Teekay Offshore Partners L.P.
NYSE : TOO

Teekay Offshore Partners L.P.

August 07, 2014 03:42 ET

Teekay Offshore Partners Reports Second Quarter 2014 Results

HAMILTON, BERMUDA--(Marketwired - Aug. 7, 2014) -

Highlights

  • Generated distributable cash flow of $40.1 million in the second quarter of 2014.
  • Declared second quarter 2014 cash distribution of $0.5384 per common unit.
  • In August 2014, completed acquisition of Logitel Offshore, an offshore floating accommodation company using the Sevan cylindrical hull design.
  • Completed the conversion of the Salamander FSO in July 2014, which is expected to commence full operations under its charter contract by mid-August 2014.
  • Remora HiLoad DP unit is expected to complete its testing during August 2014 at which time it is expected to commence its ten-year charter contract.
  • Teekay Offshore's 50/50 joint venture with Odebrecht was recently nominated by Petrobras as the lead commercial bidder on the Libra FPSO project in Brazil, subject to final contract negotiations.
  • Liquidity of approximately $531 million as at June 30, 2014.

Teekay Offshore GP LLC, the general partner of Teekay Offshore Partners L.P. (Teekay Offshore or the Partnership) (NYSE:TOO), today reported the Partnership's results for the quarter ended June 30, 2014. During the second quarter of 2014, the Partnership generated distributable cash flow(1) of $40.1 million, compared to $43.0 million in the same period of the prior year. The decrease in the distributable cash flow was primarily due to the expiration of time-charter contracts relating to four existing shuttle tankers since the first quarter of 2013, operating expenses relating to the HiLoad DP unit in the second quarter of 2014, the drydocking of the Dampier Spirit FSO unit during the second quarter of 2014 and due to the sale of three conventional tankers since the first quarter of 2013, partially offset by additional cash flows relating to the acquisition of the Voyageur Spirit FPSO unit and a 50 percent interest in the Cidade de Itajai FPSO unit in May 2013 and June 2013, respectively, and the delivery of the four BG Shuttle Tanker newbuildings in June, August and November 2013 and January 2014.

(1) Distributable cash flow is a non-GAAP financial measure used by certain investors to measure the financial performance of the Partnership and other master limited partnerships. Please see Appendix B for a reconciliation of distributable cash flow to the most directly comparable financial measure under United States generally accepted accounting principles (GAAP).

On July 9, 2014, a cash distribution of $0.5384 per common unit was declared for the quarter ended June 30, 2014. The cash distribution is payable on August 8, 2014 to all unitholders of record on July 25, 2014.

"The reduction in the Partnership's second quarter distributable cash flow mainly reflects a combination of temporary operational issues and cash flow timing differences related to certain of our offshore contracts," commented Peter Evensen, Teekay Offshore GP LLC's Chief Executive Officer. "While these matters have now largely been resolved, on a full-quarter basis, the affected fixed-rate contracts would have generated an additional $8 million of distributable cash flow during the second quarter of 2014."

"Looking forward, since reporting our first quarter results in May, the Partnership has completed its acquisition of Logitel Offshore and has made significant progress on its existing organic growth projects," Mr. Evensen continued. "The Logitel Offshore acquisition solidifies Teekay Offshore's entry into the high-specification floating accommodation sector, which provides the Partnership with further diversification and a complementary new channel for future distributable cash flow growth. In July, the conversion project of the Salamander FSO was completed and the unit has been installed on the Bualuang field in Thailand where it is currently undergoing testing in preparation for the expected commencement of its ten-year charter contract during August. And lastly, the operational testing of the innovative Remora HiLoad DP unit, the first of its kind, has been successful so far and is also expected to be completed in August, at which point the unit will commence its ten-year charter contract with Petrobras."

Mr. Evensen added, "In addition to these and other growth projects which provide a pipeline of direct growth for the Partnership between 2014 and 2017, we also have a number of dropdown growth opportunities available from our sponsor, Teekay Corporation, including up to five FPSO units, which must be offered to us once they are operating under eligible fixed-rate contracts. The largest and most near-term dropdown candidate, the Petrojarl Knarr FPSO, left the South Korean shipyard in July and is currently in transit to its North Sea field in preparation for its scheduled start-up in the fourth quarter of 2014."

Summary of Recent Events

Completed Logitel Acquisition

In August 2014, the Partnership acquired Logitel Offshore Holdings Ltd. (Logitel), a Norway-based company focused on the high-end floating accommodation market. Logitel is currently constructing two newbuilding floating accommodation units (FAUs), based on the Sevan Marine ASA (Sevan) cylindrical hull design, at the COSCO (Nantong) Shipyard (COSCO) in China. The Partnership intends to immediately exercise one of its existing six options with COSCO to construct a third FAU, subject to final documentation. Prior to the acquisition, Logitel secured a three-year fixed-rate charter contract, plus extension options, with Petroleo Brasileiro SA (Petrobras) in Brazil for the first FAU, which is scheduled to deliver in the first quarter of 2015. The Partnership expects to secure charter contracts for the remaining two newbuilding FAUs prior to their respective scheduled deliveries in the fourth quarter of 2015 and the third quarter of 2016. The construction agreements with COSCO for the newbuilding FAUs have a favorable payment schedule, with the majority of the purchase price due upon delivery. The Partnership intends to finance the initial newbuilding payments through its existing liquidity and expects to secure long-term debt financing for the units prior to their scheduled deliveries.

Libra FPSO Project

Odebrecht Oil & Gas S.A (Odebrecht), on behalf of the Partnership's 50/50 joint venture with Odebrecht, was recently nominated by Petrobras as the lead commercial bidder on the Libra FPSO project in Brazil, and has been invited by Petrobras to conclude contract negotiations. The FPSO unit is expected to be owned and operated by the Partnership's 50/50 joint venture with Odebrecht and will service the Libra pre-salt field in the Santos Basin offshore Brazil, which is expected to commence operations in early-2017. The final contract negotiations are expected to be completed during the third quarter of 2014.

Teekay Offshore's Fleet

The following table summarizes Teekay Offshore's fleet as of August 1, 2014.

Number of Vessels
Owned
Vessels
Chartered-in Vessels Committed Newbuildings /
Conversions
Conversion Candidates Total
Shuttle Tanker Segment 31(i) (ii) 2 - 2(iii) 35
FPSO Segment 5(iv) - - - 5
FSO Segment 6 - - - 6
Conventional Tanker Segment 4 - - - 4
Towage Segment - - 4(v) - 4
Floating Accommodation Segment - - 3(vi) - 3
Total 46 2 7 2 57
(i) Includes six shuttle tankers in which Teekay Offshore's ownership interest is 50 percent and three shuttle tankers in which Teekay Offshore's ownership interest is 67 percent. One of the 67 percent owned shuttle tankers, the Randgrid, will commence its conversion to an FSO unit for the Gina Krog FSO project after its current shuttle tanker charter contract expires in 2015.
(ii) Includes one HiLoad DP unit expected to commence its 10-year contract in the third quarter of 2014 once operational testing has been completed.
(iii) Includes two shuttle tankers which are currently in lay-up and are candidates for conversion to offshore assets.
(iv) Includes one FPSO unit in which Teekay Offshore's ownership interest is 50 percent.
(v) Includes four long-haul towing and anchor handling vessel newbuildings scheduled to deliver in 2016.
(vi) Includes three FAU newbuildings scheduled to deliver between the first quarter of 2015 and the third quarter of 2016.

