EX-99.(A)(1) 2 a19-19297_2ex99da1.htm EX-99.(A)(1)

Exhibit (a)(1)

 

 

Teekay Offshore Partners L.P.
4th Floor, Belvedere Building
69 Pitts Bay Road
Hamilton, HM 08, Bermuda

 

PRELIMINARY COPY—SUBJECT TO COMPLETION

 

NOTICE OF ACTION BY WRITTEN CONSENT
AND INFORMATION STATEMENT

 

WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A PROXY

 

Dear Common Unitholders of Teekay Offshore Partners L.P.:

 

We are sending this notice of action by written consent and the accompanying information statement to holders of common units representing limited partner interests (the “Common Units”) in Teekay Offshore Partners L.P., a Marshall Islands limited partnership (the “Partnership” or “we”). As previously announced, on September 30, 2019, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Brookfield TK Acquisition Holdings LP, a Bermuda limited partnership (“Parent”), Brookfield TK Merger Sub LLC, a Marshall Islands limited liability company (“Merger Sub”), Brookfield TK TOGP LP, a Bermuda limited partnership, Brookfield TK Block Acquisition LP, a Bermuda limited partnership (“Brookfield TK Block”), Brookfield Asset Management Private Institutional Capital Adviser (Private Equity), L.P., a Manitoba limited partnership (“Brookfield Private Institutional”), Brookfield TK TOLP LP, a Bermuda limited partnership (“Brookfield TOLP”), and Teekay Offshore GP L.L.C., a Marshall Islands limited liability company and the general partner of the Partnership (“Partnership GP”), providing for, among other things, the merger of Merger Sub with and into the Partnership (the “Merger”), with the Partnership surviving as a subsidiary of Parent, certain of its affiliates and Partnership GP, all of which are indirect controlled subsidiaries of Brookfield Business Partners L.P. and certain of its affiliates and institutional partners (collectively, “Brookfield”). If the Merger is completed, each Common Unit issued and outstanding immediately prior to the effective time of the Merger (the “Effective Time”) (other than Common Units held by Parent, the Brookfield Affiliated Holders (as defined in the Merger Agreement) or their respective Affiliates (as defined in the Merger Agreement) (collectively, the “Sponsor Units”)) will convert into the right to receive $1.55 in cash per Common Unit without any interest thereon (the “Cash Merger Consideration”). As an alternative to receiving the Cash Merger Consideration, each holder of record of Common Units other than Sponsor Units as of immediately prior to [•] New York Time on [•], 2019 will have the option to elect to forego the right to receive the Cash Merger Consideration with respect to all of such holder’s Common Units and instead receive one newly designated unlisted Class A Common Unit of the Partnership (the “Class A Common Units”) per Common Unit (the “Unit Alternative”) with respect to all of such holder’s Common Units (the “Unit Election”). The Class A Common Units will be economically equivalent to the Sponsor Units following the closing of the Merger, but will have limited voting rights and limited transferability. Each Sponsor Unit issued and outstanding immediately prior to the Effective Time will be reclassified as a Class B Common Unit of the Partnership (the “Class B Common Units”) but will be otherwise unaffected by the Merger and will be unchanged and remain outstanding, and no consideration will be delivered in respect thereof. Parent will also be issued a number of Class B Common Units equal to the number of Common Units converted into the right to receive the Cash Merger Consideration. Each of the Partnership’s 7.25% Series A Cumulative Redeemable Preferred Units (the “Series A Preferred Units”), 8.50% Series B Cumulative Redeemable Preferred Units (the “Series B Preferred Units”) and 8.875% Series E Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units (the “Series E Preferred Units” and, together with the Series A Preferred Units and the Series B Preferred Units, the “Preferred Units”) issued and outstanding as of immediately prior to the Effective Time will be unaffected by the Merger and will be unchanged and remain outstanding immediately following the Effective Time, and no consideration will be delivered in respect thereof. A copy of the Merger Agreement is attached to the accompanying information statement as Annex A.

 


 

The conflicts committee (the “Conflicts Committee”) of the board of directors of Partnership GP (the “GP Board”) has unanimously (i) determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are advisable and in the best interests of the Partnership and of the holders of Common Units other than Partnership GP, Brookfield Private Institutional, Brookfield TK Block, Brookfield TOLP, Parent, Merger Sub and their respective Affiliates (the “Unaffiliated Unitholders”), (ii) approved the Merger Agreement and the transactions contemplated thereby, including the Merger, such approval constituting “Special Approval” for all purposes under the Sixth Amended and Restated Agreement of Limited Partnership of the Partnership, dated as of January 23, 2018 (as amended, modified or supplemented as of the date hereof, the “Partnership Agreement”), and (iii) recommended that the GP Board approve the Merger Agreement and the transactions contemplated thereby, including the Merger, and that the GP Board recommend to the Partnership’s limited partners holding Common Units (the “Common Unitholders”) the approval of the Merger Agreement and the Merger. In determining whether to make its recommendation, the Conflicts Committee considered, among other things, the opinion of Evercore Group L.L.C. (“Evercore”), the financial advisor to the Conflicts Committee, to the effect that, as of September 30, 2019, and based upon and subject to the assumptions made, procedures followed, matters considered, and qualifications and limitations of the review undertaken in rendering its opinion as set forth therein, the Cash Merger Consideration is fair, from a financial point of view, to the Unaffiliated Unitholders. A copy of the written opinion of Evercore is attached to the accompanying information statement as Annex C.

 

The GP Board, acting based upon the “Special Approval”, has unanimously (i) determined that the Merger Agreement and the consummation of the transactions contemplated thereby, including the Merger, are fair to and in the best interests of the Partnership and the Unaffiliated Unitholders, (ii) approved the Merger Agreement, the execution, delivery and performance of the Merger Agreement and the consummation of the transactions contemplated thereby, including the Merger, (iii) resolved to submit the Merger Agreement and the Merger for approval of the Common Unitholders by written consent, and (iv) resolved to recommend approval of the Merger Agreement and the Merger by the Common Unitholders.

 

Neither the Conflicts Committee nor the GP Board considered the terms and conditions of the Unit Alternative in making their respective determinations, approvals or recommendations with regard to the Merger Agreement and the Merger, and neither the GP Board nor the Conflicts Committee have made any recommendation to the Unaffiliated Unitholders with regard to the Unit Election.

 

Under the applicable provisions of the Partnership Agreement, approval of the Merger Agreement and the transactions contemplated thereby, including the Merger, requires the affirmative vote or consent of the limited partners holding a majority of the outstanding Common Units, voting as a class (“Partnership Unitholder Approval”). As permitted by the Limited Partnership Act of the Marshall Islands (as amended, supplemented or restated from time to time) and the Partnership Agreement, immediately following the execution of the Merger Agreement, the Brookfield Affiliated Holders delivered to Partnership GP a written consent of limited partners constituting a majority of the outstanding Common Units approving the Merger Agreement and the transactions contemplated thereby, including the Merger, which consent constitutes Partnership Unitholder Approval. As a result, the Partnership has not solicited and is not soliciting your approval of the Merger Agreement or the transactions contemplated thereby. Assuming the timely satisfaction or waiver of the conditions set forth in the Merger Agreement, the Partnership currently anticipates that the Merger will be completed in the fourth quarter of 2019.

 

The accompanying information statement provides you with detailed information about the Merger Agreement and the transactions contemplated thereby, including the Merger, the Cash Merger Consideration and the Unit Alternative. We encourage you to carefully read the entire information statement and its annexes, including the Merger Agreement. Please read “Material U.S. Federal Income Tax Consequences of the Merger” for a summary of the U.S. federal income tax consequences of the Merger. You may also obtain additional information about the Partnership from documents the Partnership has filed with the U.S. Securities and Exchange Commission. You should consult your own tax advisers regarding the particular tax consequences to you of participating in the Merger, including the effect of any U.S. federal, state, or local or non-U.S. tax laws and taking into account your particular circumstances.

 

We are mailing this notice of action by written consent and the accompanying information statement to our unitholders on or about [·], 2019. You are urged to read the information statement carefully in its entirety. In particular, please read the section entitled “Risk Factors” of this information statement for a discussion of risks relevant

 

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to the Class A Common Units, the Merger and the Partnership. No unitholder meeting will be held in connection with the accompanying information statement. In connection with the Merger, we have included with this information statement an Election Form and Letter of Transmittal regarding the surrender of, and payment for, your Common Units and providing the ability to elect to receive the Unit Alternative in lieu of the Cash Merger Consideration. We are not asking you for a proxy and you are requested not to send us a proxy.

 

We thank you for your continued support.

 

 

Very truly yours,

 

 

 

Edith Robinson

 

Vice President and Company Secretary, Teekay Offshore GP L.L.C. on behalf of Teekay Offshore Partners L.P.

 

The accompanying information statement is dated [·], 2019, and is first being mailed to our unitholders on or about [·], 2019.

 

NEITHER THE U.S. SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES REGULATORY AGENCY HAS APPROVED OR DISAPPROVED THE MERGER, PASSED UPON THE MERITS OR FAIRNESS OF THE MERGER OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE DISCLOSURES IN THIS INFORMATION STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

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TABLE OF CONTENTS

 

 

Page

 

 

QUESTIONS AND ANSWERS ABOUT THE MERGER

1

 

 

SUMMARY TERM SHEET

6

 

 

Parties to the Merger Agreement

6

The Merger

7

Election Procedures

8

Treatment of Sponsor Units, Preferred Units and the General Partner Interest

8

Treatment of Warrants

8

Treatment of Equity Awards

9

Treatment of Incentive Distribution Rights

9

The Conflicts Committee and GP Board Recommendations and Approval of the Merger

9

Opinion of Financial Advisor to the Conflicts Committee

9

Interests of the Directors, Officers and Management of Partnership GP in the Merger

10

Position of the Brookfield Filing Parties as to the Fairness of the Merger

10

Conditions to Consummation of the Merger

11

Regulatory Approvals Required for the Merger

12

Termination of the Merger Agreement

12

Fees and Expenses

13

Remedies; Specific Performance

13

Financing of the Merger

14

Material U.S. Federal Income Tax Consequences of the Merger

14

No Appraisal Rights

14

Registration Exemption

14

Delisting and Deregistration of Common Units

15

Description of the Class A Common Units

15

Pending Litigation

15

Accounting Treatment of the Merger

15

 

 

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

16

 

 

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

21

 

 

RISK FACTORS

24

 

 

Risks Related to the Business of the Partnership

24

Risks Related to the Merger

48

Tax Risks Related to the Merger

49

Risks Related to Ownership of Class A Common Units

51

 

 

SPECIAL FACTORS

53

 

 

Effects of the Merger

53

Background of the Merger

54

Resolution of Conflicts of Interest; Standards of Conduct and Modification of Duties

67

Recommendation of the Conflicts Committee and the GP Board; Reasons for Recommending Approval of the Merger

67

Unaudited Financial Projections of the Partnership

72

Opinion of Financial Advisor to the Conflicts Committee

74

Interests of the Directors, Officers and Management of Partnership GP in the Merger

84

Position of the Brookfield Filing Parties as to the Fairness of the Merger

85

Plans for the Partnership after the Merger

87

Purpose and Reasons of the Brookfield Filing Parties for the Merger

87

Primary Benefits and Detriments of the Merger

88

Ownership of the Partnership After the Merger

89

Regulatory Approvals and Clearances Required for the Merger

89

 

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Financing of the Merger

89

Equity Commitment Letter

89

Fees and Expenses

90

Certain Legal Matters

90

Provisions for Unaffiliated Unitholders

91

No Appraisal Rights

91

Registration Exemption

91

Delisting and Deregistration of Common Units

91

Accounting Treatment of the Merger

91

Ownership of the Partnership after the Merger

92

 

 

THE MERGER AGREEMENT

93

 

 

The Merger

93

Effective Time; Closing

93

Effect of the Merger

94

Exchange of Units; Fractional Units

95

Election Procedures

96

Conditions to Consummation of the Merger

96

Unitholder Approval

98

Treatment of Sponsor Units, Preferred Units and the General Partner Interest

98

Treatment of Warrants

98

Treatment of Equity Awards

98

Treatment of Incentive Distribution Rights

99

Adjustments to Prevent Dilution

99

Withholding

99

Regulatory and Consent Matters

99

Termination of the Merger Agreement

100

Expenses

101

Conduct of Business Pending the Consummation of the Merger

101

Indemnification; Directors’ and Officers’ Insurance

101

Amendment and Waiver

101

Remedies; Specific Performance

102

Representations and Warranties

103

Distributions for Periods Prior to the Merger

104

Additional Agreements

104

 

 

CERTAIN PURCHASES AND SALES OF COMMON UNITS

105

 

 

DELISTING AND DEREGISTRATION

106

 

 

DESCRIPTION OF THE CLASS A COMMON UNITS

107

 

 

General

107

Voting Rights

107

Automatic Redemption of Class A Common Units

107

Preemptive Rights

108

Transfer of Class A Common Units

109

No Fiduciary Duty

109

Transfer Agent and Registrar

109

Listing

109

 

 

DESCRIPTION OF OTHER EQUITY SECURITIES

110

 

 

Class B Common Units

110

Preferred Units

110

 

 

DESCRIPTION OF THE AMENDED AND RESTATED PARTNERSHIP AGREEMENT

115

 

 

Organization and Duration

115

Purpose

115

 

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Power of Attorney

115

Capital Contributions

115

Voting Rights

115

Limited Liability

116

Issuance of Additional Securities

117

Amendment of the Amended and Restated Partnership Agreement

118

Merger Sale, or Other Disposition of Assets

120

Termination and Dissolution

121

Liquidation and Distribution of Proceeds

121

Withdrawal or Removal of the General Partner

121

Transfer of General Partner Interest

122

Transfer of Ownership Interests in General Partner

122

Transfer of Post-Merger Common Units, Series A Preferred Units, Series B Preferred Units and Series E Preferred Units

122

Change of Management Provisions

123

Meetings; Voting

123

Status as Limited Partner

124

Indemnification

124

Reimbursement of Expenses

125

Books and Reports

125

Right to Inspect the Partnership’s Books and Records

125

Registration Rights

126

Fiduciary Duties

126

 

 

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

129

 

 

Our Classification as a Corporation

130

United States Federal Income Taxation of U.S. Holders

130

Treatment of Receipt of Cash Merger Consideration in the Merger

130

Treatment of Receipt of Newly Designated Unlisted Class A Common Units in the Merger

130

Consequences of Possible PFIC Classification

130

Effect of the PFIC Rules on the Treatment of Receipt of Cash Merger Consideration in the Merger

131

Effect of PFIC Rules on the Treatment of Receipt of Newly Designated Unlisted Class A Common Units in the Merger

132

Backup Withholding and Information Reporting

132

 

 

INFORMATION CONCERNING THE PARTNERSHIP

134

 

 

About the Partnership

134

Recent Developments

134

Prior Public Offerings

134

 

 

INFORMATION CONCERNING THE BROOKFIELD FILING PARTIES

135

 

 

Identity and Background of the Brookfield Filing Parties

135

 

 

PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS

138

 

 

Significant Corporate Events Involving the Brookfield Filing Parties

138

 

 

COMMON UNIT MARKET PRICE AND DISTRIBUTION INFORMATION

139

 

 

Common Unit Market Price Information

139

Distribution Information

139

Book Value Per Unit

139

 

 

WHERE YOU CAN FIND MORE INFORMATION

141

 

 

INCORPORATION OF DOCUMENTS BY REFERENCE

142

 

 

UNITHOLDERS SHARING AN ADDRESS

143

 

 

ANNEX A Merger Agreement

A-1

 

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ANNEX B Form of Seventh Amended and Restated Agreement of Limited Partnership (Comparison against Existing Agreement)

B-1

 

 

ANNEX C Written Opinion of Evercore to the Conflicts Committee

C-1

 

 

ANNEX D Form of Election Form and Letter of Transmittal

D-1

 

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QUESTIONS AND ANSWERS ABOUT THE MERGER

 

Q:                                  Why am I receiving this information statement?

 

A:                                   As previously announced, on September 30, 2019, Teekay Offshore Partners L.P., a Marshall Islands limited partnership (the “Partnership”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Brookfield TK Acquisition Holdings LP, a Bermuda limited partnership (“Parent”), Brookfield TK Merger Sub LLC, a Marshall Islands limited liability company (“Merger Sub”), Brookfield TK TOGP LP, a Bermuda limited partnership (“Brookfield TOGP”), Brookfield TK Block Acquisition LP, a Bermuda limited partnership (“Brookfield TK Block”), Brookfield Asset Management Private Institutional Capital Adviser (Private Equity), L.P., a Manitoba limited partnership (“Brookfield Private Institutional”), Brookfield TK TOLP LP, a Bermuda limited partnership (“Brookfield TOLP”) and Teekay Offshore GP L.L.C., a Marshall Islands limited liability company and the general partner of the Partnership (“Partnership GP”), providing for, among other things, the merger of Merger Sub with and into the Partnership (the “Merger”), with the Partnership surviving as a subsidiary of Parent, certain of its affiliates and Partnership GP, all of which are indirect controlled subsidiaries of Brookfield Business Partners L.P., and certain of its affiliates and institutional partners (collectively, “Brookfield”). This information statement describes the Merger and the approval of the Merger Agreement and the Merger by written consent of limited partners constituting a majority of the outstanding Common Units (a “Unit Majority”). The board of directors of Partnership GP (the “GP Board”) is providing this information statement to you to inform you of, and to provide you with information about, the Merger before the Merger is consummated as well as to inform you how to receive newly designated unlisted Class A Common Units of the Partnership if you elect to receive the Unit Alternative (as defined below) in lieu of the Cash Merger Consideration (as defined below).

 

Q:                                  Why am I not being asked to vote on the Merger?

 

A:                                   Under the applicable provisions of the Sixth Amended and Restated Agreement of Limited Partnership of the Partnership, dated as of January 23, 2018 (as amended, modified or supplemented as of the date hereof, the “Partnership Agreement”), approval of the Merger Agreement and the transactions contemplated thereby, including the Merger, requires the affirmative vote of a Unit Majority (“Partnership Unitholder Approval”). Brookfield beneficially owns approximately 73% of the outstanding common units representing limited partner interests (the “Common Units”) in the Partnership, which is a sufficient number to approve the Merger Agreement and the transactions contemplated thereby, including the Merger. Immediately following the execution of the Merger Agreement, the Brookfield Affiliated Holders (as defined in the Merger Agreement) delivered to Partnership GP a written consent of limited partners approving the Merger Agreement and the transactions contemplated thereby, including the Merger, by a Unit Majority, which consent constitutes Partnership Unitholder Approval. As a result, the Partnership has not solicited and is not soliciting your approval of the Merger Agreement, and does not plan to call a meeting of the holders of Common Units (the “Common Unitholders”) to approve the Merger Agreement.

 

Q:                                  What will happen in the Merger?

 

A:                                   In the Merger, Merger Sub will merge with and into the Partnership, with the Partnership surviving as a subsidiary of Parent, certain of its affiliates and Partnership GP, all of which are indirect controlled subsidiaries of Brookfield. If the Merger is completed, the Common Units will cease to be listed on the New York Stock Exchange (the “NYSE”), will be deregistered under the Securities Exchange Act of 1934 (as amended, the “Exchange Act”) and will cease to be publicly traded.

 

Q:                                  Will the Preferred Units trade on an exchange after the Merger?

 

A:                                   The Partnership’s 7.25% Series A Cumulative Redeemable Preferred Units (the “Series A Preferred Units”), 8.50% Series B Cumulative Redeemable Preferred Units (the “Series B Preferred Units”) and 8.875% Series E Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units (the “Series E Preferred Units” and, together with the Series A Preferred Units and the Series B Preferred Units, the “Preferred Units”) will be unaffected by the Merger and will continue to be listed on the NYSE immediately following the Merger.

 

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Q:                                  What will I be entitled to receive in the Merger for my Common Units?

 

A:                                   If the Merger is completed, each Common Unit issued and outstanding immediately prior to the effective time of the Merger (the “Effective Time”) (other than Common Units held by Parent, the Brookfield Affiliated Holders or their respective Affiliates (as defined in the Merger Agreement) (collectively, the “Sponsor Units”)) will be converted into the right to receive $1.55 in cash per Common Unit without any interest thereon (the “Cash Merger Consideration”), and reduced by any applicable tax withholding, and such Common Units shall no longer be outstanding and shall automatically be canceled and cease to exist. As an alternative to receiving the Cash Merger Consideration, Unaffiliated Unitholders as of immediately prior to [·] New York Time on [·], 2019 (the “Election Deadline”) will have the option to elect to forego the right to receive the Cash Merger Consideration with respect to all of such holder’s Common Units and instead receive one newly designated unlisted Class A Common Unit of the Partnership (a “Class A Common Unit”) per Common Unit (the “Unit Alternative”) with respect to all of such holder’s Common Units. Please read “Material U.S. Federal Income Tax Consequences of the Merger” for a summary of the material U.S. federal income tax consequences of the Merger. You should consult your own tax advisers regarding the particular tax consequences to you of participating in the Merger, including the effect of any U.S. federal, state, or local or non-U.S. tax laws and taking into account your particular circumstances.

 

Q:                                  How does the $1.55 per Common Unit base Cash Merger Consideration compare to the market price of the Common Units prior to the execution of the Merger Agreement?

 

A:                                   The Cash Merger Consideration represents a 28.1% premium to the $1.21 closing price per Common Unit on May 16, 2019, immediately prior to Brookfield’s initial offer, and a 33.6% premium to the $1.16 closing price per Common Unit on September 30, 2019, the last trading day before the announcement of the Merger.

 

Q:                                  How do I elect to receive the Unit Alternative?

 

A:                                   Unaffiliated Unitholders wishing to elect to forego the right to receive the Cash Merger Consideration with respect to all of such holder’s Common Units and instead receive Class A Common Units with respect to all of such holder’s Common Units (a “Unit Election”) must follow the instructions set forth in the Election Form and Letter of Transmittal included with this information statement. Any Unit Election shall have been properly made only if Computershare, Inc., the exchange agent appointed by the Partnership to act as exchange agent for the Merger (the “Exchange Agent”), has received, by the Election Deadline, a completed Election Form and Letter of Transmittal or appropriate instruction through the facilities of the Depository Trust Company (the “DTC”) by which the holder has properly surrendered all of the Common Units held by such holder and elected to receive the Unit Alternative with respect to such surrendered Common Units. A Form of Election Form and Letter of Transmittal is attached as Annex D hereto. See “The Merger Agreement—Election Procedures.”

 

Q:                                  If I do not properly make an election in respect of my Common Units, what consideration will I receive?

 

A:                                   Any Unaffiliated Unitholder that does not properly make a Unit Election in accordance with the instructions set forth in the Election Form and Letter of Transmittal will receive the Cash Merger Consideration in respect of all of such Unaffiliated Unitholder’s Common Units.

 

Q:                                  Does the Partnership, the GP Board or the Conflicts Committee recommend that I elect the Unit Alternative in lieu of the Cash Merger Consideration?

 

A:                                   The Partnership, the GP Board and the conflicts committee of the GP Board (the “Conflicts Committee”) make no recommendation as to whether any Common Unitholder should elect to receive the Unit Alternative in lieu of the Cash Merger Consideration. Neither the Conflicts Committee nor the GP Board considered the terms and conditions of the Unit Alternative in making their respective determinations, approvals or recommendations with regard to the Merger Agreement and the Merger.

 

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Q:                                  Can I make a Unit Election for only a portion of my Common Units?

 

A:                                   No. If a Unit Election is made by any Common Unitholder, it must be made with respect to all Common Units held by such Common Unitholder.

 

Q:                                  Can I revoke my Unit Election after I submit an Election Form and Letter of Transmittal?

