NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all
tabular amounts stated in thousands of U.S. dollars, except unit and per unit
data or unless otherwise indicated)
1. Basis
of Presentation
During
August 2006, Teekay Corporation formed Teekay Offshore Partners L.P., a Marshall
Islands limited partnership (the
Partnership
), as part of its strategy
to expand in the marine transportation, processing and storage sectors of the
offshore oil industry and for the Partnership to acquire, in connection with
the
Partnership’s initial public offering of its common units, a 26.0% interest in
Teekay Offshore Operating L.P. (or
OPCO
), consisting of a 25.99%
limited partner interest to be held directly by the Partnership and a 0.01%
general partner interest to be held through the Partnership’s ownership of
Teekay Offshore Operating GP L.L.C., OPCO’s sole general partner.
Prior
to
the closing of the Partnership’s initial public offering on December 19, 2006,
Teekay Corporation transferred eight Aframax-class conventional crude oil
tankers to a subsidiary of Norsk Teekay Holdings Ltd. (or
Norsk Teekay
)
and one floating storage and offtake (or
FSO
) unit to Teekay Offshore
Australia Trust. Teekay Corporation then transferred to OPCO all of the
outstanding interests of four wholly-owned subsidiaries — Norsk Teekay,
Teekay Nordic Holdings Inc. (or
Teekay Nordic
), Teekay Offshore
Australia Trust and Pattani Spirit L.L.C. These four wholly-owned subsidiaries,
the assets of which include the eight Aframax-class conventional crude oil
tankers and the FSO unit, are collectively referred to as
Teekay Offshore
Partners Predecessor
or the
Predecessor
. The excess of the price
paid by the Partnership over the book value of these assets was $226.8 million
and was accounted for as an equity distribution to Teekay Corporation.
Immediately prior to the closing of the Partnership’s initial public offering,
Teekay Corporation sold to the Partnership the 25.99% limited partner interest
in OPCO and its subsidiaries and a 100% interest in Teekay Offshore Operating
GP
L.L.C., which owns the 0.01% general partner interest in OPCO, in exchange
for
(a) the issuance to Teekay Corporation of 2,800,000 common units and
9,800,000 subordinated units of the Partnership and a $134.6 million
non-interest bearing promissory note and (b) the issuance of the 2.0%
general partner interest in the Partnership and all of the Partnership’s
incentive distribution rights to Teekay Offshore GP L.L.C., a wholly owned
subsidiary of Teekay Corporation (or
the General Partner
). The
Partnership controls OPCO through its ownership of OPCO’s general partner, and
Teekay Corporation owns the remaining 74.0% interest in OPCO. These transfers
represented a reorganization of entities under common control and were recorded
at historical cost. Immediately preceding the public offering, the net book
equity of the Partnership’s 26% share of these assets was $3.5
million.
The
accompanying unaudited interim consolidated financial statements for periods
prior to the initial public offering reflect the combined consolidated financial
position, results of operations and cash flows of the Predecessor and its
subsidiaries. In the preparation of these unaudited interim combined
consolidated financial statements of the Predecessor, general and administrative
expenses were not identifiable as relating solely to the vessels. General and
administrative expenses, which consist primarily of salaries and other employee
related costs, office rent, legal and professional fees, and travel and
entertainment, were allocated based on the Predecessor’s proportionate share of
Teekay Corporation’s total ship-operating (calendar) days for each of the
periods presented. Management believes this allocation reasonably presents
the
general and administrative expenses of the Predecessor.
The
accompanying unaudited interim consolidated financial statements have been
prepared in accordance with United States generally accepted accounting
principles (or
GAAP
). The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions
that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates. These financial statements
include the accounts of the Predecessor and its subsidiaries for the periods
prior to the Partnership's initial public offering on December 19, 2006. For
periods commencing December 19, 2006, the consolidated financial statements
include the accounts of Teekay Offshore Partners L.P. and its subsidiaries.
In
addition, the consolidated financial statements include the accounts of the
Predecessor’s and the Partnership’s controlled joint ventures from December 1,
2006, the date the joint venture operating agreements were amended such that
OPCO obtained control of these joint ventures. Certain information and footnote
disclosures required by GAAP for complete annual financial statements have
been
omitted and, therefore, these interim financial statements should be read in
conjunction with the Partnership’s audited consolidated financial statements for
the year ended December 31, 2006. In the opinion of the General Partner’s
management, these interim consolidated financial statements reflect all
adjustments, of a normal recurring nature, necessary to present fairly, in
all
material respects, the Partnership’s consolidated financial position, results of
operations, changes in partners’ equity and cash flows for the interim periods
presented. The results of operations for the interim periods presented are
not
necessarily indicative of those for a full fiscal year. Significant intercompany
balances and transactions have been eliminated upon consolidation.
2. Change
in Accounting Policy
In
July
2006, the Financial Accounting Standards Board (or
FASB
) issued FASB
Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109
(or
FIN 48
). This
interpretation clarifies the accounting for uncertainty in income taxes
recognized in financial statements in accordance with FASB Statement No.
109,
Accounting for Income Taxes
. FIN 48 requires companies to
determine whether it is more-likely-than-not that a tax position taken or
expected to be taken in a tax return will be sustained upon examination,
including resolution of any related appeals or litigation processes, based
on
the technical merits of the position. If a tax position meets the
more-likely-than-not recognition threshold, it is measured to determine the
amount of benefit to recognize in the financial statements based on guidance
in
the interpretation.
The
Partnership adopted FIN 48 as of January 1, 2007. The adoption of FIN 48 did
not
have a significant impact on the Partnership’s financial position and results of
operations. As of January 1 and September 30, 2007, the Partnership did not
have
any material unrecognized tax benefits or material accrued interest and
penalties relating to taxes. The Partnership does not expect any material
changes to its unrecognized tax positions within the next twelve
months.
TEEKAY
OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor
to Teekay Offshore Partners Predecessor)
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all
tabular amounts stated in thousands of U.S. dollars, except unit and per unit
data or unless otherwise indicated)
The
Partnership recognizes interest and penalties related to uncertain tax positions
in income tax expense. The tax years 2005 through 2006 remain open to
examination by the major taxing jurisdiction to which the Partnership is
subject.
3. Initial
Public Offering
On
December 19, 2006, the Partnership completed its initial public offering (or
the
Offering
) of 8.05 million common units at a price of $21.00 per unit.
This included 1.05 million common units sold to the underwriters in connection
with the exercise of their over-allotment option. The proceeds received by
the
Partnership from the Offering and the use of those proceeds are summarized
as
follows:
Proceeds
received:
|
|
|
|
Sale
of 8,050,000 common units at $21.00 per unit
|
|
$
|
169,050
|
|
|
|
|
|
|
Use
of proceeds from sale of common units:
|
|
|
|
|
Underwriting
and structuring fees
|
|
$
|
11,088
|
|
Professional
fees and other offering expenses to third parties
|
|
|
2,793
|
|
Repayment
of promissory note and redemption of 1.05 million common units from
Teekay
Corporation
|
|
|
155,169
|
|
|
|
$
|
169,050
|
|
4. Segment
Reporting
The
Partnership is engaged in the international marine transportation and storage
of
crude oil through the operation of its oil tankers and FSO units. The
Partnership’s revenues are earned in international markets.
The
Partnership has three reportable segments: its shuttle tanker segment; its
conventional tanker segment; and its FSO segment. The Partnership’s shuttle
tanker segment consists of shuttle tankers operating primarily on fixed-rate
contracts of affreightment, time-charter contracts or bareboat charter
contracts. The Partnership’s conventional tanker segment consists of
conventional tankers primarily operating on fixed-rate, time-charter contracts.
The Partnership’s FSO segment consists of its FSO units subject to fixed-rate,
time-charter contracts or bareboat charter contracts. Segment results are
evaluated based on income from vessel operations. The accounting policies
applied to the reportable segments are the same as those used in the preparation
of the Partnership’s consolidated financial statements for the year ended
December 31, 2006.
The
following tables present results for these segments for the three and nine
months ended September 30, 2007 and 2006:
|
|
Three
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Shuttle
Tanker Segment
$
|
|
|
Conventional
Tanker
Segment
$
|
|
|
FSO
Segment
$
|
|
|
Total
$
|
|
|
Shuttle
Tanker Segment
$
|
|
|
Conventional
Tanker
Segment
$
|
|
|
FSO
Segment
$
|
|
|
Total
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage
revenues
|
|
|
145,166
|
|
|
|
30,100
|
|
|
|
16,784
|
|
|
|
192,050
|
|
|
|
132,753
|
|
|
|
14,576
|
|
|
|
5,317
|
|
|
|
152,646
|
|
Voyage
expenses
|
|
|
29,404
|
|
|
|
6,816
|
|
|
|
238
|
|
|
|
36,458
|
|
|
|
22,559
|
|
|
|
1,399
|
|
|
|
168
|
|
|
|
24,126
|
|
Vessel
operating expenses
|
|
|
25,532
|
|
|
|
6,125
|
|
|
|
3,590
|
|
|
|
35,247
|
|
|
|
19,099
|
|
|
|
3,928
|
|
|
|
1,493
|
|
|
|
24,520
|
|
Time-charter
hire expense
|
|
|
37,161
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37,161
|
|
|
|
38,988
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38,988
|
|
Depreciation
and amortization
|
|
|
22,453
|
|
|
|
5,053
|
|
|
|
3,812
|
|
|
|
31,318
|
|
|
|
17,283
|
|
|
|
5,432
|
|
|
|
2,243
|
|
|
|
24,958
|
|
General
and administrative
(1)
|
|
|
12,908
|
|
|
|
2,070
|
|
|
|
753
|
|
|
|
15,731
|
|
|
|
11,552
|
|
|
|
2,033
|
|
|
|
398
|
|
|
|
13,983
|
|
Vessels
and equipment writedowns/ (gain) on sale of vessels
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,404
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,404
|
)
|
Restructuring
charge
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
353
|
|
|
|
-
|
|
|
|
353
|
|
Income
from vessel operations
|
|
|
17,708
|
|
|
|
10,036
|
|
|
|
8,391
|
|
|
|
36,135
|
|
|
|
29,676
|
|
|
|
1,431
|
|
|
|
1,015
|
|
|
|
32,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TEEKAY
OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor
to Teekay Offshore Partners Predecessor)
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS –
(Cont’d)
(all
tabular amounts stated in thousands of U.S. dollars, except unit and per unit
data or unless otherwise indicated)
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Shuttle
Tanker Segment
$
|
|
|
Conventional
Tanker
Segment
$
|
|
|
FSO
Segment
$
|
|
|
Total
$
|
|
|
Shuttle
Tanker Segment
$
|
|
|
Conventional
Tanker
Segment
$
|
|
|
FSO
Segment
$
|
|
|
Total
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage
revenues
|
|
|
435,730
|
|
|
|
102,748
|
|
|
|
33,513
|
|
|
|
571,991
|
|
|
|
395,956
|
|
|
|
126,131
|
|
|
|
17,283
|
|
|
|
539,370
|
|
Voyage
expenses
|
|
|
81,245
|
|
|
|
25,969
|
|
|
|
584
|
|
|
|
107,798
|
|
|
|
67,249
|
|
|
|
4,530
|
|
|
|
691
|
|
|
|
72,470
|
|
Vessel
operating expenses
|
|
|
73,160
|
|
|
|
17,187
|
|
|
|
8,678
|
|
|
|
99,025
|
|
|
|
57,506
|
|
|
|
14,959
|
|
|
|
5,009
|
|
|
|
77,474
|
|
Time-charter
hire expense
|
|
|
111,749
|
|
|
|
-
|
|
|
|
-
|
|
|
|
111,749
|
|
|
|
125,280
|
|
|
|
79,338
|
|
|
|
-
|
|
|
|
204,618
|
|
Depreciation
and amortization
|
|
|
62,973
|
|
|
|
15,748
|
|
|
|
10,221
|
|
|
|
88,942
|
|
|
|
53,094
|
|
|
|
16,219
|
|
|
|
6,976
|
|
|
|
76,289
|
|
General
and administrative
(1)
|
|
|
39,352
|
|
|
|
5,928
|
|
|
|
1,873
|
|
|
|
47,153
|
|
|
|
38,739
|
|
|
|
17,346
|
|
|
|
1,367
|
|
|
|
57,452
|
|
Vessels
and equipment writedowns/ (gain) on sale of vessels
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,254
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,254
|
)
|
Restructuring
charge
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
806
|
|
|
|
-
|
|
|
|
806
|
|
Income
(loss) from vessel operations
|
|
|
67,251
|
|
|
|
37,916
|
|
|
|
12,157
|
|
|
|
117,324
|
|
|
|
58,342
|
|
|
|
(7,067
|
)
|
|
|
3,240
|
|
|
|
54,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes
direct general and administrative expenses and indirect general and
administrative expenses (allocated to each segment based on estimated
use
of corporate resources).
