Teekay Offshore Partners L.P.
NYSE : TOO

Teekay Offshore Partners L.P.

August 09, 2012 08:30 ET

Teekay Offshore Partners Reports Second Quarter Results

HAMILTON, BERMUDA--(Marketwire - Aug. 9, 2012) - Teekay Offshore Partners L.P. (NYSE:TOO) -

Highlights

  • Generated distributable cash flow(1) of $54.2 million in the second quarter of 2012, up approximately 27 percent from the same period of the prior year.

  • Received offer from Teekay Corporation to acquire the Voyageur Spirit FPSO unit.

  • Three-year extension option on the Petrojarl Varg FPSO unit exercised by Talisman Energy, extending firm contract period to June 30, 2016.

  • Total liquidity of $373 million as at June 30, 2012, including the Partnership's $46 million equity private placement completed in July 2012.

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, 2012. During the second quarter of 2012, the Partnership generated distributable cash flow(1) of $54.2 million, compared to $42.6 million in the same period of the prior year.

On July 13, 2012, a cash distribution of $0.5125 per common unit was declared for the quarter ended June 30, 2012. The cash distribution is payable on August 10, 2012 to all unit holders of record on July 25, 2012.

"The Partnership's second quarter distributable cash flow was up 27 percent from the same quarter last year due primarily to higher revenues, including a $14.7 million charter termination fee received from Teekay Corporation, and lower operating and time-charter-in costs, as well as accretive acquisitions completed over the past year," commented Peter Evensen, Teekay Offshore GP LLC's Chief Executive Officer. "The extension of the Petrojarl Varg FPSO unit time-charter for an additional three years further enhances the Partnership's cash flow stability and with several FPSO assets soon to be available for purchase from Teekay Corporation, the Partnership is also well-positioned for visible cash flow growth over the next several years. This includes an offer from Teekay Corporation to the Partnership to purchase the Voyageur Spirit FPSO unit, which offer was received in June and is currently being reviewed by the Conflicts Committee of the Partnership's Board of Directors."

"Furthermore, construction of the Partnership's four newbuilding shuttle tankers is on schedule," Mr. Evensen added. "Proceeds from the Partnership's recently completed $46 million equity private placement will be used to partially finance upcoming shipyard installment payments on these vessels, which are expected to deliver from the shipyard between April and October 2013."

  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).

Teekay Offshore's Fleet

The following table summarizes Teekay Offshore's fleet as of August 1, 2012.

Number of Vessels
Owned
Vessels
Chartered-in Vessels Committed Newbuildings Conversion Candidates
(iii)
Total
Shuttle Tanker Segment 30(i) 4 4(ii) 2 40
Conventional Tanker Segment 7 - - 2 9
FSO Segment 5 - - - 5
FPSO Segment 3 - - - 3
Total 45 4 4 4 57
  1. 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.
  2. Includes four shuttle tanker newbuildings expected to deliver in mid- to late-2013 and commence operations under contracts with a subsidiary of BG Group plc in Brazil.
  3. Includes two shuttle tankers and two conventional tankers which are currently in lay-up and are candidates for conversion to offshore assets.

Future Growth Opportunities

Pursuant to an omnibus agreement that Teekay Offshore entered into in connection with its initial public offering in December 2006, Teekay Corporation (Teekay) is obligated to offer to the Partnership its interest in certain shuttle tankers, floating storage and offtake (FSO) units and floating, production, storage and offloading (FPSO) units Teekay 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 may offer it from time to time and intends to pursue direct acquisitions from third parties and new organic offshore projects.

Shuttle Tankers

In June 2011, the Partnership entered into a long-term contract with a subsidiary of BG Group plc (BG) to provide shuttle tanker services in Brazil. The contract with BG will be serviced by four Suezmax newbuilding shuttle tankers under construction by Samsung Heavy Industries for an estimated total delivered cost of approximately $470 million. Upon their scheduled deliveries in mid- to late-2013, the vessels will commence operations under 10-year, fixed-rate time-charter contracts. The contract with BG also includes certain extension options and vessel purchase options.