 

A:                                   Yes. Any Unit Election may be revoked with respect to the Common Units subject thereto up until the Election Deadline in accordance with the procedures set forth in the Election Form and Letter of Transmittal, a form of which is included as Annex D hereto.

 

Q:                                  Will the Class A Common Units be traded on an exchange?

 

A:                                   No. The Class A Common Units will not be listed for trading on any national securities exchange.

 

Q:                                  Will the Class A Common Units be transferable?

 

A:                                   No. The Class A Common Units will be non-transferable, meaning that they may not be sold, assigned, conveyed, transferred, pledged or in any other manner disposed of, other than in certain limited circumstances as shall be set forth in our Seventh Amended and Restated Agreement of Limited Partnership (the “Amended and Restated Partnership Agreement”) to be entered into in connection with consummation of the Merger, the form of which is attached as Annex B hereto. Under the terms of the Class A Common Units, upon the occurrence of a Brookfield Sales Event (as defined in “Description of the Class A Common Units—Automatic Redemption of Class A Common Units”) the Partnership will be required to redeem all or a portion of the outstanding Class A Common Units with no action or consent required on the part of the holders of Class A Common Units (“Class A Common Unitholders”). Such a redemption would be triggered by any sale of Class B Common Units of the Partnership (the “Class B Common Units”) by Brookfield TKC Acquisition L.P., Brookfield TOLP or certain of their affiliates to any person other than Brookfield TKC Acquisition L.P., Brookfield TOLP or such affiliates, and in such circumstances, Class A Common Unitholders generally will receive the same consideration for the redemption of their Class A Common Units as Brookfield receives for the sale of its Class B Common Units, subject to applicable legal, tax, or regulatory constraints.

 

Q:                                  If I elect the Unit Alternative, will I have voting rights with respect to the Class A Common Units?

 

A:                                   Class A Common Unitholders will have no voting rights, unless expressly required by the Limited Partnership Act of the Marshall Islands (as amended, supplemented or restated from time to time, the “Marshall Islands Act”), but only to the extent such voting rights may not be waived. As a result, all matters submitted to the Partnership’s unitholders after the Merger will be decided by the vote of holders of Class B Common Units (such holders, the “Class B Common Unitholders”), subject to consent rights, to the extent applicable, of the Preferred Units. Brookfield, which may have interests that differ from those of the Class A Common Unitholders, will have control of all outstanding Class B Common Units after completion of the Merger and will have the ability to control the outcome of all matters submitted to our unitholders for approval, subject to consent rights, to the extent applicable, of the Preferred Units.

 

Q:                                  What will happen to my Phantom Units in the Merger?

 

A:                                   Immediately prior to the Effective Time, all outstanding awards granted under the Teekay Offshore Partners L.P. 2006 Long-Term Incentive Plan (as amended from time to time and including any successor or replacement plan or plans, the “Partnership Long-Term Incentive Plan”) that was designated as a “Phantom Unit” on the date of grant (each, a “Phantom Unit”) will be converted into a phantom unit award with respect to the same number of Class A Common Units as the number of Common Units to which such Phantom Unit was subject, and otherwise with substantially the same terms and conditions as were applicable to the award of such Phantom Unit immediately prior to the Effective Time as applied to the award of Phantom Units for which they were exchanged, except for terms rendered inoperative by reason of the transactions contemplated by the Merger Agreement or for such other administrative or ministerial changes as in the reasonable and good faith determination of the Partnership GP are appropriate to conform the administration of such Phantom Unit.

 

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Q:                                  What will happen to my Restricted Units in the Merger?

 

A:                                   Immediately prior to the Effective Time, all outstanding awards granted under the Partnership Long-Term Incentive Plan that was designated as a “Restricted Unit” on the date of grant (each, a “Restricted Unit”) will be converted into a restricted unit award with respect to the same number of Class A Common Units as the number of Common Units to which such Restricted Unit was subject, and otherwise with substantially the same terms and conditions as were applicable to the award of such Restricted Unit immediately prior to the Effective Time as applied to the award of Restricted Units for which they were exchanged, except for terms rendered inoperative by reason of the transactions contemplated by the Merger Agreement or for such other administrative or ministerial changes as in the reasonable and good faith determination of the Partnership GP are appropriate to conform the administration of such Restricted Unit.

 

Q:                                  When do you expect to complete the Merger?

 

A:                                   The parties to the Merger Agreement are working toward completing the Merger as soon as possible. Assuming the timely satisfaction or waiver of the conditions set forth in the Merger Agreement, the Partnership currently anticipates that the Merger will be completed in the fourth quarter of 2019. However, no assurance can be given as to when, or if, the Merger will occur.

 

Q:                                  What happens if the Merger is not completed?

 

A:                                   If the Merger is not completed for any reason, Common Unitholders will not receive any form of consideration for their Common Units in connection with the Merger, the Partnership will remain a publicly traded limited partnership and the Common Units will continue to be listed and traded on the NYSE.

 

Q:                                  When is this information statement being mailed?

 

A:                                   This information statement is first being sent to Common Unitholders on or about [•], 2019.

 

Q:                                  Am I entitled to appraisal or dissenters’ rights?

 

A:                                   No. Appraisal and dissenters’ rights are not available in connection with the Merger under the laws of the Republic of the Marshall Islands or under the Partnership Agreement.

 

Q:                                  Is completion of the Merger subject to any conditions?

 

A:                                   Yes. Completion of the Merger requires the receipt of any necessary regulatory approval or governmental clearances and the satisfaction or, to the extent permitted by applicable law, waiver of the other conditions specified in the Merger Agreement. The Merger is not conditioned on the receipt of any financing. The Merger is not conditioned on any minimum or maximum number of Common Units electing to receive the Unit Alternative, and in no event will the payment of Cash Merger Consideration or the availability of the Unit Alternative be subject to proration. For further discussion of the conditions to the Merger, see “The Merger Agreement—Conditions Precedent.”

 

Q:                                  Are there any risks associated with the Merger and the Class A Common Units?

 

A:                                   Yes. There are risks associated with all business combinations, including the Merger. There are also risks associated with the Partnership’s business and the ownership of the Class A Common Units. The Partnership has described certain of these risks and other risks in more detail in the section entitled “Risk Factors.”

 

Q:                                  What are the material U.S. federal income tax consequences of the Merger to the Common Unitholders?

 

A:                                   If you are a U.S. Holder (as defined in “Material U.S. Federal Income Tax Consequences of the Merger—United States Federal Income Taxation of U.S. Holders”), the receipt of cash in exchange for Common Units pursuant to the Merger will be a taxable transaction for U.S. federal income tax purposes and the resulting tax liability, if any, will depend on your particular situation. Accordingly, you should consult your tax advisors regarding the particular tax consequences to you of the exchange of Common Units for cash pursuant to the Merger in light of your particular circumstances (including the application and effect of any state, local or foreign income and other tax laws). Please read “Material U.S. Federal Income Tax Consequences of the

 

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Merger” for a summary of the material U.S. federal income tax consequences of the Merger. You should consult your own tax advisers regarding the particular tax consequences to you of participating in the Merger, including the effect of any U.S. federal, state, or local or non-U.S. tax laws and taking into account your particular circumstances.

 

Q:                                  What do I need to do now?

 

A:                                   You should follow the instructions in the accompanying Form of Election Form and Letter of Transmittal regarding the surrender of your Common Units and payment for your Common Units.

 

Q:                                  Whom should I call with questions?

 

A:                                   If you have any questions about the Merger or need additional copies of this information statement, you should contact D.F. King & Co., Inc. (the “Information Agent”), the information agent for the Merger, at the contact information below.

 

D.F. King & Co., Inc.

48 Wall Street, 22nd Floor

New York, NY 10005

 

Banks and Brokers call: (212) 269-5550

All others call Toll-Free: (888) 887-0082

Email: teekay@dfking.com

 

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SUMMARY TERM SHEET

 

The following summary highlights selected information in this information statement and may not contain all of the information that may be important to you. Accordingly, the Partnership encourages you to read carefully this entire information statement, its annexes and the documents incorporated by reference into this information statement. You may obtain a list of the documents incorporated by reference into this information statement in the section titled “Where You Can Find More Information.”

 

Parties to the Merger Agreement

 

Teekay Offshore Partners L.P.
4th Floor, Belvedere Building
69 Pitts Bay Road
Hamilton, HM 08, Bermuda
(441) 405-5560

 

Teekay Offshore Partners L.P. is a leading international midstream services provider to the offshore oil production industry, primarily focused on the ownership and operation of critical infrastructure assets in offshore oil regions of the North Sea, Brazil and the East Coast of Canada. The Partnership has consolidated assets of approximately $5.2 billion, comprised of 58 offshore assets, including floating production, storage and offloading units, shuttle tankers (including seven newbuildings), floating storage and offtake units, long-distance towing and offshore installation vessels, and a unit for maintenance and safety. The majority of the Partnership’s fleet is employed on medium-term, stable contracts.

 

The Partnership’s Common Units and Preferred Units trade on the New York Stock Exchange under the symbols “TOO,” “TOO PR A,” “TOO PR B” and “TOO PR E,” respectively.

 

Teekay Offshore GP L.L.C.
4th Floor, Belvedere Building
69 Pitts Bay Road
Hamilton, HM 08, Bermuda
(441) 405-5560

 

Teekay Offshore GP L.L.C., a Marshall Islands limited liability company, is the general partner of the Partnership, and its board of directors, officers and the members of its senior management team, who are executive officers of Teekay Offshore Group Ltd. (“Management”) manage the Partnership. Partnership GP is wholly owned by Brookfield.

 

Brookfield TK Acquisition Holdings LP
c/o Brookfield Capital Partners (Bermuda) Ltd.
73 Front Street, 5th Floor
Hamilton HM 12, Bermuda

 

Brookfield TK Acquisition Holdings LP, a Bermuda limited partnership, has not carried on any activities or operations to date, except for those activities incidental to its formation on August 19, 2019 and undertaken in connection with the transactions contemplated by the Merger Agreement (as defined below).

 

Brookfield TK Merger Sub LLC
c/o Brookfield Capital Partners (Bermuda) Ltd.
73 Front Street, 5th Floor
Hamilton HM 12, Bermuda

 

Brookfield TK Merger Sub LLC, a Marshall Islands limited liability company, is a direct wholly owned subsidiary of Parent formed solely for the purpose of facilitating the Merger. Merger Sub has not carried on any activities or operations to date, except for those activities incidental to its formation on September 26, 2019 and undertaken in connection with the transactions contemplated by the Merger Agreement. By operation of the Merger,

 

 

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Merger Sub will be merged with and into the Partnership, with the Partnership surviving as a subsidiary of Parent, certain of its affiliates and Partnership GP, all of which are indirect controlled subsidiaries of Brookfield.

 

Brookfield TK TOGP LP
c/o Brookfield Capital Partners (Bermuda) Ltd.
73 Front Street, 5th Floor
Hamilton HM 12, Bermuda

 

Brookfield TK TOGP LP, a Bermuda limited partnership, is the sole member of Partnership GP. The principal business of Brookfield TOGP is to hold interests of the Partnership GP owned by Brookfield.

 

Brookfield TK Block Acquisition LP
c/o Brookfield Capital Partners (Bermuda) Ltd.
73 Front Street, 5th Floor
Hamilton HM 12, Bermuda

 

Brookfield TK Block Acquisition LP, a Bermuda limited partnership, is a direct holder of the Partnership’s Common Units and warrants to purchase Common Units (“Warrants”). The principal business of Brookfield TK Block is to hold interests of the Partnership owned by Brookfield.

 

Brookfield Asset Management Private Institutional Capital Adviser (Private Equity), L.P.
c/o Brookfield Asset Management Inc.
181 Bay Street, Suite 300
Toronto, Ontario M5J 2T3

 

Brookfield Asset Management Private Institutional Capital Adviser (Private Equity), L.P., a Manitoba limited partnership, is a direct holder of the Partnership’s Common Units and Warrants. The principal business of Brookfield Private Institutional is to hold interests of the Partnership owned by Brookfield.

 

Brookfield TK TOLP LP
c/o Brookfield Capital Partners (Bermuda) Ltd.
73 Front Street, 5th Floor
Hamilton HM 12, Bermuda

 

Brookfield TK TOLP LP, a Bermuda limited partnership, is a direct holder of the Partnership’s Common Units and Warrants. The principal business of Brookfield TOLP is to hold interests of the Partnership owned by Brookfield.

 

The Merger (see page 93)

 

Pursuant to the terms of the Merger Agreement, Parent, an indirect controlled subsidiary of Brookfield, has agreed to acquire all of the publicly held Common Units (other than Sponsor Units) in the Partnership, as described in this information statement. Under the terms and subject to the conditions of the Merger Agreement, Merger Sub will merge with and into the Partnership, with the Partnership surviving as a subsidiary of Parent, certain of its affiliates and Partnership GP, all of which are indirect controlled subsidiaries of Brookfield.

 

As a result of the Merger, at the Effective Time, each issued and outstanding Common Unit of the Partnership, other than Sponsor Units, will convert into the right to receive the Cash Merger Consideration. As an alternative to receiving the Cash Merger Consideration, each Unaffiliated Unitholder of record immediately prior to the Election Deadline will have the option to elect to forego the right to receive the Cash Merger Consideration with respect to all of such holder’s Common Units and instead receive one Class A Common Unit per Common Unit with respect to all of such holder’s Common Units. The Class A Common Units will be economically equivalent to the Sponsor Units following the closing of the Merger, but will have limited voting rights and limited transferability. Each Sponsor Unit issued and outstanding immediately prior to the Effective Time will be reclassified as a Class B Common Unit of the

 

 

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Partnership but will be otherwise unaffected by the Merger and will be unchanged and remain outstanding, and no consideration will be delivered in respect thereof.

 

The Merger Agreement is attached as Annex A hereto. The Partnership encourages you to read the Merger Agreement because it is the legal document that governs the terms and conditions of the Merger. For more information regarding the terms of the Merger Agreement, see “Special Factors—Effects of the Merger” and “The Merger Agreement.”

 

Election Procedures (see page 96)

 

Each Unaffiliated Unitholder wishing to make a Unit Election must follow the instructions set forth in the Election Form and Letter of Transmittal prior to the Election Deadline. Any Unit Election may be revoked with respect to the Common Units subject thereto in accordance with the procedures set forth in the Election Form and Letter of Transmittal. If a Unit Election is revoked, the Unaffiliated Unitholder as to which such Unit Election previously applied shall receive the Cash Merger Consideration in respect of its Common Units unless a new Unit Election is submitted by such holder in accordance with the procedures set forth in the Election Form and Letter of Transmittal.

 

Any Unit Election shall have been properly made only if the Exchange Agent has received, by the Election Deadline, a completed Election Form and Letter of Transmittal or appropriate instruction through the facilities of the DTC by which the holder has properly surrendered all of the Common Units held by such holder and elected to receive the Unit Alternative with respect to such surrendered Common Units. After a Unit Election is validly made with respect to any Common Units, no further registration of transfers of such Common Units shall be made on the unit transfer books of the Partnership unless and until such Unit Election is properly revoked in accordance with the procedures set forth in the Election Form and Letter of Transmittal.

 

For a more complete discussion of the election procedures, see “The Merger Agreement—Election Procedures.”

 

Treatment of Sponsor Units, Preferred Units and the General Partner Interest (see page 98)

 

Each Sponsor Unit, Series A Preferred Unit, Series B Preferred Unit and Series E Preferred Unit issued and outstanding as of immediately prior to the Effective Time will be unaffected by the Merger, will be unchanged and remain outstanding and no consideration will be delivered in respect thereof, provided that each Sponsor Unit will be reclassified as a Class B Common Unit. The General Partner’s general partner interest in the Partnership (the “General Partner Interest”) issued and outstanding immediately prior to the Effective Time will be unaffected by the Merger, will be unchanged and remain outstanding, and no consideration will be delivered in respect thereof.

 

In addition, Parent will be issued a number of Class B Common Units equal to the number of Common Units converted into the right to receive the Cash Merger Consideration.

 

Treatment of Warrants(see page 98)

 

Each Warrant that is outstanding and unexercised as of immediately prior to the Effective Time will be converted into the right to receive the Cash Merger Consideration that a Common Unit issuable (at the Effective Time) upon exercise of such Warrant immediately prior to the Effective Time would have been entitled to receive pursuant to the Merger Agreement. In the event that no Common Units would be issuable upon exercise of a Warrant immediately prior to the Effective Time (which would occur in the event that the exercise price of such Warrant exceeds the Cash Merger Consideration), such Warrant will automatically be canceled and cease to exist, and no consideration will be delivered in respect thereof. As of the date hereof, the exercise price of each of the outstanding Warrants exceeds the Cash Merger Consideration. Accordingly, the Partnership anticipates that each of the Warrants will automatically be cancelled and cease to exist as a result of the Merger and that no consideration will be delivered in respect thereof.

 

 

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Treatment of Equity Awards (see page 98)

 

Each Phantom Unit will be converted into a phantom unit award with respect to the same number of Class A Common Units as the number of Common Units to which such Phantom Unit was subject.

 

Each Restricted Unit will be converted into a restricted unit award with respect to the same number of Class A Common Units as the number of Common Units to which such Restricted Unit was subject.

 

The Partnership and Partnership GP will take all actions as may be necessary to provide for or give effect to the assumption of the Partnership Long-Term Incentive Plan by the surviving entity.

 

Treatment of Incentive Distribution Rights (see page 99)

 

All Incentive Distribution Rights (“IDRs”) of the Partnership issued and outstanding immediately prior to the Effective Time will be automatically canceled and cease to exist, and no consideration will be delivered in respect of the cancellation of the IDRs.

 

Recommendation of the Conflicts Committee and the GP Board; Reasons for Recommending Approval of the Merger (see page 67)

 

On September 30, 2019, the Conflicts Committee unanimously (i) determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are advisable and in the best interests of the Partnership and the Unaffiliated Unitholders, (ii) approved the Merger Agreement and the transactions contemplated thereby, including the Merger, such approval constituting “Special Approval” for all purposes under the Partnership Agreement, and (iii) recommended that the GP Board approve the Merger Agreement and the transactions contemplated thereby, including the Merger, and that the GP Board recommend to the Common Unitholders the approval of the Merger Agreement and the Merger.

 

The GP Board, acting based upon the “Special Approval”, has unanimously (i) determined that the Merger Agreement and the consummation of the transactions contemplated thereby, including the Merger, are fair to and in the best interests of the Partnership and the Unaffiliated Unitholders, (ii) approved the Merger Agreement, the execution, delivery and performance of the Merger Agreement and the consummation of the transactions contemplated thereby, including the Merger, (iii) resolved to submit the Merger Agreement and the Merger for approval of the Common Unitholders by written consent, and (iv) resolved to recommend approval of the Merger Agreement and the Merger by the Common Unitholders.

 

Neither the Conflicts Committee nor the GP Board considered the terms and conditions of the Unit Alternative in making their respective determinations, approvals or recommendations with regard to the Merger Agreement and the Merger, and neither the GP Board nor the Conflicts Committee have made any recommendation to the Unaffiliated Unitholders with regard to the Unit Election.

 

The Conflicts Committee retained Potter Anderson & Corroon LLP (“Potter Anderson”) as its legal counsel and Evercore Group L.L.C. (“Evercore”) as its financial advisor. The Conflicts Committee negotiated with Brookfield and its representatives with respect to the Merger and the Merger Agreement and conducted a review and evaluation of the Merger and the Merger Agreement. For a more complete discussion of these items, see “Special Factors—Recommendation of the Conflicts Committee and the GP Board; Reasons for Recommending Approval of the Merger.”

 

Opinion of Financial Advisor to the Conflicts Committee (see page 74)

 

The Conflicts Committee retained Evercore to act as its financial advisor in connection with the Merger. As part of this engagement, the Conflicts Committee requested that Evercore evaluate the fairness, from a financial point of view, of the Cash Merger Consideration to the holders of Common Units other than Partnership GP, Brookfield Private Institutional, Brookfield TK Block, Brookfield TOLP, Parent, Merger Sub and their respective Affiliates (the “Unaffiliated Unitholders”). At a meeting of the Conflicts Committee held on September 30, 2019, Evercore rendered

 

 

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to the Conflicts Committee its opinion to the effect that, as of that date and based upon and subject to the assumptions, limitations, qualifications and conditions described in Evercore’s opinion, the Cash Merger Consideration was fair, from a financial point of view, to the Unaffiliated Unitholders.

 

The full text of the written opinion of Evercore, dated September 30, 2019, which sets forth, among other things, the procedures followed, assumptions made, matters considered and qualifications and limitations on the scope of review undertaken in rendering its opinion, is attached as Annex C to this information statement and is incorporated herein by reference. The Partnership encourages you to read this opinion carefully and in its entirety. Evercore’s opinion was addressed to, and provided for the information and benefit of, the Conflicts Committee (in its capacity as such) in connection with its evaluation of the Merger. The opinion does not constitute a recommendation to the Conflicts Committee or to any other persons in respect of the Merger, including as to how any holder of the Common Units should act in respect of the Merger. Evercore’s opinion does not address the relative merits of the Merger as compared to other business or financial strategies that might be available to the Partnership, nor does it address the underlying business decision of the Partnership to engage in the Merger. Evercore was not asked, nor did it, express any view on, and Evercore’s opinion did not address, the structure or form of the Merger, the Unit Election, the Class A Common Units, the Unit Alternative or any term or aspect of the Amended and Restated Partnership Agreement.

 

For a description of the opinion that the Conflicts Committee received from Evercore, see “Special Factors—Opinion of Financial Advisor to the Conflicts Committee.”

 

Interests of the Directors, Officers and Management of Partnership GP in the Merger (see page 84)

 

Some of the directors, officers and members of Management of Partnership GP have financial interests in the Merger that may be different from, or in addition to, those of the Unaffiliated Unitholders generally. The Conflicts Committee and the GP Board were aware of these interests and considered them, among other matters, in approving the Merger Agreement and the transactions contemplated thereby, including the Merger.

 

As of the Effective Time, the Partnership will be owned by Parent and current holders of Common Units who elect to receive Class A Common Units. Brookfield will own, directly or indirectly, all of the equity interests in Parent. Messrs. Laurie, Reid, and Turcotte are each employees of Brookfield. Additionally, Messrs. Morrison and Transier each serve as directors on the board(s) of other Brookfield portfolio companies.

 

Certain of the directors and members of Management of Partnership GP hold Common Units that will be cancelled at the Effective Time and converted into the right to receive the Cash Merger Consideration. Additionally, each director and member of Management of Partnership GP that holds Common Units will be entitled to elect to forego the right to receive the Cash Merger Consideration and instead receive Class A Common Units with respect to all of such director’s Common Units.

 

Partnership GP’s directors and officers are entitled to continued indemnification and directors’ and officers’ liability insurance coverage for at least six years following the Effective Time under the Merger Agreement. For a further discussion of the interests of directors and executive officers in the Merger, see “The Merger Agreement—Interests of the Directors, Officers and Management of Partnership GP in the Merger.”

 

Position of the Brookfield Filing Parties as to the Fairness of the Merger (see page 85)

 

The Brookfield Filing Parties (as defined in “Information Concerning the Brookfield Filing Parties—Identity and Background of the Brookfield Filing Parties”) believe that the proposed Merger is substantively and procedurally fair to the Unaffiliated Unitholders. However, none of the Brookfield Filing Parties nor any of their respective affiliates has performed, or engaged a financial advisor to perform, any valuation or other analysis for purposes of assessing the fairness of the Merger to the Partnership and the Unaffiliated Unitholders. The belief of the Brookfield Filing Parties as to the procedural and substantive fairness of the Merger is based on the factors discussed in “Special Factors—Position of the Brookfield Filing Parties as to the Fairness of the Merger.” For the avoidance of doubt, the Brookfield Filing Parties that are not specifically a party to the Merger Agreement have not been involved in any aspect of the related transactions, negotiations, or discussions and are relying on Parent and the Brookfield Affiliated Holders in making these statements.

