or the date that the replacement vessel is abandoned or disposed of. Debt incurred to pay or equity issued to fund construction period interest payments, and distributions on such equity, will also be considered maintenance capital expenditures.
      Because we expect that maintenance capital expenditures will be very large and vary significantly in timing, the amount of actual maintenance capital expenditures may differ substantially from period to period, which could cause similar fluctuations in the amounts of operating surplus, adjusted operating surplus, and available cash for distribution to our unitholders if we subtracted actual maintenance capital expenditures from operating surplus each quarter. Accordingly, to eliminate the effect on operating surplus of these fluctuations, our partnership agreement will require that an amount equal to an estimate of the average quarterly maintenance capital expenditures necessary to maintain the operating capacity of or the revenue generated by our capital assets over the long term be subtracted from operating surplus each quarter, as opposed to the actual amounts spent. The amount of estimated maintenance capital expenditures deducted from operating surplus is subject to review and change by the board of directors of our general partner at least once a year, provided that any change must be approved by the board’s conflicts committee. The estimate will be made at least annually and whenever an event occurs that is likely to result in a material adjustment to the amount of our maintenance capital expenditures, such as a major acquisition or the introduction of new governmental regulations that will affect our fleet. For purposes of calculating operating surplus, any adjustment to this estimate will be prospective only. For a discussion of the amounts we have allocated toward estimated maintenance capital expenditures, please read “Our Cash Distribution Policy and Restrictions on Distributions.” The partnership agreement of OPCO requires that the board of directors of our general partner, on our behalf, must approve the amount of maintenance capital reserves for OPCO.

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      Our use of estimated maintenance capital expenditures in calculating operating surplus will have the following effects:
  •  it will reduce the risk that actual maintenance capital expenditures in any one quarter will be large enough to make operating surplus less than the minimum quarterly distribution to be paid on all the units for that quarter and subsequent quarters;
 
  •  it will reduce the need for us to borrow to pay distributions;
 
  •  it will be more difficult for us to raise our distribution above the minimum quarterly distribution and pay incentive distributions to our general partner; and
 
  •  it will reduce the likelihood that a large maintenance capital expenditure in a period will prevent our general partner’s affiliates from being able to convert some or all of their subordinated units into common units since the effect of an estimate is to spread the expected expense over several periods, mitigating the effect of the actual payment of the expenditure on any single period.
Definition of Capital Surplus
      We also define capital surplus in the glossary, and it generally will be generated only by:
  •  borrowings other than working capital borrowings;
 
  •  sales of debt and equity securities; and
 
  •  sales or other dispositions of assets for cash, other than inventory, accounts receivable and other current assets sold in the ordinary course of business or non-current assets sold as part of normal retirements or replacements of assets.
Characterization of Cash Distributions
      We will treat all available cash distributed as coming from operating surplus until the sum of all available cash distributed since we began operations equals the operating surplus as of the most recent date of determination of available cash. We will treat any amount distributed in excess of operating surplus, regardless of its source, as capital surplus. As described above, operating surplus does not reflect actual cash on hand that is available for distribution to our unitholders. For example, it includes a provision that will enable us, if we choose, to distribute as operating surplus up to $15.0 million of cash we receive in the future from non-operating sources such as asset sales, issuances of securities and long-term borrowings that would otherwise be distributed as capital surplus. We do not anticipate that we will make any distributions from capital surplus.
Subordination Period
General
      During the subordination period, which we define below and in the glossary, the common units will have the right to receive distributions of available cash from operating surplus in an amount equal to the minimum quarterly distribution of $0.35 per quarter, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. Distribution arrearages do not accrue on the subordinated units. The purpose of the subordinated units is to increase the likelihood that during the subordination period there will be available cash from operating surplus to be distributed on the common units.

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Definition of Subordination Period
      We define the subordination period in the glossary. Except as described below under “Early Termination of Subordination Period,” the subordination period will extend until the first day of any quarter, beginning after December 31, 2009, that each of the following tests are met:
  •  distributions of available cash from operating surplus on each of the outstanding common units and subordinated units equaled or exceeded the minimum quarterly distribution for each of the three, consecutive, non-overlapping four-quarter periods immediately preceding that date;
 
  •  the “adjusted operating surplus” (as defined below) generated during each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date equaled or exceeded the sum of the minimum quarterly distributions on all of the outstanding common units and subordinated units during those periods on a fully diluted basis and the related distribution on the 2% general partner interest during those periods; and
 
  •  there are no arrearages in payment of the minimum quarterly distribution on the common units.
      If the unitholders remove our general partner without cause, the subordination period may end before December 31, 2009.
      Early Termination of Subordination Period. The subordination period will automatically terminate and the subordinated units will convert into common any units on a one-for-one basis if the following tests are met:
  •  distributions of available cash from operating surplus on each of the outstanding common units, subordinated units and general partner units equaled or exceeded $2.10 (150.0% of the annualized minimum quarterly distribution) for any four-quarter period immediately preceding the date of determination; and
 
  •  the “adjusted operating surplus” (as defined below) generated during any four-quarter period immediately preceding the date of determination equaled or exceeded the sum of a distribution of $2.10 per common unit (150.0% of the annualized minimum quarterly distribution) on all of the outstanding common and subordinated units on a fully diluted basis; and
 
  •  there are no arrearages in payment of the minimum quarterly distribution on the common units.
      For purposes of determining whether sufficient adjusted operating surplus has been generated under these conversion tests, the conflicts committee may adjust adjusted operating surplus upwards or downwards if it determines in good faith that the estimated amount of maintenance capital expenditures used in the determination of operating surplus was materially incorrect, based on circumstances prevailing at the time of original determination of the estimate.
Definition of Adjusted Operating Surplus
      We define adjusted operating surplus in the glossary, and for any period it generally means:
  •  operating surplus generated with respect to that period; less
 
  •  any net increase in working capital borrowings (including our proportionate share of any changes in working capital borrowings of certain subsidiaries we do not wholly own, including OPCO) with respect to that period; less
 
  •  any net reduction in cash reserves (including our proportionate share of cash reserves of certain subsidiaries we do not wholly own) for operating expenditures with respect to that period not relating to an operating expenditure made with respect to that period; plus
 
  •  any net decrease in working capital borrowings (including our proportionate share of any changes in working capital borrowings of certain subsidiaries we do not wholly own) with respect to that period; plus

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  •  any net increase in cash reserves (including our proportionate share of cash reserves of certain subsidiaries we do not wholly own) for operating expenditures with respect to that period required by any debt instrument for the repayment of principal, interest or premium.
      Adjusted operating surplus is intended to reflect the cash generated from operations during a particular period and therefore excludes net increases in working capital borrowings and net drawdowns of reserves of cash generated in prior periods.
Effect of Expiration of the Subordination Period
      Upon expiration of the subordination period, each outstanding subordinated unit will convert into one common unit and will then participate pro rata with the other common units in distributions of available cash. In addition, if the unitholders remove our general partner other than for cause and units held by our general partner and its affiliates are not voted in favor of such removal:
  •  the subordination period will end and each subordinated unit will immediately convert into one common unit;
 