Other Future Growth Opportunities

Pursuant to an omnibus agreement that the Partnership entered into in connection with our initial public offering in December 2006, Teekay Corporation is obligated to offer to the Partnership its interest in certain shuttle tankers, FSO units and FPSO units 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 also intends to pursue direct acquisitions from third parties and new organic offshore projects.

Shuttle Tankers (including HiLoad DP Units)

In September 2013, the Partnership acquired a 2010-built HiLoad Dynamic Positioning (DP) unit from Remora AS (Remora), a Norway-based offshore marine technology company, for a total purchase price of approximately $60 million, including modification and mobilization costs. The HiLoad DP unit is currently in the final stages of the charterer's operational testing, which is expected to be completed during the third quarter of 2014. Upon completion of the testing, the unit will commence its ten-year time-charter contract with Petrobras in Brazil. Under the terms of an agreement between Remora and Teekay Offshore, the Partnership has a right of first refusal to acquire any future HiLoad DP projects developed by Remora. In July 2013, Remora was awarded a contract by BG E&P Brasil Ltd. to perform a front-end engineering and design (FEED) study to develop the next generation of HiLoad DP units. The design, which is based on the main parameters of the first generation design, is expected to include new features, such as increased engine power and the capability to maneuver vessels larger than Suezmax conventional tankers.

FPSO Units

In June 2011, Teekay Corporation entered into a contract with BG Norge Limited (BG) to provide a harsh weather FPSO unit to operate in the North Sea. The contract will be serviced by a newbuilding FPSO unit, Petrojarl Knarr, which completed construction in late-June 2014. On July 11, 2014, the Petrojarl Knarr FPSO sailed away from the Samsung shipyard for the North Sea and following installation and offshore testing, the unit is expected to commence its ten-year time-charter contract with BG. Pursuant to the omnibus agreement, Teekay Corporation is obligated to offer to the Partnership its interest in the Petrojarl Knarr FPSO project at Teekay Corporation's fully built-up cost within a year after the commencement of the charter, which commencement is expected to occur in the fourth quarter of 2014.

Pursuant to the omnibus agreement and subsequent agreements, Teekay Corporation is obligated to offer to sell to the Partnership the Petrojarl Foinaven FPSO unit, an existing unit owned by Teekay Corporation and operating under a long-term contract in the North Sea, subject to approvals required from the charterer. The purchase price for the Petrojarl Foinaven would be based on fair market value.

Teekay Corporation owns three additional FPSO units, the Hummingbird Spirit FPSO, the Petrojarl Banff FPSO and the Petrojarl 1 FPSO, which may also be offered to the Partnership in the future pursuant to the omnibus agreement.

In May 2011, Teekay Corporation entered into a joint venture agreement with Odebrecht (a member of the Odebrecht group) to jointly pursue FPSO projects in Brazil. Odebrecht is a well-established Brazil-based company that operates in the engineering and construction, petrochemical, bioenergy, energy, oil and gas, real estate and environmental engineering sectors, with over 120,000 employees and a presence in over 20 countries. Through the joint venture agreement, Odebrecht became a 50 percent partner in the Cidade de Itajai FPSO and the Partnership is currently working with Odebrecht on other FPSO project opportunities.

FSO Units

In May 2013, the Partnership entered into a ten-year charter contract, plus extension options, with Salamander Energy plc (Salamander) to supply an FSO unit in Asia. In July 2014, the Partnership completed the conversion of its 1993-built shuttle tanker, the Navion Clipper, into an FSO unit for an estimated fully built-up cost of approximately $73 million, including mobilization costs. The unit is currently undergoing field installation and is expected to commence its charter contract with Salamander in the third quarter of 2014.

In May 2013, the Partnership entered into an agreement with Statoil Petroleum AS (Statoil), on behalf of the field license partners, to provide an FSO unit for the Gina Krog oil and gas field located in the North Sea. The contract will be serviced by a new FSO unit that will be converted from the 1995-built shuttle tanker, the Randgrid, which the Partnership currently owns through a 67 percent-owned subsidiary and will acquire full ownership of the vessel prior to its conversion. The FSO conversion project is expected to cost approximately $280 million, including amounts reimbursable upon delivery of the unit relating to installation and mobilization, and the cost of acquiring the remaining 33 percent ownership interest in the Randgrid shuttle tanker. Following scheduled completion in early-2017, the newly converted FSO unit will commence operations under a three-year time-charter contract to Statoil, which includes 12 additional one-year extension options.

Towage Vessels

In March 2014, Teekay Offshore acquired ALP Maritime Services B.V. (ALP), a Netherlands-based provider of long-haul ocean towage and offshore installation services to the global offshore oil and gas industry. ALP currently provides these services through a fleet of third-party owned vessels. As part of the transaction, the Partnership and ALP entered into an agreement with Niigata Shipbuilding & Repair of Japan for the construction of four state-of-the-art SX-157 Ulstein Design ultra-long distance towing and anchor handling vessel newbuildings, which will be equipped with dynamic positioning capability, for a fully built-up cost of approximately $261 million, which includes the cost of acquiring ALP. These newbuildings will be capable of ultra-long distance towing and offshore unit installation and decommissioning of large floating exploration, production and storage units, including FPSO units, floating liquefied natural gas (FLNG) units and floating drill rigs and are scheduled to deliver throughout 2016.

Financial Summary

The Partnership reported adjusted net income attributable to the partners(1) of $23.8 million for the quarter ended June 30, 2014, compared to $9.7 million for the same period of the prior year. Adjusted net income attributable to the partners excludes a number of specific items that had the net effect of decreasing net income by $29.2 million and increasing net income by $47.9 million for the quarters ended June 30, 2014 and 2013, respectively, as detailed in Appendix A to this release. Including these items, the Partnership reported, on a GAAP basis, net loss attributable to the partners of $5.5 million for the second quarter of 2014, compared to net income of $57.6 million in the same period of the prior year. Net revenues(2) increased to $215.1 million for the second quarter of 2014, compared to $199.1 million in the same period of the prior year.

The Partnership reported adjusted net income attributable to the partners(1) of $54.9 million for the six months ended June 30, 2014, compared to $28.6 million for the same period of the prior year. Adjusted net income attributable to the partners excludes a number of specific items that had the net effect of decreasing net income by $53.0 million and increasing net income by $49.2 million for the six months ended June 30, 2014 and 2013, respectively, as detailed in Appendix A to this release. Including these items, the Partnership reported, on a GAAP basis, net income attributable to the partners of $1.9 million for the six months ended June 30, 2014, compared to $77.7 million in the same period of the prior year. Net revenues(2) increased to $440.9 million for the six months ended June 30, 2014, compared to $388.3 million in the same period of the prior year.