|
|
A
reconciliation of total segment assets to total assets presented
in the
consolidated balance sheets is as
follows:
|
|
|
September
30,
2007
$
|
|
|
December
31, 2006
$
|
|
|
|
|
|
|
|
Shuttle
tanker segment
|
|
|
1,580,542
|
|
|
|
1,445,830
|
|
Conventional
tanker segment
|
|
|
255,312
|
|
|
|
310,699
|
|
FSO
segment
|
|
|
114,676
|
|
|
|
75,633
|
|
Unallocated:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
96,589
|
|
|
|
113,986
|
|
Accounts
receivable, prepaid expenses and other assets
|
|
|
114,711
|
|
|
|
95,173
|
|
Consolidated
total assets
|
|
|
2,161,830
|
|
|
|
2,041,321
|
|
5. Intangible
Assets
The
carrying amount of intangible assets as at September 30, 2007 and December
31,
2006 is as follows:
|
|
September
30,
2007
$
|
|
|
December
31, 2006
$
|
|
|
|
|
|
|
|
Gross
carrying amount
|
|
|
124,250
|
|
|
|
124,250
|
|
Accumulated
amortization
|
|
|
(66,128
|
)
|
|
|
(57,825
|
)
|
Net
carrying amount
|
|
|
58,122
|
|
|
|
66,425
|
|
Aggregate
amortization expense of intangible assets for the three and nine months ended
September 30, 2007 was $2.8 million ($3.0 million – 2006) and $8.3 million ($9.0
million – 2006), respectively. Amortization of intangible assets for the next
five years subsequent to September 30, 2007 is expected to be $2.8 million
(fourth quarter of 2007), $10.1 million (2008), $9.1 million (2009), $8.1
million (2010) and $7.0 million (2011).
TEEKAY
OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor
to Teekay Offshore Partners Predecessor)
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS –
(Cont’d)
(all
tabular amounts stated in thousands of U.S. dollars, except unit and per unit
data or unless otherwise indicated)
6.
|
Supplemental
Cash Flow Information
|
Cash
interest paid by the Partnership during the nine months ended September 30,
2007
and 2006 totaled $52.3 million and $35.6 million, respectively. No taxes were
paid during the nine months ended September 30, 2007. Taxes paid during the
nine
months ended September 30, 2006 totaled $0.1 million.
|
|
September
30,
2007
$
|
|
|
December
31, 2006
$
|
|
|
|
|
|
|
|
|
U.S.
Dollar-denominated Revolving Credit Facilities due through
2017
|
|
|
1,153,200
|
|
|
|
1,080,000
|
|
U.S.
Dollar-denominated Term Loans due through
2017
|
|
|
296,201
|
|
|
|
223,352
|
|
|
|
|
1,449,401
|
|
|
|
1,303,352
|
|
Less
current
portion
|
|
|
18,980
|
|
|
|
17,656
|
|
Total
|
|
|
1,430,421
|
|
|
|
1,285,696
|
|
As
at
September 30, 2007, the Partnership had three long-term revolving credit
facilities (collectively, the
Revolvers
), which, as at such date,
provided for borrowings of up to $1,417.7 million, of which $264.5 million
was undrawn. The total amount available under the Revolvers reduces by $46.5
million (fourth quarter of 2007), $101.8 million (2008),
$108.2 million (2009), $114.9 million (2010), $122.0 million
(2011) and $924.3 million (thereafter). Two of the Revolvers contain
covenants that require the Partnership to maintain the greater of a minimum
liquidity (cash, cash equivalents and undrawn committed revolving credit lines
with at least six months to maturity) of at least $75.0 million and 5.0% of
the Partnership’s total consolidated debt. The remaining revolving credit
facility is guaranteed by Teekay Corporation and contains covenants that require
Teekay Corporation to maintain the greater of a minimum liquidity of at least
$50.0 million and 5.0% of Teekay Corporation’s total consolidated debt. The
Revolvers are collateralized by first-priority mortgages granted on 28 of the
Partnership’s vessels, together with other related collateral, including a
guarantee from certain subsidiaries of the Partnership for all outstanding
amounts.
As
at
September 30, 2007, each of the Partnership’s six 50%-owned joint ventures had
an outstanding term loan, which in aggregate totaled $296.2 million. The term
loans have varying maturities through 2017 and semi-annual payments that reduce
over time. All term loans are collateralized by first-priority mortgages on
the
vessels to which the loans relate, together with other related collateral.
As at
September 30, 2007, the Partnership had guaranteed $42.2 million of these term
loans, which represents its 50% share of the outstanding vessel mortgage debt
of
two of these 50%-owned joint venture companies. Teekay Corporation and the
Partnership’s joint venture partner have guaranteed the remaining $254.0
million.
Interest
payments on the Revolvers and term loans are based on LIBOR plus a margin.
At
September 30, 2007 and December 31, 2006, the margins ranged between 0.45%
and
0.80%. The weighted-average effective interest rate on the Partnership’s
long-term debt as at September 30, 2007 was 5.9% (December 31, 2006 – 6.0%).
This rate does not reflect the effect of the interest rate swaps (see Note
11).
8. Comprehensive
(Loss) Income
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2007
$
|
|
|
|
2006
$
|
|
|
|
2007
$
|
|
|
|
2006
$
|
|
Net
income
|
|
|
2,114
|
|
|
|
32,301
|
|
|
|
12,660
|
|
|
|
15,502
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(loss) gain on derivative instruments
|
|
|
(8,160
|
)
|
|
|
(734
|
)
|
|
|
84
|
|
|
|
434
|
|
Reclassification
adjustment for gain on derivative instruments included in net
income
|
|
|
(398
|
)
|
|
|
(68
|
)
|
|
|
(1,366
|
)
|
|
|
(66
|
)
|
Comprehensive
(loss) income
|
|
|
(6,444
|
)
|
|
|
31,499
|
|
|
|
11,378
|
|
|
|
15,870
|
|
As
at
September 30, 2007 and December 31, 2006, the Partnership’s accumulated other
comprehensive income of $4.0 million and $5.3 million, respectively, consisted
of net unrealized gains on derivative instruments.
TEEKAY
OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor
to Teekay Offshore Partners Predecessor)
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS –
(Cont’d)
(all
tabular amounts stated in thousands of U.S. dollars, except unit and per unit
data or unless otherwise indicated)
9. Other
Income - Net
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2007
$
|
|
|
|
2006
$
|
|
|
|
2007
$
|
|
|
|
2006
$
|
|
Volatile
organic compound emissions plant lease income
|
|
|
2,792
|
|
|
|
2,767
|
|
|
|
8,280
|
|
|
|
8,424
|
|
Miscellaneous
|
|
|
173
|
|
|
|
3
|
|
|
|
(14
|
)
|
|
|
40
|
|
Other
income - net
|
|
|
2,965
|
|
|
|
2,770
|
|
|
|
8,266
|
|
|
|
8,464
|
|
10.
|
Related
Party Transactions
|
a.
|
Navion
Shipping Ltd., a subsidiary of the Predecessor, time-chartered vessels
to
a subsidiary of Teekay Corporation at charter rates that provided
for a
1.25% fixed profit margin. Pursuant to this arrangement, the Predecessor
earned voyage revenues of $84.8 million during the first half of
2006.
|
During
the first half of 2006, the Predecessor earned $5.1 million of management fees
for commercial management services provided to a subsidiary of Teekay
Corporation, relating to the vessels chartered from Navion Shipping
Ltd.
On
July
1, 2006, the Predecessor sold Navion Shipping Ltd. to a subsidiary of Teekay
Corporation.
b.
|
On
October 1, 2006, OPCO entered into new time-charter contracts for
its nine
Aframax-class conventional tankers with a subsidiary of Teekay Corporation
at market-based daily rates for terms of five to twelve years. Under
the
terms of eight of these nine time-charter contracts, OPCO is responsible
for the bunker fuel expenses; however, OPCO adds the approximate
amounts
of these expenses to the daily hire rate. Pursuant to these time-charter
contracts, OPCO earned voyage revenues of $30.1 million and $95.2
million
for the three and nine months ended September 30, 2007,
respectively.
|
During
the three months and nine months ended September 30, 2006, seven of these nine
tankers were employed on time-charter contracts with a subsidiary of Teekay
Corporation. The rates earned by each vessel, which were generally lower than
market rates, depended upon the cash flow requirements of each vessel, which
included operating expenses, loan principal and interest payments and drydock
expenditures. Pursuant to these time-charter contracts, the Predecessor earned
voyage revenues of $7.9 million and $24.6 million during the three and nine
months ended September 30, 2006, respectively.
c.
|
Eight
of OPCO’S Aframax conventional oil tankers and two FSO units are managed
by subsidiaries of Teekay Corporation. Pursuant to the related management
services agreements, the Partnership incurred general and administrative
expenses of $1.1 million and $3.3 million during the three and nine
months
ended September 30, 2007, respectively. During the three and nine
months
ended September 30, 2006, the Partnership incurred $1.4 million and
$4.1
million, respectively, of these
costs.
|
d.
|
Two
of OPCO’s FSO units have been employed on long-term bareboat charters with
subsidiaries of Teekay Corporation. Pursuant to these charter contracts,
the Partnership earned voyage revenues of $2.8 million and $8.4 million
during the three and nine months ended September 30, 2007,
respectively. The Partnership earned $2.5 million and $7.9
million during the three and nine months ended September 30, 2006,
respectively, pursuant to these
contracts.
|
e.
|
Effective
October 1, 2006, two of OPCO’s shuttle tankers have been employed on
long-term bareboat charters with a subsidiary of Teekay Corporation.