  •  any existing arrearages in payment of the minimum quarterly distribution on the common units will be extinguished; and
 
  •  our general partner will have the right to convert its general partner interest and, if any, its incentive distribution rights into common units or to receive cash in exchange for those interests.
Distributions of Available Cash From Operating Surplus During the Subordination Period
      We will make distributions of available cash from operating surplus for any quarter during the subordination period in the following manner:
  •  first, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding common unit an amount equal to the minimum quarterly distribution for that quarter;
 
  •  second, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding common unit an amount equal to any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period;
 
  •  third, 98.0% to the subordinated unitholders, pro rata, and 2.0% to our general partner, until we distribute for each subordinated unit an amount equal to the minimum quarterly distribution for that quarter; and
 
  •  thereafter, in the manner described in “— Incentive Distribution Rights” below.
      The preceding paragraph is based on the assumption that our general partner maintains its 2.0% general partner interest and that we do not issue additional classes of equity securities.
Distributions of Available Cash From Operating Surplus After the Subordination Period
      We will make distributions of available cash from operating surplus for any quarter after the subordination period in the following manner:
  •  first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding unit an amount equal to the minimum quarterly distribution for that quarter; and
 
  •  thereafter, in the manner described in “— Incentive Distribution Rights” below.
      The preceding paragraph is based on the assumption that our general partner maintains its 2.0% general partner interest and that we do not issue additional classes of equity securities.

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Incentive Distribution Rights
      Incentive distribution rights represent the right to receive an increasing percentage of quarterly distributions of available cash from operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. Our general partner currently holds the incentive distribution rights, but may transfer these rights separately from its general partner interest. Except for transfers of incentive distribution rights to an affiliate or another entity as part of our general partner’s merger or consolidation with or into, or sale of all or substantially all of its assets to such entity, the approval of a majority of our common units (excluding common units held by our general partner and its affiliates), voting separately as a class, generally is required for a transfer of the incentive distributions rights to a third party prior to December 31, 2016. Please read “The Partnership Agreement — Transfer of Incentive Distribution Rights.” Any transfer by our general partner of the incentive distribution rights would not change the percentage allocations of quarterly distributions with respect to such rights.
      If for any quarter:
  •  we have distributed available cash from operating surplus to the common and subordinated unitholders in an amount equal to the minimum quarterly distribution; and
 
  •  we have distributed available cash from operating surplus on outstanding common units in an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly distribution;
then, we will distribute any additional available cash from operating surplus for that quarter among the unitholders and our general partner in the following manner:
  •  first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unitholder receives a total of $0.4025 per unit for that quarter (the “first target distribution”);
 
  •  second, 85.0% to all unitholders, pro rata, and 15.0% to our general partner, until each unitholder receives a total of $0.4375 per unit for that quarter (the “second target distribution”);
 
  •  third, 75.0% to all unitholders, pro rata, and 25.0% to our general partner, until each unitholder receives a total of $0.525 per unit for that quarter (the “third target distribution”); and
 
  •  thereafter, 50.0% to all unitholders, pro rata, and 50.0% to our general partner.
      In each case, the amount of the target distribution set forth above is exclusive of any distributions to common unitholders to eliminate any cumulative arrearages in payment of the minimum quarterly distribution. The percentage interests set forth above assume that our general partner maintains its 2.0% general partner interest and has not transferred the incentive distribution rights and that we do not issue additional classes of equity securities.

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Percentage Allocations of Available Cash From Operating Surplus
      The following table illustrates the percentage allocations of the additional available cash from operating surplus between the unitholders and our general partner up to the various target distribution levels. The amounts set forth under “Marginal Percentage Interest in Distributions” are the percentage interests of the unitholders and our general partner in any available cash from operating surplus we distribute up to and including the corresponding amount in the column “Total Quarterly Distribution Target Amount,” until available cash from operating surplus we distribute reaches the next target distribution level, if any. The percentage interests shown for the unitholders and our general partner for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests shown for our general partner include its 2.0% general partner interest and assume our general partner has contributed any capital necessary to maintain its 2.0% general partner interest and has not transferred the incentive distribution rights.
                         
        Marginal Percentage
        Interest in Distributions
    Total Quarterly Distribution    
    Target Amount   Unitholders   General Partner
             
Minimum Quarterly Distribution
    $0.35       98.0 %     2.0 %
First Target Distribution
    Up to $0.4025       98.0 %     2.0 %
Second Target Distribution
    Above $0.4025 up to $0.4375       85.0 %     15.0 %
Third Target Distribution
    Above $0.4375 up to $0.525       75.0 %     25.0 %
Thereafter
    Above $0.525       50.0 %     50.0 %
Distributions From Capital Surplus
How Distributions From Capital Surplus Will Be Made
      We will make distributions of available cash from capital surplus, if any, in the following manner:
  •  first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until we distribute for each common unit that was issued in this offering, an amount of available cash from capital surplus equal to the initial public offering price; and
 
  •  second, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each common unit, an amount of available cash from capital surplus equal to any unpaid arrearages in payment of the minimum quarterly distribution on the common units; and
 
  •  thereafter, we will make all distributions of available cash from capital surplus as if they were from operating surplus.
      The preceding paragraph is based on the assumption that our general partner maintains its 2.0% general partner interest and that we do not issue additional classes of equity securities.
Effect of a Distribution From Capital Surplus
      Our partnership agreement treats a distribution of capital surplus as the repayment of the initial unit price from this offering, which is a return of capital. Each time a distribution of capital surplus is made, the minimum quarterly distribution and the target distribution levels will be reduced in the same proportion as the distribution had to the fair market value of the common units prior to the announcement of the distribution. Because distributions of capital surplus will reduce the minimum quarterly distribution, after any of these distributions are made, it may be easier for our general partner to receive incentive distributions and for the subordinated units to convert into common units. However, any distribution of capital surplus before the minimum quarterly distribution is reduced to zero cannot be applied to the payment of the minimum quarterly distribution or any arrearages.
      Once we reduce the minimum quarterly distribution and the target distribution levels to zero, we will then make all future distributions from operating surplus, with 50.0% being paid to the holders of units and

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50.0% to our general partner. The percentage interests shown for our general partner include its 2.0% general partner interest and assume the general partner maintains its 2.0% general partner interest and has not transferred the incentive distribution rights.
Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels
      In addition to adjusting the minimum quarterly distribution and target distribution levels to reflect a distribution of capital surplus, if we combine our units into fewer units or subdivide our units into a greater number of units, we will proportionately adjust:
  •  the minimum quarterly distribution;
 