 

 

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Conditions to Consummation of the Merger (see page 96)

 

As more fully described in this information statement, each party’s obligation to complete the transactions contemplated by the Merger Agreement depends on a number of customary closing conditions being satisfied or, where legally permissible, waived, including the following:

 

·                  any required regulatory approvals must have been obtained and must be in full force and effect; and

 

·                  no law, injunction, judgment or ruling enacted, promulgated, pending, issued, entered, amended or enforced by or before any governmental authority (a “Restraint”) shall be in effect to enjoin, restrain, prevent or prohibit the consummation of the transactions contemplated by the Merger Agreement or make the consummation of such transactions illegal.

 

The obligations of Parent and Merger Sub to effect the Merger are subject to the satisfaction or waiver of the following additional conditions:

 

·                  (i) the representations and warranties of the Partnership and Partnership GP in Sections 4.3(a) (Capitalization) and 4.3(c) (Subsidiaries) of the Merger Agreement shall be true and correct, except for any de minimis inaccuracies, both as of the date of the Merger Agreement and as of the closing date, except to the extent expressly made as of an earlier date, in which case as of such date, and (ii) the other representations and warranties of the Partnership and Partnership GP contained in Article IV of the Merger Agreement shall be true and correct, both as of the date of the Merger Agreement and as of the closing date of the Merger, except to the extent expressly made as of an earlier date, in which case as of such date, except where the failure of such representations and warranties to be so true and correct (without giving effect to any limitation as to material adverse effect or materiality contained in any individual representation or warranty) would not reasonably be expected to have, individually or in the aggregate, a Partnership Material Adverse Effect; as described under and defined in “The Merger Agreement—Conditions to Consummation of the Merger.”

 

·                  the Partnership and Partnership GP shall have performed or complied with, in all material respects, all covenants and obligations required to be performed by them under the Merger Agreement at or prior to the closing date; and

 

·                  there shall not have been a Partnership Material Adverse Effect.

 

The obligations of the Partnership to effect the Merger are subject to the satisfaction or waiver of the following additional conditions:

 

·                  (i) the representations and warranties of Parent and Merger Sub contained in Section 5.3(a) (Ownership of Partnership Units) of the Merger Agreement shall be true and correct, except for any de minimis inaccuracies, both as of the date of the Merger Agreement and as of the closing date, except to the extent expressly made as of an earlier date, in which case as of such date, and (ii) the other representations and warranties of Parent and Merger Sub in Article V of the Merger Agreement shall be true and correct, both as of the date of the Merger Agreement and as of the closing date, except to the extent expressly made as of an earlier date, in which case as of such date, except where the failure of such representations and warranties to be so true and correct (without giving effect to any limitation as to material adverse effect or materiality set forth in any individual such representation or warranty) would not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the ability of Parent and Merger Sub to consummate the transactions contemplated by the Merger Agreement; and

 

·                  Parent and Merger Sub shall have performed or complied with, in all material respects, all covenants and obligations required to be performed by them under the Merger Agreement.

 

For a further discussion of the conditions to the consummation of the Merger, see “The Merger Agreement—Conditions to Consummation of the Merger.”

 

 

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Regulatory Approvals and Clearances Required for the Merger (see page 89)

 

In connection with the Merger, the Partnership intends to make all required filings under the Exchange Act, as well as any required filings with the NYSE and the Registrar of Corporations of the Republic of the Marshall Islands. None of the Partnership, Partnership GP or the GP Board is aware of any federal or state regulatory approval required in connection with the Merger, other than compliance with applicable federal securities laws and applicable Marshall Islands law.

 

For a further discussion of required regulatory approvals, see “Special Factors—Regulatory Approvals and Clearances Required for the Merger.”

 

Termination of the Merger Agreement (see page 100)

 

The Merger Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time:

 

·                  by mutual written consent of the Partnership and Parent duly authorized by, in the case of the Partnership, the Conflicts Committee, and in the case of Parent, the general partner of Parent;

 

·                  by either Parent or, following authorization by the Conflicts Committee, the Partnership, if the Merger has not occurred on or before April 1, 2020 (the “Outside Date”); provided, that the right to terminate is not available to a party if the failure to satisfy any condition was due to the failure of such party (or, in the case of the Partnership, the Partnership or Partnership GP, and in the case of Parent, Parent or Merger Sub) to perform and comply in all material respects with the covenants and agreements to be performed or complied with by it prior to closing or if any other party has filed and is pursuing an action seeking specific performance pursuant to the terms of the Merger Agreement;

 

·                  by Parent:

 

·                  if there is a breach or failure to perform by the Partnership or Partnership GP of any of its representations, warranties, covenants or agreements in the Merger Agreement such that certain closing conditions would not be satisfied, or if capable of being cured, such breach has not been cured within the earlier of the Outside Date or 30 days following delivery of written notice of such breach by Parent, subject to certain exceptions discussed in “The Merger Agreement—Termination of the Merger Agreement”; provided, however, that the right to terminate is not available to Parent if Parent or Merger Sub is then in material breach of any of its representations, warranties, covenants or agreements contained in the Merger Agreement; or

 

·                  if at any time prior to closing a Restraint is in effect to enjoin, restrain, prevent or prohibit the consummation of the transactions contemplated by the Merger Agreement or make the consummation of the transactions contemplated illegal; provided, however, that the right to terminate is not available to Parent if such Restraint was due to the failure of Parent or Merger Sub to perform in all material respects any of their respective obligations under the Merger Agreement;

 

·                  by the Partnership (following authorization by the Conflicts Committee):

 

·                  if there is a breach or failure to perform by Parent or Merger Sub of any of their representations, warranties, covenants or agreements in the Merger Agreement such that certain closing conditions would not be satisfied, or if capable of being cured, such breach has not been cured within the earlier of the Outside Date or 30 days following delivery of written notice of such breach by the Partnership, subject to certain exceptions discussed in “The Merger Agreement—Termination of the Merger Agreement”; provided, however, that the right to terminate is not available to the Partnership if the Partnership or Partnership GP is then in material breach of any of its representations, warranties, covenants or agreements contained in the Merger Agreement;

 

·                  if at any time prior to closing a Restraint is in effect to enjoin, restrain, prevent or prohibit the transactions contemplated by the Merger Agreement or make the transactions contemplated by the

 

 

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Merger Agreement illegal; provided, however, that the right to terminate is not available to the Partnership if such Restraint was due to the failure of the Partnership or Partnership GP to perform in all material respects any of their respective obligations under the Merger Agreement; or

 

·                  if (i) all of Parent and Merger Sub’s conditions to closing have been met or waived, (ii) Partnership GP has delivered written notice to Parent stating, among other things, that it and the Partnership each stands ready, willing and able to close the Merger on the date of such notice and at all times during the five business days immediately after such notice, as more fully described in “The Merger Agreement—Termination of the Merger Agreement,” and (iii) Parent fails to consummate the closing within those five business days.

 

For a further discussion of the termination of the Merger Agreement, see “The Merger Agreement—Termination of the Merger Agreement.”

 

Fees and Expenses (see page 90)

 

Generally, all fees and expenses incurred in connection with the transactions contemplated by the Merger Agreement will be the obligation of the respective party incurring such fees and expenses.

 

The Merger Agreement provides that, in the event of termination of the Merger Agreement in specified circumstances, Parent will, within two business days after the date of such termination, pay a termination fee to the Partnership in the amount of $25.0 million (the “Termination Fee”) (it being understood that in no event will Parent be required to pay the Termination Fee on more than one occasion). Following payment of the Termination Fee, if any, Parent will not be obligated to pay any additional expenses incurred by the Partnership or Partnership GP. If the Merger Agreement is terminated by the Partnership under certain circumstances, Parent must pay the Partnership’s reasonable and documented out-of-pocket expenses incurred in connection with the Merger Agreement and the transactions contemplated thereby, including the Merger, up to a maximum amount of $4.0 million; provided, that no such payment is required if Parent has paid the Termination Fee.

 

The Merger Agreement also provides that the Partnership will pay Parent’s reasonable and documented out-of-pocket expenses incurred in connection with the Merger Agreement and the transactions contemplated thereby, including the Merger, up to a maximum amount of $4.0 million, in the event the Merger is terminated under certain circumstances.

 

For a further discussion of the payment of fees and expenses in connection with the Merger, see “Special Factors—Fees and Expenses.”

 

Remedies; Specific Performance (see page 102)

 

The Merger Agreement provides that no termination of the Merger Agreement will relieve the Partnership from any liability for any failure to consummate the Merger and the other transactions contemplated thereby when required pursuant to the Merger Agreement, and that in the event of the Partnership’s or Partnership GP’s willful breach of the Merger Agreement or intentional fraud, Parent will be entitled to pursue any and all legally available remedies, including equitable relief, and to seek recovery of all losses, liabilities, damages, costs and expenses of every kind and nature (including reasonable attorneys’ fees and time value of money) in an amount not to exceed $6.75 million.

 

The Merger Agreement also provides that the parties are entitled to obtain an injunction to prevent breaches of the Merger Agreement and to specifically enforce the Merger Agreement. In the event of termination of the Merger Agreement in specified circumstances, Parent will, within two business days after the date of such termination, pay the Termination Fee (it being understood that in no event will Parent be required to pay the Termination Fee on more than one occasion). Following payment of the Termination Fee, if any, Parent will not be obligated to pay any additional expenses incurred by the Partnership or Partnership GP. If the Merger Agreement is terminated by the Partnership under certain circumstances, Parent must pay the Partnership’s reasonable and documented out-of-pocket expenses incurred in connection with the Merger

 

 

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Agreement and the transactions contemplated thereby, including the Merger, up to a maximum amount of $4.0 million; provided, that no such payment is required if Parent has paid the Termination Fee.

 

The Termination Fee (together with certain specific performance rights) is the sole and exclusive remedy of the Partnership or Partnership GP or any of their respective affiliates against Parent, Merger Sub, the Brookfield Affiliated Holders, Brookfield TOGP or any of their respective affiliates, or any direct or indirect former, current or future equity holder or any director, officer, employee, investment banker, financial advisor, attorney, accountant, agent or other representative (each a “Representative”) of any of the foregoing, for any damages, liabilities or other adverse consequences incurred by the Partnership, Partnership GP or any of their respective affiliates, and under no circumstances will Parent be obligated to both specifically perform the terms of the Merger Agreement and pay the Termination Fee.

 

The Merger Agreement also provides that the Partnership will pay Parent’s reasonable and documented out-of-pocket expenses incurred in connection with the Merger Agreement and the transactions contemplated thereby, including the Merger, up to a maximum amount of $4.0 million, in the event the Merger is terminated under certain circumstances.

 

Financing of the Merger (see page 89)

 

The obligation of Parent and Merger Sub to consummate the Merger is not subject to any financing condition. To provide financing for the Cash Merger Consideration, an affiliate of Parent (“Sponsor”) entered into an equity commitment letter (the “Equity Commitment Letter”) with Parent, pursuant to which Sponsor committed to purchase, or cause the purchase of, at or immediately prior to the Effective Time, equity interests of Parent for an aggregate cash purchase price up to approximately $170.0 million, which will be used by Parent to fund the Cash Merger Consideration pursuant to and in accordance with the Merger Agreement and to pay other amounts payable by Parent pursuant to the Merger Agreement, including the Termination Fee and the reimbursement of the Partnership’s expenses, if applicable (the “Equity Commitment”). The Partnership is designated as a third-party beneficiary for purposes of enforcing the Equity Commitment. Sponsor may purchase, or cause the purchase of, equity interests of Parent directly or indirectly through one or more affiliated entities designated by Sponsor. For a discussion of the material terms of the Equity Commitment Letter, see “Special Factors—Financing of the Merger.”

 

Material U.S. Federal Income Tax Consequences of the Merger (see page 129)

 

If you are a U.S. Holder, the receipt of Cash Merger Consideration in exchange for Common Units pursuant to the Merger will be a taxable transaction for U.S. federal income tax purposes and the resulting tax liability, if any, will depend on your particular situation. Accordingly, you should consult your tax advisors regarding the particular tax consequences to you of the exchange of Common Units for Cash Merger Consideration, or alternatively if you so elect, newly designated unlisted Class A Common Units, pursuant to the Merger in light of your particular circumstances (including the application and effect of any state, local or foreign income and other tax laws). Please read “Material U.S. Federal Income Tax Consequences of the Merger” for a summary of the material U.S. federal income tax consequences of the Merger.

 

No Appraisal Rights (see page 91)

 

Appraisal rights are not available in connection with the Merger under the laws of the Republic of the Marshall Islands or under the Partnership Agreement.

 

Registration Exemption (see page 91)

 

The issuance by the Partnership of the Class A Common Units will be made in reliance upon the exemption from registration requirements pursuant to Section 3(a)(9) of the U.S. Securities Act of 1933, as amended (the “Securities Act”).

 

 

14


 

 

Delisting and Deregistration of Common Units (see page 91)

 

The Common Units are currently listed on the NYSE under the ticker symbol “TOO.” If the Merger is completed, the Common Units will cease to be listed on the NYSE and will be deregistered under the Exchange Act.

 

Description of the Class A Common Units (see page 107)

 

As of the date hereof, there are no Class A Common Units outstanding. In connection with the Merger, Partnership GP will enter into the Amended and Restated Partnership Agreement to, among other things, create a new series of units designated as Class A Common Units, which shall be issued to Common Unitholders that properly make, and do not validly revoke, a Unit Election. Other than as described in “Description of the Class A Common Units,” each Class A Common Unit shall be economically equivalent to and rank pari passu with a Class B Common Unit, and a Class A Common Unitholder shall have rights equivalent to a Class B Common Unitholder with respect to, without limitation, distributions and allocations of income, gain, loss or deductions.

 

The Class A Common Units shall not have any voting rights except as required by the Marshall Islands Act, but only to the extent that such voting rights under the Marshall Islands Act may not be waived. Subject to applicable legal, tax or regulatory constraints, a certain number of Class A Common Units will be automatically redeemed in connection with any Brookfield Sales Event (as defined in “Description of the Class A Common Units—Automatic Redemption of Class A Common Units”). Class A Common Unitholders shall have preemptive rights in connection with certain issuances of securities to Brookfield. No Class A Common Unitholder may sell, assign, convey, pledge, transfer or otherwise dispose of any Class A Common Units other than in connection with a Brookfield Sales Event, and any sale, assignment, conveyance, pledge, transfer or other disposition of Class A Common Units in violation of the Amended and Restated Partnership Agreement, other than by operation of law (including intestacy), shall be null and void. Neither the Partnership, Partnership GP, Partnership GP’s officers and directors nor any other affiliates of Partnership GP will owe any duties, including fiduciary duties, or have any liability to Class A Common Unitholders, other than the implied contractual covenant of good faith and fair dealing, pursuant to the Amended and Restated Partnership Agreement. The Class A Common Units will not be listed for trading on any national securities exchange. For a more complete description of the Class A Common Units, see “Description of the Class A Common Units.”

 

Pending Litigation (see page 91)

 

Following the public announcement of Brookfield’s initial offer to the Conflicts Committee, five Common Unitholders filed two putative class actions against the Partnership, the Partnership GP, several named directors of the Partnership GP, Brookfield Asset Management Inc. (“BAM”) and Brookfield. These complaints allege that, among other things, the defendants breached the Partnership Agreement by undertaking actions that suppressed the trading price of the Common Units and that Brookfield tortiously interfered with the Partnership Agreement. The complaints seek injunctive relief enjoining the Merger, damages and costs, among other remedies. The defendants believe that these complaints are without merit and intend to vigorously defend them.

 

Accounting Treatment of the Merger (see page 91)

 

The Partnership, as the surviving entity in the Merger, is considered the acquiror for accounting purposes. Therefore, its net assets remain at historical cost.

 

 

15


 

 

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

 

The following table sets forth selected consolidated financial and other data of the Partnership for the years ended December 31, 2018, 2017, 2016, 2015 and 2014, as well as for the six-month periods ended June 30, 2019 and 2018. You should read the notes to the Partnership’s consolidated financial statements for a discussion of the basis on which the Partnership’s consolidated financial statements are presented. The information provided below should be read in conjunction with the consolidated financial statements, related notes and other financial information included in the Partnership’s Annual Report for the fiscal year ended December 31, 2018, filed on Form 20-F, and the Partnership’s Report of Foreign Private Issuer for the quarterly period ended June 30, 2019, filed on Form 6-K, each of which are incorporated by reference in this information statement.

 

 

 

 

 

 

 

 

Unaudited for the Six
Months Ended June 30,

 

Year Ended December 31,

 

 

 

2019

 

2018

 

2018

 

2017

 

2016

 

2015

 

2014

 

 

 

(in thousands of U.S. Dollars, except fleet data)

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

656,411

 

643,553

 

1,416,424

 

1,110,284

 

1,152,390

 

1,229,413

 

1,019,539

 

Income (loss) from vessel operations(1)

 

146,132

 

(112,521

)

111,737

 

(116,005

)

230,853

 

283,399

 

256,218

 

Net (loss) income

 

(30,577

)

(152,432

)

(123,945

)

(299,442

)

44,475

 

100,143

 

17,656

 

Limited partners’ interest:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

(46,582

)

(158,772

)

(147,141

)

(339,501

)

(12,952

)

31,205

 

(19,380

)

Net (loss) income per

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Unit - basic

 

(0.11

)

(0.39

)

(0.36

)

(1.45

)

(0.25

)

0.32

 

(0.22

)

Common Unit - diluted

 

(0.11

)

(0.39

)

(0.36

)

(1.46

)

(0.25

)

0.32

 

(0.22

)

Cash distributions declared per Common Unit

 

 

 

 

 

0.04

 

0.24

 

0.44

 

2.18

 

2.15

 

Balance Sheet Data (at end of year):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

201,567

 

241,202

 

225,040

 

221,934

 

227,378

 

258,473

 

252,138

 

Restricted cash

 

8,963

 

12,425

 

8,540

 

28,360

 

114,909

 

60,520

 

46,760

 

Vessels and equipment(2)

 

4,010,862

 

4,388,304

 

4,270,622

 

4,687,494

 

4,716,933

 

4,743,619

 

3,183,465

 

Investments in equity accounted joint ventures

 

215,304

 

195,082

 

212,202

 

169,875

 

141,819

 

77,647

 

54,955

 

Total assets

 

5,184,361

 

5,425,663

 

5,312,052

 

5,637,795

 

5,718,620

 

5,744,166

 

3,917,837

 

Total debt

 

3,772,547

 

3,962,170

 

3,097,742

 

3,123,728

 

3,182,894

 

3,363,874

 

2,408,596

 

Total equity

 

1,411,814

 

1,463,493

 

1,459,124

 

1,473,528

 

1,138,596

 

967,848

 

802,853

 

Common Units outstanding

 

410,707,764

 

410,314,977

 

410,314,977

 

410,045,210

 

147,514,113

 

107,026,979

 

92,386,383

 

Preferred Units outstanding(3)

 

15,800,000

 

15,800,000

 

15,800,000

 

11,000,000

 

23,517,745

 

21,438,413

 

6,000,000

 

Cash Flow Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash flow provided by (used for):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

187,246

 

77,055

 

280,643

 

305,200

 

396,473

 

371,456

 

160,186

 

Financing activities

 

(126,964

)

49,498

 

(121,338

)

142,947

 

(93,415

)

286,663

 

89,164

 

Investing activities

 

(83,332

)

(123,220

)

(176,019

)

(540,140

)

(279,764

)

(638,024

)

(169,578

)

Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues (4)

 

589,721

 

572,061

 

1,264,616

 

1,010,840

 

1,071,640

 

1,131,407

 

906,999

 

EBITDA(5)

 

254,536

 

133,793

 

466,799

 

162,618

 

492,648

 

475,590

 

306,050

 

Adjusted EBITDA(5)

 

347,091

 

320,645

 

782,521

 

522,394

 

570,572

 

615,775

 

456,528

 

Expenditures for vessels and equipment

 

(112,849

)

(160,175

)

233,736

 

533,260

 

294,581

 

664,667

 

172,169

 

Fleet data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average number of shuttle tankers(6)

 

28.3

 

31.4

 

30.3

 

31.7

 

32.5

 

33.8

 

34.7

 

Average number of FPSO units(6)

 

8.0

 

8.0

 

8.0

 

8.0

 

8.0

 

7.8

 

5.2

 

Average number of conventional tankers(6)

 

1.0

 

2.0

 

2.0

 

2.0

 

2.0

 

3.9

 

4.0

 

Average number of FSO units(6)

 

5.6

 

6.0

 

6.0

 

6.8

 

7.0

 

6.6

 

6.0

 

Average number of towing vessels(6)

 

10.0

 

9.8

 

9.9

 

7.9

 

6.3

 

4.3

 

 

Average number of units for maintenance and safety(6)

 

1.0

 

1.0

 

1.0

 

1.0

 

1.0

 

0.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16


 

 


(1)                                 Income (loss) from vessel operations includes, among other things, the following:

 

 

 

 

 

 

 

 

 

 

 

Unaudited for the Six
Months Ended June 30,

 

Year Ended December 31,

 

 

 

 

2019

 

2018

 

2018

 

2017

 

2016

 

2015

 

2014

 

 

(Write-down) and gain (loss) on sale of vessels

 

11,756

 

(207,291

)

(223,355

)

(318,078

)

(40,079

)

(69,998

)

(1,638

)

 

(2)                                 Vessels and equipment consists of (a) vessels, at cost less accumulated depreciation and write-downs and (b) advances on newbuilding contracts and conversion costs.

 

(3)                                 Preferred Units outstanding includes the Series A Preferred Units from April 23, 2013 through June 30, 2019, the Series B Preferred Units from April 13, 2015 through June 30, 2019, the Series C Preferred Units from July 1, 2015 through June 29, 2016, the Series C-1 and Series D Preferred Units from June 29, 2016 through September 25, 2017, and the Series E Preferred Units from January 18, 2018 through June 30, 2019.

 

(4)                                 Net revenues is a non-GAAP financial measure. Consistent with general practice in the shipping industry, the Partnership uses “net revenues,” defined as revenues less voyage expenses. Net revenues are also widely used by investors and analysts in the shipping industry for comparing financial performance between companies in the shipping industry to industry averages. Net revenue should not be considered as an alternative to revenue or any other measure of financial performance in accordance with GAAP. Net revenue is adjusted for expenses that the Partnership classifies as voyage expenses and, therefore, may not be comparable to similarly titled measures of other companies. The following table reconciles net revenues with revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unaudited for the Six
Months Ended June 30,

 

Year Ended December 31,

 

 

 

 

2019

 

2018

 

2018

 

2017

 

2016

 

2015

 

2014

 

 

Revenues

 

656,411

 

643,553

 

1,416,424

 

1,110,284

 

1,152,390

 

1,229,413

 

1,019,539

 

 

Voyage expenses

 

(66,690

)

(71,492

)

(151,808

)

(99,444

)

(80,750

)

(98,006

)

(112,540

)

 

Net revenues

 

589,721

 

572,061

 

1,264,616

 

1,010,840

 

1,071,640

 

1,131,407

 

906,999

 

 

 

 

 

 

 

 

(5)                                 EBITDA and Adjusted EBITDA are non-GAAP measures. EBITDA represents net (loss) income before interest, taxes, depreciation and amortization. Adjusted EBITDA represents EBITDA adjusted to exclude certain items whose timing or amount cannot be reasonably estimated in advance or that are not considered representative of core operating performance. Such adjustments include vessel write-downs, gains or losses on sale of vessels, unrealized gains or losses on derivative instruments, foreign exchange gains or losses, losses on debt repurchases, and certain other income or expenses. Adjusted EBITDA also excludes realized gains or losses on interest rate swaps as management, in assessing performance, views these gains or losses as an element of interest expense and realized gains or losses on derivative instruments resulting from amendments or terminations of the underlying instruments. Adjusted EBITDA is further adjusted to include the Partnership’s proportionate share of Adjusted EBITDA from the Partnership’s equity-accounted joint ventures and to exclude the non-controlling interests’ proportionate share of the Adjusted EBITDA from the Partnership’s consolidated joint ventures. These measures are used as supplemental financial measures by management and by external users of the Partnership’s financial statements, such as investors and the Partnership’s controlling unitholder, as discussed below.