Pursuant to these charter contracts, the Partnership earned voyage
revenues of $3.6 million and $10.6 million during the three and nine
months ended September 30, 2007,
respectively.
|
f.
|
The
Partnership has entered into an omnibus agreement with Teekay Corporation,
Teekay LNG Partners L.P., the General Partner and others governing,
among
other things, when the Partnership, Teekay Corporation and Teekay
LNG
Partners L.P. may compete with each other and certain rights of first
offer on liquefied natural gas carriers, oil tankers, shuttle tankers,
FSO
units and floating production, storage and offloading
units.
|
g.
|
The
Partnership, OPCO and certain of OPCO’s operating subsidiaries have
entered into services agreements with certain subsidiaries of Teekay
Corporation in connection with the initial public offering, pursuant
to
which Teekay Corporation subsidiaries provide the Partnership, OPCO
and
its operating subsidiaries with administrative, advisory, technical
and
strategic consulting services and ship management
services. During the three and nine months ended September 30,
2007, the Partnership incurred $14.0 million and $39.4 million of
these
costs, respectively. Prior to the Offering, the shore-based staff
who
provided these services to the Predecessor were transferred to a
subsidiary of Teekay Corporation.
|
h.
|
On
October 1, 2006, a subsidiary of Teekay Corporation entered into
a
services agreement with a subsidiary of OPCO, pursuant to which the
subsidiary of OPCO provides the Teekay Corporation subsidiary with
ship
management services. During the three and nine months ended
September 30, 2007, the Partnership earned management fees of $0.7
million
and $1.9 million, respectively, under the
agreement.
|
TEEKAY
OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor
to Teekay Offshore Partners Predecessor)
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS –
(Cont’d)
(all
tabular amounts stated in thousands of U.S. dollars, except unit and per unit
data or unless otherwise indicated)
i.
|
The
Partnership reimburses the General Partner for all expenses incurred
by
the Partnership that are necessary or appropriate for the conduct
of the
Partnership’s business. During the three and nine months ended September
30, 2007, the Partnership incurred $0.1 million and $0.3 million
of these
costs, respectively.
|
j.
|
In
July 2007, the Partnership acquired interests in two double-hull
shuttle
tankers from Teekay Corporation for a total cost of $159.1 million,
including assumption of debt. The Partnership acquired Teekay
Corporation's 100% interest in the 2000-built
Navion
Bergen
and Teekay Corporation’s 50% interest in
the 2006-built
Navion Gothenburg
, together with their respective
13-year, fixed-rate bareboat charters to Petroleo Brasileiro S.A.
The
purchases were financed with one of the Partnership’s existing Revolvers
and the assumption of debt. The excess of the proceeds paid by the
Partnership over Teekay Corporation’s historical cost was accounted for as
an equity distribution to Teekay Corporation of $28.9
million.
|
k.
|
At
September 30, 2007 and December 31, 2006, amounts due to affiliates
totaled $10.4 million and $17.0 million, respectively. Amounts due
to
affiliates are non-interest bearing and
unsecured.
|
11. Derivative
Instruments and Hedging Activities
The
Partnership uses derivatives only for hedging purposes. The following summarizes
the Partnership’s risk strategies with respect to market risk from foreign
currency fluctuations and changes in interest rates.
The
Partnership hedges a portion of its forecasted expenditures denominated in
foreign currencies with foreign exchange forward contracts. As at September
30,
2007, the Partnership was committed to foreign exchange contracts for the
forward purchase of approximately Australian Dollars 5.7 million,
Euros 4.0 million, and Singapore Dollars 2.9 million for U.S. Dollars at an
average rate of Australian Dollar 1.31 per U.S. Dollar, Euro 0.72 per U.S.
Dollar and Singapore Dollar 1.51 per U.S. Dollar. The foreign exchange forward
contracts mature as follows: $8.8 million in 2007; and $2.9 million in
2008.
As
at
September 30, 2007, the Partnership was committed to the following interest
rate
swap agreements related to its LIBOR-based debt, whereby certain of the
Partnership’s floating-rate debt was swapped with fixed-rate
obligations:
|
Interest
Rate
Index
|
Principal
Amount
$
|
Fair
Value/ Carrying Amount of Asset (Liability)
$
|
Weighted-Average
Remaining Term
(years)
|
Fixed
Interest
Rate
(%)
(1)
|
U.S.
Dollar-denominated interest rate swaps
|
LIBOR
|
890,000
|
15,384
|
6.3
|
4.8
|
U.S.
Dollar-denominated interest rate swaps
(2
)
|
LIBOR
|
353,922
|
3,991
|
14.3
|
5.0
|
U.S.
Dollar-denominated interest rate swaps
(3)
|
LIBOR
|
335,000
|
(3,232)
|
2.0
|
4.9
|
(1)
|
Excludes
the margin the Partnership pays on its variable-rate debt, which
as at
September 30, 2007, ranged from 0.60% to 0.80%.
|
(2)
|
Principal
amount reduces quarterly or semiannually.
|
(3)
|
Commencement
date of the interest rate swap is December 28,
2007.
|
To
the
extent the hedge is effective, changes in the fair value of the Partnership’s
derivatives are recognized in other comprehensive income until the hedged item
is recognized in income. The ineffective portion of the Partnership’s interest
rate swap agreements and foreign exchange forward contracts is immediately
recognized into income and is presented as interest expense and other income,
respectively. During the nine months ended September 30, 2007, the ineffective
portion of the Partnership’s interest rate swaps and foreign exchange forward
contracts was $0.6 million. During the three and nine months ended September
30,
2006, the ineffective portion of the Partnership’s interest rate swaps was
nominal.
The
Partnership is exposed to credit loss in the event of non-performance by the
counter-parties to the foreign exchange forward contracts and the interest
rate
swap agreements; however, the Partnership does not anticipate non-performance
by
any of the counter-parties.
TEEKAY
OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor
to Teekay Offshore Partners Predecessor)
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS –
(Cont’d)
(all
tabular amounts stated in thousands of U.S. dollars, except unit and per unit
data or unless otherwise indicated)
12. Income
Taxes
The
components of the provision for income taxes follow.
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
$
|
|
|
|
2006
$
|
|
|
|
2007
$
|
|
|
|
2006
$
|
|
Current
|
|
|
(157
|
)
|
|
|
(254
|
)
|
|
|
(522
|
)
|
|
|
(331
|
)
|
Deferred
|
|
|
(5,900
|
)
|
|
|
4,772
|
|
|
|
(2,161
|
)
|
|
|
(2,913
|
)
|
Income
tax (expense) recovery
|
|
|
(6,057
|
)
|
|
|
4,518
|
|
|
|
(2,683
|
)
|
|
|
(3,244
|
)
|
13. Commitments
and Contingencies
In
June
2007, the Partnership exercised its option to purchase a 2001-built shuttle
tanker, which is currently part of the Partnership’s in-chartered shuttle tanker
fleet. The vessel is expected to be delivered in January 2008. The purchase
commitment for this vessel is $41.7 million, which will be financed through
one
of the Partnership’s Revolvers and surplus cash balances.
14.
Vessel
Sales and
Writedowns on Vessels and Equipment
a)
Vessel Sales
During
July 2006, the Partnership sold a 1981-built shuttle tanker. The Partnership
recorded a gain of $6.4 million and a minority interest expense of $3.2 million
relating to the sale.
b)
Equipment Writedowns
During
the nine months ended September 30, 2006, the Predecessor incurred a $2.2
million writedown of certain offshore equipment. This writedown occurred due
to
a reassessment of the estimated net realizable value of this equipment and
follows a $12.2 million writedown in 2005 arising from the early termination
of
a contract for this equipment.
Net
income per unit is determined by dividing net income, after deducting the amount
of net income allocated to the General Partner’s interest from the issuance date
of the common units of December 19, 2006, by the weighted-average number of
units outstanding during the applicable period. For periods prior to December
19, 2006, such units are deemed equal to the common and subordinated units
received by Teekay Corporation in exchange for net assets contributed to the
Partnership, or 12,600,000 units.
As
required by Emerging Issues Task Force Issue No. 03-6,
Participating
Securities and Two-Class Method under FASB Statement No. 128, Earnings Per
Share
, the General Partner’s, common unit holders’ and subordinated
unitholder’s interests in net income
are
calculated as if all net income for periods subsequent to December 19, 2006
was
distributed according to the terms of the Partnership's Partnership Agreement,
regardless of whether those earnings would or could be distributed. The
Partnership Agreement does not provide for the distribution of net income;
rather, it provides for the distribution of available cash, which is a
contractually defined term that generally means all cash on hand at the end
of
each quarter after establishment of cash reserves. Unlike available cash, net
income is affected by non-cash items such as depreciation and amortization,
and
foreign currency translation gains (losses).
Under
the
Partnership Agreement, the holder of the incentive distribution rights in the
Partnership, which is currently the General Partner, has the right to receive
an
increasing percentage of cash distributions after the minimum quarterly
distribution. Assuming there are no cumulative arrearages on common unit
distributions, the target distribution levels entitle the General Partner to
receive 2% of quarterly cash distributions up to $0.4025 per unit, 15% of
quarterly cash distributions between $0.4025 and $0.4375 per unit, 25% of
quarterly cash distributions between $0.4375 and $0.525 per unit, and 50% of
quarterly cash distributions in excess of $0.525 per unit. During the three
months ended September 30, 2007, net income did not exceed $0.4025 per unit
and,
consequently, the assumed distribution of net income did not result in the
use
of the increasing percentages to calculate the General Partner’s interest in net
income.
Under
the
Partnership Agreement, during a subordination period the common units have
the
right to receive distributions of available cash from operating surplus in
an
amount equal to the minimum quarterly distribution of $0.35 per quarter, plus
any arrearages in the payment of the minimum quarterly distribution on the
common units from prior quarters, before any distributions of available cash
from operating surplus may be made on the subordinated units. During the three
months ended September 30, 2007, net income did not exceed the minimum quarterly
distribution of $0.35 per unit and, consequently, the assumed distribution
of
net income resulted in an unequal distribution of net income between the
subordinated unit holders and common unit holders.
TEEKAY
OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor
to Teekay Offshore Partners Predecessor)
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS –
(Cont’d)
(all
tabular amounts stated in thousands of U.S. dollars, except unit and per unit
data or unless otherwise indicated)
In
October 2007, the Partnership acquired an FSO unit, the
Dampier Spirit
,
from Teekay Corporation and the related 7-year, fixed-rate time-charter to
Apache Corporation of Australia for a total cost of approximately $30.3 million.
The purchase was financed with one of the Partnership’s existing
Revolvers.
TEEKAY
OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor
to Teekay Offshore Partners Predecessor)
SEPTEMBER
30, 2007
PART
I – FINANCIAL INFORMATION
ITEM
2 -
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
OVERVIEW
We
are an
international provider of marine transportation and storage services to the
offshore oil industry. We were formed in August 2006 by Teekay Corporation,
a
leading provider of marine services to the global oil and natural gas
industries, to further develop its operations in the offshore market. Our growth
strategy focuses on expanding our fleet of shuttle tankers and floating storage
and offtake (or
FSO
) units under long-term, fixed-rate time charters.
We intend to continue our practice of acquiring shuttle tankers and FSO units
as
needed for approved projects only after the long-term charters for the projects
have been awarded to us, rather than ordering vessels on a speculative basis.
We
intend to follow this same practice in acquiring floating production, storage
and offloading (or
FPSO
) units, which produce and process oil offshore
in addition to providing storage and offloading capabilities. We seek to
capitalize on opportunities emerging from the global expansion of the offshore
transportation, storage and production sectors by selectively targeting
long-term, fixed-rate time charters. We may enter into joint ventures and
partnerships with companies that may provide increased access to these
opportunities or may engage in vessel or business acquisitions. We plan to
leverage the expertise, relationships and reputation of Teekay Corporation
and
its affiliates to pursue these growth opportunities in the offshore sectors
and
may consider other opportunities to which our competitive strengths are well
suited. We view our conventional tanker fleet primarily as a source of stable
cash flow as we expand our offshore operations.
SIGNIFICANT
DEVELOPMENTS
Our
Initial Public Offering
On
December 19, 2006, we completed our initial public offering of 8.05 million
common units at a price of $21.00 per unit. The net proceeds from the offering
were $155.2 million. The offering included 1.05 million common units sold to
the
underwriters in connection with the exercise of their over-allotment option.