  •  the target distribution levels; and
 
  •  the initial unit price.
      For example, if a two-for-one split of the common and subordinated units should occur, the minimum quarterly distribution, the target distribution levels and the initial unit price would each be reduced to 50.0% of its initial level. If we combine our common units into a lesser number of units or subdivide our common units into a greater number of units, we will combine our subordinated units or subdivide our subordinated units, using the same ratio applied to the common units. We will not make any adjustment by reason of the issuance of additional units for cash or property.
      In addition, if legislation is enacted or if existing law is modified or interpreted by a governmental taxing authority so that OPCO or any subsidiary becomes subject to additional taxation as an entity for U.S. federal, state, local or foreign tax purposes, our partnership agreement specifies that the minimum quarterly distribution and the target distribution levels for each quarter will be reduced by multiplying each distribution level by a fraction, the numerator of which is available cash for that quarter and the denominator of which is the sum of available cash for that quarter plus the general partner’s estimate of our direct or indirect aggregate liability for the quarter for such taxes payable by reason of such legislation or interpretation. To the extent that the actual tax liability differs from the estimated tax liability for any quarter, the difference will be accounted for in subsequent quarters.
Distributions of Cash Upon Liquidation
      If we dissolve in accordance with the partnership agreement, we will sell or otherwise dispose of our assets in a process called liquidation. We will apply the proceeds of liquidation in the manner set forth below.
      If, as of the date three trading days prior to the announcement of the proposed liquidation, the average closing price of our common units for the preceding 20 trading days (or the current market price) is greater than the sum of:
  •  any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period; plus
 
  •  the initial unit price (less any prior capital surplus distributions and any prior cash distributions made in connection with a partial liquidation);
      then the proceeds of the liquidation will be applied as follows:
  •  first, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding common unit an amount equal to the current market price of our common units;
 
  •  second, 98.0% to the subordinated unitholders, pro rata, and 2.0% to our general partner, until we distribute for each subordinated unit an amount equal to the current market price of our common units; and

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  •  thereafter, 50.0% to all unitholders, pro rata, 48.0% to holders of incentive distribution rights and 2.0% to our general partner.
      If, as of the date three trading days prior to the announcement of the proposed liquidation, the current market price of our common units is equal to or less than the sum of:
  •  any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period; plus
 
  •  the initial unit price (less any prior capital surplus distributions and any prior cash distributions made in connection with a partial liquidation);
      then the proceeds of the liquidation will be applied as follows:
  •  first, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding common unit an amount equal to the initial unit price (less any prior capital surplus distributions and any prior cash distributions made in connection with a partial liquidation);
 
  •  second, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding common unit an amount equal to any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period;
 
  •  third, 98.0% to the subordinated unitholders and 2.0% to our general partner, until we distribute for each outstanding subordinated unit an amount equal to the initial unit price (less any prior capital surplus distributions and any prior cash distributions made in connection with a partial liquidation); and
 
  •  thereafter, 50.0% to all unitholders, pro rata, 48.0% to holders of incentive distribution rights and 2.0% to our general partner.
      The immediately preceding two paragraphs are based on the assumption that our general partner maintains its 2.0% general partner interest and that we do not issue additional classes of equity securities.

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SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
      The following table presents, in each case for the periods and as at the dates indicated, selected:
  •  historical financial and operating data of Teekay Offshore Partners Predecessor; and
 
  •  pro forma financial and operating data of Teekay Offshore Partners L.P.
      The selected historical financial and operating data has been prepared on the following basis:
  •  the historical financial and operating data of Teekay Offshore Partners Predecessor as at and for the years ended December 31, 2001, 2002 and 2003 are derived from the unaudited combined consolidated financial statements of Teekay Offshore Partners Predecessor, which are not included in this prospectus;
 
  •  the historical financial and operating data of Teekay Offshore Partners Predecessor as at and for the years ended December 31, 2004 and 2005 are derived from the audited combined consolidated financial statements of Teekay Offshore Partners Predecessor included elsewhere in this prospectus; and
 
  •  the historical financial and operating data of Teekay Offshore Partners Predecessor as at and for the six months ended June 30, 2005 and June 30, 2006 are derived from the unaudited combined consolidated financial statements of Teekay Offshore Partners Predecessor, which, other than the unaudited combined balance sheet as at June 30, 2005, are included elsewhere in this prospectus.
      The unaudited pro forma financial data of Teekay Offshore Partners L.P. presented for the year ended December 31, 2005 and as at and for the six months ended June 30, 2006 are derived from our unaudited pro forma consolidated financial statements included elsewhere in this prospectus. The pro forma income statement data for the year ended December 31, 2005 and for the six months ended June 30, 2006 assumes this offering and related transactions occurred on January 1, 2005. The pro forma balance sheet data assumes this offering and related transactions occurred on June 30, 2006. A more complete explanation of the pro forma data can be found in our unaudited pro forma consolidated financial statements.
      The following table includes two financial measures, net voyage revenues and EBITDA, which we use in our business and are not calculated or presented in accordance with GAAP. We explain these measures and reconcile them to their most directly comparable financial measures calculated and presented in accordance with GAAP in “— Non-GAAP Financial Measures” below.

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      The following table should be read together with, and is qualified in its entirety by reference to, the historical combined consolidated and unaudited pro forma consolidated financial statements and the accompanying notes included elsewhere in this prospectus. The table should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
                                                                           
    Historical   Pro Forma
         
        Six    
        Months       Six
        Ended       Months
    Years Ended December 31,   June 30,   Year Ended   Ended
            December 31,   June 30,
    2001   2002   2003   2004   2005   2005   2006   2005   2006
                                     
    (unaudited)   (audited)   (unaudited)   (unaudited)
                 
    (in thousands, except per unit and fleet data)
Income Statement Data:
                                                                       
Voyage revenues
    $137,258       $156,745       $747,383       $986,504       $807,548       $400,315       $386,724       $678,888       $349,299  
                                                       
Operating expenses:
                                                                       
 
Voyage expenses(1)
    7,447       8,894       146,893       118,819       74,543       32,400       48,344       93,935       60,186  
 
Vessel operating expenses(2)
    31,617       42,395       87,507       105,595       104,475       52,900       52,954       114,843       57,545  
 
Time-charter hire expenses
                235,976       372,449       373,536       176,276       165,935       145,423       76,288  
 
Depreciation and amortization
    45,167       49,579       93,269       118,460       107,542       55,620       51,331       116,922       56,138  
 
General and administrative
    10,424       11,733       33,968       65,819       85,856       37,838       43,469       61,546       32,265  
 
Vessel and equipment writedowns and (gain) loss on sale of vessels
                63       (3,725 )     2,820       5,369       1,845       (9,423 )     (305 )
 
Restructuring charge
                            955             453       955       453  
                                                       
Total operating expenses
    94,655       112,601       597,676       777,417       749,727       360,403       364,331       524,201       282,570  
                                                       