FPSO Units

As previously announced, on November 30, 2011, Teekay acquired from Sevan Marine ASA (Sevan) the Hummingbird Spirit FPSO unit (which is currently operating under a short-term charter contract), and has agreed to acquire the Voyageur Spirit FPSO unit upon the completion of certain upgrades that are expected to be completed in the fourth quarter of 2012 (upon which time the unit is expected to commence operations under a 5-year charter contract, plus extension options). In June 2012, Teekay formally offered to sell the Voyageur Spirit FPSO unit to Teekay Offshore at fair market value and the offer is currently being reviewed by the Conflicts Committee of the Partnership's Board of Directors. Pursuant to the omnibus agreement, Teekay is obligated to offer the Hummingbird Spirit FPSO unit to Teekay Offshore within approximately one year following commencement of a charter contract with a firm period of greater than three years in duration.

Pursuant to the omnibus agreement and a subsequent agreement, Teekay is obligated to offer to sell the Petrojarl Foinaven FPSO unit, an existing unit owned by Teekay and operating under a long-term contract in the North Sea, to Teekay Offshore prior to July 9, 2013. The purchase price for the Petrojarl Foinaven FPSO unit would be its fair market value plus any additional tax or other costs to Teekay that would be required to transfer the FPSO unit to the Partnership.

In October 2010, Teekay signed a long-term contract with Petroleo Brasileiro S.A. (or Petrobras) to provide an FPSO unit for the Tiro and Sidon fields located in the Santos Basin offshore Brazil. The contract with Petrobras will be serviced by a newly-converted FPSO unit named Cidade de Itajai. This FPSO unit is scheduled to deliver from the shipyard in the third quarter of 2012 and arrive in Brazilian waters in the fourth quarter of 2012, at which time the unit is expected to commence operations under a nine-year, fixed-rate time-charter contract with Petrobras with six additional one-year extension options. Pursuant to the omnibus agreement, Teekay is obligated to offer to the Partnership its 50 percent interest in this FPSO project at Teekay's fully built-up cost, within approximately one year after the commencement of its charter with Petrobras.

In May 2011, Teekay entered into a joint venture agreement with Odebrecht Oil & Gas S.A. (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. As part of the joint venture agreement, Odebrecht is a 50 percent partner in the Tiro Sidon FPSO project and Teekay is currently working with Odebrecht on other FPSO project opportunities that, if awarded, may result in the Partnership being able to acquire Teekay's interests in such projects pursuant to the omnibus agreement.

In June 2011, Teekay entered into a new contract with BG Norge Limited to provide a high-specification FPSO unit for the Knarr oil and gas field located in the North Sea. The contract will be serviced by a new FPSO unit to be constructed by Samsung Heavy Industries for a fully built-up cost of approximately $1 billion. Pursuant to the omnibus agreement, Teekay is obligated to offer to the Partnership its interest in this FPSO project at Teekay's fully built-up cost, within approximately one year after the commencement of the charter, which is expected to commence in the first quarter of 2014.

Financial Summary

The Partnership reported adjusted net income attributable to the partners(1) (as detailed in Appendix A to this release) of $20.6 million for the quarter ended June 30, 2012, compared to $26.2 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 $32.8 million and $37.5 million for the quarters ended June 30, 2012 and June 30, 2011, respectively, as detailed in Appendix A. Including these items, the Partnership reported, on a GAAP basis, net loss attributable to the partners of $12.1 million for the second quarter of 2012, compared to $11.4 million in the same period of the prior year. Net revenues(2) for the second quarter of 2012 increased to $213.4 million, compared to $201.6 million in the same period of the prior year.

The Partnership reported adjusted net income attributable to the partners(1) (as detailed in Appendix A to this release) of $46.7 million for the six months ended June 30, 2012, compared to $48.3 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 $6.2 million and $36.2 million for the six months ended June 30, 2012 and June 30, 2011, respectively, as detailed in Appendix A. Including these items, the Partnership reported, on a GAAP basis, net income attributable to the partners of $40.5 million for the six months ended June 30, 2012, compared to $12.0 million in the same period of the prior year. Net revenues(2) for the six months ended June 30, 2012 increased to $421.5 million, compared to $409.9 million in the same period of the prior year.

For accounting purposes, the Partnership is required to recognize, through the consolidated statements of (loss) income, changes in the fair value of certain derivative instruments as unrealized gains or losses. This revaluation does not affect the economics of any hedging transactions or have any impact on the Partnership's actual cash flows or the calculation of its distributable cash flow.