(1) Adjusted net income attributable to the partners is a non-GAAP financial measure. Please refer to Appendix A included in this release for a reconciliation of this non-GAAP measure to the most directly comparable financial measure under GAAP and information about specific items affecting net (loss) income that are typically excluded by securities analysts in their published estimates of the Partnership's financial results.
(2) Net revenues is a non-GAAP financial measure used by certain investors to measure the financial performance of shipping companies. Please refer to Appendix C included in this release for a reconciliation of this non-GAAP measure to the most directly comparable financial measure under GAAP.

Adjusted net income attributable to the partners for the three and six months ended June 30, 2014 increased from the same periods in the prior year, mainly due to the acquisitions of the Voyageur Spirit FPSO unit and a 50 percent interest in the Cidade de Itajai FPSO unit in the second quarter of 2013 and the commencement of the time-charters with a subsidiary of BG Group plc for four newbuilding shuttle tankers (BG Shuttle Tankers) in June, August and November 2013 and January 2014. These increases were partially offset by the sale or lay-up of four older shuttle and conventional tankers during 2013 and 2014 as their related charter contracts expired or terminated. For the three and six months ended June 30, 2013, the indemnification payments received from Teekay Corporation for the Voyageur Spirit FPSO off-hire of $12.5 million was not included in adjusted net income but rather accounted for as an equity adjustment.

For accounting purposes, the Partnership is required to recognize, through the consolidated statements of (loss) income, changes in the fair value of derivative instruments as unrealized gains or losses. This revaluation does not affect the economics of any hedging transactions nor does it have any impact on the Partnership's actual cash flows or the calculation of its distributable cash flow.

Operating Results

The following table highlights certain financial information for Teekay Offshore's four segments: the Shuttle Tanker segment, the FPSO segment, the FSO segment, and the Conventional Tanker segment (please refer to the "Teekay Offshore's Fleet" section of this release above and Appendices C through F for further details).

Three Months Ended
June 30, 2014
(unaudited)
(in thousands of U.S. dollars) Shuttle Tanker Segment FPSO Segment FSO Segment Conventional Tanker Segment Total (4)
Net revenues(1) 112,226 83,984 11,524 7,412 215,146
Vessel operating expenses 39,715 39,472 7,532 1,465 88,184
Time-charter hire expense 4,975 - - - 4,975
Depreciation and amortization 27,378 18,186 1,298 1,612 48,474
CFVO from consolidated vessels(2) 61,167 33,606 3,966 5,635 102,774
CFVO from equity accounted vessel(3) - 7,135 - - 7,135
Total CFVO(2)(3) 61,167 40,741 3,966 5,635 109,909
Three Months Ended
June 30, 2013
(unaudited)
(in thousands of U.S. dollars) Shuttle Tanker Segment FPSO Segment FSO Segment Conventional Tanker Segment Total
Net revenues(1) 110,947 65,260 15,053 7,879 199,139
Vessel operating expenses 36,511 40,074 8,315 1,619 86,519
Time-charter hire expense 14,093 - - - 14,093
Depreciation and amortization 28,165 17,789 2,743 1,568 50,265
CFVO from consolidated vessels(2) 54,422 17,234 6,749 11,810 90,215
CFVO from equity accounted vessel(3) - 1,311 - - 1,311
Total CFVO(2)(3) 54,422 18,545 6,749 11,810 91,526
(1) Net revenues is a non-GAAP financial measure used by certain investors to measure the financial performance of shipping companies. Please refer to Appendix C, included in this release for a reconciliation of this non-GAAP measure to the most directly comparable GAAP financial measure.
(2) Cash flow from vessel operations (CFVO) from consolidated vessels represents income from vessel operations before depreciation and amortization expense and amortization of in-process revenue contracts and deferred gains, and includes the realized gains (losses) on the settlement of foreign exchange forward contracts, and cash flow from vessel operations relating to its discontinued operations and adjustments for direct financing leases to a cash basis. CFVO is a non-GAAP financial measure used by certain investors to measure the financial performance of shipping companies. Please refer to Appendix E included in this release for a description and reconciliation of this non-GAAP measure to the most directly comparable GAAP financial measure.
(3) CFVO from equity accounted vessel represents the Partnership's 50 percent share of CFVO from the Cidade deItajai FPSO unit. Please see Appendix F for a description and reconciliation of CFVO from equity accounted vessel (a non-GAAP measure) as used in this release to the most directly comparable GAAP financial measure.
(4) The total column includes a $1.6 million fee paid to Teekay Corporation associated with the Partnership's acquisition of ALP Maritime Services B.V. (ALP) in CFVO from consolidated vessels and Total CFVO. This fee was recognized in general and administrative expenses in the consolidated statement of (loss) income for the three months ended June 30, 2014. The towage segment has not been disaggregated as its results are not material.

Shuttle Tanker Segment

Cash flow from vessel operations from the Partnership's Shuttle Tanker segment increased to $61.2 million in the second quarter of 2014 compared to $54.4 million for the same period of the prior year, primarily due to the delivery of the four BG Shuttle Tanker newbuildings in June, August and November 2013 and January 2014, partially offset by the expiration of time-charter out contracts relating to four existing shuttle tankers since the first quarter of 2013 and operating expenses relating to the HiLoad DP unit, which commenced operations during the second quarter of 2014. Revenue on the HiLoad DP unit, retroactive to April 11, 2014, will be recorded following completion of tests for Petrobras, which is expected in late August 2014.

FPSO Segment

Cash flow from vessel operations from the Partnership's FPSO segment, including one equity-accounted FPSO unit, increased to $40.7 million for the second quarter of 2014 compared to $18.5 million for the same period of the prior year, primarily due to additional cash flows related to the acquisition of the Voyageur Spirit FPSO unit and a 50 percent interest in the Cidade de Itajai FPSO unit in May 2013 and June 2013, respectively. Cash received related to the Voyageur Spirit indemnification of $12.5 million during the three months ended June 30, 2013 was not included as part of cash flow from vessel operations.

FSO Segment

Cash flow from vessel operations from the Partnership's FSO segment decreased to $4.0 million in the second quarter of 2014 compared to $6.7 million for the same period of the prior year, primarily due the drydocking of the Dampier Spirit FSO in the second quarter of 2014 for upgrades required for its 10-year contract extension with Apache Energy. The unit returned on-hire in late-June 2014.

Conventional Tanker Segment

Cash flow from vessel operations from the Partnership's Conventional Tanker segment decreased to $5.6 million in the second quarter of 2014 compared to $11.8 million for the same period of the prior year, primarily due to the sale of three conventional tankers since the first quarter of 2013.

Liquidity and Continuous Offering Program Update

In 2013, the Partnership implemented a continuous offering program (COP) under which the Partnership may issue new common units, representing limited partner interests, at market prices up to a maximum aggregate amount of $100 million. During the second quarter of 2014, the Partnership sold 211,350 common units under the COP, generating proceeds of approximately $7.6 million (including the general partner's 2 percent proportionate capital contribution). The net proceeds from the issuance of these common units were used for general partnership purposes.