We
used the net proceeds to repay a $134.6 million promissory to Teekay Corporation
and to redeem 1.05 million common units from Teekay Corporation for $20.6
million.
Prior
to
the closing of this offering, Teekay Corporation contributed entities owning
and
operating a fleet of shuttle tankers, FSO units and Aframax-class conventional
crude oil tankers to Teekay Offshore Operating L.P. (or
OPCO
). Upon the
closing of our initial public offering, we acquired from Teekay Corporation
a
26.0% interest in OPCO. Teekay Corporation owns the remaining 74.0% interest
in
OPCO. Prior to June 30, 2007, our 26.0% interest in OPCO represented our only
cash-generating asset. The results prior to our initial public offering
discussed below are the results of the entities that were contributed to OPCO,
which we refer to collectively as “Teekay Offshore Partners Predecessor”. The
entities contributed to OPCO do not own some of the assets and operations they
owned during the three and nine months ended September 30, 2006. References
in
this Management’s Discussion and Analysis of Financial Condition and Results of
Operations to “OPCO” when used in a historical context for periods prior to
December 19, 2006 refer to Teekay Offshore Partners Predecessor, and when used
for periods on or after December 19, 2006 refer to OPCO and its
subsidiaries.
Acquisition
of Vessels in 2007
In
July
2007, we acquired interests in two double-hull shuttle tankers and related
charters for a total cost of approximately $159.1 million, including assumption
of debt of $93.7 million. These interests, which we acquired from Teekay
Corporation, include a 100% interest in the 2000-built
Navion Bergen
and a 50% interest in the 2006-built
Navion Gothenburg
, together with
their respective 13-year, fixed-rate bareboat charters to a subsidiary of
Petrobras Transporte S.A., the shipping arm of Petroleo Brasileiro
S.A.
On
October 1, 2007, we acquired one FSO unit, the
Dampier Spirit
, for a
total cost of approximately $30.3 million. The
Dampier
Spirit
operates under a 7-year fixed-rate, time-charter to Apache
Corporation of Australia.
POTENTIAL
ADDITIONAL FPSO, FSO AND SHUTTLE TANKER PROJECTS
Pursuant
to an omnibus agreement we entered into in connection with our initial public
offering, Teekay Corporation is obligated to offer us certain shuttle tankers,
FSO units, and FPSO units it may acquire in the future, provided the vessels
are
servicing contracts in excess of three years in length.
Teekay
Corporation has ordered four Aframax shuttle tanker newbuildings, which are
scheduled to deliver in 2010 and 2011, for a total delivered cost of
approximately $463 million. It is anticipated that these vessels will be offered
to us and will be used to service either new long-term, fixed-rate contracts
Teekay Corporation may be awarded prior to delivery, or to service OPCO’s
contracts of affreightment in the North Sea.
The
omnibus agreement also obligates Teekay Corporation to offer to us (a) its
interest in certain future FPSO and FSO projects it may undertake through its
50%-owned joint venture with Teekay Petrojarl ASA and (b) if Teekay Corporation
obtains 100% ownership of Teekay Petrojarl ASA, the existing FPSO units owned
by
Teekay Petrojarl ASA that are servicing contracts in excess of three years
in
length. As of December 2007, Teekay Corporation had a 65% ownership interest
in
Teekay Petrojarl ASA.
RESULTS
OF OPERATIONS
We
use a
variety of financial and operational terms and concepts when analyzing our
results of operations, which can be found in Item 5. Operating and Financial
Review and Prospects in our Annual Report on Form 20-F for the year ended
December 31, 2006. In accordance with United States generally accepted
accounting principles (or
GAAP
), we report gross revenues in our income
statements and include voyage expenses among our operating expenses. However,
shipowners base economic decisions regarding the deployment of their vessels
upon anticipated time charter equivalent (or
TCE
) rates, and industry
analysts typically measure bulk shipping freight rates in terms of TCE rates.
This is because under time charters and bareboat charters the customer usually
pays the voyage expenses, while under voyage charters and contracts of
affreightment the shipowner usually pays the voyage expenses, which typically
are added to the hire rate at an approximate cost. Accordingly, the discussion
of revenue below focuses on net voyage revenues (i.e. voyage revenues less
voyage expenses) and TCE rates of our three reportable segments where
applicable. TCE rates represent net voyage revenues divided by revenue days.
Please read Item 1 – Financial Statements: Note 4 – Segment
Reporting.
Items
You Should Consider When Evaluating Our Results of
Operations
You
should consider the following factors when evaluating our historical financial
performance and assessing our future prospects:
§
|
Our
cash flow is reduced by distributions on Teekay Corporation’s 74% interest
in OPCO.
Since our initial public offering in
December 2006, Teekay Corporation has a 74% limited partner interest
in OPCO. OPCO’s partnership agreement requires it to distribute all of its
available cash each quarter. In determining the amount of cash available
for distribution, the Board of Directors of our general partner must
approve the amount of cash reserves to be set aside at OPCO, including
reserves for future maintenance capital expenditures, working capital
and
other matters. Distributions by OPCO to Teekay Corporation as one
of its
limited partners reduces our cash flow compared to historical
results.
|
§
|
On
July 1, 2006, OPCO transferred certain assets to Teekay Corporation
that are included in historical results of operations.
On
July 1, 2006, OPCO transferred to Teekay Corporation a subsidiary of
Norsk Teekay Holdings Ltd. (Navion Shipping Ltd.) that chartered-in
approximately 25 conventional tankers since 2004 and subsequently
time-chartered the vessels back to Teekay Corporation at charter
rates
that provided for a 1.25% fixed profit margin. In addition, OPCO
transferred to Teekay Corporation a 1987-built shuttle tanker (the
Nordic Trym
), OPCO’s single-anchor loading equipment, a
1992-built in-chartered shuttle tanker (the
Borga
) and a 50%
interest in Alta Shipping S.A., which had no material assets (collectively
with Navion Shipping Ltd., the
Non-OPCO
Assets
). During
the nine months ended September 30, 2006, the Non-OPCO Assets accounted
for approximately 19% of OPCO’s net voyage revenues,
respectively.
|
§
|
Amendments
to OPCO’s joint venture agreements resulted in
five
50%-owned joint venture companies being
consolidated with us under GAAP.
Our historical results of
operations prior to December 1, 2006 reflect OPCO’s investment in five
50%-owned joint venture companies, accounted for using the equity
method,
whereby the investment was carried at the original cost plus OPCO’s
proportionate share of undistributed earnings. On December 1, 2006,
the
operating agreements for these joint ventures were amended such that
OPCO
obtained control of these joint ventures, resulting in the consolidation
of these five joint venture companies in accordance with GAAP. Although
our net income did not change due to this change in accounting, the
results of the joint ventures are reflected in our income from operations,
commencing December 1, 2006. This change also resulted in the five
shuttle
tankers owned by these joint ventures being included in the number
of
vessels in OPCO’s owned fleet for periods subsequent to December 1,
2006.
|
§
|
The
size of our fleet continues to change.
Our historical
results of operations reflect changes in the size and composition
of our
fleet due to certain vessel deliveries and vessel dispositions. For
instance, in addition to the decrease in chartered-in vessels associated
with the transfer of Navion Shipping Ltd. described above, the average
number of owned vessels in our shuttle tanker fleet increased from
21 in
2006 to 26 in 2007. Please read “— Shuttle Tanker Segment,"
"Conventional Tanker Segment" and “FSO Segment" below for further details
about vessel dispositions and deliveries. Due to the nature of our
business, we expect our fleet to continue to fluctuate in size and
composition.
|
§
|
Our
financial results of operations reflect different time charter terms
for
OPCO’s nine conventional tankers.
On October 1, 2006, OPCO
entered into new fixed-rate time charters with a subsidiary of Teekay
Corporation for OPCO’s nine conventional tankers at rates we believe were
market-based charter rates. Under the terms of eight of these nine
time-charter contracts, OPCO is responsible for the bunker fuel expenses;
however, OPCO adds the approximate amounts of these expenses to the
daily
hire rate. Please read Item 1 - Financial Statements: Note 10 (b)
-
Related Party Transactions. At various times during the previous
three
years, eight of these nine conventional tankers were employed on
time
charters with the same subsidiary of Teekay Corporation. However,
the
charter rates were generally lower than market-based charter rates,
as
they were based on the cash flow requirements of each vessel, which
included operating expenses, loan principal and interest payments
and
drydock expenditures. The ninth conventional tanker was employed
on voyage
and bareboat charters. The new fixed-rate time charters have increased
our
voyage revenues as well as provided more stable voyage revenues for
these
vessels.
|
§
|
Our
financial results of operations are affected by fluctuations in
currency
exchange rates
. Prior to
the closing of our initial public offering, OPCO settled its foreign
currency denominated advances. In October 2006, Teekay Corporation
loaned
5.6 billion Norwegian Kroner ($863.0 million) to a subsidiary of
OPCO
primarily for the purchase of eight Aframax-class conventional
crude oil
tankers from Teekay Corporation. Immediately preceding the initial
public
offering, this interest-bearing loan was sold to OPCO. Under GAAP,
all
foreign currency-denominated monetary assets and liabilities, such
as cash
and cash equivalents, accounts receivable, accounts payable, advances
from
affiliates and deferred income taxes are revalued and reported
based on
the prevailing exchange rate at the end of the period. Most of
our
historical foreign currency gains and losses prior to our initial
public
offering are attributable to this revaluation in respect of our
foreign
currency denominated advances from affiliates. In addition, a substantial
majority of OPCO’s crewing expenses historically have been denominated in
Norwegian Kroner, which is primarily a function of the nationality
of the
crew. Fluctuations in the Norwegian Kroner relative to the
U.S. Dollar have caused fluctuations in operating results. Prior to
our initial public offering, OPCO entered into new services agreements
with subsidiaries of Teekay Corporation whereby the subsidiaries
operate
and crew the vessels. Under these services agreements, OPCO pays
all
vessel operating expenses in U.S. Dollars, and will not be subject to
currency exchange fluctuations until 2009. Beginning in 2009, payments
under the services agreements will adjust to reflect any change
in Teekay
Corporation’s cost of providing services based on fluctuations in the
value of the Kroner relative to the U.S. Dollar. We may seek to hedge
this currency fluctuation risk in the
future.
|
§
|
We
have entered into services agreements with subsidiaries of Teekay
Corporation.
Prior to the closing of our initial public
offering, we, OPCO and certain of its subsidiaries entered into services
agreements with subsidiaries of Teekay Corporation, pursuant to which
those subsidiaries provide certain services, including strategic
consulting, advisory, ship management, technical and administrative
services. Our cost for these services depends on the amount and types
of
services provided during each period. The services are valued at
an
arm’s-length rate that will include reimbursement of reasonable direct
or
indirect expenses incurred to provide the services. We also reimburse
our
general partner for all expenses it incurs on our behalf, including
CEO/CFO compensation and expenses relating to its Board of Directors,
including compensation, travel and liability insurance costs. We may
also grant equity compensation that would result in an expense to
us.
|
§
|
We
are incurring additional general and administrative expenses.
As a result of becoming a publicly-traded limited
partnership on December 19, 2006, we have begun to incur costs associated
with annual reports to unitholders and SEC filings, investor relations,
NYSE annual listing fees and tax compliance
expenses.
|
§
|
Our
operations are seasonal.
Historically, the utilization of
shuttle tankers in the North Sea is higher in the winter months,
as
favorable weather conditions in the summer months provide opportunities
for repairs and maintenance to our vessels and to the offshore
oil
platforms. Downtime for repairs and maintenance generally reduces
oil
production and, thus, transportation requirements. OPCO generally
has not
experienced seasonality in its FSO and conventional tanker
segments.
|
We
manage
our business and analyze and report our results of operations on the basis
of
three business segments: the shuttle tanker segment, the conventional tanker
segment and the FSO segment.