  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 income that are typically excluded by securities analysts in their published estimates of the Partnership's financial results.
  2. Net revenues represents revenues less voyage expenses, which comprise all expenses relating to certain voyages, including bunker fuel expenses, port fees, canal tolls and brokerage commissions. Net revenues is a non-GAAP financial measure used by certain investors to measure the financial performance of shipping companies. Please see the Partnership's web site at www.teekayoffshore.com for a reconciliation of this non-GAAP measure as used in this release to the most directly comparable GAAP financial measure.

Operating Results

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

Three Months Ended
June 30, 2012
(unaudited)
(in thousands of U.S. dollars) Shuttle Tanker Segment Conventional Tanker Segment FSO Segment FPSO Segment Total
Net revenues(1) 111,597 30,656 14,781 56,317 213,351
Vessel operating expenses 33,341 4,366 6,519 25,854 70,080
Time-charter hire expense 12,969 - - - 12,969
Depreciation and amortization 31,944 3,331 2,001 12,727 50,003
Cash flow from vessel operations(2) 54,282 25,192 8,010 22,329 109,813
Three Months Ended
June 30, 2011
(unaudited)
(in thousands of U.S. dollars) Shuttle Tanker Segment Conventional Tanker Segment FSO Segment FPSO Segment Total
Net revenues(1) 113,471 30,915 14,626 42,561 201,573
Vessel operating expenses 42,109 6,012 7,411 19,665 75,197
Time-charter hire expense 18,182 - - - 18,182
Depreciation and amortization 28,704 5,557 2,991 8,911 46,163
Cash flow from vessel operations(2) 44,551 24,145 6,520 19,955 95,171
  1. Net revenues represents revenues less voyage expenses, which comprise all expenses relating to certain voyages, including bunker fuel expenses, port fees, canal tolls and brokerage commissions. Net revenues is a non-GAAP financial measure used by certain investors to measure the financial performance of shipping companies. Please see the Partnership's web site at www.teekayoffshore.com for a reconciliation of this non-GAAP measure as used in this release to the most directly comparable GAAP financial measure.
  2. Cash flow from vessel operations represents income from vessel operations before depreciation and amortization expense and amortization of deferred gains and in-process revenue contract, loss on sale of vessel and write-down of vessels, includes the realized gains (losses) on the settlement of foreign exchange forward contracts, excludes the cash flow from vessel operations relating to the Partnership's Variable Interest Entities and adjusting for direct financing leases to a cash basis. Cash flow from vessel operations is a non-GAAP financial measure used by certain investors to measure the financial performance of shipping companies. Please see the Partnership's web site at www.teekayoffshore.com for a reconciliation of this non-GAAP measure as used in this release to the most directly comparable GAAP financial measure.

Shuttle Tanker Segment

Cash flow from vessel operations from the Partnership's Shuttle Tanker segment increased to $54.3 million for the second quarter of 2012 compared to $44.6 million for the same period of the prior year, primarily due to decreases in vessel operating expenses and time-charter hire expense. Vessel operating expenses decreased due to lower repairs and maintenance and crewing costs, and due to the lay-ups of the shuttle tankers Navion Torinita and Basker Spirit commencing in the second quarter of 2012 and the third quarter of 2011, respectively. Time-charter hire expense decreased due to the redelivery of one in-chartered vessel in the fourth quarter of 2011 and fewer short-term chartered-in days.

Conventional Tanker Segment

Cash flow from vessel operations from the Partnership's Conventional Tanker segment increased to $25.2 million in the second quarter of 2012 compared to $24.1 million for the same period of the prior year. In June 2012, the Partnership sold a 1997-built conventional Aframax tanker to a third party buyer for net proceeds of $8.7 million. As a result of the early termination of the time-charter for this vessel, the Partnership received a termination fee of $14.7 million from Teekay the charterer of the vessel. This is partially offset by the expiry of time-charter contracts on two conventional tankers during the fourth quarter of 2011, which are currently laid up, and the sale of a conventional Aframax tanker, the Scotia Spirit in the third quarter of 2011.

FSO Segment

Cash flow from vessel operations from the Partnership's FSO segment increased to $8.0 million in the second quarter of 2012 compared to $6.5 million for the same period of the prior year, primarily due to a decrease in vessel operating expenses as a result of a decrease in the consumption and use of consumables.