Income from vessel operations
    42,603       44,144       149,707       209,087       57,821       39,912       22,393       154,687       66,729  
Interest expense
    (31,090 )     (28,136 )     (46,872 )     (43,957 )     (39,791 )     (20,100 )     (24,504 )     (73,458 )     (36,961 )
Interest income
    999       549       1,278       2,459       4,605       2,271       3,291       5,265       3,834  
Equity income (loss) from joint ventures
    2,634       4,597       5,047       6,162       5,199       2,573       3,191       (971 )     (49 )
Gain (loss) on sale of marketable securities
    (1,415 )     (1,227 )     517       94,222                                
Foreign currency exchange gain (loss)(3)
    3,685       (35,121 )     (17,821 )     (37,910 )     34,178       25,730       (18,688 )     9,281       (4,339 )
Income tax recovery (expense)
    (4,963 )     (8,116 )     (30,035 )     (28,188 )     13,873       15,786       (7,762 )     13,873       (7,762 )
Other — net
    2,923       1,313       4,455       14,064       9,091       3,694       5,694       5,689       5,694  
Non-controlling interest
    (2,345 )     (1,212 )     (2,763 )     (2,167 )     (229 )     (692 )     (414 )     (87,248 )     (21,541 )
                                                       
Net income (loss)
    $13,031       $(23,209 )     $63,513       $213,772       $84,747       $69,174       $(16,799 )     $27,118       $5,605  
                                                       
Pro forma net income per common unit (basic and diluted)(4)
                                                            $1.40       $0.56  
Balance Sheet Data (at end of period):
                                                                       
Cash and marketable securities
    $32,605       $39,754       $160,957       $143,729       $128,986       $119,495       $133,962               $90,000  
Vessels and equipment(5)
    709,787       725,263       1,431,947       1,427,481       1,300,064       1,346,328       1,260,765               1,528,480  
Total assets
    878,816       1,002,452       2,037,855       2,040,642       1,884,017       1,913,756       1,866,330               2,038,218  
Total debt(6)
    456,761       673,074       1,354,392       1,210,998       991,855       1,045,094       971,992               1,317,314  
Non-controlling interest(7)
    13,199       14,412       15,525       14,276       11,859       14,597       11,770               437,450  
Total owner’s/partners’ equity
    369,287       262,835       529,794       659,212       740,379       727,052       727,801               138,405  
Cash Flow Data:
                                                                       
Net cash provided by (used in):
                                                                       
 
Operating activities
    $34,054       $12,110       $227,297       $242,592       $152,687       $81,232       $48,705                  
 
Financing activities
    298,471       151,340       731,329       (69,710 )     (201,554 )     (153,647 )     (42,602 )                
 
Investing activities
    (299,920 )     (156,301 )     (837,423 )     (190,110 )     34,124       48,182       (1,127 )                
Other Financial Data:
                                                                       
Net voyage revenues
    $129,811       $147,851       $600,490       $867,685       $733,005       $367,915       $338,380       $584,953       $289,113  
EBITDA(8)
    93,252       62,073       232,411       401,918       213,602       126,837       63,507       198,360       102,632  
Capital expenditures:
                                                                       
 
Expenditures for vessels and equipment
    128,297       56,017       146,279       170,630       24,760       7,116       5,054       23,675       5,054  
 
Expenditures for drydocking
    4,774       9,038       11,980       9,174       8,906       2,679       3,780       8,906       3,780  
Fleet Data:
                                                                       
Average number of shuttle tankers(9)
    8.7       11.1       30.5       37.9       35.8       35.9       35.1       37.9       37.2  
Average number of conventional tankers(9)
    7.1       7.0       27.4       40.7       41.2       40.2       34.3       10.5       10.0  
Average number of FSO units(9)
    1.7       2.0       2.2       3.0       3.0       3.0       3.0       3.0       3.0  

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(1)  Voyage expenses are all expenses unique to a particular voyage, including any bunker fuel expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and commissions.
 
(2)  Vessel operating expenses include crewing, repairs and maintenance, insurance, stores, lube oils and communication expenses.
 
(3)  Substantially all of these foreign currency exchange gains and losses were unrealized and not settled in cash. Under U.S. accounting guidelines, all foreign currency-denominated monetary assets and liabilities, such as cash and cash equivalents, accounts receivable, accounts payable, advances from affiliates and deferred income taxes, are revalued and reported based on the prevailing exchange rate at the end of the period. Our primary source for the foreign currency gains and losses is our Norwegian Kroner-denominated advances from affiliates, which totaled $157.6 million at June 30, 2006, $164.6 million at December 31, 2005 and $188.5 million at December 31, 2004.
 
(4)  Please read Note 6 of our unaudited pro forma consolidated financial statements included in this prospectus for a calculation of our pro forma net income per unit.
 
(5)  Vessels and equipment consists of (a) vessels, at cost less accumulated depreciation, (b) vessels under capital leases, at cost less accumulated depreciation, and (c) advances on newbuildings.
 
(6)  Total debt includes long-term debt, capital lease obligations and advances from affiliates.
 
(7)  Historical non-controlling interest represents minority interests of third parties in joint ventures to which OPCO or its subsidiaries were a party. Pro forma non-controlling interest represents these minority interests and the minority interests in OPCO’s five 50%-owned joint ventures that OPCO has consolidated on a pro forma basis, together with Teekay Shipping Corporation’s 74.0% limited partner interest in OPCO.
 
(8)  EBITDA is calculated as net income (loss) before interest, taxes, depreciation and amortization, as set forth in “— Non-GAAP Financial Measures” below, which also includes reconciliations of EBITDA to our most directly comparable GAAP financial measures. EBITDA includes the following items:
                                                                         
    Historical   Pro Forma
         
        Six    
        Months       Six
        Ended       Months
    Years Ended December 31,   June 30,   Year Ended   Ended
            December 31,   June 30,
    2001   2002   2003   2004   2005   2005   2006   2005   2006
                                     
    (unaudited)   (audited)   (unaudited)   (unaudited)
                 
    (in thousands)
Vessel and equipment writedowns and gain (loss) on sale of vessels
    $—       $—       $(63 )     $3,725       $(2,820 )     $(5,369 )     $(1,845 )     $9,423       $305  
Gain (loss) on sale of marketable securities
    (1,415 )     (1,227 )     517       94,222                                
Foreign currency exchange gain (loss)
    3,685       (35,121 )     (17,821 )     (37,910 )     34,178       25,730       (18,688 )     9,281       (4,339 )
                                                       
Total
    $2,270       $(36,348 )     $(17,367 )     $60,037       $31,358       $20,361       $(20,533 )     $18,704       $(4,034 )
                                                       
(9)  Historical average number of ships consists of the average number of owned (excluding vessels owned by OPCO’s five 50%-owned joint ventures) and chartered-in vessels that were in OPCO’s possession during a period. Pro forma average number of ships consists of the average number of chartered-in and owned (including vessels owned by the five 50%-owned joint ventures, as OPCO has consolidated the joint ventures on a pro forma basis) in OPCO’s possession during the pro forma periods.