Shuttle
Tanker Segment
Our
shuttle tanker fleet consists of 38 vessels that operate under fixed-rate
contracts of affreightment, time charters and bareboat charters. Of the 38
shuttle tankers, 24 are owned by OPCO (including five through 50%-owned joint
ventures), 12 are chartered-in by OPCO and 2 are owned by us (including one
through a 50%-owned joint venture). All of these shuttle tankers provide
transportation services to energy companies, primarily in the North Sea and
Brazil.
The
following table presents our shuttle tanker segment’s operating results for the
three and nine months ended September 30, 2007 and 2006, and compares its net
voyage revenues (which is a non-GAAP financial measure) for the three and nine
months ended September 30, 2007 and 2006 to voyage revenues, the most directly
comparable GAAP financial measure, for the same periods. The following table
also provides a summary of the changes in calendar-ship-days by owned and
chartered-in vessels for our shuttle tanker segment:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
(in
thousands of U.S. dollars, except calendar-ship-days and
percentages)
|
|
2007
|
|
|
2006
|
|
|
%
Change
|
|
|
2007
|
|
|
2006
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage
revenues
|
|
|
145,166
|
|
|
|
132,753
|
|
|
|
9.4
|
|
|
|
435,730
|
|
|
|
395,956
|
|
|
|
10.0
|
|
Voyage
expenses
|
|
|
29,404
|
|
|
|
22,559
|
|
|
|
30.3
|
|
|
|
81,245
|
|
|
|
67,249
|
|
|
|
20.8
|
|
Net
voyage revenues
|
|
|
115,762
|
|
|
|
110,194
|
|
|
|
5.1
|
|
|
|
354,485
|
|
|
|
328,707
|
|
|
|
7.8
|
|
Vessel
operating expenses
|
|
|
25,532
|
|
|
|
19,099
|
|
|
|
33.7
|
|
|
|
73,160
|
|
|
|
57,506
|
|
|
|
27.2
|
|
Time-charter
hire expense
|
|
|
37,161
|
|
|
|
38,988
|
|
|
|
(4.7
|
)
|
|
|
111,749
|
|
|
|
125,280
|
|
|
|
(10.8
|
)
|
Depreciation
and amortization
|
|
|
22,453
|
|
|
|
17,283
|
|
|
|
29.9
|
|
|
|
62,973
|
|
|
|
53,094
|
|
|
|
18.6
|
|
General
and administrative
(1)
|
|
|
12,908
|
|
|
|
11,552
|
|
|
|
11.7
|
|
|
|
39,352
|
|
|
|
38,739
|
|
|
|
1.6
|
|
Vessels
and equipment writedowns/ (gain) on sale of vessels
|
|
|
-
|
|
|
|
(6,404
|
)
|
|
|
100.0
|
|
|
|
-
|
|
|
|
(4,254
|
)
|
|
|
100.0
|
|
Income
from vessel operations
|
|
|
17,708
|
|
|
|
29,676
|
|
|
|
(40.3
|
)
|
|
|
67,251
|
|
|
|
58,342
|
|
|
|
15.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar-Ship-Days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned
Vessels
|
|
|
2,369
|
|
|
|
1,853
|
|
|
|
27.8
|
|
|
|
6,713
|
|
|
|
5,654
|
|
|
|
18.7
|
|
Chartered-in
Vessels
|
|
|
1,074
|
|
|
|
1,140
|
|
|
|
(5.8
|
)
|
|
|
3,204
|
|
|
|
3,687
|
|
|
|
(13.1
|
)
|
Total
|
|
|
3,443
|
|
|
|
2,993
|
|
|
|
15.0
|
|
|
|
9,917
|
|
|
|
9,341
|
|
|
|
6.2
|
|
(1)
|
Includes
direct general and administrative expenses and indirect general and
administrative expenses (allocated to the shuttle tanker segment
based on
estimated use of corporate
resources).
|
The
average size of OPCO’s owned shuttle tanker fleet increased for the three and
nine months ended September 30, 2007 compared to the same periods last year,
primarily due to:
§
|
the
consolidation into our results of the five vessels owned by OPCO’s
50%-owned joint ventures, effective December 1, 2006 upon amendments
to
the applicable operating agreements, which granted OPCO control of
the
joint ventures (the
Consolidation of Joint Ventures
);
and
|
§
|
the
acquisition of the 2000-built shuttle tanker (the
Navion Bergen
)
and a 50% interest in the 2006-built shuttle-tanker (the
Navion
Gothenburg
) in July 2007 (collectively, the
2007 Shuttle Tanker
Acquisitions
);
|
partially
offset by
§
|
the
sale of a 1981-built shuttle tanker (the
Nordic Laurita
) in July
2006 to a third party and the sale of a 1987-built shuttle tanker
(the
Nordic Trym
) to Teekay Corporation in November 2006
(collectively, the
2006 Shuttle Tanker
Dispositions
).
|
The
average size of OPCO’s chartered-in shuttle tanker fleet decreased for the three
and nine months ended September 30, 2007 compared to the same periods last
year,
primarily due to:
§
|
the
redelivery of one chartered-in vessel back to its owner in April
2006;
and
|
§
|
the
sale in July 2006 of a time charter-in contract for a 1992-built
shuttle
tanker (the
Borga
) to Teekay
Corporation.
|
Net
Voyage Revenues.
Net voyage revenues increased for the three and nine
months ended September 30, 2007, from the same periods last
year. These increases were primarily due to:
§
|
increases
of $10.6 million and $34.5 million, respectively, for the three and
nine
months ended September 30, 2007, due to the Consolidation of Joint
Ventures;
|
§
|
an
increase of $4.7 million for the three and nine months ended September
30,
2007, due to the 2007 Shuttle Tanker
Acquisitions;
|
§
|
increases
of $1.1 million and $3.9 million, respectively, for the three and
nine
months ended September 30, 2007, due to the renewal of certain vessels
on
time charter contracts at higher daily rates during 2006 and a higher
number of revenue days for these vessels;
and
|
§
|
increases
of $0.4 million and $6.6 million, respectively, for the three and
nine
months ended September 30, 2007, due to the redeployment of
excess capacity of one shuttle tanker from servicing contracts of
affreightment to a bareboat
charter;
|
partially
offset by
§
|
decreases
of $9.3 million and $7.2 million, respectively, for the three and
nine
months ended September 30, 2007, in revenues due to (a) fewer revenue
days
for shuttle tankers servicing contracts of affreightment during the
three
and nine months ended September 30, 2007 due to a decline in oil
production from mature oil fields in the North Sea, partially offset
by
(b) the redeployment of idle shuttle tankers servicing contracts
of
affreightment in the conventional spot market at a higher average
charter
rate than the same periods last year due to a strong spot tanker
market in
2007;
|
§
|
decreases
of $1.1 million and $7.5 million, respectively, for the three and
nine
months ended September 30, 2007, due to the 2006 Shuttle Tanker
Dispositions;
|
§
|
decreases
of $0.6 million and $4.4 million, respectively, for the three and
nine
months ended September 30, 2007, due to the sale of the time charter-in
contract for the
Borga
;
and
|
§
|
a
decrease of $2.9 million for the nine months ended September 30,
2007,
from the redelivery of one chartered-in vessel to its owner in April
2006.
|
Vessel
Operating Expenses.
Vessel operating expenses increased for the three and
nine months ended September 30, 2007, from the same periods last year, primarily
due to:
§
|
increases
of $5.0 million and $13.1 million, respectively, for the three and
nine
months ended September 30, 2007, due to the Consolidation of Joint
Ventures;
|
§
|
increases
of $0.6 million and $3.6 million, respectively, for the three and
nine
months ended September 30, 2007, in salaries for crew and officers
primarily due to general wage escalations and a change in the crew
rotation system; and
|
§
|
increases
of $1.5 and $0.8 million, respectively, for the three and nine months
ended September 30, 2007, relating to the timing of planned maintenance
activities;
|
partially
offset by
§
|
decreases
of $0.6 million and $2.5 million, respectively, for the three and
nine
months ended September 30, 2007, due to the 2006 Shuttle Tanker
Dispositions.
|
Time-Charter
Hire Expense.
Time-charter hire expense decreased for the three and nine
months ended September 30, 2007, from the same periods last year. These
decreases were primarily due to the decrease in the average number of vessels
chartered-in.
Depreciation
and Amortization.
Depreciation and amortization expense increased for the
three and nine months ended September 30, 2007, from the same periods last
year,
primarily due to:
§
|
increases
of $3.7 million and $11.1 million, respectively, for the three and
nine
months ended September 30, 2007, due to the Consolidation of Joint
Ventures;
|
§
|
an
increase of $1.6 million for the three and nine months ended September
30,
2007, due to the 2007 Shuttle Tanker Acquisitions;
and
|
§
|
increases
of $1.3 million and $3.3 million, respectively, for the three and
nine
months ended September 30, 2007, from the amortization of vessel
upgrades
and drydock costs incurred during 2006 and the nine months ended
September
30, 2007;
|
partially
offset by
§
|
decreases
of $1.3 million and $5.3 million, respectively, for the three and
nine
months ended September 30, 2007, relating to the 2006 Shuttle Tanker
Dispositions.
|
Conventional
Tanker Segment
OPCO
owns
nine Aframax-class conventional crude oil tankers, all of which operate under
fixed-rate time charters with Teekay Corporation.
The
following table presents our conventional tanker segment’s operating results for
the three and nine months ended September 30, 2007 and 2006, and compares its
net voyage revenues (which is a non-GAAP financial measure) for the three and
nine months ended September 30, 2007 and 2006 to voyage revenues, the most
directly comparable GAAP financial measure, for the same periods. The following
table also provides a summary of the changes in calendar-ship-days by owned
and
chartered-in vessels for our conventional tanker segment:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
(in
thousands of U.S. dollars, except calendar-ship-days and
percentages)
|
|
2007
|
|
|
2006
|
|
|
%
Change
|
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage
revenues
|
|
|
30,100
|
|
|
|
14,576
|
|
|
|
106.5
|
|
|
|
102,748
|
|
|
|
126,131
|
|
|
|
(18.5
|
)
|
Voyage
expenses
|
|
|
6,816
|
|
|
|
1,399
|
|
|
|
387.2
|
|
|
|
25,969
|
|
|
|
4,530
|
|
|
|
473.3
|
|
Net
voyage revenues
|
|
|
23,284
|
|
|
|
13,177
|
|
|
|
76.7
|
|
|
|
76,779
|
|
|
|
121,601
|
|
|
|
(36.9
|
)
|
Vessel
operating expenses
|
|
|
6,125
|
|
|
|
3,928
|
|
|
|
55.9
|
|
|
|
17,187
|
|
|
|
14,959
|
|
|
|
14.9
|
|
Time-charter
hire expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
79,338
|
|
|
|
(100.0
|
)
|
Depreciation
and amortization
|
|
|
5,053
|
|
|
|
5,432
|
|
|
|
(7.0
|
)
|
|
|
15,748
|
|
|
|
16,219
|
|
|
|
(2.9
|
)
|
General
and administrative
(1)
|
|
|
2,070
|
|
|
|
2,033
|
|
|
|
1.8
|
|
|
|
5,928
|
|
|
|
17,346
|
|
|
|
(65.8
|
)
|
Restructuring
charge
|
|
|
-
|
|
|
|
353
|
|
|
|
(100.0
|
)
|
|
|
-
|
|
|
|
806
|
|
|
|
(100.0
|
)
|
Income
(loss) from vessel
operations
|
|
|
10,036
|
|
|
|
1,431
|
|
|
|
601.3
|
|
|
|
37,916
|
|
|
|
(7,067
|
)
|
|
|
636.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar-Ship-Days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned
Vessels
|
|
|
828
|
|
|
|
920
|
|
|
|
(10.0
|
)
|
|
|
2,577
|
|
|
|
2,730
|
|
|
|
(5.6
|
)
|
Chartered-in
Vessels
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,395
|
|
|
|
(100.0
|
)
|
Total
|
|
|
828
|
|
|
|
920
|
|
|
|
(10.0
|
)
|
|
|
2,577
|
|
|
|
7,125
|
|
|
|
(63.8
|
)
|
________
(1)
|
Includes
direct general and administrative expenses and indirect general and
administrative expenses (allocated to the conventional tanker segment
based on estimated use of corporate
resources).