In May 2014, the partnership issued $300.0 million in new senior unsecured, non-rated bonds in the United States bond market, which mature in January 2019. The bonds are listed on the New York Stock Exchange and pay a fixed coupon of 6.0 percent per annum. Net proceeds from the bond offering were used for general partnership purposes.

As of June 30, 2014, the Partnership had total liquidity of $530.7 million, which consisted of $251.6 million in cash and cash equivalents and $279.1 million in undrawn revolving credit facilities.

Conference Call

The Partnership plans to host a conference call on Friday, August 8, 2014 at noon (ET) to discuss the results for the second quarter of 2014. All unitholders and interested parties are invited to listen to the live conference call by choosing from the following options:

  • By dialing 1-800-524-8850 or 416-204-9702, if outside North America, and quoting conference ID code 9278679.
  • By accessing the webcast, which will be available on Teekay Offshore's website at www.teekayoffshore.com (the archive will remain on the website for a period of 30 days).

A supporting Second Quarter 2014 Earnings Presentation will also be available at www.teekayoffshore.com in advance of the conference call start time.

The conference call will be recorded and available until Friday, August 15, 2014. This recording can be accessed following the live call by dialing 1-888-203-1112 or 647-436-0148, if outside North America, and entering access code 9278679.

About Teekay Offshore Partners L.P.

Teekay Offshore Partners L.P. is an international provider of marine transportation, oil production and storage services to the offshore oil industry focusing on the fast-growing, deepwater offshore oil regions of the North Sea and Brazil. Teekay Offshore is structured as a publicly-traded master limited partnership (MLP) and owns interests in 34 shuttle tankers (including two chartered-in vessels), five floating production, storage and offloading (FPSO) units, six floating storage and offtake (FSO) units (excluding one committed FSO conversion unit), one HiLoad Dynamic Positioning (DP) unit, four long-haul towing and anchor handling vessel newbuildings, three floating accommodation unit newbuildings and four conventional oil tankers. The majority of Teekay Offshore's fleet is employed on long-term, stable contracts. In addition, Teekay Offshore also has rights to participate in certain other FPSO, shuttle tanker and HiLoad DP opportunities provided by Teekay Corporation (NYSE: TK), Sevan Marine ASA (Oslo Bors: SEVAN) and Remora AS.

Teekay Offshore's common units trade on the New York Stock Exchange under the symbol "TOO".