 

Financial and operating performance. EBITDA and Adjusted EBITDA assist the Partnership’s management and investors by increasing the comparability of the Partnership’s fundamental performance from period to period and against the fundamental performance of other companies in the Partnership’s industry that provide EBITDA or Adjusted EBITDA-based information. This increased comparability is achieved by excluding the potentially disparate effects between periods or companies of interest expense and income, taxes, depreciation and amortization, and, for Adjusted EBITDA, by excluding certain additional items whose timing or amount cannot be reasonably estimated in advance or that are not considered representative of core operating performance. These items are affected by various and possibly changing financing methods, capital structure and historical cost basis which may significantly affect net income between periods. The Partnership

 

 

17


 

 

believes that including EBITDA and Adjusted EBITDA as financial and operating measures benefits investors in (a) selecting between investing in the Partnership and other investment alternatives and (b) monitoring the Partnership’s ongoing financial and operational strength and health in assessing whether to continue to hold an investment in the Partnership.

 

Liquidity. EBITDA allows the Partnership 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 Partnership’s existing capitalization and other items such as dry-docking expenditures and changes in non-cash working capital items (which may vary significantly from period to period), EBITDA provides a consistent measure of the Partnership’s ability to generate cash over the long term. Management uses this information as a significant factor in determining (a) the Partnership’s proper capitalization structure (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 cash distribution commitments to the holders of Preferred Units (the “Preferred Unitholders”). The use of EBITDA as a liquidity measure also permits investors to assess the Partnership’s fundamental ability to generate cash sufficient to meet cash needs, including distributions on the Preferred Units.

 

EBITDA should not be considered as an alternative to net (loss) income, cash flow from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjusted EBITDA should not be considered as an alternative to net (loss) income or any other measure of financial performance presented in accordance with GAAP. EBITDA and Adjusted EBITDA exclude certain items that affect net (loss) income and these measures may vary among other companies. Therefore, EBITDA and Adjusted EBITDA as presented in this information statement may not be comparable to similarly titled measures of other companies.

 

The following table reconciles the Partnership’s historical consolidated EBITDA and Adjusted EBITDA to net (loss) income, and the Partnership’s EBITDA to net operating cash flow.

 

 

 

 

 

 

 

 

 

 

Unaudited for the Six 
Months Ended June 30,

 

Year Ended December 31,

 

 

 

 

2019

 

2018

 

2018

 

2017

 

2016

 

2015

 

2014

 

 

 

 

(in thousands of U.S. Dollars, except per unit, unit and fleet data)

 

 

Reconciliation of “EBITDA” and “Adjusted EBITDA(i)” to “Net (loss) income”:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

(30,577

)

(152,432

)

(123,945

)

(299,442

)

44,475

 

100,143

 

17,656

 

 

Depreciation and amortization

 

178,132

 

189,744

 

372,290

 

309,975

 

300,011

 

274,599

 

198,553

 

 

Interest expense, net of interest income

 

101,534

 

89,843

 

195,797

 

152,183

 

139,354

 

122,205

 

87,662

 

 

Income tax expense (recovery)

 

5,447

 

6,638

 

22,657

 

(98

)

8,808

 

(21,357

)

2,179

 

 

EBITDA

 

254,536

 

133,793

 

466,799

 

162,618

 

492,648

 

475,590

 

306,050

 

 

Write-down and (gain) loss of sale of vessels

 

(11,756

)

207,291

 

223,355

 

318,078

 

40,079

 

69,998

 

1,638

 

 

Realized and unrealized (gain) loss on derivative instruments

 

72,229

 

(43,892

)

(12,808

)

42,853

 

20,313

 

73,704

 

143,703

 

 

Equity income(ii)

 

(3,274

)

(22,344

)

(39,458

)

(14,442

)

(17,933

)

(7,672

)

(10,341

)

 

Foreign currency exchange (gain) loss

 

(1,221

)

5,803

 

9,413

 

14,006

 

14,805

 

17,467

 

16,140

 

 

Losses on debt repurchases(iii)

 

 

 

55,479

 

3,102

 

 

 

 

 

Other expense (income) - net

 

1,994

 

3,863

 

4,602

 

(14,167

)

21,031

 

(1,091

)

(781

)

 

Realized (loss) gain on foreign currency forward contracts

 

(2,317

)

990

 

(1,228

)

900

 

(7,153

)

(13,799

)

(1,912

)

 

Adjusted EBITDA from equity-accounted vessels (ii)

 

43,415

 

44,485

 

92,637

 

33,360

 

30,246

 

27,320

 

25,722

 

 

Adjusted EBITDA attributable to non-controlling interests (iv)

 

(6,515

)

(9,344

)

(16,270

)

(23,914

)

(23,464

)

(25,742

)

(23,691

)

 

Adjusted EBITDA (i)

 

347,091

 

320,645

 

782,521

 

522,394

 

570,572

 

615,775

 

456,528

 

 

Reconciliation of “EBITDA” to “Net operating cash flow”

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating cash flow

 

187,246

 

77,055

 

280,643

 

305,200

 

396,473

 

371,456

 

160,186

 

 

Expenditures for dry docking

 

10,593

 

9,995

 

21,411

 

17,269

 

26,342

 

13,060

 

36,221

 

 

Change in non-cash working capital items related to operating activities

 

(30,148

)

70,456

 

83,227

 

(33,506

)

(74,218

)

(25,903

)

111,484

 

 

Amortization of in-process revenue contracts

 

15,062

 

6,101

 

35,219

 

12,745

 

12,779

 

12,745

 

12,744

 

 

Current income tax expense

 

5,447

 

6,638

 

4,051

 

1,772

 

3,954

 

1,650

 

1,290

 

 

(Write down) and gain (loss) on sale of vessels

 

11,756

 

(207,291

)

(223,355

)

(318,078

)

(40,079

)

(69,998

)

(1,638

)

 

Equity income, net of dividends received

 

(550

)

17,644

 

33,258

 

2,842

 

10,727

 

(171

)

(6,462

)

 

Unrealized gain (loss) on derivative instruments

 

(63,468

)

67,795

 

53,419

 

59,702

 

44,128

 

(51,072

)

(180,156

)

 

Interest expense, net of interest income

 

101,534

 

89,843

 

195,797

 

152,183

 

139,354

 

122,205

 

87,662

 

 

Deferred income tax expense

 

(2,351

)

(5,435

)

 

 

 

 

 

 

Other

 

19,415

 

992

 

(16,871

)

(37,511

)

(26,812

)

101,618

 

84,719

 

 

EBITDA

 

254,536

 

133,793

 

466,799

 

162,618

 

492,648

 

475,590

 

306,050

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18


 

 

(i)                                     In 2018, the Partnership changed its definition of Adjusted EBITDA to more closely align with internal management reporting and metrics used by the Partnership’s controlling unitholder. Adjusted EBITDA no longer excludes revenue associated with the amortization of in-process revenue contracts of $12.7 million in 2017, $12.8 million in 2016, $12.7 million in 2015 and $12.7 million in 2014, and other expenses of $0.3 million in 2017, $6.5 million in 2016, $2.7 million in 2015 and $0.4 million in 2014, and now excludes Adjusted EBITDA attributable to non-controlling interests of $23.9 million in 2017, $23.5 million in 2016, $25.7 million in 2015 and $23.7 million in 2014. Adjusted EBITDA amounts reported in prior years have been recast to conform to the definition adopted in 2018.

 

(ii)                                  Adjusted EBITDA from equity-accounted vessels, which is a non-GAAP measure, should not be considered as an alternative to equity income or any other measure of financial performance presented in accordance with GAAP. Adjusted EBITDA from equity-accounted vessels excludes certain items that affect equity income and these measures may vary among other companies. Therefore, Adjusted EBITDA from equity-accounted vessels as presented in this information statement may not be comparable to similarly titled measures of other companies. The Partnership does not have control over the operations, nor does it have any legal claim to the revenue and expenses of the Partnership’s investments in equity accounted for joint ventures. Consequently, the cash flow generated by the Partnership’s investments in equity accounted joint ventures may not be available for use by the Partnership in the period that such cash flows are generated. The Partnership’s proportionate share of Adjusted EBITDA from equity-accounted vessels is summarized in the table below:

 

 

 

 

 

 

 

 

 

 

Unaudited for the Six
 Months Ended June 30,

 

Year Ended December 31,

 

 

 

 

2019

 

2018

 

2018

 

2017

 

2016

 

2015

 

2014

 

 

Equity income

 

3,274

 

22,344

 

39,458

 

14,442

 

17,933

 

7,672

 

10,341

 

 

Depreciation and amortization

 

16,732

 

15,090

 

30,947

 

10,719

 

8,715

 

8,356

 

8,086

 

 

Interest expense, net of interest income

 

11,342

 

6,684

 

18,585

 

7,437

 

3,541

 

4,234

 

3,999

 

 

Income tax expense (recovery)

 

118

 

408

 

442

 

103

 

372

 

161

 

(32

)

 

EBITDA

 

31,466

 

44,526

 

89,432

 

32,701

 

30,561

 

20,423

 

22,394

 

 

Add (subtract) specific items affecting EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Write-down and loss on sale of equipment

 

 

 

 

 

676

 

290

 

 

 

Realized and unrealized loss (gain) on derivative instruments

 

12,111

 

(863

)

3,523

 

70

 

(805

)

6,607

 

3,328

 

 

Foreign currency exchange (gain) loss

 

(162

)

822

 

(318

)

589

 

(186

)

 

 

 

Adjusted EBITDA from equity-accounted vessels

 

43,415

 

44,485

 

92,637

 

33,360

 

30,246

 

27,320

 

25,722

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19


 

 

(iii)                               Losses on debt repurchases of $55.5 million for 2018, relates to the prepayment of the Partnership’s $200.0 million promissory note amended and transferred to Brookfield in September 2017 (or the Brookfield Promissory Note) and the repurchases of $225.2 million of the existing $300.0 million five-year senior unsecured bonds that matured and were repaid on July 30, 2019, and NOK 914 million of the existing NOK 1,000 million senior unsecured bonds that were repaid in January 2019. The losses on debt repurchases are comprised of an acceleration of non-cash accretion expense of $31.5 million resulting from the difference between the $200.0 million settlement amount of the Brookfield Promissory Note at its par value and its carrying value of $168.5 million and an associated early termination fee of $12.0 million paid to Brookfield, as well as 2.0% - 2.5% premiums on the repurchase of the bonds and the write-off of capitalized loan costs. The carrying value of the Brookfield Promissory Note was lower than face value due to it being recorded at its relative fair value based on the allocation of net proceeds invested by Brookfield on September 25, 2017.

 

(iv)                              Losses on debt repurchases of $3.1 million for 2017, relates to the repurchase of NOK 508.0 million of the remaining NOK 1,220.0 million senior unsecured bonds that matured in late-2018.

 

Adjusted EBITDA attributable to non-controlling interests, which is a non-GAAP measure, should not be considered as an alternative to non-controlling interests in net (loss) income or any other measure of financial performance presented in accordance with GAAP. Adjusted EBITDA attributable to non-controlling interests excludes certain items that affect non-controlling interests in net (loss) income and these measures may vary among other companies. Therefore, Adjusted EBITDA attributable to non-controlling interests as presented in this information statement may not be comparable to similarly titled measures of other companies. The proportionate share of Adjusted EBITDA attributable to non-controlling interests is summarized in the table below:

 

 

 

 

 

 

 

 

Unaudited for the Six 
Months Ended June 30,

 

Year Ended December 31,

 

 

 

2019

 

2018

 

2018

 

2017

 

2016

 

2015

 

2014

 

Net (loss) income attributable to non- controlling interests

 

286

 

(7,852

)

(7,161

)

3,764

 

11,858

 

13,911

 

10,503

 

Depreciation and amortization

 

5,433

 

8,668

 

14,617

 

13,324

 

12,327

 

10,727

 

13,188

 

Interest expense, net of interest income

 

793

 

1,105

 

2,064

 

1,549

 

1,456

 

1,383

 

1,602

 

EBITDA attributable to non-controlling interests

 

6,512

 

1,921

 

9,520

 

18,637

 

25,641

 

26,021

 

25,293

 

Add (subtract) specific items affecting EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Write-down and (gain) loss on sale of vessels

 

 

7,386

 

6,711

 

5,400

 

(2,270

)

(742

)

(2,079

)

Realized and unrealized loss on derivative instruments

 

 

 

 

 

53

 

199

 

285

 

Foreign currency exchange loss (gain)

 

3

 

37

 

39

 

(123

)

41

 

264

 

180

 

Other, net

 

 

 

 

 

(1

)

 

12

 

Adjusted EBITDA attributable to non-controlling interests

 

6,515

 

9,344

 

16,270

 

23,914

 

23,464

 

25,742

 

23,691

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6)                                 Average number of vessels consists of the average number of owned and chartered-in vessels that were in the Partnership’s possession during the period, including the Petrojarl Knarr floating production, storage and offloading (“FPSO”) unit, along with its operations and charter contract. For 2018, 2017, 2016, 2015 and 2014 this includes two FPSO units in the Partnership’s equity accounted joint ventures, in which the Partnership has 50% ownership interests, at 100%.

 

 

20


 

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

 

Statements included in this information statement which are not historical facts (including the Partnership’s financial forecast and any other statements concerning plans and objectives of management for future operations or economic performance, or assumptions related thereto) are forward-looking statements. In addition, the Partnership and its respective representatives may from time to time make other oral or written statements which are also forward-looking statements. Such statements include, in particular, statements about plans, strategies, business prospects, changes and trends in the business and the markets in which the Partnership operates as described in this information statement. In some cases, you can identify the forward-looking statements by the use of words such as “may,” “could,” “should,” “would,” “expect,” “plan,” “anticipate,” “intend,” “forecast,” “believe,” “estimate,” “predict,” “propose,” “potential,” “continue” or the negative of these terms or other comparable terminology.

 

Forward-looking statements appear in a number of places and include statements with respect to, among other things:

 

·                  the expected benefits of the Merger and the effects of the consummation of the Merger;

 

·                  the consequences of the satisfaction or waiver of the Merger conditions;

 

·                  the anticipated tax consequences of and the accounting treatment of the Merger;

 

·                  the expected results of the election to receive either the Cash Merger Consideration or the Unit Alternative;

 

·                  the value of Class A Common Units;

 

·                  the Partnership’s distribution policy and the Partnership’s ability to make cash distributions on its units or any changes in quarterly distributions;

 

·                  the Partnership’s future growth prospects, business strategy and other plans and objectives for future operations;

 

·                  the Partnership’s future capital expenditures and the availability of capital resources to fund the Partnership’s capital expenditures;

 

·                  the Partnership’s liquidity needs and meeting the Partnership’s going concern requirements, including the Partnership’s working capital deficit, anticipated funds and sources of financing for liquidity needs and the sufficiency of cash flows, and the Partnership’s estimation that it will have sufficient liquidity for a one-year period following the issuance of financial statements included in applicable filings with the U.S. Securities and Exchange Commission;

 

·                  the Partnership’s ability to refinance existing debt obligations, to raise additional debt and capital (including long-term debt financing for the Partnership’s shuttle tanker newbuildings), to fund capital expenditures, obtain loans from the Partnership’s sponsors, negotiate extensions or redeployments of existing assets and the sale of partial interests of certain assets;

 

·                  the Partnership’s ability to maintain and expand long-term relationships with major crude oil companies, including the Partnership’s ability to service fields until they no longer produce, and the negative impact of low oil prices on the likelihood of certain contract extensions;

 

·                  the derivation of a substantial majority of the Partnership’s revenue from a limited number of customers;

 

·                  any offers of shuttle tankers, floating storage and off-take (“FSO”) units, or FPSO units and related contracts from Teekay Corporation and the Partnership’s accepting such offers;

 

21


 

·                  the outcome and cost of claims and potential claims against the Partnership, including claims and potential claims by COSCO (Nantong) Shipyard relating to Logitel Offshore Rig II Pte Ltd. and Logitel Offshore Pte. Ltd and cancellation of Units for Maintenance and Safety (or “UMS”) newbuildings and by Damen Shipyard Group’s DSR Schiedam Shipyard relating to the Petrojarl I FPSO unit upgrade;

 

·                  the Partnership’s continued ability to enter into fixed-rate time charters and FPSO contracts with customers, including the effect of a potential continuation of lower oil prices to motivate charterers to use existing FPSO units on new projects;

 

·                  results of operations and revenues and expenses;

 

·                  maintaining a reduced level of vessel operating expenses, including services and spares and crewing costs;

 

·                  offshore and tanker market fundamentals, including the balance of supply and demand in the offshore and tanker market and spot tanker charter rates;

 

·                  the Partnership’s competitive advantage in the shuttle tanker market;

 

·                  the expected lifespan of the Partnership’s vessels;

 

·                  the estimated sales price or scrap value of the Partnership’s vessels;

 

·                  expectations as to any impairment of the Partnership’s vessels;

 

·                  acquisitions from third parties and obtaining offshore projects that the Partnership or Teekay Corporation bid on or may be awarded;

 

·                  certainty of completion, estimated delivery and completion dates, commencement of charter, intended financing and estimated costs for newbuildings, acquisitions and upgrades;

 

·                  expected employment and trading of older shuttle tankers;

 

·                  the Partnership’s ability to recover the initial discounted rate for the Petrojarl I FPSO unit five-year charter contract over the final 3.5 years of the contract;

 

·                  the Partnership’s expectations as to the chartering of unchartered vessels;

 

·                  the Partnership’s expectations regarding competition in the markets it serves;

 

·                  the Partnership’s entering into joint ventures or partnerships with companies;

 

·                  the Partnership’s ability to maximize the use of the Partnership’s vessels, including the re-deployment or disposition of vessels no longer under long-term time charter contracts;

 

·                  the duration of dry dockings;

 

·                  the future valuation of goodwill;

 

·                  the Partnership’s compliance with covenants under credit facilities;

 

·                  timing of settlement of amounts due to and from affiliates;

 

·                  the ability of the counterparties for the Partnership’s derivative contracts to fulfill their contractual obligations;

 

22


 

·                  the Partnership’s hedging activities relating to foreign exchange, interest rate and spot market risks;

 

·                  the Partnership’s exposure to foreign currency fluctuations, particularly in Norwegian Krone;

 

·                  increasing the efficiency of Partnership business and redeploying vessels as charters expire or terminate;

 

·                  the adequacy of the Partnership’s insurance coverage;

 

·                  the expected impact of heightened environmental and quality concerns of insurance underwriters, regulators and charterers;

 

·                  the expected cost of, and the Partnership’s ability to comply with, governmental regulations and maritime self-regulatory organization standards applicable to the Partnership’s business, including the expected cost to install ballast water treatment systems on the Partnership’s vessels in compliance with the International Marine Organization (the “IMO”) proposals and the effect of IMO 2020;

 

·                  anticipated taxation of the Partnership and its subsidiaries and taxation of unitholders and the adequacy of the Partnership’s reserves to cover potential liability for additional taxes;

 

·                  the Partnership’s intent to take the position that the Partnership is not a passive foreign investment company;

 

·                  the potential for the reorganization of the Partnership’s FPSO business to result in a lower cost organization going forward;

 

·                  the Partnership’s general and administrative expenses as a public company and expenses under service agreements with affiliates of Teekay Corporation and for reimbursements of fees and costs of the Partnership GP; and

 

·                  the ability to avoid labor disruptions and attract and retain highly skilled personnel.

 

These and other forward-looking statements are made based upon the Partnership’s current plans, expectations, estimates, assumptions, and beliefs concerning future events and therefore involve a number of risks and uncertainties, including those risks discussed under the section “Risk Factors.” The forward-looking statements contained in this information statement are based on the Partnership’s current expectations and beliefs concerning future developments and their potential effects on the Partnership. There can be no assurance that future developments will be those that the Partnership has anticipated.

 

The risks, uncertainties and assumptions involved are inherently subject to significant uncertainties and contingencies, many of which are beyond control. You are cautioned that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements.

 

The Partnership undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for the Partnership to predict all of these factors. Further, the Partnership cannot assess the impact of each such factor on business or the extent to which any factor, or combination of factors, may cause actual results to be materially different from those contained in any forward-looking statement.

 

23


 

RISK FACTORS

 

Risks Related to the Business of the Partnership

 

The Partnership’s cash flow depends substantially on the ability of its subsidiaries to make distributions to the Partnership.

 

The source of the Partnership’s cash flow includes cash distributions from its subsidiaries. The amount of cash that the Partnership’s subsidiaries can distribute to the Partnership principally depends upon the amount of cash they generate from their operations, which may fluctuate from quarter to quarter based on, among other things:

 

·                  the rates they obtain from their FPSO contracts, charters, voyages, management fees and contracts of affreightment (whereby the Partnership’s subsidiaries carry an agreed quantity of cargo for a customer over a specified trade route within a given period of time);

 

·                  the rates and the utilization of the Partnership’s towage fleet;

 

·                  the price and level of production of, and demand for, crude oil, particularly the level of production at the offshore oil fields the Partnership’s subsidiaries service under contracts of affreightment;

 

·                  the operating performance of the Partnership’s FPSO units, whereby receipt of incentive-based revenue from the Partnership’s FPSO units is dependent upon the fulfillment of the applicable performance criteria, including additional compensation from periodic production tariffs, which are based on the volume of oil produced, the price of oil, as well as other monthly or annual operational performance measures;

 

·                  the level of their operating costs, such as the cost of crews and repairs and maintenance;

 

·                  the number of off-hire days for their vessels and the timing of, and number of days required for, dry docking of vessels;

 

·                  the rates, if any, at which the Partnership’s subsidiaries may be able to redeploy shuttle tankers in the spot market as conventional oil tankers during any periods of reduced or terminated oil production at fields serviced by contracts of affreightment;

 

·                  the rates, if any, at which the Partnership’s subsidiaries may be able to redeploy vessels, particularly FPSO units, after they complete their charters or contracts and are redelivered to the Partnership;

 

·                  the ability of the Partnership’s subsidiaries to contract the Partnership’s newbuilding vessels and the rates thereon (if any);

 

·                  delays in the delivery of any newbuildings and the beginning of payments under charters relating to those vessels;

 

·                  prevailing global and regional economic and political conditions;

 

·                  currency exchange rate fluctuations; and

 

·                  the effect of governmental regulations and maritime self-regulatory organization standards on the conduct of business.

 

The actual amount of cash the Partnership’s subsidiaries have available for distribution also depends on other factors such as:

 

24


 

·                  the level of their capital expenditures, including for maintaining vessels or converting existing vessels for other uses and complying with regulations;

 

·                  their debt service requirements and restrictions on distributions contained in their debt agreements;

 

·                  fluctuations in their working capital needs;

 

·                  their ability to make working capital or long-term borrowings; and

 

·                  the amount of any cash reserves, including reserves for future maintenance capital expenditures, working capital and other matters, established by the GP Board at its discretion.

 

The amount of cash our subsidiaries generate from operations may differ materially from their profit or loss for the period, which will be affected by non-cash items and the timing of debt service payments. As a result of this and the other factors mentioned above, our subsidiaries may make cash distributions during periods when they record losses and may not make cash distributions during periods when they record net income.