|
The
average size of the conventional crude oil tanker fleet (including vessels
chartered-in) decreased for the three and nine months ended September 30, 2007,
compared to the same periods last year, primarily due to:
§
|
the
sale of Navion Shipping Ltd. to Teekay Corporation during July 2006
(Navion Shipping Ltd. chartered-in approximately 25 conventional
tankers
since 2004 and subsequently time-chartered the vessels back to Teekay
Corporation at charter rates that provided for a 1.25% fixed profit
margin
(please read "--
Items You Should Consider When Evaluating Our Results
– On July 1, 2006, OPCO transferred certain assets to Teekay Corporation
that are included in historical results of operations"
));
and
|
§
|
the
transfer of the
Navion Saga
to the FSO segment, as a result of
the completion of its conversion to an FSO unit and commencing a
three-year FSO time charter contract in early May 2007 (prior to
the
completion of the vessel’s conversion to an FSO unit, it was included as a
conventional crude oil tanker within the conventional tanker
segment).
|
Net
Voyage Revenues.
Net voyage revenues increased for the three months ended
September 30, 2007 from the same period last year, and decreased for the nine
months ended September 30, 2007 from the same period last year, primarily due
to:
§
|
a
decrease of $80.0 million for the nine months ended September 30,
2007,
from the sale of Navion Shipping
Ltd.;
|
partially
offset by
§
|
increases
of $10.8 million and $33.5 million, respectively, for the three
and nine months ended September 30, 2007, from higher hire rates
earned by
the nine owned Aframax-class conventional tankers on time charters
with a
subsidiary of Teekay Corporation (please read “--
Items You Should
Consider When Evaluating Our Results – Our financial results of operations
reflect different time charter terms for OPCO’s nine conventional
tankers”
); and
|
§
|
an
increase of $1.7 million for the nine months ended September 30,
2007,
relating to the
Navion Saga
temporarily trading in the spot
market as a conventional crude oil tanker until it was transferred
to the
FSO segment in early May 2007, compared to the same period last year
when
the vessel was employed on a time charter with a subsidiary of Teekay
Corporation at a lower daily hire
rate.
|
Vessel
Operating Expenses.
Vessel operating expenses increased for the three and
nine months ended September 30, 2007, from the same periods last year. This
increase was primarily due to an increase in salaries for crew and officers
as a
result of general wage escalations and the timing of repairs and maintenance.
In
addition, one of the nine owned Aframax-class conventional tankers was employed
on a short-term bareboat-charter during the nine months ended September 30,
2006, of which the customer was responsible for vessel operating expenses.
However,
in 2007, it was employed on a time-charter contract where we are responsible
for
vessel operating expenses.
Time-Charter
Hire Expense.
Due to the sale of Navion Shipping Ltd to Teekay Corporation
in July 2006, OPCO did not incur any time-charter hire expense for the
conventional tanker fleet during the three and nine months ended September
30,
2007, compared to $79.4 million for the nine months ended September 30,
2006.
Depreciation
and Amortization.
Depreciation and amortization expense decreased for the
three and nine months ended September 30, 2007, from the same periods last
year,
primarily due to the transfer of the
Navion
Saga
to the FSO
segment in early May 2007.
FSO
Segment
OPCO
owns
four FSO units that operate under fixed-rate time charters or fixed-rate
bareboat charters. FSO units provide an on-site storage solution to oil field
installations that have no oil storage facilities or that require supplemental
storage. In October 2007, we acquired an FSO unit, the
Dampier Spirit
,
from Teekay Corporation and the related 7-year, fixed-rate time-charter to
Apache Corporation of Australia for a total cost of approximately $30.3
million.
The
following table presents our FSO segment’s operating results for the three and
nine months ended September 30, 2007 and 2006, and compares its net voyage
revenues (which is a non-GAAP financial measure) for the three and nine months
ended September 30, 2007 and 2006 to voyage revenues, the most directly
comparable GAAP financial measure, for the same periods. The following table
also provides a summary of the changes in calendar-ship-days by owned vessels
for our FSO segment:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
(in
thousands of U.S. dollars, except calendar-ship-days and
percentages)
|
|
2007
|
|
|
2006
|
|
|
%
Change
|
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage
revenues
|
|
|
16,784
|
|
|
|
5,317
|
|
|
|
215.7
|
|
|
|
33,513
|
|
|
|
17,283
|
|
|
|
93.9
|
|
Voyage
expenses
|
|
|
238
|
|
|
|
168
|
|
|
|
41.7
|
|
|
|
584
|
|
|
|
691
|
|
|
|
(15.5
|
)
|
Net
voyage revenues
|
|
|
16,546
|
|
|
|
5,149
|
|
|
|
221.3
|
|
|
|
32,929
|
|
|
|
16,592
|
|
|
|
98.5
|
|
Vessel
operating expenses
|
|
|
3,590
|
|
|
|
1,493
|
|
|
|
140.5
|
|
|
|
8,678
|
|
|
|
5,009
|
|
|
|
73.2
|
|
Depreciation
and amortization
|
|
|
3,812
|
|
|
|
2,243
|
|
|
|
70.0
|
|
|
|
10,221
|
|
|
|
6,976
|
|
|
|
46.5
|
|
General
and administrative
(1)
|
|
|
753
|
|
|
|
398
|
|
|
|
89.2
|
|
|
|
1,873
|
|
|
|
1,367
|
|
|
|
37.0
|
|
Income
from vessel operations
|
|
|
8,391
|
|
|
|
1,015
|
|
|
|
726.7
|
|
|
|
12,157
|
|
|
|
3,240
|
|
|
|
275.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar-Ship-Days
Owned Vessels
|
|
|
368
|
|
|
|
276
|
|
|
|
33.3
|
|
|
|
972
|
|
|
|
819
|
|
|
|
18.7
|
|
________
(1)
|
Includes
direct general and administrative expenses and indirect general and
administrative expenses (allocated to the FSO segment based on estimated
use of corporate resources).
|
During
2006, OPCO operated three FSO units. A fourth FSO unit, the
Navion
Saga
, was included as a conventional crude oil tanker within the
conventional tanker segment until its conversion to an FSO unit was completed
and it commenced a three-year FSO time charter contract commencing in early
May
2007. Accordingly, since May 2007, the FSO segment has included four FSO
units.
The
operating results for the FSO segment for the three and nine months ended
September 30, 2007 increased from the same periods in 2006 primarily due to
the
inclusion of the operating results of the
Navion Saga
commencing in the
second quarter of 2007.
Other
Operating Results
General
and Administrative Expenses.
General and administrative expenses increased
to $15.7 million for the three months ended September 30, 2007, from $14.0
million for the same period last year. General and administrative
expenses decreased to $47.2 million for the nine months ended September 30,
2007, from $57.5 million for the same period last year. These changes
were primarily due to:
§
|
increases
of $0.9 million and $2.1 million, respectively, for the three and
nine
months ended September 30, 2007 relating to an increase in shore-based
compensation, travel and consulting fees;
and
|
§
|
increases
of $0.6 million and $1.6 million, respectively, for the three and
nine
months ended September 30, 2007 relating to additional expenses as
a
result of our being a publicly-traded limited partnership since our
initial public offering in December
2006;
|
partially
offset by
§
|
a
decrease of $13.9 million for the nine months ended September 30,
2007 in
general and administrative expenses as a result of the sale of Navion
Shipping Ltd. to Teekay Corporation in July 2006. Prior to our initial
public offering, general and administrative expenses were allocated
based
on OPCO’s proportionate share of Teekay Corporation’s total ship-operating
(calendar) days for each of the periods presented; since the initial
public offering, we have incurred general and administrative expenses
primarily through services agreements between we, OPCO and certain
of its
subsidiaries and subsidiaries of Teekay
Corporation.
|
Interest
Expense.
Interest expense increased to $21.6 million and $57.6 million,
respectively, for the three and nine months ended September 30, 2007, from
$13.8
million and $38.3 million for the same periods last year, primarily due
to:
§
|
increases
of $11.1 million and $31.7 million, respectively, for the three and
nine months ended September 30, 2007 relating to additional debt
of $773
million under a new revolving credit facility OPCO entered into during
the
fourth quarter of 2006; and
|
§
|
increases
of $3.2 million and $9.6 million, respectively, for the three and
nine months ended September 30, 2007 due to the Consolidation of
Joint
Ventures; and
|
§
|
an
increase of $1.5 million for the three and nine months ended September
30,
2007 due to the assumption of debt relating to the
2007 Shuttle Tanker
Acquisitions
;
|
partially
offset by
§
|
decreases
of $3.3 million and $10.1 million, respectively, for the three and
nine months ended September 30, 2007, relating to the settlement
of
interest-bearing advances from affiliates during the fourth quarter
of
2006;
|
§
|
decreases
of $4.7 million and $8.9 million, respectively, for the three and
nine
months ended September 30, 2007, relating to interest incurred under
one
of the revolving credit facilities, which was prepaid and cancelled
prior
to our initial public offering; and
|
§
|
decreases
of $1.7 million and $6.3 million, respectively, for the three and
nine months ended September 30, 2007, relating to interest incurred
by
Teekay Offshore Partners Predecessor on one of its revolving credit
facilities, which was not transferred to OPCO prior to our initial
public
offering.
|
Interest
Income.
Interest income increased to $1.8 million for the three months
ended September 30, 2007, from $1.0 million for the same period last year,
primarily due to an increase in average cash balances during the three months
ended September 30, 2007 compared to the same period last year. Interest income
for the nine months ended September 30, 2007 remained substantially unchanged
from the same period last year.
Equity
Income From Joint Ventures.
Equity income from OPCO’s 50%-owned joint
ventures was $1.4 million and $4.6 million for the three and nine months
ended September 30, 2006, respectively. On December 1, 2006, the operating
agreements for these joint ventures were amended, resulting in OPCO obtaining
control of these joint ventures and, consequently, OPCO has consolidated these
entities since December 1, 2006.
Foreign
Currency Exchange Gains (Losses).
Foreign currency exchange loss was $4.4
million for the three months ended September 30, 2007, compared to a foreign
currency exchange gain of $7.5 million for the same period last year. Foreign
currency exchange loss was $14.3 million for the nine months ended September
30,
2007 compared to a foreign currency exchange loss of $11.2 million for the
same
period last year. These foreign currency exchange losses and gains,
substantially all of which were unrealized, are due primarily to the relevant
period-end revaluation of Norwegian Kroner-denominated monetary assets and
liabilities for financial reporting purposes. Gains reflect a stronger U.S.
Dollar against the Kroner on the date of revaluation or settlement compared
to
the rate in effect at the beginning of the period. Losses reflect a weaker
U.S.
Dollar against the Kroner on the date of revaluation or settlement compared
to
the rate in effect at the beginning of the period.
Income
Tax Recovery (Expense).