TEEKAY OFFSHORE PARTNERS L.P.
SUMMARY CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(in thousands of U.S. dollars, except unit data)
Three Months Ended Six Months Ended
June 30, 2014 March 31, 2014 June 30, 2013(1) June 30, 2014 June 30, 2013(1)
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
REVENUES 241,402 259,234 222,412 500,636 434,524
OPERATING EXPENSES
Voyage expenses 26,256 33,454 23,273 59,710 46,221
Vessel operating expenses 88,184 88,130 86,519 176,314 163,843
Time-charter hire expense 4,975 11,412 14,093 16,387 28,870
Depreciation and amortization 48,474 48,488 50,265 96,962 94,775
General and administrative 18,054 14,849 10,417 32,903 20,807
Restructuring charge (2) (821 ) 559 1,395 (262 ) 2,054
Total operating expenses 185,122 196,892 185,962 382,014 356,570
Income from vessel operations 56,280 62,342 36,450 118,622 77,954
OTHER ITEMS
Interest expense (21,568 ) (18,920 ) (16,035 ) (40,488 ) (27,663 )
Interest income 190 177 1,465 367 1,660
Realized and unrealized (losses) gains on derivative instruments (3) (38,144 ) (36,632 ) 33,901 (74,776 ) 32,824
Equity income 2,388 3,703 1,598 6,091 1,598
Foreign currency exchange (loss) gain(4) (2,836 ) (775 ) 3,555 (3,611 ) (83 )
Loss on bond repurchase(5) - - - - (1,759 )
Other income - net 72 390 260 462 574
Total other items (59,898 ) (52,057 ) 24,744 (111,955 ) 7,151
(Loss) income from continuing operations before income tax expense (3,618 ) 10,285 61,194 6,667 85,105
Income tax expense (182 ) (1,263 ) (456 ) (1,445 ) (222 )
Net (loss) income from continuing operations (3,800 ) 9,022 60,738 5,222 84,883
Net loss from discontinued operations(6) - - (2,134 ) - (4,309 )
Net (loss) income (3,800 ) 9,022 58,604 5,222 80,574
Non-controlling interests in net (loss) income 1,654 1,679 3,274 3,333 5,051
Dropdown Predecessor's interest in net income(1) - - (2,225 ) - (2,225 )
Preferred unitholders' interest in net (loss) income 2,719 2,719 1,813 5,438 1,813
General Partner's interest in net (loss) income 3,696 3,943 3,833 7,639 6,906
Limited partners' interest in net (loss) income (11,869 ) 681 51,909 (11,188 ) 69,029
Weighted-average number of common units - basic 85,529,102 85,455,292 82,726,359 85,492,401 81,423,123
Weighted-average number of common units - diluted 85,529,102 85,480,352 82,742,751 85,492,401 81,432,027
Total number of common units outstanding at end of period 85,681,495 85,468,145 83,700,308 85,681,495 83,700,308
(1) Results for the Voyageur Spirit FPSO unit for the period beginning April 13, 2013 prior to its acquisition by the Partnership on May 2, 2013 when it was owned and operated by Teekay Corporation, are included in Dropdown Predecessor.
(2) Restructuring charges for the three and six months ended June 30, 2014 include a $0.8 million reimbursement relating to the reorganization of the Partnership's shuttle tanker marine operations, which were completed during 2013. Restructuring charges for the three months ended March 31, 2014 relates to the reflagging of a shuttle tanker. Restructuring charges for the three and six months ended June 30, 2013 relate to the reorganization of the Partnership's marine operations to create better alignment with its shuttle tanker and conventional tanker business units and a lower-cost organization.
(3) Realized (losses) gains on derivative instruments relate to amounts the Partnership actually paid or received to settle derivative instruments, and the unrealized (losses) gains on derivative instruments relate to the change in fair value of such derivative instruments, as detailed in the table below:
Three Months Ended Six Months Ended
June 30, 2014 March 31, 2014 June 30, 2013 June 30, 2014 June 30, 2013
Realized (losses) gains relating to:
Interest rate swaps (13,997 ) (14,063 ) (14,956 ) (28,060 ) (29,579 )
Foreign currency forward contracts 196 (497 ) (1,646 ) (302 ) (1,293 )
Termination of interest rate swap in Dropdown Predecessor - - (4,099 ) - (4,099 )
(13,801 ) (14,560 ) (20,701 ) (28,362 ) (34,971 )
Unrealized (losses) gains relating to:
Interest rate swaps (22,985 ) (24,108 ) 52,947 (47,093 ) 67,918
Foreign currency forward contracts (1,358 ) 2,036 (2,329 ) 679 (4,107 )
Termination of interest rate swap in Dropdown Predecessor - - 3,984 - 3,984
(24,343 ) (22,072 ) 54,602 (46,414 ) 67,795
Total realized and unrealized (losses) gainson derivative instruments (38,144 ) (36,632 ) 33,901 (74,776 ) 32,824
(4) Foreign exchange losses include realized gains relating to the amounts the Partnership received to settle the Partnership's non-designated cross currency swaps that were entered into as an economic hedge relating to the Partnership's Norwegian Kroner (NOK)-denominated unsecured bonds as detailed in the table below. The Partnership issued NOK 600 million unsecured bonds in 2010 that matured in the fourth quarter of 2013, of which it repurchased NOK 388.5 million in the first quarter of 2013 and recognized a realized gain of $6.8 million on the partial early termination of a cross currency swap and a realized foreign exchange loss of $6.6 million on the repurchase of the bonds. The Partnership also issued NOK 600 million unsecured bonds in 2012 maturing in 2017, NOK 1,300 million of unsecured bonds in 2013 maturing in 2016 and 2018, and NOK 1,000 million unsecured bonds in 2014 maturing in 2019. Foreign exchange losses also include unrealized (losses) gains relating to the change in fair value of such derivative instruments, partially offset by unrealized gains (losses) on the revaluation of the NOK bonds, as detailed in the table below:
Three Months Ended Six Months Ended
June 30, 2014 March 31, 2014 June 30, 2013 June 30, 2014 June 30, 2013
Realized gain on partial termination of cross-currency swap - - - - 6,800
Realized foreign exchange loss on partial repurchase of NOK bonds - - - - (6,573 )
Realized (losses) gains on cross-currency swaps (38 ) 16 297 (22 ) 1,022
Unrealized (losses) gains on cross-currency swaps (14,267 ) 7,575 (9,307 ) (6,692 ) (34,809 )
Unrealized gains (losses) on revaluation of NOK bonds 11,431 (9,130 ) 13,250 2,301 38,261
(5) Loss on bond repurchase for the six months ended June 30, 2013 relates to the repurchase in the first quarter of 2013 of NOK 388.5 million of the Partnership's NOK 600 million bond issue at a premium.
(6) Results for three conventional tankers (Leyte Spirit, Poul Spirit and Gotland Spirit), which the Partnership sold during 2013, have been included in Net loss from discontinued operations for the periods presented.
TEEKAY OFFSHORE PARTNERS L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars)
As at As at As at
June 30, 2014 March 31, 2014 December 31, 2013
(unaudited) (unaudited) (unaudited)
ASSETS
Current
Cash and cash equivalents 251,561 222,990 219,126
Accounts receivable 153,226 169,021 176,265
Net investments in direct financing leases - current 5,537 4,830 5,104
Prepaid expenses 34,073 36,525 31,675
Due from affiliates 55,843 19,675 15,202
Current portion of derivative instruments 712 1,546 500
Other current assets 3,987 3,384 3,051
Total current assets 504,939 457,971 450,923
Vessels and equipment
At cost, less accumulated depreciation 2,931,060 3,021,864 3,059,770
Advances on newbuilding contracts and conversion costs 114,087 92,385 29,812
Investment in equity accounted joint venture 58,338 55,824 52,120
Net investments in direct financing leases 73,909 21,305 22,463
Derivative instruments 5,743 12,168 10,323
Deferred tax asset 8,106 7,981 7,854
Other assets 45,723 37,307 35,272
Intangible assets - net 8,423 9,429 10,436
Goodwill 129,145 129,145 127,113
Total assets 3,879,473 3,845,379 3,806,086
LIABILITIES AND EQUITY
Current
Accounts payable 16,754 18,518 15,753
Accrued liabilities 121,243 134,756 138,156
Deferred revenues 24,004 24,437 29,075
Due to affiliates 75,577 80,183 121,864
Current portion of long-term debt 339,087 748,055 806,009
Current portion of derivative instruments 63,136 55,165 47,944
Current portion of in-process revenue contracts 12,744 12,744 12,744
Total current liabilities 652,545 1,073,858 1,171,545
Long-term debt 2,204,394 1,730,873 1,562,967
Derivative instruments 154,681 131,302 121,135
In-process revenue contracts 82,230 85,407 88,550
Other long-term liabilities 27,441 23,480 23,984
Total liabilities 3,121,291 3,044,920 2,968,181
Redeemable non-controlling interest 15,149 15,911 16,564
Equity
Limited partners - common units (85.7 million and 85.5 million units issued and outstanding at June 30, 2014 and December 31, 2013, respectively) 523,500 579,830 621,002
Limited partners - preferred units (6.0 million and 6.0 million units issued and outstanding at June 30, 2014 and December 31, 2013, respectively) 144,800 144,800 144,800
General Partner 19,389 20,399 21,242
Partners' equity 687,689 745,029 787,044
Non-controlling interests 55,344 39,519 34,297
Total equity 743,033 784,548 821,341
Total liabilities and total equity 3,879,473 3,845,379 3,806,086
TEEKAY OFFSHORE PARTNERS L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars)
Six Months Ended
June 30, 2014 June 30, 2013(1)
(unaudited) (unaudited)
Cash and cash equivalents provided by (used for)
OPERATING ACTIVITIES
Net income 5,222 80,574
Non-cash items:
Unrealized loss (gain) on derivative instruments 53,106 (32,927 )
Equity income (6,091 ) (1,598 )
Depreciation and amortization 96,962 96,011
Write-down and loss on sale of vessels - 19,029
Deferred income tax recovery (223 ) (62 )
Amortization of in-process revenue contracts (6,320 ) (6,285 )
Foreign currency exchange gain and other 371 (29,813 )
Change in non-cash working capital items related to operating activities (96,617 ) 6,919
Expenditures for dry docking (9,468 ) (7,656 )
Net operating cash flow 36,942 124,192
FINANCING ACTIVITIES
Proceeds from long-term debt 720,443 736,725
Scheduled repayments of long-term debt (241,223 ) (97,215 )
Prepayments of long-term debt (302,413 ) (424,152 )
Debt issuance costs (10,094 ) (10,126 )
Equity contribution from Teekay Corporation to Dropdown Predecessor - 5,596
Purchase of Voyageur LLC from Teekay Corporation (net of cash acquired of $0.9 million) 3,474 (252,086 )
Equity contribution from joint venture partner 22,017 1,500
Proceeds from issuance of common units 7,784 65,067
Proceeds from issuance of preferred units - 150,000
Expenses relating to equity offerings (153 ) (5,385 )
Cash distributions paid by the Partnership (107,197 ) (90,972 )
Cash distributions paid by subsidiaries to non-controlling interests (5,718 ) (280 )
Other 397 -
Net financing cash flow 87,317 78,672
INVESTING ACTIVITIES
Expenditures for vessels and equipment (92,084 ) (216,242 )
Purchase of equity investment in Itajai joint venture (net of cash acquired of $1.3 million) - (52,520 )
Proceeds from sale of vessels and equipment - 20,350
Investment in direct financing lease net of payments received 2,582 2,953
Acquisition of ALP Maritime Services B.V. (net of cash acquired of $0.3 million) (2,322 ) -
Net investing cash flow (91,824 ) (245,459 )
Increase (decrease) in cash and cash equivalents 32,435 (42,595 )
Cash and cash equivalents, beginning of the period 219,126 206,339
Cash and cash equivalents, end of the period 251,561 163,744
(1) In accordance with GAAP, the Consolidated Statement of Cash Flows for the six months ended June 30, 2013 includes the cash flows relating to the Voyageur Spirit FPSO unit for the period from April 13, 2013 to May 2, 2013 (or the Dropdown Predecessor), when the vessel was under the common control of Teekay Corporation, but prior to its acquisition by the Partnership.
TEEKAY OFFSHORE PARTNERS L.P.
APPENDIX A - SPECIFIC ITEMS AFFECTING NET (LOSS) INCOME
(in thousands of U.S. dollars)