FPSO Segment

Cash flow from vessel operations from the Partnership's FPSO segment increased to $22.3 million for the second quarter of 2012 compared to $20.0 million for the same period of the prior year, primarily due to the acquisition of the Piranema Spirit FPSO unit on November 30, 2011. Vessel operating expenses for the Piranema Spirit FPSO unit in the second quarter of 2012 includes additional maintenance costs from a scheduled shutdown.

Liquidity

As of June 30, 2012, the Partnership had total liquidity of $327.5 million, which consisted of $179.5 million in cash and cash equivalents and $148.0 million in undrawn revolving credit facilities. Following the $45.9 million private placement completed in July 2012, the Partnership had total liquidity of $373.4 million.

Conference Call

The Partnership plans to host a conference call on Friday, August 10, 2012 at noon (ET) to discuss its results for the second quarter of 2012. An accompanying investor presentation will be available on Teekay Offshore's website at www.teekayoffshore.com prior to the start of the call. All unitholders and interested parties are invited to listen to the live conference call by choosing from the following options:

• By dialing (866) 322-8032 or (416) 640-3406, if outside North America, and quoting conference ID code 4125062.

• 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).

The conference call will be recorded and made available until Friday August 17, 2012. This recording can be accessed following the live call by dialing (888) 203-1112 or (647) 436-0148, if outside North America, and entering access code 4125062.

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 owns interests in 40 shuttle tankers (including four chartered-in vessels and four committed newbuildings), three floating production, storage and offloading (FPSO) units, five floating storage and offtake (FSO) units and nine conventional oil tankers. Teekay Offshore has rights to participate in certain other FPSO and shuttle tanker opportunities provided by Teekay Corporation (NYSE:TK) and Sevan Marine ASA (Oslo Bors:SEVAN). The Partnership has recently received an offer from Teekay Corporation to acquire the Voyageur Spirit FPSO unit which offer is currently being reviewed by the Conflicts Committee of the Partnership's Board of Directors. A majority of Teekay Offshore's fleet trades on long-term, stable contracts and it is structured as a publicly-traded master limited partnership.