Income tax expense was $6.1 million for the three
months ended September 30, 2007, compared to an income tax recovery of
$4.5 million for the same period last year. Income tax expense was $2.7
million for the nine months ended September 30, 2007, compared to income tax
expense of $3.2 million for the same period last year. The $10.6 million
increase to income tax expense and $0.5 million decrease in income tax expense,
respectively, were primarily due to an increase in deferred income tax expense
relating to unrealized foreign exchange translation gains for the three months
ended September 30, 2007, partially offset by deferred income tax recoveries
from the financial restructuring of our Norwegian shuttle tanker operations
during 2006.
Other
Income.
Other income for the three and nine months ended September 30, 2007
and 2006 was $3.0 million and $8.3 million, and $2.8 million and $8.5
million, respectively, which was primarily comprised of leasing income from
our
volatile organic compound emissions (or
VOC
) equipment.
Non-controlling
Interest.
Non-controlling interest for the three and nine months ended
September 30, 2007 was $6.8 million and $42.5 million, respectively, which
primarily reflects Teekay Corporation’s 74.0% interest in OPCO of $6.1 million
and $39.0 million, respectively.
Net
Income.
As a result of the foregoing factors, net income was
$2.1 million and $12.7 million for the three and nine months ended
September 30, 2007, respectively, compared to $32.3 million and $15.5 million
for the same periods last year, respectively.
Liquidity
and Capital Resources
Liquidity
and Cash Needs
|
As
at September 30, 2007, our total cash and cash equivalents were $96.6
million, compared to $114.0 million at December 31, 2006. Our total
liquidity, including cash, cash equivalents and undrawn long-term
borrowings, was $361.1 million as at September 30, 2007, compared
to
$429.0 million as at December 31, 2006. The decrease in liquidity
was
primarily the result of our purchase of the
Navion Bergen LLC
and
Navion Gothenburg LLC
in July 2007, the payment of cash
distributions by us and OPCO and expenditures for vessels and equipment,
partially offset by cash generated by our operating activities during
the
nine months ended September 30,
2007.
|
|
In
addition to distributions on our equity interests, our primary short-term
liquidity needs are to fund general working capital requirements
and
drydocking expenditures, while our long-term liquidity needs primarily
relate to expansion and investment capital expenditures and other
maintenance capital expenditures and debt repayment. Expansion capital
expenditures are primarily for the purchase or construction of vessels
to
the extent the expenditures increase the operating capacity of or
revenue
generated by our fleet, while maintenance capital expenditures primarily
consist of drydocking expenditures and expenditures to replace vessels
in
order to maintain the operating capacity of or revenue generated
by our
fleet. Investment capital expenditures are those capital expenditures
that
are neither maintenance capital expenditures nor expansion capital
expenditures.
|
|
We
anticipate that our primary sources of funds for our short-term liquidity
needs will be cash flows from operations. We believe that cash flows
from
operations will be sufficient to meet our existing liquidity needs
for at
least the next 12 months. Generally, our long-term sources of funds
will be from cash from operations, long-term bank borrowings and
other
debt or equity financings, or a combination thereof. Because we and
OPCO
distribute all of our and its available cash, we expect that we and
OPCO
will rely upon external financing sources, including bank borrowings
and
the issuance of debt and equity securities, to fund acquisitions
and
expansion and investment capital expenditures, including opportunities
we
may pursue under the omnibus agreement with Teekay Corporation and
other
of its affiliates.
|
Cash
Flows.
The following table summarizes our sources and
uses of cash for the periods presented:
|
|
Nine
Months Ended September 30,
|
|
|
2007
($000’s)
|
|
|
2006
($000’s)
|
|
|
|
|
|
|
|
|
Net
cash flow from operating activities
|
|
|
58,502
|
|
|
|
93,077
|
|
Net
cash flow from financing activities
|
|
|
(7,944
|
)
|
|
|
(99,286
|
)
|
Net
cash flow from investing activities
|
|
|
(67,955
|
)
|
|
|
(18,012
|
)
|
Operating
Cash Flows.
Net cash flow from operating activities decreased to
$58.5 million for the nine months ended September 30, 2007, from $93.1 million
for the same period in 2006, primarily reflecting a $40.0 million increase
in
cash distributions paid by OPCO to non-controlling interest owners, a $9.3
million increase in drydocking expenditures, and an increase in interest expense
from our new revolving credit facility which we entered into during the fourth
quarter of 2006 and the assumption of debt due to our acquisition of the
Navion Bergen
and our 50% interest in the
Navion Gothenburg
,
partially offset by an increase in cash flows from operations due to an increase
in the hire rate earned by our nine conventional tankers, which are on time
charters with a subsidiary of Teekay Corporation and the inclusion of the
results of the
Navion Bergen
and
Navion Gothenburg
since July
2007. Net cash flow from operating activities depends upon the timing and amount
of drydocking expenditures, repairs and maintenance activity, vessel additions
and dispositions, foreign currency rates, changes in interest rates,
fluctuations in working capital balances and spot market hire rates. The number
of vessel drydockings tends to be uneven between years.
Financing
Cash Flows.
Prior to our initial public offering in December 2006, advances
under revolving credit facilities, advances from Teekay Corporation and net
cash
flow from operations were used to finance OPCO’s investments in
vessels and equipment and direct financing leases. In addition, advances under
the revolving credit facilities were loaned to Teekay Corporation to temporarily
finance vessel construction and for other general corporate purposes. In effect,
prior to the initial public offering these revolving credit facilities were
used
as corporate-related debt of Teekay Corporation. Net proceeds from long-term
debt, prepayments of long-term debt and net advances to affiliates during the
periods prior to our initial public offering reflect this use. Prior to our
initial public offering, OPCO settled its advances from affiliates.
Scheduled
debt repayments were $12.2 million during the nine months ended September 30,
2007. Net proceeds from long-term debt of $137.0 million were used to make
debt
prepayments of $115.0 million during the nine months ended September 30, 2007
and to partially finance the acquisition of the
Navion Bergen
and our
50% interest in the
Navion Gothenburg
.
Cash
distributions paid during the nine months ended September 30, 2007 totaled
$15.0
million. Subsequent to September 30, 2007, cash distributions were declared
and
paid on November 14, 2007 for the three months ended September 30, 2007 and
totaled $7.7 million.
Investing
Cash Flows.
During the nine months ended September 30, 2007, we incurred
$65.4 million for the acquisition of the
Navion Bergen
and our 50%
interest in the
Navion
Gothenburg
.
During the
nine months ended September 30, 2007 and 2006, we incurred $13.3 million
and $21.4 million, respectively, of expenditures for vessels and equipment,
and incurred $8.3 million and $6.8 million, respectively, in investments in
direct financing leases. During the nine months ended September 30, 2007 and
2006, we received $15.9 million and $13.9 million, respectively, in scheduled
repayments received from the leasing of our VOC equipment. During the nine
months ended September 30, 2007 and 2006, we received $3.2 million and $8.9
million, respectively, in proceeds from the sale of certain offshore equipment
and one older shuttle tanker, respectively.
Credit
Facilities
As
at
September 30, 2007, our total debt was $1,449.4 million, compared to $1,303.4
million as at December 31, 2006. As at September 30, 2007, we had three
revolving credit facilities available, which, as at such date, provided for
borrowings of up to $1,417.7 million, of which $264.5 million was
undrawn. As at September 30, 2007, each of our six 50%-owned joint ventures
had
an outstanding term loan, which, in aggregate, totaled $296.2 million. The
joint
venture term loans reduce in semi-annual payments with varying maturities
through 2017. Please read Item 1 – Financial Statements: Note 7 – Long-Term
Debt.
Our
three
revolving credit facilities have the following terms:
§
|
Amended
2006 Revolving Credit Facility
. This 8-year amended reducing
revolving credit facility allows OPCO and it subsidiaries to borrow
up to
$455 million (subject to scheduled reductions through 2014) and may
be used for acquisitions and for general partnership purposes. Obligations
under this credit facility are collateralized by first-priority mortgages
on eight of OPCO’s vessels. Borrowings under the facility may be prepaid
at any time in amounts of not less than
$5.0 million.
|
§
|
New
2006 Revolving Credit Facility
. This 8-year reducing revolving credit
facility allows for borrowing of up to $940 million (subject to
scheduled reductions through 2014) and may be used for acquisitions
and
for general partnership purposes. Obligations under this credit facility
are collateralized by first-priority mortgages on 19 of OPCO’s vessels.
Borrowings under the facility may be prepaid at any time in amounts
of not
less than $5.0 million. This credit facility allows OPCO to make
working capital borrowings and loan the proceeds to us (which we
could use
to make distributions, provided that such amounts are paid down
annually).
|
§
|
New
2007 Revolving Credit Facility
. This 10-year reducing revolving
credit facility allows for borrowing of up to $70 million and may
be used
for general partnership purposes. Obligations under this credit facility
are collateralized by a first-priority mortgage on one of our vessels.
Borrowings under the facility may be prepaid at any time in amounts
of not
less than $5.0 million.
|
Two
of
the revolving credit facilities contain covenants that require OPCO to maintain
the greater of a minimum liquidity (cash, cash equivalents and undrawn committed
revolving credit lines with at least six months of maturity) of at least
$75.0 million and 5.0% of OPCO’s total consolidated debt, which as at
September 30, 2007 was $65.7 million. OPCO’s minimum liquidity as at September
30, 2007 was $333.7 million. The remaining revolving credit facility is
guaranteed by Teekay Corporation and contains covenants that require Teekay
Corporation to maintain the greater of a minimum liquidity of at least
$50.0 million and 5.0% of Teekay Corporation’s total consolidated debt. As
at September 30, 2007, we and Teekay Corporation were in compliance with all
of
our covenants under these credit facilities.
The
term
loans of our 50% joint ventures are collateralized by first-priority mortgages
on the vessels to which the loans relate, together with other related
collateral. As at September 30, 2007, we had guaranteed $42.2 million of these
term loans, which represents our 50% share of the outstanding vessel mortgage
debt in two of these 50%-owned joint venture companies. Teekay Corporation
and
our joint venture partner have guaranteed the remaining $254.0
million.
Interest
payments on the revolving credit facilities and term loans are based on LIBOR
plus a margin. At September 30, 2007 and December 31, 2006, the margins ranged
between 0.45% and 0.80%.
All
of
our vessel financings are collateralized by the applicable vessels. The term
loans used to finance the six 50%-owned joint venture shuttle tankers and our
three revolving credit facility agreements contain typical covenants and other
restrictions, including those that restrict the relevant subsidiaries
from:
•
|
incurring
or guaranteeing indebtedness;
|
•
|
changing
ownership or structure, including by mergers, consolidations, liquidations
and dissolutions;
|
•
|
making
dividends or distributions when in default of the relevant
loans;
|
•
|
making
capital expenditures in excess of specified
levels;
|
•
|
making
certain negative pledges or granting certain
liens;
|
•
|
selling,
transferring, assigning or conveying
assets; or
|
•
|
entering
into a new line of business.
|
We
conduct our funding and treasury activities within corporate policies designed
to minimize borrowing costs and maximize investment returns while maintaining
the safety of the funds and appropriate levels of liquidity for our
purposes. We hold cash and cash equivalents primarily in U.S.
Dollars.