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Non-GAAP Financial Measures
      This discussion presents:
  •  Non-GAAP financial measures included above in “Selected Historical and Pro Forma Financial and Operating Data;” and
 
  •  Reconciliations of these non-GAAP financial measures to our most directly comparable financial measures under GAAP.
      Net Voyage Revenues. Consistent with general practice in the shipping industry, we use net voyage revenues (defined as voyage revenues less voyage expenses) as a measure of equating revenues generated from voyage charters to revenues generated from time charters, which assists us in making operating decisions about the deployment of vessels and their performance. Under time charters and bareboat charters the charterer typically pays the voyage expenses, whereas under voyage charter contracts and contracts of affreightment the shipowner typically pays the voyage expenses. Some voyage expenses are fixed, and the remainder can be estimated. If OPCO, as the shipowner, pays the voyage expenses, it typically passes the approximate amount of these expenses on to its customers by charging higher rates under the contract or billing the expenses to them. As a result, although voyage revenues from different types of contracts may vary, the net revenues after subtracting voyage expenses, which we call net voyage revenues, are comparable across the different types of contracts. We principally use net voyage revenues, a non-GAAP financial measure, because it provides more meaningful information to us than voyage revenues, the most directly comparable GAAP financial measure. Net voyage revenues are also widely used by investors and analysts in the shipping industry for comparing financial performance between companies in the shipping industry to industry averages.
      The following table reconciles net voyage revenues with voyage revenues:
                                                                         
    Historical   Pro Forma
         
        Six    
        Months       Six
        Ended       Months
    Year Ended December 31,   June 30,   Year Ended   Ended
            December 31,   June 30,
    2001   2002   2003   2004   2005   2005   2006   2005   2006
                                     
    (unaudited)   (audited)   (unaudited)   (unaudited)
                 
    (in thousands)
Voyage revenues
  $ 137,258     $ 156,745     $ 747,383     $ 986,504     $ 807,548     $ 400,315     $ 386,724     $ 678,888     $ 349,299  
Voyage expenses
    7,447       8,894       146,893       118,819       74,543       32,400       48,344       93,935       60,186  
                                                       
Net voyage revenues
  $ 129,811     $ 147,851     $ 600,490     $ 867,685     $ 733,005     $ 367,915     $ 338,380     $ 584,953     $ 289,113  
                                                       
      EBITDA. Earnings before interest, taxes, depreciation and amortization is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, as discussed below:
  •  Financial and operating performance. EBITDA assists our management and investors by increasing the comparability of the fundamental performance of OPCO and us from period to period and against the fundamental performance of other companies in our industry that provide EBITDA information. This increased comparability is achieved by excluding the potentially disparate effects between periods or companies of interest expense, taxes, depreciation or amortization, which items are affected by various and possibly changing financing methods, capital structure and historical cost basis and which items may significantly affect net income between periods. We believe that including EBITDA as a financial and operating measure benefits investors in (a) selecting between investing in us and other investment alternatives and (b) monitoring the ongoing financial and operational strength and health of OPCO and us in assessing whether to continue to hold common units.
 
  •  Liquidity. EBITDA allows us to assess the ability of assets to generate cash sufficient to service debt, make distributions and undertake capital expenditures. By eliminating the cash flow effect

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  resulting from the existing capitalization of OPCO and other items such as drydocking expenditures, working capital changes and foreign currency exchange gains and losses (which may vary significantly from period to period), EBITDA provides a consistent measure of OPCO’s ability to generate cash over the long term. Management uses this information as a significant factor in determining (a) OPCO’s proper capitalization (including assessing how much debt to incur and whether changes to the capitalization should be made) and (b) whether to undertake material capital expenditures and how to finance them, all in light of existing cash distribution commitments to unitholders. Use of EBITDA as a liquidity measure also permits investors to assess the fundamental ability of OPCO and us to generate cash sufficient to meet cash needs, including distributions on our common units.

      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.
                                                                         
    Historical   Pro Forma
         
        Six    
        Months   Year   Six
        Ended   Ended   Months
    Years Ended December 31,   June 30,   December   Ended
            31,   June 30,
    2001   2002   2003   2004   2005   2005   2006   2005   2006
                                     
    (unaudited)   (audited)   (unaudited)   (unaudited)
                 
    (in thousands)
Reconciliation of “EBITDA” to “Net income (loss)”:
                                                                       
Net income (loss)
  $ 13,031     $ (23,209 )   $ 63,513     $ 213,772     $ 84,747     $ 69,174     $ (16,799 )   $ 27,118     $ 5,605  
Depreciation and amortization
    45,167       49,579       93,269       118,460       107,542       55,620       51,331       116,922       56,138  
Interest expense, net
    30,091       27,587       45,594       41,498       35,186       17,829       21,213       68,193       33,127  
Provision (benefit) for income taxes
    4,963       8,116       30,035       28,188       (13,873 )     (15,786 )     7,762       (13,873 )     7,762  
                                                       
EBITDA
  $ 93,252     $ 62,073     $ 232,411     $ 401,918     $ 213,602     $ 126,837     $ 63,507     $ 198,360     $ 102,632  
                                                       
Reconciliation of “EBITDA” to “Net operating cash flow”:
                                                                       
Net operating cash flow
  $ 34,054     $ 12,110     $ 227,297     $ 242,592     $ 152,687     $ 81,232     $ 48,705     $ 212,382     $ 81,895  
Non-controlling interest
    (2,345 )     (1,212 )     (2,763 )     (2,167 )     (229 )     (692 )     (414 )     (87,248 )     (21,541 )
Expenditures for drydocking
    4,774       9,038       11,980       9,174       8,906       2,679       3,780       8,906       3,780  
Interest expense, net
    30,091       27,587       45,594       41,498       35,186       17,829       21,213       66,973       32,516  
Gain (loss) on sale of vessels
                (63 )     3,725       9,423       4,831       305       9,423       305  
Gain on sale of marketable securities, net of writedowns
    (1,415 )     (1,227 )     (4,393 )     94,222                                
Loss on writedown of vessels and equipment
                            (12,243 )     (10,200 )     (2,150 )            
Write-off of capitalized loan costs
                                              (3,402 )      
Equity income (net of dividends received)
    2,540       2,849       (1,234 )     (1,338 )     2,449       2,573       691       (971 )     (49 )
Change in working capital
    25,341       12,000       (10,602 )     37,709       (22,951 )     (3,918 )     9,870       (22,951 )     9,870  
Foreign currency exchange gain (loss) and other, net
    212       928       (33,405 )     (23,497 )     40,374       32,503       (18,493 )     15,248       (4,144 )
                                                       
EBITDA
  $ 93,252     $ 62,073     $ 232,411     $ 401,918     $ 213,602     $ 126,837     $ 63,507     $ 198,360     $ 102,632  
                                                       