Teekay Offshore Partners' 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, 2012 March 31, 2012 June 30, 2011 June 30, 2012 June 30, 2011
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
REVENUES 251,151 244,598 234,145 495,749 467,916
OPERATING EXPENSES
Voyage expenses 37,800 36,481 32,572 74,281 58,037
Vessel operating expenses(1) 70,080 71,007 75,197 141,087 150,327
Time-charter hire expense 12,969 13,617 18,182 26,586 38,452
Depreciation and amortization 50,003 49,611 46,163 99,614 91,733
General and administrative(1) 18,689 20,136 18,157 38,825 36,887
Loss on sale of vessels and write-down of vessels 3,269 - 8,194 3,269 9,265
Restructuring charge(2) - - - - 3,924
192,810 190,852 198,465 383,662 388,625
Income from vessel operations 58,341 53,746 35,680 112,087 79,291
OTHER ITEMS
Interest expense (12,506 ) (12,776 ) (8,890 ) (25,282 ) (17,359 )
Interest income 138 212 150 350 279
Realized and unrealized (loss) gain on derivative instruments(3) (60,317 ) 16,239 (38,720 ) (44,078 ) (27,880 )
Foreign exchange gain (loss)(4) 888 (2,758 ) 367 (1,870 ) (432 )
Income tax recovery (expense) 1,946 (1,485 ) (3,037 ) 461 (5,690 )
Other (loss) income - net (119) 1,425 1,159 1,306 2,469
Net (loss) income (11,629 ) 54,603 (13,291 ) 42,974 30,678
Net (loss) income attributable to:
Non-controlling interests 499 1,969 (1,937 ) 2,468 18,656
Partners (12,128 ) 52,634 (11,354 ) 40,506 12,022
Limited partners' units outstanding:
Weighted-average number of common units outstanding
- Basic and diluted 70,626,554 70,626,554 62,800,314 70,626,554 60,000,819
Total units outstanding at end of period 70,626,554 70,626,554 62,800,314 70,626,554 62,800,314
  1. The Partnership has entered into foreign exchange forward contracts, which are economic hedges for certain vessel operating expenses and general and administrative expenses. Certain of these forward contracts have been designated as cash flow hedges pursuant to GAAP. Unrealized (losses) gains arising from hedge ineffectiveness from such forward contracts are reflected in vessel operating expenses, and general and administrative expenses in the above Summary Consolidated Statements of (Loss) Income as detailed in the table below:
Three Months Ended Six Months Ended
June 30, 2012 March 31, 2012 June 30, 2011 June 30, 2012 June 30, 2011
Vessel operating expenses - - (83 ) - (267 )
General and administrative (254 ) 20 69 (234 ) 199
  1. Restructuring charges for the six months ended June 30, 2011 were incurred in connection with the sale of an FSO unit and the termination of the charter contract of one of the Partnership's shuttle tankers.
  1. The realized (losses) gains on derivative instruments relate to the amounts the Partnership actually paid or received to settle such 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, 2012 March 31, 2012 June 30, 2011 June 30, 2012 June 30, 2011
Realized (losses) gains relating to:
Interest rate swaps (14,338 ) (15,007 ) (13,769 ) (29,345 ) (27,471 )
Foreign currency forward contract 437 1,198 1,204 1,635 1,622
(13,901 ) (13,809 ) (12,565 ) (27,710 ) (25,849 )
Unrealized (losses) gains relating to:
Interest rate swaps (41,842 ) 24,763 (26,969 ) (17,079 ) (6,204 )
Foreign currency forward contracts (4,574 ) 5,285 814 711 4,173
(46,416 ) 30,048 (26,155 ) (16,368 ) (2,031 )
Total realized and unrealized (losses) gains on non-designated derivative instruments (60,317 ) 16,239 (38,720 ) (44,078 ) (27,880 )
  1. Foreign exchange gain (loss) includes 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 in relation 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 maturing in 2013 and issued NOK 600 million unsecured bonds in 2012 maturing in 2017. Foreign exchange gain (loss) also includes 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, 2012 March 31, 2012 June 30, 2011 June 30, 2012 June 30, 2011
Realized gains on cross-currency swaps 696 994 777 1,690 1,444
Unrealized (losses) gains on cross-currency swaps (10,776 ) 7,879 3,135 (2,897 ) 9,363
Unrealized gains (losses) on revaluation of NOK bonds 9,414 (9,031 ) (3,058 ) 383 (8,312 )
TEEKAY OFFSHORE PARTNERS L.P.
SUMMARY CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars)
As at As at As at
June 30, 2012 March 31, 2012 December 31, 2011
(unaudited) (unaudited) (unaudited)
ASSETS
Cash and cash equivalents 179,462 234,742 179,934
Vessels held for sale 14,930 19,000 19,000
Other current assets 157,242 162,295 148,825
Vessels and equipment 2,446,287 2,493,934 2,539,949
Advances on newbuilding contracts 69,163 46,333 45,637
Other assets 61,875 71,768 62,627
Intangible assets 18,585 20,114 21,644
Goodwill 127,113 127,113 127,113
Total Assets 3,074,657 3,175,299 3,144,729
LIABILITIES AND EQUITY
Accounts payable and accrued liabilities 91,606 98,963 99,220
Other current liabilities 102,445 112,848 99,624
Current portion of long-term debt 261,272 214,274 229,365
Long-term debt 1,734,169 1,847,607 1,799,711
Other long-term liabilities 400,634 362,118 393,769
Redeemable non-controlling interest 36,356 37,805 38,307
Equity:
Non-controlling interest 40,384 42,046 40,622