 

The Partnership’s ability to pay distributions on its units, and the amount of distributions that the Partnership may pay in the future, largely depends upon the distributions that the Partnership receives from its subsidiaries, and the Partnership may not have sufficient cash from operations to enable it to pay distributions to its unitholders.

 

In January 2019 the Partnership announced that it would reduce its quarterly Common Unit cash distributions to zero, down from $0.01 per Common Unit in previous quarters, in order to reinvest additional cash in the Partnership’s business and further strengthen its balance sheet. The Partnership may not have sufficient available cash from operations each quarter to enable it to make a distribution to holders of its Post-Merger Common Units (as defined in “Description of the Amended and Restated Partnership Agreement”) (the “Post-Merger Common Unitholders”). The source of the Partnership’s earnings and cash flow includes cash distributions from its subsidiaries. Therefore, the amount of distributions the Partnership is able to make to its unitholders will fluctuate based on the level of distributions made to the Partnership by its subsidiaries. The Partnership’s subsidiaries may not make quarterly distributions at a level that will permit the Partnership to resume or increase its quarterly distributions on common units in the future. In addition, while the Partnership may make distributions, subject to Brookfield approval, to its Post-Merger Common Unitholders if the Partnership’s subsidiaries increase distributions to it, the timing of such resumption and the amount of any such distributions will not necessarily be comparable to the timing and amount of the increase in distributions made by the Partnership’s subsidiaries to the Partnership. The Partnership’s ability to distribute to its unitholders any cash it may receive from its subsidiaries is or may be limited by a number of factors, including, among others:

 

·                  interest expense and principal payments on any indebtedness the Partnership incurs;

 

·                  distributions on any preferred units the Partnership has issued or may issue;

 

·                  capital expenditures related to committed projects;

 

·                  changes in the Partnership’s cash flows from operations;

 

·                  restrictions on distributions contained in any of the Partnership’s current or future debt agreements;

 

·                  fees and expenses of the Partnership, the Partnership GP, its affiliates or third parties the Partnership are required to reimburse or pay, including expenses the Partnership incurs as a result of being a public company; and

 

25


 

·                  reserves the GP Board believes are prudent for the Partnership to maintain for the proper conduct of the Partnership’s business or to provide for future distributions, including reserves for future capital expenditures and for anticipated future credit needs.

 

Many of these factors reduce the amount of cash the Partnership may otherwise have available for distribution. The actual amount of cash that is available for distribution to the Partnership’s unitholders depends on several factors, many of which are beyond the control of the Partnership or the Partnership GP.

 

Current market conditions limit the Partnership’s access to capital and its growth prospects.

 

The Partnership has relied primarily upon bank financing and debt and equity offerings to fund its growth. Current depressed market conditions in the energy sector and for master limited partnerships have significantly reduced the Partnership’s access to capital, particularly equity capital. Debt financing or refinancing may not be available on acceptable terms, if at all. Issuing significant additional common equity given current market conditions would be highly dilutive and costly. Lack of access to debt or equity capital at reasonable rates will adversely affect the Partnership’s growth prospects and the Partnership’s ability to refinance debt and make distributions to its unitholders.

 

The Partnership’s ability to repay or refinance its debt obligations and to fund its capital expenditures and estimated funding gaps will depend on certain financial, business and other factors, many of which are beyond the Partnership’s control. To the extent the Partnership is able to finance these obligations and expenditures with cash from operations or by issuing debt or equity securities, the Partnership’s ability to make cash distributions may be diminished, its financial leverage may increase or its unitholders may be diluted. The Partnership’s business may be adversely affected if the Partnership needs to access other sources of funding.

 

To fund the Partnership’s existing and future debt obligations and capital expenditures, the Partnership will be required to use cash from operations, incur borrowings including securing debt financing on the Partnership’s under-levered and unmortgaged vessels, enter into sale-leaseback transactions, raise capital through the sale of assets, debt or additional equity securities and/or seek to access other financing sources, including financing or re-financing loans from Brookfield. The Partnership’s ability to draw on committed funding sources and potential funding sources and the Partnership’s future financial and operating performance will be affected by prevailing economic conditions and financial, business, regulatory and other factors, many of which are beyond the Partnership’s control. If the Partnership is unable to access additional bank financing and generate sufficient cash flow to meet its debt, capital expenditure and other business requirements, the Partnership may be forced to take actions such as:

 

·                  restructuring the Partnership’s debt;

 

·                  seeking additional debt or equity capital;

 

·                  selling additional assets or equity interests in certain assets or joint ventures;

 

·                  reducing, delaying or cancelling the Partnership’s business activities, acquisitions, investments or capital expenditures; or

 

·                  seeking bankruptcy protection.

 

Such measures might not be successful, and additional debt or equity capital may not be available on acceptable terms or enable the Partnership to meet its debt, capital expenditure and other obligations. Some of such measures may adversely affect the Partnership’s business and reputation. In addition, the Partnership’s financing agreements may restrict its ability to implement some of these measures. The sale of certain assets will reduce cash from operations and the cash available for distributions to its unitholders.

 

Use of cash from operations for capital purposes will reduce cash available for distribution to its unitholders. The Partnership’s ability to obtain bank financing or to access the capital markets for future offerings may be limited by the Partnership’s financial condition at the time of any such financing or offering as well as by adverse market

 

26


 

conditions in general. Even if the Partnership is successful in obtaining necessary funds, the terms of such financings could limit the Partnership’s ability to pay cash distributions to unitholders or operate the Partnership’s business as currently conducted. In addition, incurring additional debt may significantly increase the Partnership’s interest expense and financial leverage, and issuing additional equity securities, including the issuance of equity awards in connection with the Partnership’s current or any future long-term incentive plan, may result in significant unitholder dilution and would increase the aggregate amount of cash required to resume and make any increase in the Partnership’s quarterly distributions to unitholders.

 

Primarily as a result of the working capital deficit and committed capital expenditures, over the one-year period following the issuance of the Partnership’s consolidated financial statements for the quarter ended June 30, 2019, the Partnership will need to obtain additional sources of financing, in addition to amounts generated from operations, to meet the Partnership’s liquidity needs and the Partnership’s minimum liquidity requirements under its financial covenants. Additional potential sources of financing include refinancing debt facilities, increasing amounts available under existing debt facilities and entering into new debt facilities, including long-term debt financing related to the seven shuttle tanker newbuildings ordered. The Partnership is actively pursuing the funding alternatives described above, which the Partnership considers probable of completion based on the Partnership’s history of being able to raise and refinance loan facilities. The Partnership is in various stages of completion on these matters.

 

The Partnership has limited current liquidity.

 

As of June 30, 2019, the Partnership had total liquidity of $202.0 million and a working capital deficit of $390.6 million. The Partnership’s limited availability under existing credit facilities and the Partnership’s current working capital deficit could limit the Partnership’s ability to meet its financial obligations and growth prospects. The Partnership expects to manage its working capital deficit primarily with net operating cash flow, including extensions and redeployments of existing assets, debt financing and re-financings, and existing liquidity. However, there can be no assurance that any such funding will be available to the Partnership on acceptable terms, if at all.

 

The Partnership must make substantial capital expenditures to maintain the operating capacity of its fleet, which reduces cash available for distribution.

 

The Partnership must make substantial capital expenditures to maintain, over the long term, the operating capacity of its fleet. Maintenance capital expenditures include capital expenditures associated with dry docking a vessel, modifying an existing vessel or acquiring a new vessel to the extent these expenditures are incurred to maintain the operating capacity of the Partnership’s 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 vary significantly from quarter to quarter based on the number of vessels dry docked during that quarter. Certain repair and maintenance items are more efficient to complete while a vessel is in dry dock. Consequently, maintenance capital expenditures typically increase in periods when there is an increase in the number of vessels dry docked. Significant maintenance capital expenditures reduce the amount of cash that the Partnership has available to make distribution to its unitholders.

 

27


 

The Partnership requires substantial capital expenditures and generally is 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.

 

Currently, the total cost for an Aframax or Suezmax-size shuttle tanker is approximately $100 to $150 million, the cost of an FSO unit is approximately $50 to $250 million, the cost of an FPSO unit is approximately $200 million (for purchasing an older, idle FPSO unit) to over $2 billion for building a new FPSO unit, although actual costs vary significantly depending on the market price charged by shipyards, the size and specifications of the vessel, governmental regulations and maritime self-regulatory organization standards.

 

The Partnership regularly evaluates and pursues opportunities to provide marine transportation services and offshore oil production and storage services for new or expanding offshore projects. Under an omnibus agreement that the Partnership entered into in connection with its initial public offering, Teekay Corporation is required to offer to the Partnership certain shuttle tankers, FSO units and FPSO units that Teekay Corporation owns or may acquire in the future, provided the vessels are servicing contracts with remaining durations of greater than three years. The Partnership may also acquire other vessels that Teekay Corporation may offer it from time to time and pursue direct acquisitions from third parties and new offshore projects. Neither the Partnership nor Teekay Corporation may be awarded charters or contracts of affreightment relating to any of the projects the Partnership pursues or Teekay Corporation pursues, and the Partnership may choose not to purchase any vessels Teekay Corporation is required to offer to the Partnership under the omnibus agreement. If the Partnership elects pursuant to the omnibus agreement to obtain Teekay Corporation’s interests in any projects that Teekay Corporation may be awarded, or if the Partnership bids on and is awarded contracts relating to any offshore project, the Partnership will need to incur significant capital expenditures to buy Teekay Corporation’s interest in these offshore projects or to build the offshore units.

 

Although delivery of the completed vessel does not occur until much later (approximately two to three years from the time the order is placed), the Partnership typically must pay between 10% to 20% of the purchase price of a shuttle tanker upon signing the purchase contract. During the construction period, the Partnership generally is required to make installment payments on newbuildings prior to their delivery, in addition to incurring financing, miscellaneous construction and project management costs. If the Partnership finances these acquisition costs by issuing debt or equity securities, the Partnership will increase the aggregate amount of interest or cash required to make quarterly distributions to unitholders, if any, prior to generating cash from the operation of the newbuilding.

 

The Partnership’s substantial capital expenditures may reduce its cash available for distribution to its unitholders. Funding of any capital expenditures with debt may significantly increase the Partnership’s interest expense and financial leverage, and funding of capital expenditures through issuing additional equity securities may result in significant unitholder dilution. The Partnership’s failure to obtain the funds for future capital expenditures could have a material adverse effect on its business, results of operations and financial condition and on the Partnership’s ability to make cash distributions.

 

The Partnership’s substantial debt levels may limit its flexibility in obtaining additional financing, refinancing credit facilities upon maturity, pursuing other business opportunities and paying distributions.

 

As of June 30, 2019, the Partnership’s total debt was approximately $3.1 billion. The Partnership plans to increase its total debt relating to its shuttle tanker newbuildings and on its under-levered and unmortgaged vessels. If the Partnership is awarded contracts for additional offshore projects or otherwise acquires additional vessels or businesses, the Partnership’s consolidated debt may significantly increase. The Partnership may incur additional debt under these or future credit facilities. The Partnership’s level of debt could have important consequences to the Partnership, including:

 

·                  the Partnership’s ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes, and the Partnership’s ability to refinance its credit facilities may be impaired or such financing may not be available on favorable terms;

 

·                  limiting management’s discretion in operating the Partnership’s business and its flexibility in planning for, or reacting to, changes in the Partnership’s business and the industry in which it operates;

 

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·                  the Partnership will need a substantial portion of the its cash flow from operations to make principal and interest payments on the Partnership’s debt, reducing the funds that would otherwise be available for operations, future business opportunities and distributions to unitholders;

 

·                  the Partnership’s debt level may make it more vulnerable than its competitors with less debt to competitive pressures or a downturn in the Partnership’s industry, increases in interest rates or the economy generally;

 

·                  if the Partnership’s cash flow and capital resources are insufficient to fund debt service obligations, forcing the Partnership to reduce or delay investments and capital expenditures, sell assets, seek additional capital or restructure or refinance its indebtedness; and

 

·                  the Partnership’s debt level may limit its flexibility in responding to changing business and economic conditions.

 

The Partnership may not be able to generate sufficient cash to service all of its indebtedness and may be forced to take other actions to satisfy the obligations under its indebtedness, which may not be successful.

 

Given volatility associated with the Partnership’s business and industry, the Partnership’s future cash flow may be insufficient to meet its debt obligations and other commitments. Any insufficiency could negatively impact the Partnership’s business. A range of economic, competitive, business and industry factors, including those beyond the Partnership’s control, will affect its future financial performance, and, as a result, its ability to generate cash flow from operations and to pay its debt obligations. If the Partnership’s cash flows and capital resources are insufficient to fund its debt service obligations and other commitments, it may be forced to reduce or delay planned investments and capital expenditures, or to sell assets, seek additional financing in the debt or equity markets or restructure or refinance its indebtedness. The Partnership’s ability to restructure or refinance its indebtedness will depend on the condition of the capital markets and the Partnership’s financial condition at such time. Any refinancing of the Partnership’s indebtedness could be at higher interest rates and may require it to comply with more onerous covenants, which could further restrict its business operations. In addition, any failure to make payments of interest and principal on the Partnership’s outstanding indebtedness on a timely basis would likely result in a reduction of the Partnership’s credit rating, which could harm its ability to incur additional indebtedness. In the absence of sufficient cash flows and capital resources, the Partnership could face substantial liquidity problems and may be required to dispose of material assets or operations to meet its debt service and other obligations. The Partnership may not be able to consummate those dispositions or to obtain the proceeds that it could have realized from them and any proceeds may not be adequate to meet any debt service obligations then due. These alternative measures may not be successful and may not permit the Partnership to meet its debt service obligations.

 

Financing agreements containing operating and financial restrictions may restrict the Partnership’s business and financing activities.

 

The operating and financial restrictions and covenants in the Partnership’s current financing arrangements and any future financing agreements could adversely affect its ability to finance future operations or capital needs or to engage, expand or pursue its business activities. For example, the arrangements may restrict the ability of the Partnership and its subsidiaries to:

 

·                  incur additional indebtedness or guarantee indebtedness;

 

·                  change ownership or structure, including mergers, consolidations, liquidations and dissolutions;

 

·                  make dividends or distributions or repurchase or redeem the Partnership’s equity securities;

 

·                  prepay, redeem or repurchase certain debt;

 

·                  issue certain preferred units or similar equity securities;

 

·                  make certain negative pledges and grant certain liens;

 

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·                  sell, transfer, assign or convey assets;

 

·                  enter into transactions with affiliates;

 

·                  create unrestricted subsidiaries;

 

·                  make certain acquisitions and investments;

 

·                  enter into agreements restricting the Partnership’s subsidiaries’ ability to pay dividends;

 

·                  make loans and certain investments; and

 

·                  enter into a new line of business.

 

One revolving credit facility is guaranteed by the Partnership for all outstanding amounts and contains covenants that require the Partnership to maintain a minimum liquidity (cash, cash equivalents and undrawn committed revolving credit lines with at least six months to maturity) in an amount equal to the greater of $75.0 million and 5.0% of the Partnership’s total consolidated debt. One revolving credit facility is guaranteed by subsidiaries of the Partnership, and contains covenants that require Teekay Shuttle Tankers L.L.C. (or “ShuttleCo”) to maintain a minimum liquidity (cash, cash equivalents and undrawn committed revolving credit lines with at least six months to maturity) in an amount equal to the greater of $35.0 million and 5.0% of ShuttleCo’s total consolidated debt, and a net debt to total capitalization ratio no greater than 75.0%. The revolving credit facilities are collateralized by first-priority mortgages granted on 15 of the Partnership’s vessels, together with other related security. The ability of the Partnership to comply with covenants and restrictions contained in debt instruments may be affected by events beyond its control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, compliance with these covenants may be impaired. If restrictions, covenants, ratios or tests in the financing agreements are breached, a significant portion or all of the obligations may become immediately due and payable, and the lenders’ commitment to make further loans may terminate. This could lead to cross-defaults under other financing agreements and result in obligations becoming due and commitments being terminated under such agreements. The Partnership might not have, nor be able to obtain, sufficient funds to make these accelerated payments.

 

Obligations under the Partnership’s credit facilities are secured by certain vessels, and if it is unable to repay debt under the credit facilities, the lenders could seek to foreclose on those assets. The Partnership has several credit facilities that require it to maintain vessel values to drawn principal balance ratios of a minimum range of 100% to 125%. As of June 30, 2019, these ratios ranged from 124% to 451% and the Partnership was in compliance with the minimum ratios required. The vessel values used in calculating these ratios are the appraised values provided by third parties where available, or prepared by the Partnership based on second-hand sale and purchase market data. Changes in the shuttle tanker, towage and offshore installation, UMS, or FPSO markets could negatively affect these ratios.

 

Furthermore, the termination of any of the Partnership’s charter contracts by its customers could result in the repayment of the debt facilities to which the chartered vessels relate.

 

At June 30, 2019, the Partnership was in compliance with all covenants in its credit facilities and other long-term debt agreements.

 

Restrictions in the Partnership’s financing agreements may prevent the Partnership or its subsidiaries from paying distributions.

 

The payment of principal and interest on the Partnership’s and its subsidiaries’ debt reduces cash available for distribution to the Partnership and on its units. In addition, the Partnership’s and the Partnership’s subsidiaries’ financing agreements 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;

 

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·                  failure to notify the lenders of any material oil spill or discharge of hazardous material, or of any action or claim related thereto;

 

·                  breach or lapse of any insurance with respect to vessels securing the facilities;

 

·                  breach of certain financial covenants;

 

·                  failure to observe any other agreement, security instrument, obligation or covenant beyond specified cure periods in certain cases;

 

·                  default under other indebtedness;

 

·                  bankruptcy or insolvency events;

 

·                  failure of any representation or warranty to be materially correct;

 

·                  a change of control, as defined in the applicable agreement; and

 

·                  a material adverse effect, as defined in the applicable agreement.

 

The Partnership’s variable rate indebtedness subjects it to interest rate risk, which could cause the Partnership’s debt service obligations to increase significantly, as well as risks related to the phasing out of LIBOR.

 

The Partnership is subject to interest rate risk in connection with borrowings under its revolving facilities and secured term loan facilities, which bear interest at variable rates. Interest rate changes could impact the amount of its interest payments, and accordingly, its future earnings and cash flow, assuming other factors are held constant. The Partnership cannot assure you that any hedging activities entered into by it will be effective in fully mitigating its interest rate risk from its variable rate indebtedness.

 

In addition, the London Inter-bank Offered Rate (“LIBOR”) and certain other interest “benchmarks” may be subject to regulatory guidance and/or reform that could cause interest rates under the Partnership’s current and future debt agreements to perform differently than in the past or cause other unanticipated consequences. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has announced that it intends to stop encouraging or requiring banks to submit LIBOR rates after 2021, and it is unclear if LIBOR will cease to exist or if new methods of calculating LIBOR will evolve. While the agreements governing the Partnership’s revolving facilities and secured term loan facilities provide for an alternate method of calculating interest rates in the event that a LIBOR rate is unavailable, if LIBOR ceases to exist or if the methods of calculating LIBOR change from their current form, there may be adverse impacts on the financial markets generally and interest rates on borrowings under the Partnership’s revolving facilities and secured term loan facilities may be materially adversely affected.

 

The Partnership 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.

 

The Partnership has derived, and it believes that it will continue to derive, a substantial majority of revenues and cash flow from a limited number of customers. Shell, Petroleo Brasileiro S.A. (or Petrobras), Equinor ASA (or Equinor, formerly Statoil ASA) accounted for approximately 23%, 18% and 13%, respectively, of the Partnership’s consolidated revenues during 2018. Shell, Petrobras, Equinor and Premier Oil plc (or Premier Oil, formerly E.ON Ruhgras UK GP Limited or E.ON) accounted for approximately 31%, 17% 10% and 10%, respectively, of the Partnership’s consolidated revenues during 2017. Shell, Petrobras and Premier Oil accounted for approximately 30%, 19% and 10%, respectively, of the Partnership’s consolidated revenues during 2016. No other customer accounted for 10% or more of revenues during any of these periods.

 

The Partnership could lose a customer or the benefits of a contract if:

 

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·                  the customer fails to make payments because of its financial inability, disagreements with the Partnership or otherwise;

 

·                  the Partnership agrees to reduce the payments due to it under a contract because of the customer’s inability to continue making the original payments;

 

·                  the customer exercises certain rights to terminate the contract; or

 

·                  the customer terminates the contract because the Partnership fails to deliver the vessel within a fixed period of time, the vessel is lost or damaged beyond repair, there are serious deficiencies in the vessel or prolonged periods of off-hire, or the Partnership defaults under the contract.

 

If the Partnership 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, or terminate the charter, the Partnership may be unable to acquire an adequate replacement vessel or charter. Any replacement newbuilding would not generate revenues during its construction and the Partnership 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 the Partnership’s significant customers or a reduction in revenues from them could have a material adverse effect on its business, results of operations and financial condition and the Partnership’s ability to make cash distributions.

 

Allegations of improper payments may harm the Partnership’s reputation and business

 

In May 2016, a former executive of Transpetro, the transportation and logistics subsidiary of Petrobras, alleged in a plea bargain that a subsidiary of the Partnership’s, among a number of other third-party shipping companies, purportedly made improper payments to obtain shuttle tanker business with Transpetro. Such payments by the Partnership’s subsidiary were alleged to have been made between 2004 and 2006, prior to the Partnership’s initial public offering, in an aggregate amount of approximately 1.5 million Brazilian Reals (less than $0.4 million at the June 30, 2019 exchange rate). The Partnership conducted an extensive internal investigation, with the assistance of United States, Brazilian and Norwegian counsel and forensic accountants, to evaluate these allegations. Based on the information reasonably available and reviewed as part of the investigation, the investigation did not identify conclusive proof that the Partnership or any of its subsidiaries made the alleged improper payments or that any of the Partnership’s or its subsidiaries’ current or former employees intended for the alleged improper payments to be made. However, there is no assurance the conclusions of the investigation are accurate or will not be challenged, or that other information may exist or become available that would affect such conclusions, and such conclusions are not binding on regulatory or governmental authorities. It is uncertain how these allegations ultimately may affect the Partnership, if at all, including the possibility of penalties that could be assessed by relevant authorities. Any claims against the Partnership may adversely affect its reputation, business, financial condition and operating results. In addition, any dispute with Petrobras in connection with this matter may adversely affect the Partnership’s relationship with Petrobras. As of the date of this information statement, no legal or governmental proceedings are pending or, to the Partnership’s knowledge, contemplated against the Partnership relating to these allegations.

 

In January 2015, through the Libra joint venture, OOG-TK Libra GmbH & Co KG, a 50/50 joint venture of the Partnership and Ocyan S.A. (“Ocyan”) (formerly Odebrecht Oil & Gas S.A.), the Partnership finalized a contract with Petrobras to provide an FPSO unit for the Libra field located in the Santos Basin offshore Brazil. The contract is being serviced by the Pioneiro de Libra (“Libra”) FPSO unit, which commenced operations in late-2017 under a 12-year firm period fixed-rate contract with Petrobras and its international partners. Senior Odebrecht S.A. personnel, including a former executive of Ocyan, have been implicated in corruption charges related to improper payments to Brazilian politicians and political parties. Any adverse effect of these charges against Ocyan may harm the Partnership’s growth prospects, reputation, financial condition and results of operations.

 

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The Partnership depends on Teekay Corporation and certain joint venture partners to assist the Partnership in operating its businesses and competing in its markets.

 

The Partnership has entered into various services agreements with certain direct and indirect subsidiaries of Teekay Corporation pursuant to which those subsidiaries provide to the Partnership certain administrative and other services. During 2018, the Partnership acquired several of these direct and indirect subsidiaries from Teekay Corporation. The Partnership’s operational success and ability to execute its growth strategy depends on the performance of these services by the subsidiaries. The Partnership’s business could be harmed if such subsidiaries fail to perform these services satisfactorily or if they stop providing these services.