Set forth below is a reconciliation of the Partnership's unaudited adjusted net income attributable to the partners, a non-GAAP financial measure, to net (loss) income attributable to the partners as determined in accordance with GAAP. The Partnership believes that, in addition to conventional measures prepared in accordance with GAAP, certain investors use this information to evaluate the Partnership's financial performance. The items below are also typically excluded by securities analysts in their published estimates of the Partnership's financial results. Adjusted net income attributable to the partners is intended to provide additional information and should not be considered a substitute for measures of performance prepared in accordance with GAAP.

Three Months Ended Six Months Ended
June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013
(unaudited) (unaudited) (unaudited) (unaudited)
Net (loss) income - GAAP basis (3,800 ) 58,604 5,222 80,574
Adjustments:
Net income attributable to non-controlling interests (1,654 ) (3,274 ) (3,333 ) (5,051 )
Net loss attributable to Dropdown Predecessor - 2,225 - 2,225
Net (loss) income attributable to the partners (5,454 ) 57,555 1,889 77,748
Add (subtract) specific items affecting net (loss) income :
Foreign currency exchange losses (gains)(1) 2,798 (3,529 ) 3,589 836
Unrealized losses (gains) on derivative instruments(2) 25,237 (51,803 ) 47,158 (64,996 )
Components of discontinued operations (3) - 3,302 - 7,749
Realized losses on foreign currency forward contracts(4) - 1,863 - 1,863
Acquisition, restructuring charges and other (5) 779 1,501 1,701 2,322
Loss on bond repurchase (6) - - - 1,759
Non-controlling interests' share of items above (7) 401 808 600 1,278
Total adjustments 29,215 (47,858 ) 53,048 (49,189 )
Adjusted net income attributable to the partners(8) 23,761 9,697 54,937 28,559
(1) Foreign exchange losses (gains) primarily relate to the Partnership's revaluation of all foreign currency-denominated monetary assets and liabilities based on the prevailing exchange rate at the end of each reporting period and unrealized gains or losses related to the Partnership's cross currency swaps and repurchase of Norwegian Kroner bonds and excludes the realized gains and losses relating to the cross currency swaps for outstanding Norwegian bonds of the Partnership.
(2) Reflects the unrealized losses (gains) due to changes in the mark-to-market value of interest rate swaps and foreign exchange forward contracts that are not designated as hedges for accounting purposes, including the unrealized mark-to-market value of the interest rate swap within the Cidade de Itajai FPSO equity accounted joint venture and excluding amounts relating to the Dropdown Predecessor.
(3) Related to components of net loss from discontinued operations. The results for the three months ended June 30, 2013 include the termination fee received from Teekay Corporation upon cancellation of the Gotland Spirit time-charter contract, partially offset by the write down of the Gotland Spirit to its estimated fair value in conjunction with the termination of its charter contract and the loss on sale of the Poul Spirit. In addition, the results for the six months ended June 30, 2013 include the termination fee received from Teekay Corporation upon cancellation of the Poul Spirit time-charter contract, partially offset by the write down of the Poul Spirit to its estimated fair value in conjunction with the termination of its charter contract.
(4) Reflects the realized losses on foreign currency forward contracts entered into for the purchase of the HiLoad DP unit from Remora AS that is not designated as hedges for accounting purposes.
(5) Other items primarily include fees of $1.6 million paid to Teekay Corporation and $2.6 million for the three and six months ended June 30, 2014, respectively, associated with the Partnership's acquisition of ALP. Other items for the three and six months ended June 30, 2014 include a restructuring charge reimbursement of $0.8 million for the reorganization of the Partnership's shuttle tanker marine operations, which were completed by June 2013. Other items for the three and six months ended June 30, 2013 primarily includes restructuring charges of $1.4 million and $2.1 million, respectively, relating to the reorganization of the Partnership's marine operations to create better alignment with its shuttle tanker and conventional tanker business units and a lower-cost organization.
(6) Loss on bond repurchase for the six months ended June 30, 2013 relates to the repurchase of NOK 388.5 million of the Partnership's then existing NOK 600 million bond issue at a premium in January 2013.
(7) Items affecting net (loss) income include items from the Partnership's consolidated non-wholly-owned subsidiaries. The specific items affecting net (loss) income are analyzed to determine whether any of the amounts originated from a consolidated non-wholly-owned subsidiary. Each amount that originates from a consolidated non-wholly-owned subsidiary is multiplied by the non-controlling interests' percentage share in this subsidiary to arrive at the non-controlling interests' share of the amount. The amount identified as "non-controlling interests' share of items above" in the table above is the cumulative amount of the non-controlling interests' proportionate share of items listed in the table.
(8) Adjusted net income attributable to the partners excludes indemnification payments from Teekay Corporation relating to the loss of revenues and certain unrecovered vessel operating expenses for the Voyageur Spirit FPSO, which for the six months ended June 30, 2014 was $3.5 million and for the three and six months ended June 30, 2013 was $17.0 million.
TEEKAY OFFSHORE PARTNERS L.P.
APPENDIX B - RECONCILIATION OF NON-GAAP FINANCIAL MEASURE
DISTRIBUTABLE CASH FLOW
(in thousands of U.S. dollars)

Description of Non-GAAP Financial Measure - Distributable Cash Flow (DCF)

Distributable cash flow represents net (loss) income adjusted for depreciation and amortization expense, non-controlling interests, non-cash items, distributions relating to equity financing of newbuilding installments and on our preferred units, vessel and business acquisition costs, estimated maintenance capital expenditures, unrealized gains and losses from derivatives, non-cash income taxes, foreign currency and unrealized foreign exchange related items. Maintenance capital expenditures represent those capital expenditures required to maintain over the long-term the operating capacity of, or the revenue generated by, the Partnership's capital assets. Distributable cash flow is a quantitative standard used in the publicly-traded partnership investment community to assist in evaluating a partnership's ability to make quarterly cash distributions. Distributable cash flow is not defined by GAAP and should not be considered as an alternative to net (loss) income or any other indicator of the Partnership's performance required by GAAP. The table below reconciles distributable cash flow to net (loss) income for the quarters ended June 30, 2014 and June 30, 2013, respectively.