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
      You should read the following discussion of our financial condition and results of operations in conjunction with the audited and unaudited combined consolidated financial statements and related notes of Teekay Offshore Partners Predecessor (described below) and the unaudited pro forma consolidated financial statements and related notes of Teekay Offshore Partners L.P. included elsewhere in this prospectus. Among other things, those financial statements include more detailed information regarding the basis of presentation for the following information. The financial statements have been prepared in accordance with U.S. generally accepted accounting principles (or GAAP) and are presented in U.S. Dollars unless otherwise indicated. Any amounts converted from another non-U.S. currency to U.S. Dollars in this prospectus are at the rate applicable at the relevant date, or the average rate during the applicable period.
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 Shipping Corporation, a leading provider of marine services to the global oil and natural gas industries, to further develop its operations in the offshore market.
      Prior to closing this offering, Teekay Shipping Corporation will contribute entities owning and operating a fleet of shuttle tankers, floating storage and offtake (or FSO) units and conventional oil tankers to Teekay Offshore Operating L.P. (or OPCO). Upon the closing of this offering, we will acquire from Teekay Shipping Corporation a 26.0% interest in OPCO, including a 25.99% limited partner interest held by us and a 0.01% general partner interest held through our ownership of OPCO’s general partner, Teekay Offshore Operating GP L.L.C. Teekay Shipping Corporation will own the remaining 74.0% interest in OPCO. The historical results discussed below, and the financial statements and related notes of what we refer to as “Teekay Offshore Partners Predecessor” included elsewhere in this prospectus, are the results of the entities to be contributed to OPCO. As discussed below under “Items You Should Consider When Evaluating Our Historical Financial Performance and Assessing Our Future Prospects,” the entities contributed to OPCO will not own certain assets and operations they owned during the periods discussed below. References in this Management’s Discussion and Analysis of Financial Conditions and Results of Operations to “OPCO” when used in a historical context refer to Teekay Offshore Partners Predecessor, and when used in the present tense or prospectively refers to OPCO and its subsidiaries.
      Upon the closing of this offering, our partnership interest in OPCO will represent our only cash-generating asset. We anticipate growing by acquiring additional vessels and operations directly through wholly owned subsidiaries and by acquiring additional limited partnership interests in OPCO that Teekay Shipping Corporation may offer us in the future.
      We manage our business and analyze and report our results of operations on the basis of the following three business segments:
      Shuttle Tanker Segment. OPCO’s shuttle tanker fleet consists of 36 vessels that operate under fixed-rate contracts of affreightment, time charters and bareboat charters. Of the 36 shuttle tankers, 24 are owned (including 5 through joint ventures) and 12 are chartered-in. These shuttle tankers provide transportation services to energy companies, primarily in the North Sea and Brazil. During the six months ended June 30, 2006 and the year ended December 31, 2005, this segment generated 64.6% and 61.2%, respectively, of total net voyage revenues.
      FSO Segment. OPCO owns four FSO units, of which three operate under fixed-rate time charters and one operates under a fixed-rate bareboat charter. FSO units provide an on-site storage solution to oil field installations that have no oil storage facilities or that require supplemental storage. During the six months ended June 30, 2006 and the year ended December 31, 2005, this segment generated 3.4% and 3.2%, respectively, of total net voyage revenues.

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      Conventional Tanker Segment. OPCO owns nine Aframax-class conventional crude oil tankers, all of which operate under fixed-rate time charters with Teekay Shipping Corporation. During the six months ended June 30, 2006 and the year ended December 31, 2005, this segment generated 32.0% and 35.6%, respectively, of total net voyage revenues.
      We will have the opportunity to directly acquire three vessels from Teekay Shipping Corporation by the second quarter of 2008. Pursuant to an omnibus agreement we will enter into at the closing of this offering, Teekay Shipping Corporation will be obligated to offer to us two shuttle tankers, each currently undergoing conversion, and one FSO unit currently being upgraded. The two shuttle tankers will operate under 13-year bareboat charters with Petróleo Brasileiro S.A. (or Petrobras) and the FSO unit will operate under a seven-year time charter with a consortium of energy companies. If we elect to acquire any of these vessels, the purchase price will be the vessel’s fair market value, as agreed by Teekay Shipping Corporation and the conflicts committee of our general partner’s board of directors, plus the cost of converting or upgrading the vessel prior to delivery. Teekay Shipping Corporation will be obligated to offer to us certain other shuttle tankers, FSO units and FPSO units it may acquire in the future. Please read “Certain Relationships and Related Party Transactions — Omnibus Agreement.”
OPCO’s Contracts of Affreightment and Charters
      OPCO generates revenues by charging customers for the transportation and storage of their crude oil using OPCO’s vessels. Historically, these services generally have been provided under the following basic types of contractual relationships:
  •  Contracts of affreightment, whereby OPCO carries an agreed quantity of cargo for a customer over a specified trade route within a given period of time;
 
  •  Time charters, whereby vessels OPCO operates and is responsible for crewing are chartered to customers for a fixed period of time at rates that are generally fixed, but may contain a variable component based on inflation, interest rates or current market rates;
 
  •  Bareboat charters, whereby customers charter vessels for a fixed period of time at rates that are generally fixed, but the customers operate the vessels with their own crews; and
 
  •  Voyage charters, which are charters for shorter intervals that are priced on a current, or “spot,” market rate.
      The table below illustrates the primary distinctions among these types of charters and contracts:
                                 
    Contract of            
    Affreightment   Time Charter   Bareboat Charter   Voyage Charter(1)
                 
Typical contract length
    One year or more       One year or more       One year or more       Single voyage  
Hire rate basis(2)
    Typically daily       Daily       Daily       Varies  
Voyage expenses(3)
    OPCO pays       Customer pays       Customer pays       OPCO pays  
Vessel operating expenses(3)
    OPCO pays       OPCO pays       Customer pays       OPCO pays  
Off-hire(4)
  Customer typically does not pay     Varies     Customer typically pays     Customer does not pay  
 
(1)  Under a consecutive voyage charter, the customer pays for idle time.
 
(2)  “Hire” rate refers to the basic payment from the charterer for the use of the vessel.
 
(3)  Defined below under “Important Financial and Operational Terms and Concepts.”
 
(4)  “Off-hire” refers to the time a vessel is not available for service.

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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 OPCO pays 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 OPCO. Because the amount of voyage expenses OPCO incurs 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 GAAP. Please read “Selected Historical and Pro Forma Financial and Operating Data” for a further discussion of net voyage revenues and a reconciliation of net voyage revenues to voyage revenues.
      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 OPCO’s vessel operating expenses are crews and repairs and maintenance.
  •  Crews. For the six months ended June 30, 2006, crews represented 54.7%, 60.9% and 54.2% of vessel operating expenses for the shuttle tanker, FSO and conventional tanker segments, respectively. For the year ended December 31, 2005, these percentages were 50.8%, 65.6% and 52.7% for those respective segments. A substantial majority of OPCO’s crewing expenses have been denominated in Norwegian Kroner, which is primarily a function of the nationality of the crew. Fluctuations in the Norwegian Kroner relative to the U.S. Dollar have caused fluctuations in operating results. However, prior to the closing this offering OPCO will enter into new services agreements with subsidiaries of Teekay Shipping Corporation whereby the subsidiaries will operate and crew OPCO’s vessels. Under these service agreements, OPCO will pay all vessel operating expenses in U.S. Dollars and will not be subject to currency exchange fluctuations prior to 2009. Beginning in 2009, payments under the service agreements will adjust to reflect any change in Teekay Shipping Corporation’s cost of providing services based on fluctuations in the value of the Norwegian Kroner relative to the U.S. Dollar. We may seek to hedge this currency fluctuation risk in the future.
 