 

In addition, the Partnership has entered into, and expects to enter into additional, joint venture arrangements with third parties to expand its fleet and access growth opportunities. In particular, the Partnership relies on the expertise and relationships that its joint ventures and joint venture partners may have with current and potential customers to jointly pursue FPSO projects and provide assistance in competing in new markets.

 

The Partnership’s ability to compete for offshore oil marine transportation, processing, offshore accommodation, support for maintenance and modification projects, towage and offshore installation and storage projects and to enter into new charters or contracts of affreightment and expand the Partnership’s customer relationships depends on its ability to maintain its status as a reputable service provider in the industry. In addition, the Partnership’s ability to compete depends on its ability to leverage its relationship with Brookfield, or the Partnership’s joint venture partners and their reputation and relationships in the shipping and offshore industries. If Brookfield or the Partnership’s joint venture partners suffer material damage to their reputation or relationships, it may harm the ability of the Partnership or other subsidiaries 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 the Partnership’s ability to do any of the things described above is impaired, it could have a material adverse effect on the Partnership’s business, results of operations and financial condition and the Partnership’s ability to make cash distributions.

 

A decline in oil prices may adversely affect the Partnership’s growth prospects and results of operations.

 

A decline in oil prices may adversely affect the Partnership’s business, results of operations and financial condition and the Partnership’s ability to make cash distributions, as a result of, among other things:

 

·                  a reduction in exploration for or development of new offshore oil fields, or the delay or cancellation of existing offshore projects as energy companies lower their capital expenditures budgets, which may reduce the Partnership’s growth opportunities;

 

·                  a reduction in, or termination of, production of oil at certain fields the Partnership services, which may reduce its revenues under volume-based contracts of affreightment, production-based and oil price-based components of its FPSO unit contracts or life-of-field contracts;

 

·                  lower demand for vessels of the types the Partnership owns and operates, which may reduce available charter rates and revenue to the Partnership upon redeployment of the its vessels, in particular FPSO units, following expiration or termination of existing contracts or upon the initial chartering of vessels, or which may result in extended periods of the Partnership’s vessels being idle between contracts;

 

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·                  customers potentially seeking to renegotiate or terminate existing vessel contracts, failing to extend or renew contracts upon expiration, or seeking to negotiate cancelable contracts;

 

·                  the inability or refusal of customers to make charter payments to the Partnership due to financial constraints or otherwise; or

 

·                  declines in vessel values, which may result in losses to the Partnership upon vessel sales or impairment charges against its earnings.

 

The Partnership’s growth depends on continued growth in demand for offshore oil transportation and processing and storage services.

 

The Partnership’s long-term growth strategy focuses on expansion in the shuttle tanker and FPSO sectors. Accordingly, the Partnership’s 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 the Partnership services 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 the Partnership 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, storage services, offshore accommodation or towage and offshore installation services would have a material adverse effect on the Partnership’s future growth and could harm its business, results of operations and financial condition.

 

Because payments under the Partnership’s contracts of affreightment are based on the volume of oil transported and a portion of the payments under certain of its FPSO contracts are based on the volume of oil produced and the price of oil, utilization of its shuttle tanker fleet, the success of its shuttle tanker business and the revenue from its FPSO units depends upon continued production from existing or new oil fields, which is beyond the Partnership’s control and generally declines naturally over time.

 

A portion of the Partnership’s shuttle tankers operates under contracts of affreightment. Payments under these contracts of affreightment are based upon the volume of oil transported, which depends upon the level of oil production at the fields the Partnership services under the contracts. Payments made to the Partnership under certain of its FPSO contracts are partially based on an incentive component, which is determined by the volume of oil produced. Oil production levels are affected by several factors, all of which are beyond the Partnership’s control, including: geologic factors, including general declines in production that occur naturally over time; mechanical failure or operator error; the rate of technical developments in extracting oil and related infrastructure and implementation costs; the availability of necessary drilling and other governmental permits; the availability of qualified personnel and equipment; strikes, employee lockouts or other labor unrest; and regulatory changes. In addition, the volume of oil produced 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 the Partnership services may decline from existing levels. If such a reduction occurs, the spot market rates in the conventional oil tanker trades at which the Partnership may be able to

 

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redeploy the affected shuttle tankers may be lower than the rates previously earned by the vessels under the contracts of affreightment. Low spot market rates for the shuttle tankers or any idle time prior to the commencement of a new contract or the Partnership’s inability to redeploy any of its FPSO units at an acceptable rate may have an adverse effect on its business and operating results.

 

The duration of many of the Partnership’s shuttle tanker, FSO and FPSO contracts is the life of the relevant oil field or is subject to extension by the field operator or vessel charterer. If the oil field no longer produces oil or is abandoned or the contract term is not extended, the Partnership will no longer generate revenue under the related contract and will need to seek to redeploy affected vessels.

 

Some of the Partnership’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 or the field is abandoned for any reason, the Partnership no longer will generate revenue under the related contract. Other shuttle tanker, FSO and FPSO contracts under which the Partnership’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 the Partnership is unable to promptly redeploy any affected vessels at rates at least equal to those under the contracts, if at all, its operating results will be harmed. Any potential redeployment may not be under long-term contracts, which may affect the stability of the Partnership’s cash flow and its ability to make cash distributions.

 

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. In addition, FPSO units typically require substantial capital investments prior to being redeployed to a new field and production service contract. These factors increase the redeployment risk of FPSO units. Unless extended, one of the Partnership’s FPSO production service contracts will expire in 2019 and a further contract will expire in 2020. The Partnership’s clients may also terminate certain of its FPSO production service contracts prior to their expiration under specified circumstances. Any idle time prior to the commencement of a new contract or the Partnership’s inability to redeploy the vessels at acceptable rates may have an adverse effect on its business and operating results.

 

Future adverse economic conditions, including disruptions in the global credit markets, could adversely affect the Partnership’s results of operations.

 

Commencing in 2007 and 2008, the global economy experienced an economic downturn and crisis in the global financial markets that produced illiquidity in the capital markets, market volatility, and increased exposure to interest rate and credit risks and reduced access to capital markets. Additionally, although global crude oil and gas prices have experienced moderate recovery since falling from the highs of mid-2014, prices have not returned to those same highs and this has adversely affected energy and master limited partnership capital markets and available sources of financing. If there is economic instability in the future, the Partnership may face restricted access to the capital markets or secured debt lenders, such as the Partnership’s revolving credit facilities. This decreased access to such resources could have a material adverse effect on the Partnership’s business, financial condition and results of operations.

 

Future adverse economic conditions or other developments may affect the Partnership’s customers’ ability to charter its vessels and pay for its services and may adversely affect its business and results of operations.

 

Future adverse economic conditions or other developments relating directly to the Partnership’s customers may lead to a decline in its customers’ operations or ability to pay for its services, which could result in decreased demand for its vessels and services. The Partnership’s customers’ inability to pay for any reason could also result in their default on the Partnership’s current contracts and charters. The decline in the amount of services requested by the Partnership’s customers or their default on the Partnership’s contracts with them could have a material adverse effect on the Partnership’s business, financial condition and results of operations.

 

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The results of the Partnership’s shuttle tanker and FPSO 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 one of the Partnership’s primary existing offshore oil markets, this seasonal repair and maintenance activity contributes to quarter-to-quarter volatility in the Partnership’s 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 portion of the Partnership’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 pattern of transport demand. Additionally, the Partnership’s North Sea FPSO units, the Petrojarl Knarr and Voyageur Spirit FPSO units, operate higher in the winter months, as favorable weather conditions in the summer months provide opportunities for repairs and maintenance to the Partnership’s units, which generally reduces oil production. When the Partnership redeploys affected shuttle tankers as conventional oil tankers while platform maintenance and repairs are conducted, the overall financial results for the North Sea shuttle tanker operations may be negatively affected as the rates in the conventional oil tanker markets are usually lower than contract of affreightment rates. In addition, the Partnership seeks to coordinate some of the general dry-docking schedule of its fleet with this seasonality, which may result in lower revenues and increased dry-docking expenses during the summer months.

 

The Partnership’s recontracting of existing vessels and its future growth depends on its ability to expand relationships with existing customers and obtain new customers, for which the Partnership will face substantial competition.

 

One of the Partnership’s principal objectives is to enter into additional long-term, fixed-rate time charters and contracts of affreightment, including the redeployment of the Partnership’s assets as their current charter contracts expire. 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, FPSO, towage and offshore installation vessel and UMS 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 or conversions 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.

 

The Partnership expects competition for providing services for potential offshore projects from other experienced companies, including state-sponsored entities. The Partnership’s competitors may have greater financial resources than the Partnership. This increased competition may cause greater price competition for charters. As a result of these factors, the Partnership may be unable to expand its relationships with existing customers or obtain new customers on a profitable basis, if at all, which would have a material adverse effect on the Partnership’s business, results of operations and financial condition and the Partnership’s ability to make cash distributions to unitholders.

 

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Delays in the operational start-up of FPSO units or deliveries of newbuilding vessels could harm the Partnership’s operating results.

 

The operational start-up of FPSO units, the completion of final performance tests of FPSO units, or the deliveries of any newbuilding vessels the Partnership may order or undertake could be delayed, which would delay the Partnership’s receipt of revenues under the charters or other contracts related to the units or vessels. In addition, under some charters the Partnership may enter into, if the operational start-up or the Partnership’s delivery of the newbuilding vessel to the Partnership’s customer is delayed, the Partnership 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, the Partnership may be responsible for substantial liquidated damages.

 

The operational start-up of FPSO units or completion and deliveries of newbuildings or of vessel conversions or upgrades 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 events, 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 the operational start-up of an FPSO unit or the delivery of a newbuilding vessel is materially delayed, it could adversely affect the Partnership’s results of operations and financial condition and its ability to make cash distributions to unitholders.

 

Charter rates for towage and offshore installation vessels may fluctuate substantially over time and may be lower when the Partnership is attempting to charter its towage and offshore installation vessels, which could adversely affect operating results. Any changes in charter rates for shuttle tankers, FSO or FPSO units and UMS could also adversely affect redeployment opportunities for those vessels.

 

The Partnership’s ability to charter its towage and offshore installation vessels will depend, among other things, on the state of the towage market. Towage contracts are highly competitive and are based on the level of projects undertaken by the customer base. There also exists some volatility in charter rates for shuttle tankers, FSO and FPSO units and UMS, which could affect the Partnership’s ability to charter or recharter these vessels at acceptable rates, if at all.

 

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Over time, the value of the Partnership’s vessels may decline, which could adversely affect the Partnership’s operating results.

 

·                  Values for shuttle tankers, FSO and FPSO units, towage and offshore installation vessels and UMS 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;

 

·                  competition from more technologically advanced vessels;

 

·                  the cost of retrofitting or modifying existing vessels, as a result of technological advances in vessel design or equipment, changes in applicable environmental or other regulations or standards, or otherwise; and

 

·                  a decrease in oil reserves in the fields in which the Partnership’s FPSO units or other vessels are or might be deployed.

 

Vessel values may decline from existing levels. If the operation of a vessel is not profitable, or if the Partnership cannot re-deploy a vessel at attractive rates upon termination of its contract, rather than continue to incur costs to maintain and finance the vessel, the Partnership may seek to dispose of it. The Partnership’s inability to dispose of the vessel at a reasonable value could result in a loss on its sale and adversely affect the Partnership’s results of operations and financial condition. Further, if the Partnership determines at any time that a vessel’s future useful life and earnings require the Partnership to impair its value on the Partnership’s financial statements, the Partnership may need to recognize a significant charge against its earnings.

 

The Partnership has recognized write-downs on certain vessels and may recognize additional vessel write-downs in the future, which could adversely affect the Partnership’s operating results.

 

During 2018, the Partnership recognized aggregate vessel write-downs of $223.4 million, net of a net gain on sale of vessels, relating to the Partnership’s determination that seven of its vessels were impaired and that their carrying values should be written down to their respective estimated fair values based on a discounted cash flow approach or using appraised values. The non-cash charges related to these or other impairments or write-downs reduced the Partnership’s operating results for the applicable period. The Partnership may recognize additional vessel write-downs in the future, which could adversely affect the Partnership’s operating results.

 

Climate change and greenhouse gas restrictions may adversely impact the Partnership’s operations and markets.

 

Due to concern over the risk of climate change, a number of countries have adopted, or are considering the adoption of, regulatory frameworks to reduce greenhouse gas emissions. These regulatory measures include, among others, adoption of cap and trade regimes, carbon taxes, increased efficiency standards, and incentives or mandates for renewable energy. Compliance with changes in laws, regulations and obligations relating to climate change could increase the Partnership’s costs related to operating and maintaining its vessels and require the Partnership to install new emission controls, acquire allowances or pay taxes related to its greenhouse gas emissions, or administer and manage a greenhouse gas emissions program. Revenue generation and strategic growth opportunities may also be adversely affected.

 

Adverse effects upon the oil industry relating to climate change may also adversely affect demand for the Partnership’s services. Although the Partnership does not expect that demand for oil will reduce dramatically over the short term, in the long term, climate change may reduce the demand for oil or increased regulation of greenhouse gases may create greater incentives for use of alternative energy sources. Any long-term material adverse effect on the oil industry could have a significant adverse financial and operational impact on the Partnership’s business that the Partnership cannot predict with certainty at this time.

 

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The Partnership may be unable to make or realize expected benefits from acquisitions, and implementing the Partnership’s growth strategy through acquisitions may harm its business, financial condition and operating results.

 

The Partnership’s long-term growth strategy includes selectively acquiring or constructing shuttle tankers and FPSO units as needed for approved projects only after charters for the projects have been awarded to the Partnership, rather than ordering vessels on a speculative basis. Historically, there have been very few purchases of existing vessels and businesses in the FPSO segments. Factors that may contribute to a limited number of acquisition opportunities for FPSO units in the near term include the relatively small number of independent FPSO fleet owners. In addition, competition from other companies, many of which have significantly greater financial resources than do the Partnership could reduce its acquisition opportunities or cause it 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, the Partnership’s acquisition growth strategy exposes it to risks that may harm its business, financial condition and operating results, including risks that the Partnership 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 the Partnership’s growing business and fleet;

 

·                  decrease the Partnership’s liquidity by using a significant portion of available cash or borrowing capacity to finance acquisitions;

 

·                  significantly increase the Partnership’s interest expense or financial leverage if the Partnership incurs 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.

 

Unlike newbuilding vessels, existing vessels typically do not carry warranties as to their condition. While the Partnership generally inspects existing vessels prior to purchase, such an inspection would normally not provide the Partnership with as much knowledge of a vessel’s condition as the Partnership would possess if it had been built for the Partnership and operated by the Partnership during its life. Repairs and maintenance costs for existing vessels are difficult to predict and may be substantially higher than for vessels the Partnership has operated since they were built. These costs could decrease the Partnership’s cash flow and reduce its liquidity.

 

The Partnership may not be successful in its entry into new markets, which may have competitive dynamics that differ from markets in which the Partnership already participates, and the Partnership may be unsuccessful in gaining acceptance in these markets from customers or competing against other companies with more experience or larger fleets or resources in these markets. The Partnership also may not be successful in employing the HiLoad DP unit, the Petrojarl Varg FPSO unit, the Ostras FPSO unit, the Arendal Spirit UMS or the ALP Ace towage and offshore installation vessel, each of which is currently in lay-up, on contracts sufficient to recover the Partnership’s investment in the vessels.

 

The Partnership’s and many of the Partnership’s customers’ substantial operations outside the United States expose the Partnership to political, governmental and economic instability, which could harm its operations.

 

Because the Partnership’s operations are primarily conducted outside of the United States, they may be affected by economic, political and governmental conditions in the countries where the Partnership engages in business or where its vessels are registered. Any disruption caused by these factors could harm the Partnership’s

 

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business, including by reducing the levels of oil exploration, development and production activities in these areas. The Partnership derives some of its revenues from shipping oil from politically unstable regions, in particular, the Partnership’s operations in Brazil and elsewhere in South America. Conflicts in these regions have included attacks on ships and other efforts to disrupt shipping. Hostilities or other political instability in regions where the Partnership operates or where it may operate could have a material adverse effect on the growth of 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, the Middle East or elsewhere as a result of terrorist attacks, hostilities or otherwise may limit trading activities with those countries, which could also harm the Partnership’s business and ability to make cash distributions. Finally, governments could requisition one or more of the Partnership’s vessels, which is most likely during war or national emergency. Any such requisition would cause a loss of the vessel and could harm the Partnership’s cash flow and financial results.

 

Marine transportation and oil production is inherently risky, particularly in the extreme conditions in which many of the Partnership’s vessels operate. An incident involving significant loss of product or environmental contamination by any of the Partnership’s vessels could harm its reputation and business.

 

Vessels and their cargoes, and oil production facilities the Partnership services, are at risk of being damaged or lost because of events such as:

 

·                  marine disasters;

 

·                  adverse weather;

 

·                  mechanical failures;

 

·                  grounding, capsizing, fire, explosions and collisions;

 

·                  piracy;

 

·                  cyber-attacks;

 

·                  human error; and

 

·                  war and terrorism.

 

A portion of the Partnership’s shuttle tanker fleet and its towage fleet, two FSO units, and the Voyageur Spirit and Petrojarl Knarr FPSO units operate in the North Sea. Harsh weather conditions in this region and other regions in which the Partnership’s vessels operate may increase the risk of collisions, oil spills, or mechanical failures.

 

An accident involving any of the Partnership’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 affected by the spill;

 

·                  governmental fines, penalties or restrictions on conducting business;

 

·                  higher insurance rates; and

 

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·                  damage to the Partnership’s reputation and customer relationships generally.

 

Any of these results could have a material adverse effect on the Partnership’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.

 

The Partnership’s insurance may not be sufficient to cover losses that may occur to its property or as a result of its operations.

 

The operation of shuttle tankers, conventional oil tankers, FSO and FPSO units, towage and offshore installation vessels, and UMS, is inherently risky. All risks may not be adequately insured against, and any particular claim may not be paid by insurance. In addition, all but three of the Partnership’s vessels, the Petrojarl Knarr FPSO unit, the Itajai FPSO unit and the Libra FPSO unit, are not insured against loss of revenues resulting from vessel off-hire time, based on the cost of this insurance compared to the Partnership’s off-hire experience. Any significant off-hire time of the Partnership’s vessels could harm its business, operating results and financial condition. Any claims relating to the Partnership’s operations covered by insurance would be subject to deductibles, and since it is possible that a large number of claims may be brought, the aggregate amount of these deductibles could be material. Certain insurance coverage is maintained through mutual protection and indemnity associations, and as a member of such associations the Partnership may be required to make additional payments over and above budgeted premiums if member claims exceed association reserves.

 

The Partnership 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 or natural disaster could exceed the insurance coverage, which could harm the Partnership’s business, financial condition and operating results. Any uninsured or underinsured loss could harm the Partnership’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 regulatory organizations.

 

Changes in the insurance markets attributable to terrorist attacks or political change 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.

 

The Partnership may experience operational problems with vessels that reduce revenue and increase costs.

 

Shuttle tankers, FSO and FPSO units, towage and offshore installation vessels and UMS are complex and their operations are technically challenging. Marine transportation and oil production operations are subject to mechanical risks and problems as well as environmental risks. 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 the Partnership’s business, financial condition and operating results.

 

Terrorist attacks, piracy, increased hostilities or war could lead to further economic instability, increased costs and disruption of business.

 

Terrorist attacks, piracy and the current or future conflicts in the Middle East, West Africa, Libya and elsewhere, and political change may adversely affect the Partnership’s business, operating results, financial condition, and ability to raise capital and future growth. Continuing hostilities in the Middle East especially among Qatar, Saudi Arabia, UAE, Iran, Yemen and elsewhere 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 the Partnership’s services, impact its operations and affect its ability to conduct business.

 

In addition, oil facilities, shipyards, vessels, pipelines, oil fields or other infrastructure could be targets of future terrorist attacks or warlike operations and the Partnership’s vessels could be targets of pirates, hijackers, terrorists or warlike operations. Any such attacks could lead to, among other things, bodily injury or loss of life, vessel

 

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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, piracy, hijacking or other events beyond the Partnership’s control that adversely affect the distribution, production or transportation of oil to be shipped by the Partnership could entitle customers to terminate the charters and impact the use of shuttle tankers under contracts of affreightment, towage and offshore installation vessels under voyage charters and FPSO units under FPSO contracts, which would harm the Partnership’s cash flow and business.

 

Acts of piracy on ocean-going vessels have continued to be a risk, which could adversely affect the Partnership’s business.

 

Acts of piracy have historically affected ocean-going vessels trading in regions of the world such as the South China Sea, Gulf of Guinea and the Indian Ocean off the coast of Somalia. While there continues to be a significant risk of piracy in the Gulf of Aden and Indian Ocean, recently there have been increases in the frequency and severity of piracy incidents off the coast of West Africa. If these piracy attacks result in regions in which the Partnership’s vessels are deployed being named on the Joint War Committee Listed Areas, war risk insurance premiums payable for such coverage can increase significantly and such insurance coverage may be more difficult to obtain. In addition, crew costs, including costs which are incurred to the extent the Partnership employs on-board armed security guards and escort vessels, could increase in such circumstances. The Partnership may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on the Partnership. In addition, hijacking as a result of an act of piracy against the Partnership’s vessels, or an increase in cost or unavailability of insurance for its vessels, could have a material adverse impact on its business, financial condition and results of operations.

 

A cyber-attack could materially disrupt the Partnership’s business.

 

The Partnership relies on information technology systems and networks in its operations and the administration of its business. Cyber-attacks have increased in number and sophistication in recent years. The Partnership’s operations could be targeted by individuals or groups seeking to sabotage or disrupt its information technology systems and networks, or to steal data. A successful cyber-attack could materially disrupt the Partnership’s operations, including the safety of its operations, or lead to unauthorized release of information or alteration of information on its systems. Any such attack or other breach of the Partnership’s information technology systems could have a material adverse effect on its business and results of operations.

 

The Partnership’s failure to comply with data privacy laws could damage its customer relationships and expose it to litigation risks and potential fines.

 

Data privacy is subject to frequently changing rules and regulations, which sometimes conflict among the various jurisdictions and countries in which the Partnership provides services and continue to develop in ways which the Partnership cannot predict, including with respect to evolving technologies such as cloud computing. The European Union has adopted the General Data Privacy Regulation (the “GDPR”), a comprehensive legal framework to govern data collection, use and sharing and related consumer privacy rights which took effect in May 2018. The GDPR includes significant penalties for non-compliance. The Partnership’s failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impairment to the Partnership’s reputation in the marketplace, which could have a material adverse effect on its business, financial condition and results of operations.

 

The offshore shipping and storage industry is subject to substantial environmental and other regulations, which may significantly limit operations or increase expenses.

 

The Partnership’s operations are affected by extensive and changing international, national and local environmental protection laws, regulations, treaties and conventions in force in international waters, the jurisdictional waters of the countries in which the Partnership’s vessels operate, as well as the countries of the Partnership’s vessels’ registration, including those governing oil spills, discharges to air and water, and the handling and disposal of hazardous substances and wastes. Many of these requirements are designed to reduce the risk of oil spills and other pollution. In addition, the Partnership believes that the heightened environmental, quality and security concerns of insurance underwriters, regulators and charterers will lead to additional regulatory requirements, including enhanced risk assessment and security requirements and greater inspection and safety requirements on vessels. The Partnership

 

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expects to incur substantial expenses in complying with these laws and regulations, including expenses for vessel modifications and changes in operating procedures. For example, the Partnership estimates that the installation of approved ballast water management systems pursuant to the IMO’s Ballast Water Management Convention may cost between $2 million and $3 million per vessel when required to be installed.