Three Months Ended
June 30, 2014 June 30, 2013
(unaudited) (unaudited)
Net (loss) income (3,800 ) 58,604
Net loss attributable to Dropdown Predecessor - 2,225
(3,800 ) 60,829
Add (subtract):
Depreciation and amortization 48,474 49,169
Unrealized losses (gains) on derivative instruments (1) 24,343 (50,618 )
Partnership's share of equity accounted joint venture's distributable cash flow net of estimated maintenance capital expenditures (2) 4,292 605
Distributions relating to equity financing of newbuildings and conversion costs 2,184 2,813
Indemnification from Teekay Corporation relating to the Voyageur Spirit FPSO (3) - 12,505
Non-cash items in discontinued operations (4) - 8,179
Equity income from joint venture (2,388 ) (1,598 )
Distributions relating to preferred units (2,719 ) (1,817 )
Estimated maintenance capital expenditures (3) (28,354 ) (26,599 )
Foreign currency exchange and other, net 2,517 (3,382 )
Distributable Cash Flow before Non-Controlling Interests 44,549 50,086
Non-controlling interests' share of DCF (4,412 ) (7,046 )
Distributable Cash Flow 40,137 43,040
(1) Derivative instruments include interest rate swaps and foreign exchange forward contracts.
(2) The estimated maintenance capital expenditures relating to the Partnership's equity accounted joint venture for the three months ended June 30, 2014 and 2013 were $1.0 million and $0.2 million, respectively.
(3) Indemnification payments from Teekay Corporation for the loss of revenues and certain unrecovered vessel operating expenses for the Voyageur Spirit FPSO are effectively treated as a reduction to estimated maintenance capital expenditures in the second quarter of 2013, since the indemnification payments are effectively treated as a reduction to the purchase price of the Voyageur Spirit FPSO. Estimated maintenance capital expenditures excludes the estimated maintenance capital expenditures of equity accounted joint venture's, which are deducted from the equity accounted joint venture's distributable cash flow.
(4) Includes depreciation and loss on write-down of two vessels included in discontinued operations.
TEEKAY OFFSHORE PARTNERS L.P.
APPENDIX C - RECONCILIATION OF NON-GAAP FINANCIAL MEASURE
NET REVENUES
(in thousands of U.S. dollars)

Description of Non-GAAP Financial Measure - Net Revenues

Net revenues represents revenues less voyage expenses (recoveries), which comprise all expenses relating to certain voyages, including bunker fuel expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and commissions. Net revenues is a non-GAAP financial measure used by certain investors to measure the financial performance of shipping companies, however, it is not required by GAAP and should not be considered as an alternative to revenues or any other indicator of the Partnership's performance required by GAAP.

Three Months Ended June 30, 2014
(unaudited)
Shuttle Tanker Segment FPSO
Segment
FSO
Segment
Conventional Tanker Segment Total
Revenues 137,145 83,984 11,673 8,600 241,402
Voyage expenses 24,919 - 149 1,188 26,256
Net revenues 112,226 83,984 11,524 7,412 215,146
Three Months Ended June 30, 2013
(unaudited)
Shuttle Tanker Segment FPSO
Segment
FSO
Segment
Conventional Tanker Segment Total
Revenues 133,222 65,260 15,053 8,877 222,412
Voyage expenses 22,275 - - 998 23,273
Net revenues 110,947 65,260 15,053 7,879 199,139
Six Months Ended June 30, 2014
(unaudited)
Shuttle Tanker Segment FPSO
Segment
FSO
Segment
Conventional Tanker Segment Total
Revenues 290,325 167,121 25,962 17,228 500,636
Voyage expenses 56,625 - 172 2,913 59,710
Net revenues 233,700 167,121 25,790 14,315 440,926
Six Months Ended June 30, 2013
(unaudited)
Shuttle Tanker Segment FPSO
Segment
FSO
Segment
Conventional Tanker Segment Total
Revenues 263,572 122,945 30,193 17,814 434,524
Voyage expenses (recoveries) 44,569 - (485 ) 2,137 46,221
Net revenues 219,003 122,945 30,678 15,677 388,303
TEEKAY OFFSHORE PARTNERS L.P.
APPENDIX D - SUPPLEMENTAL SEGMENT INFORMATION
(in thousands of U.S. dollars)
Three Months Ended June 30, 2014
(unaudited)
Shuttle Tanker Segment FPSO Segment FSO Segment Conventional Tanker Segment Total
Net revenues (See Appendix C) 112,226 83,984 11,524 7,412 215,146
Vessel operating expenses 39,715 39,472 7,532 1,465 88,184
Time-charter hire expense 4,975 - - - 4,975
Depreciation and amortization 27,378 18,186 1,298 1,612 48,474
General and administrative 7,126 7,989 1,027 312 16,454
Acquisition fee (1) - - - - 1,600
Restructuring charge (821 ) - - - (821 )
Income from vessel operations 33,853 18,337 1,667 4,023 56,280
(1) The towage segment has not been disaggregated as its results are not material. A $1.6 million fee paid to Teekay Corporation associated with the Partnership's acquisition of ALP was recognized in general and administrative expenses in the consolidated statement of (loss) income for the three months ended June 30, 2014.
Three Months Ended June 30, 2013
(unaudited)
Shuttle Tanker Segment FPSO Segment FSO Segment Conventional Tanker Segment Total
Net revenues (See Appendix C) 110,947 65,260 15,053 7,879 199,139
Vessel operating expenses 36,511 40,074 8,315 1,619 86,519
Time-charter hire expense 14,093 - - - 14,093
Depreciation and amortization 28,165 17,789 2,743 1,568 50,265
General and administrative 4,911 4,600 809 97 10,417
Restructuring charge 957 - - 438 1,395
Income from vessel operations 26,310 2,797 3,186 4,157 36,450
TEEKAY OFFSHORE PARTNERS L.P.
APPENDIX E - RECONCILIATION OF NON-GAAP FINANCIAL MEASURE
CASH FLOW FROM VESSEL OPERATIONS FROM CONSOLIDATED VESSELS
(in thousands of U.S. dollars)

Description of Non-GAAP Financial Measure - Cash Flow from Vessel Operations from Consolidated Vessels

Cash flow from vessel operations from consolidated vessels represents income from vessel operations before depreciation and amortization expense, write-down of vessels and amortization of deferred gains, and includes the realized (losses) gains on the settlement of foreign exchange forward contracts, and cash flow from vessel operations relating to its discontinued operations and adjustments for direct financing leases to a cash basis. Cash flow from vessel operations is included because certain investors use this data to measure a company's financial performance. Cash flow from vessel operations is not required by GAAP and should not be considered as an alternative to net (loss) income or any other indicator of the Partnership's performance required by GAAP.