  •  Repairs and Maintenance. For the six months ended June 30, 2006, repairs and maintenance represented 31.5%, 22.6% and 34.1% of vessel operating expenses for the shuttle tanker, FSO and conventional tanker segments, respectively. For the year ended December 31, 2005, these percentages were 29.2%, 16.7% and 32.3% for those respective segments. 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.

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      Income from Vessel Operations. To assist us in evaluating operations by segment, we sometimes analyze the income OPCO receives 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. OPCO must periodically drydock each of its shuttle tankers and conventional oil tankers for inspection, repairs and maintenance and any modifications to comply with industry certification or governmental requirements. OPCO may drydock FSO units if it desires 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 costs related to routine repairs and maintenance incurred 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:
  •  charges related to the depreciation of the historical cost of OPCO’s fleet (less an estimated residual value) over the estimated useful lives of the vessels;
 
  •  charges related to the amortization of drydocking expenditures over the estimated number of years to the next scheduled drydocking; and
 
  •  charges related to the amortization of the fair value of contracts of affreightment where amounts have been attributed to those items in acquisitions; these amounts are amortized over the period the asset is expected to contribute to future cash flows.
      Time Charter Equivalent Rates. Bulk shipping industry freight rates are commonly measured in the shipping industry at the net voyage revenues level in terms of “time charter equivalent” (or TCE) rates, which represent net voyage revenues divided by revenue days.
      Revenue Days. Revenue days are the total number of calendar days OPCO’s vessels were in its 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.
      Average Number of Ships. Historical average number of ships consists of the average number of owned (excluding vessels owned by OPCO’s five 50%-owned joint ventures) and chartered-in vessels that were in OPCO’s possession during a period. Following the closing of this offering, average number of ships will consist of the average number of chartered-in and owned vessels (including vessels owned by five of OPCO’s 50%-owned joint ventures, as OPCO will be required to consolidate the five joint ventures on a pro forma basis) that are in OPCO’s possession during the periods. We use average number of ships primarily to highlight changes in vessel operating expenses, time charter hire expense and depreciation and amortization.
      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.
Seasonality
      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

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the offshore oil platforms. Downtime for repairs and maintenance generally reduces oil production and thus transportation requirements. OPCO generally has not experienced seasonality in its FSO and conventional tanker segments.
Items You Should Consider When Evaluating Our Historical Financial Performance and Assessing Our Future Prospects
      You should consider the following factors when evaluating our historical financial performance and assessing our future prospects:
  •  Our cash flow will be reduced by distributions on Teekay Shipping Corporation’s interest in OPCO. Following the closing of this offering, Teekay Shipping Corporation will own a 74% limited partner interest in OPCO. OPCO’s partnership agreement requires it to distribute all of its available cash each quarter. In determining the amount of cash available for distribution, the board of directors of our general partner must approve the amount of cash reserves to be set aside, including reserves for future maintenance capital expenditures, working capital and other matters. Distributions to Teekay Shipping Corporation will reduce our cash flow compared to historical results.
 
  •  On July 1, 2006, OPCO transferred certain assets to Teekay Shipping Corporation that are included in historical results of operations. On July 1, 2006, OPCO transferred to Teekay Shipping Corporation a subsidiary of Norsk Teekay Holdings Ltd. (Navion Shipping Ltd.) that chartered-in approximately 25 conventional tankers since 2004 and subsequently time-chartered the vessels back to Teekay Shipping Corporation at charter rates that provided for a 1.25% fixed profit margin. In addition, OPCO transferred to Teekay Shipping Corporation a 1987-built shuttle tanker (the Nordic Trym), OPCO’s single anchor loading equipment, a 1992-built in-chartered shuttle tanker (the Borga) and a 50% interest in Alta Shipping S.A., which has no material assets (collectively with Navion Shipping Ltd., the Non-OPCO Assets). In 2005 and the six months ended June 30, 2006, the Non-OPCO Assets accounted for approximately 31.3% and 26.0%, respectively, of OPCO’s net voyage revenues. Please read the unaudited pro forma consolidated financial statements and related notes of Teekay Offshore Partners L.P. included elsewhere in this prospectus for further details regarding the impact of the transfer of the Non-OPCO Assets.
 
  •  Proposed amendments to OPCO’s joint venture agreements would result in five 50%-owned joint venture companies being consolidated with us under GAAP. Our historical results of operations reflect OPCO’s investment in five 50%-owned joint venture companies, accounted for using the equity method, whereby the investment is carried at the original cost plus OPCO’s proportionate share of undistributed earnings. Prior to the closing of this offering, we anticipate that the operating agreements for these joint ventures will be amended such that OPCO will have unilateral control of these joint ventures, which would require consolidation of these five joint venture companies in accordance with GAAP. Although our net income would not change due to this change in accounting, the results of the joint ventures would be reflected in our income from operations. This change would also cause the five shuttle tankers owned by these joint ventures to be included in the size of OPCO’s owned fleet for purposes of explaining future results of operations.
 
  •  The size of OPCO’s fleet continues to change. Our historical results of operations reflect changes in the size and composition of OPCO’s fleet due to certain vessel deliveries and vessel dispositions. For instance, in addition to the decrease in chartered-in vessels associated with the transfer of Navion Shipping Ltd. described above, the average number of owned vessels in OPCO’s shuttle tanker fleet (excluding the five joint venture vessels) decreased from 24.5 during 2004 to 21.0 during the six months ended June 30, 2006, while the number of chartered-in vessels in the shuttle tanker fleet increased from 13.4 to 14.1 during the same periods. Upon the closing of this offering, the number of owned shuttle tankers is expected to be 24.0 — excluding two vessels that have been sold and including the five joint venture vessels, assuming consolidation of the joint ventures as discussed above — and the number of chartered-in shuttle tankers is expected to be 12.0 — excluding one older vessel under a charter that OPCO did not renew, one joint venture vessel under

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  a charter that will be consolidated and one older vessel that will be transferred to Teekay Shipping Corporation. Upon the closing of this offering, OPCO will initially own nine conventional tankers compared to an average of over 10.0 tankers during most of the past two years. In addition, the Navion Saga is being converted from a conventional oil tanker to an FSO unit. When it commences operations as an FSO unit, scheduled for the second quarter of 2007, OPCO’s FSO fleet will include four vessels, compared to three during recent years. Please read “— Results of Operations” below for further details about vessel dispositions and deliveries. Due to the nature of our business, we expect our fleet to continue to fluctuate in size and composition.
 