 

These requirements can affect the resale value or useful lives of the Partnership’s vessels, require a reduction in cargo capacity, ship modifications or operational changes or restrictions, lead to decreased availability of insurance coverage for environmental matters or result in the denial of access to certain jurisdictional waters or ports, or detention in, certain ports. Under local, national and foreign laws, as well as international treaties and conventions, the Partnership could incur material liabilities, including cleanup obligations, in the event that there is a release of petroleum or hazardous substances from the Partnership’s vessels or otherwise in connection with its operations. The Partnership could also become subject to personal injury or property damage claims relating to the release of or exposure to hazardous materials associated with its operations. In addition, failure to comply with applicable laws and regulations may result in administrative and civil penalties, criminal sanctions or the suspension or termination of the Partnership’s operations, including, in certain instances, seizure or detention of its vessels.

 

Exposure to currency exchange rate fluctuations results in fluctuations in cash flows and operating results.

 

The Partnership currently is paid partly in Norwegian Krone, British Pound and Brazilian Real under some of the Partnership’s charters and FPSO contracts. The strengthening or weakening of the U.S. Dollar relative to the Norwegian Krone, Brazilian Real, and British Pound may result in significant decreases or increases, respectively, in the Partnership’s revenues and vessel operating expenses. The Partnership has entered into foreign currency forward contracts to economically hedge portions of the Partnership’s forecasted expenditures denominated in Norwegian Krone and Euro. In the past the Partnership entered into cross-currency swaps to economically hedge the foreign exchange risk on the principal and interest payments on the Partnership’s previously outstanding Norwegian Krone bonds.

 

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 the Partnership’s cash flows.

 

A significant portion of seafarers that crew certain of the Partnership’s vessels and Norwegian-based onshore operational staff that provide services to the Partnership are employed under collective bargaining agreements. The Partnership may become subject to additional labor agreements in the future. The Partnership may suffer labor disruptions if relationships deteriorate with the seafarers or the unions that represent them. The collective bargaining agreements may not prevent labor disruptions, particularly when the agreements are being renegotiated. Salaries are typically renegotiated annually or bi-annually for seafarers and annually for onshore operational staff and higher compensation levels will increase the Partnership’s costs of operations. Although these negotiations have not caused labor disruptions in the past, any future labor disruptions could harm the Partnership’s operations and could have a material adverse effect on its business, results of operations and financial condition.

 

The Partnership and certain of its joint venture partners may be unable to attract and retain qualified, skilled employees or crew necessary to operate the Partnership’s business, or may have to pay substantially increased costs for its employees and crew.

 

The Partnership’s success depends in large part on its ability to attract and retain highly skilled and qualified personnel. In crewing the Partnership’s vessels, the Partnership requires technically skilled employees with specialized training who can perform physically demanding work. Any inability the Partnership experiences in the future to hire, train and retain a sufficient number of qualified employees could impair the its ability to manage, maintain and grow its business.

 

Teekay Corporation and its affiliates may engage in competition with the Partnership.

 

Teekay Corporation and its affiliates may engage in competition with the Partnership. Pursuant to an omnibus agreement the Partnership entered into in connection with its initial public offering, Teekay Corporation, Teekay LNG

 

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Partners L.P. (NYSE: TGP) (or Teekay LNG) and their respective controlled affiliates (other than the Partnership and the Partnership’s subsidiaries) generally have agreed not to engage in, acquire or invest in any business that owns, operates or charters (a) dynamically-positioned shuttle tankers (other than those operating in the conventional oil tanker trade under contracts with a remaining duration of less than three years, excluding extension options), (b) FSO units or (c) FPSO units without the consent of the Partnership GP.

 

If there is a change of control of Teekay Corporation or of the general partner of Teekay LNG, the non-competition provisions of the omnibus agreement may terminate, which termination could have a material adverse effect on the Partnership’s business, results of operations and financial condition and the Partnership’s ability to make payments on its debt securities and cash distributions to unitholders.

 

The Partnership GP and its other affiliates own a controlling interest in the Partnership and have conflicts of interest and limited fiduciary duties, which may permit them to favor their own interests to those of other unitholders.

 

As of June 30, 2019, affiliates of Brookfield held approximately 73% of the Partnership’s outstanding Common Units and all of the interests in the Partnership GP. After the Merger, although the Partnership GP will have certain duties to the Partnership and its unitholders, the directors and officers of the Partnership GP will continue to have a fiduciary duty to manage the Partnership GP in a manner beneficial to its members. Furthermore, certain directors and an officer of the Partnership GP are directors or officers of affiliates of the Partnership GP. Conflicts of interest may arise between Brookfield and its affiliates, including the Partnership GP, on the one hand, and the Partnership and its unitholders, on the other hand. As a result of these conflicts, the Partnership GP may favor its own interests and the interests of its affiliates over the interests of the Partnership’s unitholders. These conflicts include, among others, the following situations:

 

·                  neither the Partnership Agreement (or the Amended and Restated Partnership Agreement) nor any other agreement requires or will require Brookfield or its affiliates (other than the Partnership GP) to pursue a business strategy that favors the Partnership or utilizes its assets, and Brookfield’s respective officers and directors have fiduciary duties to make decisions in the best interests of the shareholders of Brookfield, which may be contrary to the Partnership’s interests;

 

·                  four directors of the Partnership GP serve as officers, management or directors of Brookfield or its affiliates;

 

·                  the Partnership GP is allowed to take into account the interests of parties other than the Partnership, such as Brookfield, in resolving conflicts of interest, which has the effect of limiting its fiduciary duty to the Partnership’s unitholders;

 

·                  the Partnership GP has restricted its liability and reduced its fiduciary duties under the laws of the Marshall Islands, while also restricting the remedies available to the Partnership’s unitholders and unitholders are treated as having agreed to the modified standard of fiduciary duties and to certain actions that may be taken by the Partnership GP, all as set forth in the Partnership Agreement and to be set forth in the Amended and Restated Partnership Agreement;

 

·                  the Partnership GP approves the Partnership’s annual budget and the amount and timing of its asset purchases and sales, capital expenditures, borrowings, reserves and issuances of additional partnership securities, each of which can affect the amount of cash that is available for distribution to the Partnership’s unitholders;

 

·                  in some instances, the Partnership GP may cause the Partnership to borrow funds in order to permit the payment of cash distributions;

 

·                  the Partnership GP can determine when certain costs incurred by it and its affiliates are reimbursable by the Partnership;

 

·                  the Partnership Agreement does not (and the Amended and Restated Partnership Agreement will not) restrict the Partnership from paying the Partnership GP or its affiliates for any services rendered to the Partnership

 

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on terms that are fair and reasonable or entering into additional contractual arrangements with any of these entities;

 

·                  the Partnership GP intends to limit its liability regarding the Partnership’s contractual and other obligations;

 

·                  the Partnership GP controls the enforcement of obligations owed to the Partnership by it and its affiliates; and

 

·                  the Partnership GP decides whether to retain separate counsel, accountants or others to perform services for the Partnership.

 

The fiduciary duties of directors of the Partnership GP may conflict with those of the officers and directors of Brookfield and Teekay Corporation.

 

The Partnership GP’s officers and directors have fiduciary duties to manage the Partnership’s business in a manner beneficial to the Partnership and its partners. However, four directors of the Partnership GP also serve as officers, management or directors of Brookfield and/or its affiliates and one director of the Partnership GP also serves as an officer and director of Teekay Corporation and/or its affiliates. Consequently, these directors may encounter situations in which their fiduciary obligations to Brookfield or Teekay Corporation, or their other affiliates, on one hand, and the Partnership, on the other hand, are in conflict. The resolution of these conflicts may not always be in the best interest of the Partnership or its unitholders.

 

The international nature of the Partnership’s operations may make the outcome of any bankruptcy proceedings difficult to predict.

 

The Partnership was formed under the laws of the Republic of the Marshall Islands and its subsidiaries were formed or incorporated under the laws of the Marshall Islands, Norway, Singapore and certain other countries besides the United States, and the Partnership conducts operations in countries around the world. Consequently, in the event of any bankruptcy, insolvency, liquidation, dissolution, reorganization or similar proceeding involving the Partnership or any of its subsidiaries, bankruptcy laws other than those of the United States could apply. The Partnership has limited operations in the United States. If the Partnership becomes a debtor under U.S. bankruptcy law, bankruptcy courts in the United States may seek to assert jurisdiction over all of the Partnership’s assets, wherever located, including property situated in other countries. There can be no assurance, however, that the Partnership would become a debtor in the United States, or that a U.S. bankruptcy court would be entitled to, or accept, jurisdiction over such a bankruptcy case, or that courts in other countries that have jurisdiction over the Partnership and its operations would recognize a U.S. bankruptcy court’s jurisdiction if any other bankruptcy court would determine it had jurisdiction.

 

The Partnership Agreement restricts (and the Amended and Restated Partnership Agreement will restrict) the Partnership GP’s fiduciary duties to the Partnership’s unitholders and restricts the remedies available to unitholders for actions taken by the Partnership GP.

 

The Partnership Agreement contains provisions (and the Amended and Restated Partnership Agreement will contain provisions) that restrict the standards to which the Partnership GP would otherwise be held by Marshall Islands law. For example, the Amended and Restated Partnership Agreement will:

 

·                  permit the Partnership GP to make a number of decisions in its individual capacity, as opposed to in its capacity as the Partnership GP. Where the Partnership Agreement permits, the Partnership GP 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 the Partnership, its subsidiaries or its unitholders. Decisions made by the Partnership GP in its individual capacity are made by Brookfield and not by the GP Board. Examples include the exercise of call rights, voting rights with respect to the Common Units they own, registration rights and their determination whether to consent to any merger or consolidation of the partnership;

 

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·                  provide that to the fullest extent permitted by law, the Partnership GP shall not owe any duties, including fiduciary duties, or have any liability to the Class A Common Unitholders, other than the implied contractual covenant of good faith and fair dealing;

 

·                  provide that the Partnership GP is entitled to make other decisions in “good faith” if it reasonably believes that the decision is in the Partnership’s best interests;

 

·                  generally provide that affiliated transactions and resolutions of conflicts of interest not approved by the Conflicts Committee of the GP Board and not involving a vote of Class B Common Unitholders must be on terms no less favorable to the Partnership than those generally being provided to or available from unrelated third parties or be “fair and reasonable” to the Partnership and that, in determining whether a transaction or resolution is “fair and reasonable,” the Partnership GP may consider the totality of the relationships between the parties involved, including other transactions that may be particularly favorable or advantageous to the Partnership; and

 

·                  provide that the Partnership GP and its officers and directors will not be liable for monetary damages to the Partnership or the Partnership’s 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 Partnership GP or those other persons acted in bad faith or engaged in fraud, willful misconduct or gross negligence.

 

Fees and cost reimbursements, which the Partnership GP determines for services provided to the Partnership, may be substantial and reduce the Partnership’s cash available for distribution to its unitholders and for debt service.

 

The Partnership pay fees for any services provided to it and its operating subsidiaries by certain subsidiaries of Teekay Corporation, and the Partnership reimburses the Partnership GP for all expenses it incurs on the Partnership’s behalf. These fees are negotiated on the Partnership’s behalf by the Partnership GP, and the Partnership GP can determine when certain costs are reimbursed. The payment of any fees to Teekay Corporation and reimbursement of expenses to the Partnership GP could adversely affect the Partnership’s ability to pay cash distributions to unitholders and debt service.

 

The Partnership GP, which is owned by Brookfield, makes all decisions on the Partnership’s behalf, subject to the limited voting rights of the Partnership’s unitholders. Even if public unitholders are dissatisfied, they cannot remove the Partnership GP without the consent of Brookfield.

 

Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting the Partnership’s business and, therefore, limited ability to influence management’s decisions regarding the Partnership’s business. Unitholders did not elect the Partnership GP or the GP Board and have no right to elect the Partnership GP or the GP Board on an annual or other continuing basis. Brookfield, which owns the Partnership GP, appoints all but one of the GP Board, with Teekay Corporation appointing one member of the members of the GP Board. The Partnership GP makes all decisions on the Partnership’s behalf. If the unitholders are dissatisfied with the performance of the Partnership GP, they have little ability to remove the Partnership GP.

 

After completion of the Merger, the vote of the holders of at least 66 2/3% of all outstanding Class B Common Units voting together as a single class is required to remove the Partnership GP. In addition, Class A Common Unitholders’ voting rights will be further restricted by the Amended and Restated Partnership Agreement provision providing that any units held by a person that owns 20% or more of any class or series of units then outstanding, other than the Partnership GP, its affiliates, their transferees, and persons who acquired such units with the prior approval of the GP Board, cannot vote on any matter. The Amended and Restated Partnership Agreement will also contain provisions limiting the ability of unitholders to call meetings or to acquire information about the Partnership’s operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.

 

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Control of the Partnership GP may be transferred to a third party without unitholder consent.

 

The Partnership GP may transfer the Partnership GP 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, the Partnership Agreement does not restrict the ability of the members of the Partnership GP from transferring their respective membership interests in the Partnership GP to a third party. In the event of any such transfer, the new members of the Partnership GP would be in a position to replace the GP Board and officers of the Partnership GP with their own choices and to control the decisions taken by the GP Board and the Partnership GP’s officers.

 

In establishing cash reserves, the Partnership GP may reduce the amount of cash available for distribution to unitholders.

 

The Partnership Agreement requires the Partnership GP to deduct from the Partnership’s available cash reserves that it determines are necessary to fund the Partnership’s future operating expenditures. These reserves affect the amount of cash available for distribution by the Partnership to its unitholders. In addition, the Partnership Agreement requires the Partnership GP each quarter to deduct from operating surplus estimated maintenance capital expenditures, as opposed to actual expenditures, which could impact the amount of available cash for distribution.

 

Unitholders may have liability to repay distributions.

 

Under certain circumstances, unitholders may have to repay amounts wrongfully distributed to them. Under the Marshall Islands Act, the Partnership may not make a distribution to unitholders to the extent that at the time of the distribution, after giving effect to the distribution, all the Partnership’s liabilities, other than liabilities to partners on account of their partnership interests and liabilities for which the recourse of creditors is limited to specified property of the Partnership’s, exceed the fair value of the Partnership’s assets, except that the fair value of property that is subject to a liability for which the recourse of creditors is limited shall be included in the assets of the Partnership only to the extent that the fair value of that property exceeds that liability. 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 distribution that it violated Marshall Islands law will be liable to the 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.

 

The Partnership has 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.

 

The Partnership’s partnership affairs are governed by the 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, for nonresident limited partnerships such as the Partnership, it is to be applied and construed to make the laws of the Marshall Islands, with respect to the subject matter of the Marshall Islands Act, uniform with the laws of the State of Delaware and, so long as it does not conflict with the Marshall Islands Act or decisions of certain Marshall Islands courts, the non-statutory law (or case law) of the courts of the State of Delaware is adopted as the law of the Marshall Islands. 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, the Partnership cannot predict whether Marshall Islands courts would reach the same conclusions as Delaware courts. For example, the rights of the Partnership’s unitholders and the fiduciary responsibilities of the Partnership GP 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 the Partnership GP and its officers and directors than would unitholders of a limited partnership formed in the United States.

 

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Because the Partnership is organized under the laws of the Marshall Islands, it may be difficult to serve the Partnership with legal process or enforce judgments against the Partnership, the Partnership’s directors or the Partnership’s management.

 

The Partnership is organized under the laws of the Marshall Islands, and all of the Partnership’s assets are located outside of the United States. The Partnership’s business is operated primarily from the offices of the Partnership’s subsidiaries in Bermuda, Norway, Brazil, the United Kingdom, Singapore and the Netherlands. In addition, the Partnership GP 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 to bring an action against the Partnership or against these individuals in the United States. Even if successful in bringing an action of this kind, the laws of the Marshall Islands and of other jurisdictions may prevent or restrict the enforcement of a judgment against the Partnership’s assets or the assets of the Partnership GP or its directors and officers.

 

As a Marshall Islands partnership with several of its subsidiaries being Marshall Islands entities, the Partnership’s operations may be subject to economic substance requirements of the European Union, which could harm the Partnership’s business.

 

Finance ministers of the European Union (“EU”) rate jurisdictions for tax transparency, governance, real economic activity and corporate tax rate. Countries that do not adequately cooperate with the finance ministers are put on a “grey list” or a “blacklist”. Various countries, including the Republic of the Marshall Islands, are currently on the blacklist. Bermuda has been removed from this list. EU member states have agreed upon a set of measures, which they can choose to apply against the listed countries, including increased monitoring and audits, withholding taxes, special documentation requirements and anti-abuse provisions. The European Commission has stated it will continue to support member states’ efforts to develop a more coordinated approach to sanctions for the listed countries in 2019. EU legislation prohibits EU funds from being channeled or transited through entities in countries on the blacklist. In July 2019, the Registrar of Corporations for the Republic of the Marshall Islands announced that the Republic of the Marshall Islands expects to be removed from the blacklist following the September and October meetings of the EU Code of Conduct Group and the Economic and Financial Affairs Council. However, it is not assured that such removal will occur at that time, or at all.

 

The effect of the EU blacklist, and any noncompliance by the Partnership with any legislation adopted by applicable countries to achieve removal from the list, could have a material adverse effect on the Partnership’s business, financial condition and operating results.

 

Risks Related to the Merger

 

The Merger is subject to closing conditions that, if not satisfied or waived, will result in the Merger not being consummated.

 

The obligations of the Partnership to effect the Merger are subject to certain customary closing conditions, including that (i) the representations and warranties of Parent and Merger Sub relating to the ownership of equity of the Partnership are true and correct, except for any de minimis inaccuracies, as of the date of the Merger Agreement and the closing date of the Merger, (ii) the other representations and warranties of Parent and Merger Sub are true and correct as of the date of the Merger Agreement and as of the closing date of the Merger, except where the failure of such representations and warranties to be true and correct would not reasonably be expected to have a material adverse effect on the ability of Parent and Merger Sub to consummate the transactions contemplated by the Merger Agreement and (iii) Parent and Merger Sub have each performed or complied with, in all material respects, all covenants and obligations required to be performed by them under the Merger Agreement. If these conditions are not satisfied or waived, the Merger will not occur, Common Unitholders will not receive the Cash Merger Consideration or Unit Alternative, as applicable, and the market price of the Common Units may decline. For more information, see “The Merger Agreement—Conditions to Consummation of the Merger.”

 

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Financial projections regarding the Partnership may not prove accurate.

 

In performing its financial analyses and rendering its fairness opinions, Evercore, the financial advisor to the Conflicts Committee, reviewed and relied on, among other things, internal financial analyses of and forecasts for the Partnership. These financial projections include assumptions about the Partnership, including with regards to future operating cash flows, expenditures and income. These financial projections were not prepared with a view toward public disclosure or toward compliance with Generally Accepted Accounting Principles in the United States (“GAAP”), the published guidelines of the SEC, or the guidelines established by the American Institute of Certified Public Accountants. The financial projections should not be regarded as an indication that the Partnership considered or considers the projections to be a reliable or accurate prediction of future performance. The financial projections are subject to significant economic, competitive, industry and other uncertainties and may not be achieved in full, at all or within projected timeframes. The failure of the Partnership to achieve projected results, including projected cash flows, could have a material adverse effect on the Partnership, its financial position and its ability to increase its distributions on its common units following the Merger.

 

The Partnership will incur substantial transaction-related costs in connection with the Merger.

 

The Partnership expects to incur substantial expenses in connection with the Merger, including fees paid to legal, financial and accounting advisors, filing fees and printing costs, and costs incurred by the Partnership in connection with the amendment of certain terms of the notes of the Partnership, which Brookfield has agreed to pay if the Merger is not completed. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time.

 

The Partnership is subject to litigation related to the Merger.

 

The Partnership and Brookfield are subject to litigation challenging the Merger. The plaintiffs in such litigation may make further efforts to enjoin the Merger or seek monetary relief from Brookfield or the Partnership. Brookfield and the Partnership cannot predict the outcome of the existing or any potential litigation, nor can they predict the amount of time and expense that will be required to resolve such litigation. An unfavorable resolution of any such litigation concerning the Merger could delay or prevent its consummation. In addition, the costs of defending the litigation, even if resolved in favor of Brookfield and the Partnership, could be substantial and such litigation could distract the Partnership from pursuing the consummation of the Merger and other potentially beneficial business opportunities. See “Special Factors—Certain Legal Matters.”

 

The Class A Common Units to be received by the electing Unaffiliated Unitholders as a result of the Merger will have different rights than the Common Units.

 

Following consummation of the Merger, Unaffiliated Unitholders will no longer hold Common Units, but will instead receive the Cash Merger Consideration or hold Class A Common Units. There are important differences between the rights associated with the Class A Common Units and the rights associated with the Common Units. While the Class A Common Units will be economically equivalent to the Common Units, and Class A Common Unitholders will have rights equivalent to Common Unitholders with respect to, without limitation, distributions and allocations of income, gain, loss or deductions, the Class A Common Units will not have any voting rights except as required by the Marshall Islands Act, but only to the extent that such voting rights under the Marshall Islands Act may not be waived. Please read “Description of the Class A Common Units—Voting Rights” below.

 

Tax Risks Related to the Merger

 

No ruling has been requested with respect to the tax consequences of the Merger.

 

Although it is intended that the Unit Alternative will qualify as an exchange described in Section 351 of the Code and that the U.S. holders of units will generally not recognize any gain or loss as a result of the Merger (other than gain that may be recognized with respect to cash received in lieu of fractional shares), no ruling has been or will be requested from the U.S. Internal Revenue Service, (“IRS”), with respect to the tax consequences of the Merger.

 

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Under certain circumstances, the Merger may be treated as a taxable transaction, and result in tax liability, for a limited partner, depending on such limited partner’s particular situation.

 

Unitholders will be allocated taxable income and gain of the Partnership through the time of the Merger and will not receive any additional distributions attributable to that income.

 

Unitholders will be allocated their proportionate share of the Partnership’s taxable income and gain for the period ending at the time of the Merger. Unitholders will have to report, and pay taxes on, such income even though they will not receive any additional cash distributions attributable to such income.

 

U.S. tax authorities could treat the Partnership as a “passive foreign investment company,” which could have adverse U.S. federal income tax consequences to U.S. holders.

 

A non-U.S. entity treated as a corporation for U.S. federal income tax purposes will be treated as a “passive foreign investment company” (“PFIC”), for such purposes in any taxable year for which either (a) at least 75% of its gross income consists of “passive income,” or (b) at least 50% of the average value of the entity’s assets is attributable to assets that produce or are held for the production of “passive income.” For purposes of these tests, “passive income” includes dividends, interest, 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). By contrast, income derived from the performance of services does not constitute “passive income.”

 

There are legal uncertainties involved in determining whether the income derived from the Partnership’s time-chartering activities constitutes rental income or income derived from the performance of services, including the decision in Tidewater Inc. v. United States, 565 F.3d 299 (5th Cir. 2009), which held that income derived from certain time-chartering activities should be treated as rental income rather than services income for purposes of a foreign sales corporation provision of the Internal Revenue Code of 1986 (as amended, the “Code”). However, the IRS stated in an Action on Decision (“AOD 2010-01”) that it disagrees with, and will not acquiesce to the way that the rental versus services framework was applied to the facts in the Tidewater decision, and in its discussion stated that the time charters at issue in Tidewater would be treated as producing services income for PFIC purposes. The IRS’s statement with respect to Tidewater cannot be relied upon or otherwise cited as precedent by taxpayers. Consequently, in the absence of any binding legal authority specifically relating to the statutory provisions governing PFICs, there can be no assurance that the IRS or a court would not follow the Tidewater decision in interpreting the PFIC provisions of the Code. Nevertheless, based on the current composition of the Partnership’s assets and operations (and those of the Partnership’s subsidiaries), the Partnership intends to take the position that the Partnership is not now and have never been a PFIC. No assurance can be given, however, that this position would be sustained by a court if contested by the IRS, or that the Partnership would not constitute a PFIC for any future taxable year if there were to be changes in the Partnership’s assets, income or operations.