Three Months Ended June 30, 2014
(unaudited)
Shuttle Tanker Segment FPSO
Segment
FSO
Segment
Conventional Tanker Segment Total
Income from vessel operations (See Appendix D) (1) 33,853 18,337 1,667 4,023 56,280
Depreciation and amortization 27,378 18,186 1,298 1,612 48,474
Realized (losses) gains from the settlements of non- designated foreign exchange forward contracts (64 ) 260 - - 196
Amortization of non-cash portion of revenue contracts - (3,177 ) - - (3,177 )
Falcon Spirit revenue accounted for as direct financing lease - - (1,141 ) - (1,141 )
Falcon Spirit cash flow from time-charter contracts - - 2,142 - 2,142
Cash flow from vessel operations from consolidated vessels 61,167 33,606 3,966 5,635 102,774
(1) The total column includes a $1.6 million fee paid to Teekay Corporation associated with the Partnership's acquisition of ALP in income from vessel operations. This fee was recognized in general and administrative expenses in the consolidated statement of (loss) income for the three months ended June 30, 2014. The towage segment has not been disaggregated as its results are not material other than this fee.
Three Months Ended June 30, 2013
(unaudited)
Shuttle Tanker Segment FPSO
Segment
FSO
Segment
Conventional Tanker Segment Total
Income from vessel operations (See Appendix D) 26,310 2,797 3,186 4,157 36,450
Depreciation and amortization 28,165 17,789 2,743 1,568 50,265
Realized (losses) gains from the settlements of non- designated foreign exchange forward contracts (53 ) 271 - - 218
Amortization of intangible and non-cash portion of revenue contracts - (3,122 ) - - (3,122 )
Falcon Spirit revenue accounted for as direct financing lease - - (1,304 ) - (1,304 )
Falcon Spirit cash flow from time-charter contracts - - 2,124 - 2,124
Cash flow from discontinued operations - - - 6,085 6,085
Dropdown Predecessor cash flow from vessel operations(1) - (501 ) - - (501 )
Cash flow from vessel operations from consolidated vessels 54,422 17,234 6,749 11,810 90,215
(1) Cash flow for the Voyageur Spirit FPSO unit for the period April 13, 2013 through May 2, 2013 prior to its acquisition by the Partnership when it was under common control by Teekay Corporation, referred to as the Dropdown Predecessor, has been excluded from cash flow from vessel operations.
TEEKAY OFFSHORE PARTNERS L.P.
APPENDIX F - RECONCILIATION OF NON-GAAP FINANCIAL MEASURE
CASH FLOW FROM VESSEL OPERATIONS FROM EQUITY ACCOUNTED VESSEL
(in thousands of U.S. dollars)

Description of Non-GAAP Financial Measure - Cash Flow from Vessel Operations from Equity Accounted Vessel

Cash flow from vessel operations from equity accounted vessel represents income from vessel operations before depreciation and amortization expense. Cash flow from equity accounted vessel represents the Partnership's proportionate share of cash flow from vessel operations from its equity-accounted vessel, the Cidade de Itajai FPSO unit. Cash flow from vessel operations from equity accounted vessel is included because certain investors use cash flow from vessel operations to measure a company's financial performance, and to highlight this measure for the Partnership's equity accounted joint venture. Cash flow from vessel operations from equity accounted vessel is not required by GAAP and should not be considered as an alternative to equity income or any other indicator of the Partnership's performance required by GAAP.

Three Months Ended Three Months Ended
June 30, 2014 June 30, 2013
(unaudited) (unaudited)
At Partnership's At Partnership's
100% 50% 100% 50%
Voyage revenues 20,838 10,419 4,375 2,188
Vessel and other operating expenses 6,568 3,284 1,736 868
Depreciation and amortization 4,717 2,359 802 401
General and administrative - - 18 9
Income from vessel operations of equity accounted vessel 9,553 4,776 1,819 910
Net interest expense (2,044 ) (1,022 ) (887 ) (443 )
Realized and unrealized (losses) gains on derivative instruments (2,646 ) (1,323 ) 2,371 1,185
Foreign currency exchange gain (loss) 150 75 (38 ) (19 )
Total other items (4,540 ) (2,270 ) 1,446 723
Net income / equity income of equity accounted vessel before income tax expense 5,013 2,506 3,265 1,633
Income tax expense 237 118 69 35
Net income / equity income of equity accounted vessel 4,776 2,388 3,196 1,598
Income from vessel operations 9,553 4,776 1,819 910
Depreciation and amortization 4,717 2,359 802 401
Cash flow from vessel operations from equity accounted vessel 14,270 7,135 2,621 1,311
FORWARD LOOKING STATEMENTS

This release contains forward-looking statements (as defined in Section 21E of the Securities Exchange Act of 1934, as amended) which reflect management's current views with respect to certain future events and performance, including statements regarding: the fundamentals in the offshore industry; future growth opportunities, including the Partnership's ability to participate in new offshore projects or to grow organically; the accretive nature of any acquisitions and any future increases in the Partnership's distributable cash flows; the timing of new and converted vessel deliveries and commencement of their time-charter contracts; the potential for the Partnership to acquire future HiLoad projects and improved features of new HiLoad DP vessel designs; the effect of the Logitel acquisition on the Partnership's future cash flows and growth opportunities; the Partnership's intention to exercise its option on the third FAU unit; the timing and certainty of entering into long-term financing and charter contracts for the FAU newbuildings prior to their deliveries; the estimated cost of building or converting vessels or offshore units; the timing and certainty of the Partnership's joint venture with Odebrecht completing final contract negotiations for the Libra FPSO project with Petrobras; and the potential for Teekay Corporation or third parties to offer additional vessels or projects to the Partnership and the Partnership agreeing to acquire such vessels or projects, including the timing and certainty of the acquisition of the Petrojarl Knarr FPSO.

The following factors are among those that could cause actual results to differ materially from the forward-looking statements, which involve risks and uncertainties, and that should be considered in evaluating any such statement: vessel operations and oil production volumes; significant changes in oil prices; variations in expected levels of field maintenance; increased operating expenses; different-than-expected levels of oil production in the North Sea and Brazil offshore fields; potential early termination of contracts; shipyard delivery or vessel conversion delays and cost overruns; failure by the Partnership to secure financing or charter contracts for FAU newbuildings; failure to complete documentation related to the third FAU unit; changes in exploration, production and storage of offshore oil and gas, either generally or in particular regions that would impact expected future growth; delays in the commencement of time-charters; the inability to successfully complete the operational testing of the HiLoad DP unit; actual results of the new HiLoad DP unit designs; failure of Teekay Corporation to offer to the Partnership additional vessels or of Sevan, Remora or Odebrecht to develop new vessels or projects; failure by the Partnership's joint venture with Odebrecht to complete final contract negotiations with Petrobras for the Libra FPSO project; potential delays in the commencement of operations of the Petrojarl Knarr FPSO unit; failure to obtain required approvals by the Conflicts Committee of Teekay Offshore's general partner to approve the acquisition of vessels offered from Teekay Corporation, or third parties; the Partnership's ability to raise adequate financing to purchase additional assets; and other factors discussed in Teekay Offshore's filings from time to time with the SEC, including its Report on Form 20-F for the fiscal year ended December 31, 2013. The Partnership expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Partnership's expectations with respect thereto or any change in events, conditions or circumstances on which any such statement is based.

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