  •  Our historical results of operations reflect different time charter terms for OPCO’s nine conventional tankers. Prior to the closing of this offering, OPCO will enter into new fixed-rate time charters with a subsidiary of Teekay Shipping Corporation for OPCO’s nine conventional tankers at rates we believe are market-based charter rates. Please read “Certain Relationships and Related Party Transactions — Aframax Tanker Time-Charter Contracts With Teekay Shipping Corporation.” At various times during the previous three years, eight of these nine conventional tankers were employed on time charters with the same subsidiary of Teekay Shipping Corporation. However, the charter rates were lower, as they were based on the cash flow requirements of each vessel, which included operating expenses, loan principal and interest payments and drydock expenditures, such that OPCO achieved break-even cash flow. A ninth conventional tanker traded on voyage charters. The new fixed-rate time charters should provide additional, more stable voyage revenues for these vessels. Please read the unaudited pro forma consolidated financial statements and related notes of Teekay Offshore Partners L.P. included elsewhere in this prospectus for further details regarding the impact of these new time charters.
 
  •  Our historical results of operations are affected by fluctuations in currency exchange rates. Prior to the closing of this offering, we will repay our foreign currency denominated advances from affiliates. As at June 30, 2006, these advances, all from Teekay Shipping Corporation, amounted to 1.0 billion Norwegian Kroner ($157.6 million) and 25.5 million Australian Dollars ($18.9 million). Under U.S. GAAP, all foreign currency-denominated monetary assets and liabilities, such as cash and cash equivalents, accounts receivable, accounts payable, advances from affiliates and deferred income taxes are revalued and reported based on the prevailing exchange rate at the end of the period. Most of our foreign currency gains and losses are attributable to this revaluation in respect of our foreign currency denominated advances from affiliates. In addition, a substantial majority of OPCO’s crewing expenses historically have been denominated in Norwegian Kroners, which is primarily a function of the nationality of the crew. Fluctuations in the Norwegian Kroner relative to the U.S. Dollar have caused fluctuations in operating results. Prior to the closing of this offering, OPCO’s operating subsidiaries will enter into new services agreements with certain subsidiaries of Teekay Shipping Corporation whereby the Teekay Shipping Corporation subsidiaries will operate and crew the vessels. Under these service agreements, OPCO’s operating subsidiaries will pay all vessel operating expenses in U.S. Dollars, and will not be subject to currency exchange fluctuations prior to 2009. Beginning in 2009, payments under the service agreements will adjust to reflect any change in the cost to the Teekay Shipping Corporation subsidiaries of providing services based on fluctuations in the value of the Kroner relative to the U.S. Dollar. We may seek to hedge this currency fluctuation risk in the future. Please read “Certain Relationships and Related Party Transactions — Advisory and Administrative Services Agreements” for a description of these service agreements.
 
  •  We will incur additional general and administrative expenses. Prior to the closing of this offering, we, OPCO and its operating subsidiaries will enter into services agreements with certain subsidiaries of Teekay Shipping Corporation, pursuant to which those subsidiaries will provide to us and OPCO administrative services and to OPCO’s operating subsidiaries certain services, including strategic consulting, advisory, ship management, technical and administrative services. Our cost for these services will depend on the amount and type of services provided during each period. The services will be valued at a reasonable, arm’s-length rate that will include reimbursement of reasonable

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  direct or indirect expenses incurred to provide the services. We will also reimburse our general partner for all expenses it incurs on our behalf, including CEO/ CFO compensation and expenses relating to its board of directors, including compensation, travel, and liability insurance costs. In addition, we will incur expenses as a result of being a publicly-traded limited partnership, including costs associated with annual reports to unitholders and SEC filings, investor relations, NYSE annual listing fees and tax compliance expenses. For the year ending December 31, 2007, we estimate these services and general partner reimbursements and public-company costs will increase our expenses by an additional $1.5 million. Please read the unaudited pro forma consolidated financial statements and related notes of Teekay Offshore Partners L.P. included elsewhere in this prospectus for further details regarding the estimated impact of these additional expenses. We may also grant equity compensation that would result in an expense to us, which may result in an increase in expenses, although we currently do not have an estimate of the possible expense. Please read “Management — 2006 Long-Term Incentive Plan.”

Results of Operations
      In accordance with GAAP, we report gross voyage revenues in our income statements and include voyage expenses among our operating expenses. However, shipowners base economic decisions regarding the deployment of their vessels upon anticipated TCE rates, and industry analysts typically measure bulk shipping freight rates in terms of TCE rates. This is because under time charters and bareboat charters the customer usually pays the voyage expenses, while under voyage charters and contracts of affreightment the shipowner usually pays the voyage expenses, which typically are added to the hire rate at an approximate cost. Accordingly, the discussion of revenue below focuses on net voyage revenues (i.e. voyage revenues less voyage expenses) and TCE rates of our three reportable segments where applicable.
      The following table compares our operating results by reportable segment for the six months ended June 30, 2005 and 2006, and the years ended December 31, 2004 and 2005, and compares our net voyage revenues (which is a non-GAAP financial measure) by reportable segment for the six months ended June 30, 2005 and 2006, and the years ended December 31, 2004 and 2005 to voyage revenues, the most directly comparable GAAP financial measure:
                                                                 
    Six Months Ended June 30,
     
    2005   2006
         
    Shuttle   Conventional       Shuttle   Conventional    
    Tanker   Tanker   FSO       Tanker   Tanker   FSO    
    Segment   Segment   Segment   Total   Segment   Segment   Segment   Total
                                 
    (in thousands)
Voyage revenues
    $260,373       $128,030       $11,912       $400,315       $263,203       $111,555       $11,966       $386,724  
Voyage expenses
    29,681       2,326       393       32,400       44,690       3,131       523       48,344  
                                                 
Net voyage revenues
    230,692       125,704       11,519       367,915       218,513       108,424       11,443       338,380  
Vessel operating expense
    37,903       11,890       3,107       52,900       38,407       11,031       3,516       52,954  
Time charter expense
    81,035       95,241             176,276       86,597       79,338             165,935  
Depreciation and amortization
    40,054       10,771       4,795       55,620       35,811       10,787       4,733       51,331  
General and administrative(1)
    23,720       13,162       956       37,838       27,187       15,313       969       43,469  
Vessel and equipment writedowns and loss on sale of vessels
    5,369                   5,369       1,845                   1,845  
Restructuring charge
                                  453             453  
                                                 
Income (loss) from vessel operations
    $42,611       $(5,360 )     $2,661       $39,912       $28,666       $(8,498 )     $2,225       $22,393  
                                                 

85


 

                                                                 
    Year Ended December 31,
     
    2004   2005
         
    Shuttle   Conventional       Shuttle   Conventional    
    Tanker   Tanker   FSO       Tanker   Tanker   FSO    
    Segment   Segment   Segment   Total   Segment   Segment   Segment   Total
                                 
    (in thousands)
Voyage revenues
    $550,445       $411,181       $24,878       $986,504       $516,758       $266,593       $24,197       $807,548  
Voyage expenses
    69,362       49,457             118,819       68,308       5,419       816       74,543  
                                                 
Net voyage revenues
    481,083       361,724       24,878