 

If the IRS were to determine that the Partnership is or have been a PFIC for any taxable year during which a U.S. Holder (as defined by the IRS) held units, such U.S. Holder would face adverse tax consequences.

 

The Partnership is subject to taxes, which reduce its cash available for distribution to partners.

 

The Partnership or its subsidiaries are subject to tax in certain jurisdictions in which the Partnership or its subsidiaries are organized, own assets or have operations, which reduces the amount of the Partnership’s cash available for distribution. In computing the Partnership’s tax obligations in these jurisdictions, it is required to take various tax accounting and reporting positions on matters that are not entirely free from doubt and for which the Partnership has not received rulings from the governing authorities. The Partnership cannot assure you that upon review of these positions, the applicable authorities will agree with the Partnership’s positions. A successful challenge by a tax authority could result in additional tax imposed on the Partnership or its subsidiaries, further reducing the cash available for distribution. The Partnership has established reserves in its financial statements that the Partnership believes are adequate to cover its liability for any such additional taxes. The Partnership cannot assure you, however, that such reserves will be sufficient to cover any additional tax liability that may be imposed on the Partnership’s subsidiaries. In addition, changes in the Partnership’s operations or ownership could result in additional tax being imposed on the Partnership or on its subsidiaries in jurisdictions in which operations are conducted. For example, Brookfield Business Partners L.P. owns less than 50% of the value of the Partnership’s outstanding common units and

 

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therefore the Partnership believes that it does not satisfy the requirements of the exemption from U.S. taxation under Section 883 of the Code and the Partnership’s U.S. source income is subject to taxation under Section 887 of the Code. The amount of such tax will depend upon the amount of income the Partnership earns from voyages into or out of the United States, which is not within the Partnership’s complete control.

 

Post-Merger Common Unitholders may be subject to income tax in one or more non-U.S. countries, including Canada, as a result of owning the Partnership’s units if, under the laws of any such country, the Partnership is considered to be carrying on business there. Such laws may require unitholders to file a tax return with, and pay taxes to, those countries.

 

The Post-Merger Common Unitholders will be subject to tax in one or more countries, including Canada, as a result of owning the Partnership’s units if, under the laws of any such country, the Partnership is considered to be carrying on business there. If unitholders are subject to tax in any such country, unitholders may be required to file a tax return with, and pay taxes to, that country based on their allocable share of the Partnership’s income. The Partnership may be required to reduce distributions to unitholders on account of any withholding obligations imposed upon the Partnership by that country in respect of such allocation to unitholders. The United States may not allow a tax credit for any foreign income taxes that unitholders directly or indirectly incur.

 

Risks Related to Ownership of Class A Common Units

 

Class A Common Unitholders generally have no voting rights and, if the Merger is completed, Brookfield will have control over key decision making as a result of its control over all of our voting units. As a result, Class A Common Unitholders will not have any ability to influence unitholder decisions.

 

Class A Common Unitholders have no voting rights, unless required by the Marshall Islands Act, but only to the extent that such voting rights under the Marshall Islands Act may not be waived. As a result, all matters submitted to unitholders will be decided by the vote of Class B Common Unitholders. If the Merger is completed, Brookfield will control the voting power of our common units and will have the ability to control the outcome of all matters submitted to our unitholders for approval. This concentrated control eliminates other unitholders’ ability to influence corporate matters and, as a result, the Partnership may take actions that its unaffiliated unitholders do not view as beneficial.

 

If the Merger is completed, the Common Units will be deregistered from the NYSE and the Partnership will no longer be required to comply with the Exchange Act with respect to the Common Units. This may limit the information available to Class A Common Unitholders.

 

If the Merger is completed, the Common Units will cease to be listed on the NYSE and will be deregistered under the Exchange Act. While the Partnership currently intends to continue its listing of the Preferred Units on the NYSE, there can be no assurance as to how long such listing will be maintained or how long the Partnership will remain subject to Exchange Act reporting requirements. If the Partnership ceases to be subject to Exchange Act reporting requirements, the scope of public information regarding its business, financial condition and results of operations may be significantly reduced and Class A Common Unitholders may not have the benefit of corporate governance and other requirements with which the Partnership is currently required to comply under the NYSE rules and the Exchange Act.

 

Deregistration of the Common Units could also have other adverse effects, including limitations on the Partnership’s ability to issue additional securities for financing or other purposes, or to otherwise arrange for any financing that it may need in the future, and a reduction in confidence in the Partnership by current or prospective employees, customers, suppliers, creditors and others with whom it has, or may seek to initiate, business relationships.

 

The Class A Common Units are non-transferable.

 

The Class A Common Units will be non-transferable, meaning that they may not be sold, assigned, conveyed, transferred, pledged or in any other manner disposed of, other than in certain limited circumstances as shall be set forth in the Amended and Restated Partnership Agreement to be entered into in connection with consummation of the Merger, the form of which is attached as Annex B hereto. The Class A Common Units will not be registered securities

 

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and they will not be listed or traded on any stock exchange. Therefore, the Class A Common Units will not be liquid and Class A Common Unitholders will not be permitted to sell or transfer them, except for in certain limited circumstances. As a result, the Class A Common Unitholders may be required to bear the economic risk of holding the Class A Common Units for an indefinite period of time.

 

Class A Common Unitholders will not have a consent right in respect of a redemption of the Class A Common Units.

 

Under the terms of the Class A Common Units, upon the occurrence of a Brookfield Sales Event (as defined in “Description of the Class A Common Units—Automatic Redemption of Class A Common Units”) the Partnership will be required to redeem all or a portion of the outstanding Class A Common Units with no action or consent required on the part of the Class A Common Unitholders. Such a redemption would be triggered by any sale of Class B Common Units by Brookfield TKC Acquisition L.P., Brookfield TOLP or certain of their affiliates, and in such circumstances, Class A Common Unitholders will receive the same consideration for the redemption of their Class A Common Units as Brookfield receives for the sale of its Class B Common Units, subject to applicable legal, tax, or regulatory constraints. There can be no assurance as to when a Brookfield Sales Event will occur, if at all, or that any resulting redemption of the Class A Common Units will be at a price per unit in excess of the Cash Merger Consideration.

 

The Partnership may issue additional Class A Common Units or Class B Common Units to Brookfield Affiliated Holders, which could adversely affect the interests of Class A Common Unitholders.

 

The Partnership will likely require additional capital, which may be raised through various means, including issuances of additional securities of the Partnership, to support future growth initiatives, address upcoming debt maturities, ensure sufficient operating liquidity and support other future initiatives relating to the Partnership’s capital structure, such as opportunistic refinancings or the repurchase of the Partnership’s outstanding securities. Raising additional equity capital to address such needs may result in significant dilution of Class A Common Unitholders. In raising such capital, the Partnership may issue, without unitholder approval, additional Class A Common Units or Class B Common Units with rights that could dilute the value of the Class A Common Units. The issuance of additional Class B Common Units or other common units could increase the number of outstanding units without simultaneously increasing the size of our asset base. Class A Common Unitholders may avoid dilution of the value of their Class A Common Units in connection with certain issuances to Brookfield by exercising their preemptive rights to purchase additional Class A Common Units at the same price as Brookfield purchases Class B Common Units or other common units. However, there can be no assurance that such additional Class A Common Units will be offered at a price that is equal to or greater than the Cash Merger Consideration or otherwise attractive to the Class A Common Unitholders. For more information, see “Description of the Class A Common Units—Preemptive Rights.”

 

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SPECIAL FACTORS

 

This section of the information statement describes the material aspects of the proposed Merger. This section may not contain all of the information that is important to you. You should carefully read this entire information statement, including the full text of the Merger Agreement, for a more complete understanding of the Merger. A copy of the Merger Agreement is attached as Annex A hereto and incorporated by reference herein.

 

Effects of the Merger

 

Upon the terms and subject to the conditions of the Merger Agreement and in accordance with Marshall Islands law, the Merger Agreement provides for the merger of Merger Sub with and into the Partnership, with the Partnership continuing as the surviving entity. After the completion of the Merger, the certificate of limited partnership of the Partnership in effect immediately prior to the Effective Time will be the certificate of limited partnership of the surviving entity, until amended in accordance with its terms and applicable law, and the Partnership Agreement in effect immediately prior to the Effective Time will be amended and restated substantially in the form attached to the Merger Agreement as Exhibit A and, as so amended and restated, will be the agreement of limited partnership of the surviving entity from and after the Effective Time, until amended in accordance with its terms and applicable law.

 

As a result of the Merger, at the Effective Time, each issued and outstanding Common Unit, other than Sponsor Units, will convert into the right to receive $1.55 in cash per Common Unit without any interest thereon and reduced by any applicable tax withholding. As an alternative to receiving the Cash Merger Consideration, each Unaffiliated Unitholder of record immediately prior to the Election Deadline will have the option to elect to forego the right to receive the Cash Merger Consideration with respect to all of such holder’s Common Units and instead receive one newly designated Class A Common Unit per Common Unit with respect to all of such holder’s Common Units. The Class A Common Units will be economically equivalent to the Sponsor Units following the closing of the Merger, but will have limited voting rights and limited transferability. See “Description of the Class A Common Units.”

 

Each Sponsor Unit issued and outstanding immediately prior to the Effective Time will be reclassified as a Class B Common Unit but will be otherwise unaffected by the Merger and will be unchanged and remain outstanding, and no consideration will be delivered in respect thereof. Parent will also be issued a number of Class B Common Units equal to the number of Common Units converted into the right to receive the Cash Merger Consideration.

 

Each Series A Preferred Unit, Series B Preferred Unit and Series E Preferred Unit issued and outstanding as of immediately prior to the Effective Time will be unaffected by the Merger and will be unchanged and remain outstanding, and no consideration will be delivered in respect thereof.

 

As of the Effective Time, all of the Common Units converted into the right to receive the Cash Merger Consideration or the Unit Alternative will no longer be outstanding and will automatically be canceled and cease to exist.

 

Each Warrant to purchase Common Units that is outstanding and unexercised as of immediately prior to the Effective Time will be converted into the right to receive the Cash Merger Consideration that a Common Unit issuable (at the Effective Time) upon exercise of such Warrant immediately prior to the Effective Time would have been entitled to receive pursuant to the Merger Agreement. For the avoidance of doubt, in the event that no Common Units would be issuable upon exercise of a Warrant immediately prior to the Effective Time (which would occur in the event that the exercise price of such Warrant exceeds the Cash Merger Consideration), such Warrant will automatically be cancelled and cease to exist, and no consideration will be delivered in respect thereof. As of the date hereof, the exercise price of each of the outstanding Warrants exceeds the Cash Merger Consideration. Accordingly, the Partnership anticipates that each of the Warrants will automatically be canceled and cease to exist as a result of the Merger and that no consideration will be delivered in respect thereof.

 

Each Phantom Unit issued under the Partnership Long-Term Incentive Plan providing for the grant of awards of Common Units that has not vested or been settled prior to the Effective Time will be converted into a phantom unit award with respect to the same number of Class A Common Units as the number of Common Units to which such

 

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Phantom Unit was subject, and otherwise with substantially the same terms and conditions as were applicable to such Phantom Unit immediately prior to the Effective Time (including with respect to vesting and termination-related vesting provisions) as applied to the award of Phantom Units for which they were exchanged, except for terms rendered inoperative by reason of the transactions contemplated by the Merger Agreement or for such other administrative or ministerial changes as in the reasonable and good faith determination of the Partnership GP are appropriate to conform the administration of such Phantom Unit.

 

Each Restricted Unit issued under the Partnership Long-Term Incentive Plan providing for the grant of awards of Common Units that has not vested or been settled prior to the Effective Time will be converted into a Restricted Unit award with respect to the same number of Class A Common Units as the number of Common Units to which such Restricted Unit was subject, and otherwise with substantially the same terms and conditions as were applicable to such Restricted Unit immediately prior to the Effective Time (including with respect to vesting and termination-related vesting provisions) as applied to the award of Restricted Units for which they were exchanged, except for terms rendered inoperative by reason of the transactions contemplated by the Merger Agreement or for such other administrative or ministerial changes as in the reasonable and good faith determination of the Partnership GP are appropriate to conform the administration of such Restricted Unit.

 

The IDRs issued and outstanding immediately prior to the Effective Time will automatically be canceled and cease to exist, and no consideration will be delivered in respect thereof.

 

The general partner interest in the Partnership issued and outstanding immediately prior to the Effective Time will be unaffected by the Merger, will remain outstanding and no consideration will be delivered in respect thereof.

 

Background of the Merger

 

Brookfield currently beneficially owns and controls, in the aggregate, 301,022,398 Common Units representing approximately 73.3% of the total number of Common Units outstanding, and Warrants to purchase 67,255,000 Common Units, which Warrants provide no right to vote on matters subject to Common Unit vote prior to the exercise thereof. Brookfield also currently indirectly owns and controls 100% of the Partnership’s general partner interest and 100% of the Partnership’s IDRs through Brookfield TOGP’s ownership of Partnership GP.

 

The Partnership was formed as a Marshall Islands limited partnership in August 2006 by Teekay Corporation (NYSE: TK), a portfolio manager and project developer in the marine midstream space. In September 2017, affiliates of Brookfield purchased from an affiliate of Teekay Corporation a 49% interest in Partnership GP, approximately 60% of the Common Units and certain warrants to purchase additional Common Units from the Partnership. In July 2018, Brookfield exercised its option to acquire an additional 2% interest in Partnership GP from an affiliate of Teekay Corporation. As a result, since July 2018, Brookfield has held a controlling ownership interest in Partnership GP and a majority of the outstanding Common Units.

 

Brookfield, the GP Board and Management regularly review operational and strategic opportunities. In connection with these reviews, the parties from time to time evaluate potential transactions that would further their respective strategic objectives.

 

The landscape for master limited partnerships (“MLPs”) has changed considerably since 2015. Between Brookfield’s acquisition of a 49% interest in Partnership GP and a majority of the outstanding Common Units on September 25, 2017 and the last trading day before the Merger Agreement was announced on October 1, 2019, the Alerian MLP Index, a leading gauge of energy MLPs whose constituents represent over 90% of total energy MLP market capitalization, declined by nearly 20%.

 

In addition, in the past several years, although there have been a number of positive changes to the Partnership’s balance sheet, the business has been challenged to raise capital on a cost-effective basis, and thus has been unable to take advantage of growth opportunities or return value to its unitholders. Since its initial investment two years ago, Brookfield has contributed approximately $425 million of additional capital in support of the Partnership’s liquidity needs and refinancing initiatives. Despite these initiatives, the Partnership continues to face challenges relating to its capital structure, and Brookfield believes that the business may require additional sponsor support in order to strengthen the balance sheet and allow Management to execute on their strategic plan.

 

On April 16, 2019, representatives of Brookfield met with representatives of Teekay Corporation to discuss certain matters relating to the business of the Partnership, including the possibility that the Partnership may require additional capital in the future in order to refinance existing indebtedness, fund future growth and maintain sufficient operating capital. In this context, Brookfield and Teekay Corporation discussed the willingness of both parties to fund

 

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additional capital into the Partnership in the event that the Partnership was unable to raise future third party capital on acceptable terms. It was noted that Teekay Corporation’s willingness and ability to fund additional capital to the Partnership would need to be determined as such needs arose, taking into consideration its obligations in respect of its core gas and tanker businesses and its own capital requirements at such time, which would be prioritized over the needs of the Partnership. Over the course of discussions, the parties touched on the possibility of Teekay Corporation selling its remaining investment in the Partnership and Partnership GP to Brookfield.

 

On April 26, 2019, representatives of Brookfield and Teekay Corporation discussed Brookfield’s acquisition of Teekay Corporation’s remaining interest in the Partnership and Partnership GP, and on April 29, 2019, Brookfield TOLP and Brookfield TOGP entered into a Securities and Loan Purchase Agreement with Teekay Corporation, Teekay Finance Limited, Teekay Holdings Limited (“Teekay Holdings”) and Teekay Shipping Limited (the “TKC Purchase Agreement”), pursuant to which Brookfield TOLP and Brookfield TOGP agreed to purchase (i) 56,587,484 Common Units, (ii) 49.0% of the outstanding limited liability company interests of Partnership GP, (iii) Warrants to purchase an aggregate of 17,255,000 Common Units and (iv) Teekay Corporation’s interest in the credit agreement, dated as of March 31, 2018, by and among the Partnership, Brookfield TOLP, as administrative agent, and Brookfield TOLP and Teekay Corporation, as lenders, for total consideration of $100.0 million in cash.

 

On May 8, 2019, Brookfield TOLP and Brookfield TOGP closed the transactions contemplated by the TKC Purchase Agreement (the “TKC-Brookfield Transaction”) and, as a result thereof, Brookfield’s indirect ownership percentage of the outstanding Common Units and the interests in Partnership GP increased to approximately 73.3% and 100%, respectively, Brookfield TOGP became the sole member of Partnership GP, and Teekay Corporation ceased to be a member of Partnership GP and ceased to have an equity interest in the Partnership and Partnership GP. In connection with the closing of the TKC-Brookfield Transaction, Brookfield TOGP and Teekay Holdings entered into an amendment to the limited liability company agreement of Partnership GP to (i) reflect the assignment of the 49.0% of the outstanding limited liability company interests of Partnership GP to Brookfield TOGP and (ii) provide that until the earlier of (a) the date that is 12 months from the date of the closing of the transactions contemplated by the TKC Purchase Agreement and (b) the date the Trademark Licensing Agreement, dated as of September 25, 2017, by and between the Partnership and Teekay Corporation is terminated, Teekay Corporation will have the right to elect one director to the GP Board.

 

On May 13, 2019, Brookfield and its affiliates filed an amendment to their existing Schedule 13D announcing the closing of TKC-Brookfield Transaction and stating, among other things, that the total consideration paid to Teekay Corporation reflected a price per Common Unit and per Warrant of $1.0479 and $0.8114, respectively.

 

After the closing of the transactions contemplated by the TKC Purchase Agreement, given the continued challenges faced by the Partnership in raising cost-efficient capital and Brookfield’s belief that the Partnership would continue to face such challenges going forward, Brookfield focused on a potential sponsor take private transaction.

 

Brookfield discussed a potential sponsor take private transaction with its legal counsel, Kirkland & Ellis LLP (“Kirkland”), and on May 15, 2019, representatives of Brookfield engaged Richard Layton Finger, P.A. (“RLF”) as special Delaware counsel to assist with the review and evaluation of a potential sponsor take private transaction.

 

On May 17, 2019, Brookfield delivered a written non-binding offer (the “May 17th Offer”) to the attention of the Conflicts Committee proposing to acquire all of the issued and outstanding publicly held Common Units of the Partnership that were not owned by Brookfield and its affiliates in exchange for $1.05 in cash for each such Common Unit. The May 17th Offer stated that the transaction would be structured as a merger between the Partnership and a newly-formed subsidiary of Brookfield, with the Partnership surviving as a wholly owned subsidiary of Brookfield, and included an assumption that the transaction would be subject to approval by the Conflicts Committee. The May 17th Offer indicated that it was Brookfield’s belief that the effective price of $1.05 per Common Unit it paid in the TKC-Brookfield Transaction was representative of a fair price for the remaining outstanding Common Units. The May 17th Offer also indicated that it was Brookfield’s belief that operating the Partnership as a private company would ultimately be in the Partnership’s best interest, in light of Brookfield’s assessment of the Partnership’s likely need for additional capital to support growth and address upcoming debt maturities, and the Partnership’s limited options for obtaining additional capital from either the public equity markets or debt markets. The proposed privatization of the Partnership’s Common Units by Brookfield is hereinafter referred to as the “Proposed Transaction.”

 

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On May 19, 2019, the Conflicts Committee, consisting at that time of Ian Craig, David Lemmon and William Transier, held a telephonic meeting to discuss the May 17th Offer. Also present by invitation of the Conflicts Committee were directors William Utt and Kenneth Hvid, and certain members of Management. Those present discussed, among other things, the formation and membership of a special committee to assess the May 17th Offer, consideration of potential legal counsel and financial advisors, a draft press release to be issued by the Partnership in response to the May 17th Offer, and the subsequent convening of a GP Board meeting to formalize the membership and empowerment of such committee.

 

On May 20, 2019, Brookfield and its affiliates filed an amendment to their existing Schedule 13D announcing that Brookfield had made the May 17th Offer, and the Partnership issued a press release announcing receipt of the May 17th Offer. The Partnership’s press release stated that the Conflicts Committee or a separate special committee appointed for these purposes, in each case consisting only of non-Brookfield affiliated directors, would retain advisors and evaluate the May 17th Offer on behalf of the Unaffiliated Unitholders.

 

On May 21, 2019, the GP Board held a telephonic meeting and adopted resolutions appointing William Utt as an additional member of the Conflicts Committee, and empowering the Conflicts Committee (or any subset thereof after the members of the Conflicts Committee confer with counsel as to due independence of each member of the Conflicts Committee in relation to Brookfield and the potential transaction, such subset being hereafter deemed to be the Conflicts Committee as provided in the Partnership Agreement) to (i) review and evaluate the terms and conditions, and determine the advisability, of the Proposed Transaction, (ii) negotiate, or delegate the ability to negotiate to any persons, with any party the Conflicts Committee deems appropriate, with respect to the terms and conditions of the Proposed Transaction, (iii) determine whether to give or withhold the Conflicts Committee’s approval of the Proposed Transaction, including by Special Approval pursuant to Section 7.9(a) of the Partnership Agreement, and (iv) determine whether to approve the Proposed Transaction. The GP Board also resolved that the Conflicts Committee shall have no duty to consider the interests of Partnership GP or its controlling affiliates, including Brookfield, or any person other than the Unaffiliated Unitholders.

 

On May 22, 2019, members of the Conflicts Committee, including Mr. Craig, as Chairman of the Conflicts Committee, separately interviewed two law firms, including Potter Anderson, as candidates to serve as legal counsel to the Conflicts Committee. Thereafter, the Conflicts Committee determined to engage Potter Anderson based on, among things, Potter Anderson’s experience representing the Conflicts Committee on a prior assignment, its qualifications and experience representing MLP conflicts committees, and its independence with respect to the Partnership and Brookfield. An engagement letter detailing the terms of Potter Anderson’s engagement was subsequently executed.

 

Later on May 22, 2019, three of the members of the Conflicts Committee, including Mr. Craig and Mr. Lemmon, with representatives of Potter Anderson and certain members of Management present, interviewed Evercore as one of the candidates to serve as financial advisor to the Conflicts Committee.

 

On May 23, 2019, two of the members of the Conflicts Committee, including Mr. Craig, with representatives of Potter Anderson and certain members of Management present, interviewed a second candidate to serve as financial advisor to the Conflicts Committee.

 

Later on May 23, 2019, two members of the Conflicts Committee, including Mr. Craig, with representatives of Potter Anderson present, considered each of the interviewed financial advisors’ independence, qualifications, capabilities, expertise and compensation expectations, and thereafter determined to pursue engagement of Evercore as financial advisor, subject to negotiation of terms of engagement and a mutually acceptable engagement letter and completion of an independence review. The determination was based on, among other things, Evercore’s qualifications and experience in the energy and shipping industries, its experience with serving as a financial advisor to conflicts committees in MLP simplification and buy-in transactions, its reputation serving as an independent financial advisor, and its independence from Brookfield. The members of the Conflicts Committee present and Potter Anderson also discussed the independence requirements of members of the Conflicts Committee and the resolutions adopted by the GP Board on May 21 delegating authority to the Conflicts Committee. The Conflicts Committee determined to hold a meeting with all member