Partners' equity 407,791 459,638 444,111
Total Liabilities and Equity 3,074,657 3,175,299 3,144,729
TEEKAY OFFSHORE PARTNERS L.P.
SUMMARY CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars)
Six Months Ended June 30,
2012 2011
(unaudited) (unaudited)
Cash and cash equivalents provided by (used for)
OPERATING ACTIVITIES
Net operating cash flow 126,229 152,506
FINANCING ACTIVITIES
Proceeds from drawdown of long-term debt 265,053 311,472
Scheduled repayments of long-term debt (95,032 ) (69,429 )
Prepayments of long-term debt (203,273 ) (50,360 )
Advance from joint venture partner - 14,500
Contribution by Teekay Corporation relating to acquisition of Rio das Ostras - 2,000
Purchase of 49% interest in Teekay Offshore Operating L.P. - (160,000 )
Equity contribution from joint venture partner 1,000 2,250
Cash distributions paid by the Partnership (76,779 ) (61,335 )
Cash distributions paid by subsidiaries to non-controlling interests (5,657 ) (19,642 )
Other (4,479 ) (91 )
Net financing cash flow (119,167 ) (30,635 )
INVESTING ACTIVITIES
Expenditures for vessels and equipment (26,148 ) (145,611 )
Direct financing lease payments received 9,129 10,477
Proceeds from sale of vessels and equipment 9,485 5,054
Investment in direct financing lease assets - 370
Net investing cash flow (7,534 ) (129,710 )
Decrease in cash and cash equivalents (472 ) (7,839 )
Cash and cash equivalents, beginning of the period 179,934 166,483
Cash and cash equivalents, end of the period 179,462 158,644
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, 2012 June 30, 2011 June 30, 2012 June 30, 2011
(unaudited) (unaudited) (unaudited) (unaudited)
Net (loss) income - GAAP basis (11,629 ) (13,291 ) 42,974 30,678
Adjustments:
Net (income) loss attributable to non-controlling interests (499 ) 1,937 (2,468 ) (18,656 )
Net (loss) income attributable to the partners (12,128 ) (11,354 ) 40,506 12,022
Add (subtract) specific items affecting net (loss) income:
Foreign exchange (gains) losses(1) (192 ) 411 3,560 1,875
Foreign currency exchange losses resulting from hedging ineffectiveness(2) 254 14 234 68
Deferred income tax expense relating to unrealized foreign exchange gains(3) - 3,577 - 10,096
Unrealized losses on derivative instruments(4) 46,416 26,155 16,368 2,031
Loss on sale of vessels(5) 2,221 - 2,221 171
Write-down of vessels(6) 1,048 8,194 1,048 9,094
Termination fee(7) (14,670 ) - (14,670 ) -
Restructuring charges and other(8) (2,410 ) - (2,956 ) 4,873
Non-controlling interests' share of items above 94 (810 ) 407 8,039
Total adjustments 32,761 37,541 6,212 36,247
Adjusted net income attributable to the partners 20,633 26,187 46,718 48,269
  1. Foreign exchange (gains) losses 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 exclude the realized gains relating to the cross currency swaps for outstanding Norwegian bonds of the Partnership.
  2. Foreign currency exchange losses resulting from hedging ineffectiveness include the unrealized losses arising from hedge ineffectiveness from foreign exchange forward contracts that are or have been designated as hedges for accounting purposes.
  3. Portion of deferred income tax (recovery) expense related to unrealized foreign exchange gains and losses. There is no adjustment for this item for the three and six months ended June 30, 2012, as a full valuation allowance was taken starting in the third quarter of 2011 against the deferred tax asset.
  4. Reflects the unrealized 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.
  5. Loss on sale of vessels relates to the sale of a 1997-built conventional tanker in 2012 and the Karratha Spirit FSO unit in 2011.
  6. The write-down of vessels for the three and six months ended June 30, 2012 and 2011 relates to the valuation impairment of one shuttle tanker in 2012 and one conventional tanker in 2011, respectively, based on their estimated fair value.
  7. A termination fee was received upon cancellation of the Hamane Spirit conventional tanker's time-charter contract with Teekay Corporation.
  8. Other items include a loss of $0.4 million and a gain of $0.2 million for the three months and six months ended June 30, 2012, respectively, related to the revaluation of a fair value adjustment of contingent consideration liability associated with the purchase of the Scott Spirit shuttle tanker. Other items include a one-time reversal of an income tax accrual of $2.8 million for the three and six months ended June 30, 2012. Restructuring charges of $3.9 million for the six months ended June 30, 2011 were incurred in connection with the sale of an FSO unit and the termination of the charter contract of one of the Partnership's shuttle tankers. Other items for the six months ended June 30, 2011 include $0.9 million related to a one-time management fee associated with the portion of stock-based compensation grants for Teekay's former Chief Executive Officer that had not yet vested prior to the date of his retirement on March 31, 2011.
TEEKAY OFFSHORE PARTNERS L.P.
APPENDIX B - RECONCILIATION OF NON-GAAP FINANCIAL MEASURE
(in thousands of U.S. dollars)

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

Distributable cash flow represents net loss adjusted for depreciation and amortization expense, non-controlling interest, non-cash items, distributions relating to equity financing of newbuilding instalments, vessel acquisition costs, estimated maintenance capital expenditures, unrealized gains and losses from derivatives, non-cash income taxes 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 or any other indicator of the Partnership's performance required by GAAP. The table below reconciles distributable cash flow to net loss for the quarters ended June 30, 2012 and June 30, 2011, respectively.

Three Months Ended
June 30, 2012 June 30, 2011
(unaudited) (unaudited)
Net loss (11,629 ) (13,291 )
Add (subtract):
Loss on sale of vessel and write-down of vessels 3,269 8,194
Depreciation and amortization 50,003 46,163
Distributions relating to equity financing of newbuilding instalments 1,447 -
Foreign exchange and other, net (2,682 ) 4,259
Estimated maintenance capital expenditures (27,652 ) (25,793 )
Unrealized gains on non-designated derivative instruments 46,416 26,155
Distributable Cash Flow before Non-Controlling Interest 59,172 45,687
Non-controlling interests' share of DCF (4,991 ) (3,097 )
Distributable Cash Flow 54,181 42,590
TEEKAY OFFSHORE PARTNERS L.P.
APPENDIX C - SUPPLEMENTAL SEGMENT INFORMATION
(in thousands of U.S. dollars)
Three Months Ended June 30, 2012
(unaudited)
Shuttle Tanker Segment Conventional Tanker Segment FSO Segment FPSO Segment Total
Net revenues(1) 111,597 30,656 14,781 56,317 213,351
Vessel operating expenses 33,341 4,366 6,519 25,854 70,080
Time-charter hire expense 12,969 - - - 12,969
Depreciation and amortization 31,944 3,331 2,001 12,727 50,003
General and administrative 11,709 1,098 919 4,963 18,689
Loss on sale of vessel and write-down of vessel 1,048 2,221 - - 3,269
Income from vessel operations 20,586 19,640 5,342 12,773 58,341
Three Months Ended June 30, 2011
(unaudited)
Shuttle Tanker Segment Conventional Tanker Segment FSO Segment FPSO Segment Total
Net revenues(1) 113,471 30,915 14,626 42,561 201,573
Vessel operating expenses 42,109 6,012 7,411 19,665 75,197
Time-charter hire expense 18,182 - - - 18,182
Depreciation and amortization 28,704 5,557 2,991 8,911 46,163
General and administrative 13,197 758 1,242 2,960 18,157
Write-down of vessel - 8,194 - - 8,194
Income from vessel operations 11,279 10,394 2,982 11,025 - 35,680
  1. Net revenues represents revenues less voyage expenses, which comprise all expenses relating to certain voyages, including bunker fuel expenses, port fees, canal tolls and brokerage commissions. Net revenues is a non-GAAP financial measure used by certain investors to measure the financial performance of shipping companies. Please see the Partnership's web site at www.teekayoffshore.com for a reconciliation of this non-GAAP measure as used in this release to the most directly comparable GAAP financial measure.

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 Partnership's future growth and stability of the Partnership's distributable cash flow; the potential for Teekay to offer additional vessels to the Partnership and the Partnership's acquisition of any such vessels, including the Petrojarl Foinaven, the Petrojarl Cidade de Itajai, the Hummingbird Spirit and the newbuilding FPSO unit that will service the Knarr field under contract with BG Norge Limited; the potential for the Partnership to accept Teekay's offer of the Voyageur Spirit FPSO unit; the timing of delivery of vessels under construction or conversion; and the potential for the Partnership to acquire other vessels or offshore projects from Teekay or directly from third parties. 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; failure of Teekay to offer to the Partnership additional vessels; the inability of the joint venture between Teekay and Odebrecht to secure new Brazil FPSO projects that may be offered for sale to the Partnership; failure to obtain required approvals by the Conflicts Committee of Teekay Offshore's general partner to acquire other vessels or offshore projects from Teekay or third parties, including the Voyageur Spirit FPSO unit; 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, 2011. 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.

Contact Information

  • Teekay Offshore Partners L.P.
    Kent Alekson
    Investor Relations Enquiries
    +1 (604) 609-6442
    www.teekayoffshore.com