Contractual
Obligations and Contingencies
The
following table summarizes our long-term contractual obligations as at September
30, 2007:
|
|
Total
|
|
|
Fourth
Quarter
of
2007
|
|
|
2008
and
2009
|
|
|
2010
and
2011
|
|
|
Beyond
2011
|
|
|
(in
millions of U.S. dollars)
|
|
Long-term
debt
(1)
|
|
|
1,449.4
|
|
|
|
3.7
|
|
|
|
126.4
|
|
|
|
255.0
|
|
|
|
1,064.3
|
|
Chartered-in
vessels (operating leases)
|
|
|
497.5
|
|
|
|
38.1
|
|
|
|
188.8
|
|
|
|
138.1
|
|
|
|
132.5
|
|
Purchase
obligation
|
|
|
41.7
|
|
|
|
-
|
|
|
|
41.7
|
|
|
|
-
|
|
|
|
-
|
|
Total
contractual obligations
|
|
|
1,988.6
|
|
|
|
41.8
|
|
|
|
356.9
|
|
|
|
393.1
|
|
|
|
1,196.8
|
|
(1)
|
Excludes
expected interest payments of $21.4 million (fourth quarter of 2007),
$163.9 million (2008 and 2009), $142.7 million (2010 and 2011)
and $148.5 million (beyond 2011). Expected interest payments are
based on LIBOR, plus margins which ranged between 0.45% and 0.80%
as at
September 30, 2007. The expected interest payments do not reflect
the
effect of related interest rate swaps that hedge certain of the
floating-rate debt.
|
Off-Balance
Sheet Arrangements
We
have
no off-balance sheet arrangements that have or are reasonably likely to have,
a
current or future material effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.
CRITICAL
ACCOUNTING ESTIMATES
We
prepare our consolidated financial statements in accordance with GAAP, which
require us to make estimates in the application of our accounting policies
based
on our best assumptions, judgments and opinions. On a regular basis, management
reviews the accounting policies, assumptions, estimates and judgments to ensure
that our consolidated financial statements are presented fairly and in
accordance with GAAP. However, because future events and their effects cannot
be
determined with certainty, actual results could differ from our assumptions
and
estimates, and such differences could be material. Accounting estimates and
assumptions that we consider to be the most critical to an understanding of
our
financial statements because they inherently involve significant judgments
and
uncertainties, can be found in Item 5. Operating and Financial Review and
Prospects, in our Annual Report on Form 20-F for the year ended December 31,
2006.
FORWARD-LOOKING
STATEMENTS
This
Report on Form 6-K for the three months and nine months ended September 30,
2007
contains certain forward-looking statements (as such term is defined in Section
27A of the Securities Exchange Act of 1933 as amended, and Section 21E of
the
Securities Exchange Act of 1934, as amended) concerning future events and
our
operations, performance and financial condition, including, in particular,
statements regarding:
·
|
our
future growth prospects;
|
·
|
results
of operations and revenues and
expenses;
|
·
|
offshore
and tanker market fundamentals, including the balance of supply
and demand
in the offshore and tanker
market;
|
·
|
future
capital expenditures and availability of capital resources to fund
capital
expenditures;
|
·
|
offers
of shuttle tankers, FSOs and FPSOs and related contracts from Teekay
Corporation;
|
·
|
obtaining
offshore projects that we or Teekay Corporation bid on or have
been
awarded;
|
·
|
delivery
dates of and financing for newbuildings or existing
vessels;
|
·
|
the
commencement of service of newbuildings or existing
vessels;
|
·
|
our
liquidity needs; and
|
·
|
our
exposure to foreign currency fluctuations, particularly in Norwegian
Kroner.
|
Forward-looking
statements include, without limitation, any statement that may predict,
forecast, indicate or imply future results, performance or achievements,
and may
contain the words “believe”, “anticipate”, “expect”, “estimate”, “project”,
“will be”, “will continue”, “will likely result”, “plan”, “intend” or words or
phrases of similar meanings. These statements involve known and unknown risks
and are based upon a number of assumptions and estimates that are inherently
subject to significant uncertainties and contingencies, many of which are
beyond
our control. Actual results may differ materially from those expressed or
implied by such forward-looking statements. Important factors that could
cause
actual results to differ materially include, but are not limited to: changes
in
production of oil from offshore oil fields; changes in the demand for offshore
oil transportation, production and storage services; greater or less than
anticipated levels of vessel newbuilding orders or greater or less than
anticipated rates of vessel scrapping; changes in trading patterns; changes
in
applicable industry laws and regulations and the timing of implementation
of new
laws and regulations; potential inability to implement our growth strategy;
competitive factors in the markets in which we operate; potential for early
termination of long-term contracts and our potential inability to renew or
replace long-term contracts; loss of any customer, time charter or vessel;
shipyard production or vessel delivery delays; our potential inability to
raise
financing to purchase additional vessels; our exposure to currency exchange
rate
fluctuations; changes to the amount of proportion of revenues and expenses
denominated in foreign currencies; and other factors detailed from time to
time
in our periodic reports filed with the SEC, including our Annual Report on
Form
20-F for the year ended December 31, 2006,. We do not intend to release publicly
any updates or revisions to any forward-looking statements contained herein
to
reflect any change in our expectations with respect thereto or any change
in
events, conditions or circumstances on which any such statement is
based.
TEEKAY
OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor
to Teekay Offshore Partners Predecessor)
SEPTEMBER
30, 2007
PART
I – FINANCIAL INFORMATION
ITEM
3 -
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Interest
Rate Risk
We
are
exposed to the impact of interest rate changes primarily through our unhedged
floating-rate borrowings. Significant increases in interest rates could
adversely affect operating margins, results of operations and our ability to
service debt. From time to time, we use interest rate swaps to reduce exposure
to market risk from changes in interest rates. The principal objective of these
contracts is to minimize the risks and costs associated with the floating-rate
debt. Changes in the fair value of our interest rate swaps are recognized in
other comprehensive income until the hedged item is recognized in income. The
ineffective portion of an interest rate swap’s change in fair value is
immediately recognized in income.
The
tables below provide information about financial instruments as at September
30,
2007 that are sensitive to changes in interest rates. For debt obligations,
the
table presents principal payments and related weighted-average interest rates
by
expected maturity dates. For interest rate swaps, the table presents notional
amounts and weighted-average interest rates by expected contractual maturity
dates.
|
|
Expected
Maturity Date
|
|
|
|
|
|
|
Fourth
Quarter of
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total
|
|
|
Fair
Value
Asset/
(Liability)
|
|
|
Rate
(1)
|
|
|
|
(in
millions of U.S. dollars, except percentages)
|
|
Long-Term
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Dollar-denominated
(2)
|
|
|
3.7
|
|
|
|
55.6
|
|
|
|
70.8
|
|
|
|
97.6
|
|
|
|
157.4
|
|
|
|
1,064.3
|
|
|
|
1,449.4
|
|
|
|
(1,449.4
|
)
|
|
|
5.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
Amount
(3)
|
|
|
295.1
|
|
|
|
12.4
|
|
|
|
547.6
|
|
|
|
12.8
|
|
|
|
13.1
|
|
|
|
697.9
|
|
|
|
1,578.9
|
|
|
|
16.1
|
|
|
|
4.9
|
%
|
Average
Fixed Pay Rate
(2)
|
|
|
5.4
|
%
|
|
|
4.9
|
%
|
|
|
4.7
|
%
|
|
|
4.9
|
%
|
|
|
4.9
|
%
|
|
|
4.8
|
%
|
|
|
4.9
|
%
|
|
|
|
|
|
|
|
|
_________
(1)
|
Rate
refers to the weighted-average effective interest rate for our debt,
including the margin paid on our floating-rate debt and the average
fixed
pay rate for interest rate swaps. The average fixed pay rate for
interest
rate swaps excludes the margin paid on the floating-rate debt, which
as of
September 30, 2007 ranged from 0.45% to
0.80%.
|
(2)
|
Interest
payments on floating-rate debt and interest rate swaps are based
on
LIBOR.
|
(3)
|
The
average variable receive rate for interest rate swaps is set quarterly
at
the 3-month LIBOR or semi-annually at the 6-month
LIBOR.
|
Counterparties
to these financial instruments expose us to credit-related losses in the event
of nonperformance; however, counterparties to these agreements are major
financial institutions, and we consider the risk of loss due to nonperformance
to be minimal. Neither we nor OPCO requires collateral from these
institutions. Neither we nor OPCO holds or issues interest rate swaps
for trading purposes.
Foreign
Currency Risk
Our
primary economic environment is the international shipping market. This market
utilizes the U.S. Dollar as its functional currency. Consequently,
virtually all of our revenues and most of our operating costs are in
U.S. Dollars. We incur certain vessel operating expenses and general and
administrative expenses in foreign currencies, the most significant of which
is
the Norwegian Kroner and, to a lesser extent, Australian Dollars, Euros and
Singapore Dollars. For the three and nine months ended September 30, 2007 and
2006, approximately 53%, 51%, 46%, and 39%, respectively, of vessel operating
costs and general and administrative expenses were denominated in Norwegian
Kroner.
There
is
a risk that currency fluctuations will have a negative effect on the value
of
cash flows
On
the
closing of our initial public offering, OPCO entered into new services
agreements with subsidiaries of Teekay Corporation whereby the subsidiaries
operate and crew OPCO’s vessels. Under these service agreements, OPCO pays all
vessel operating expenses in U.S. Dollars and will not be subject to
Norwegian Kroner exchange fluctuations until 2009. Beginning in 2009, payments
under the service agreements will adjust to reflect any change in Teekay
Corporation’s cost of providing services based on fluctuations in the value of
the Norwegian Kroner relative to the U.S. Dollar. We may seek to hedge this
currency fluctuation risk in the future. At September 30, 2007, we were
committed to foreign exchange contracts for the forward purchase of
approximately Australian Dollars 5.7 million, Euros 4.0 million, and Singapore
Dollars 2.9 million for U.S. Dollars at an average rate of Australian Dollar
1.31 per U.S. Dollar, Euro 0.72 per U.S. Dollar and Singapore Dollar 1.51 per
U.S. Dollar. The foreign exchange forward contracts mature as follows: $8.8
million in 2007; and $2.9 million in 2008.
To
the
extent the hedge is effective, changes in the fair value of the forward contract
are recognized in other comprehensive income until the hedged item is recognized
in income. The ineffective portion of a forward contract's change in fair value
is immediately recognized in income.
Although
the majority of transactions, assets and liabilities are denominated in
U.S. Dollars, OPCO had Norwegian Kroner-denominated deferred income
taxes of approximately 475.6 million ($88.3 million) at September 30,
2007.
Neither
we nor OPCO has entered into any forward contracts to protect against currency
fluctuations on any future taxes.
TEEKAY
OFFSHORE PARTNERS L.P. AND SUBSIDIARIES
(Successor
to Teekay Offshore Partners Predecessor)
SEPTEMBER
30, 2007
PART
II – OTHER INFORMATION
Item
1
– Legal Proceedings
None
Item
1A – Risk Factors
In
addition to the other information set forth in this Quarterly Report on Form
6-K, you should carefully consider the risk factors discussed in Part I,
“Item 3. Key Information” in our Annual Report on Form 20-F for the year
ended December 31, 2006, which could materially affect our business,
financial condition or results of operations. There have been no material
changes in our risk factors from those disclosed in our 2006 Annual Report
on
Form 20-F.
Item
2
– Unregistered Sales of Equity Securities and Use of Proceeds
None
Item
3
– Defaults Upon Senior Securities
None
Item
4
– Submission of Matters to a Vote of Security Holders
None
Item
5
– Other Information
None
Item
6
– Exhibits
The
following exhibits are filed as part of this Report:
3.1
|
Certificate
of Limited Partnership of Teekay Offshore Partners L.P.
(1)
|
3.2
|
First
Amended and Restated Agreement of Limited Partnership of Teekay Offshore
Partners L.P. (2)
|
3.3
|
Certificate
of Formation of Teekay Offshore GP L.L.C. (1)
|
3.4
|
Amended
and Restated Limited Liability Company Agreement of Teekay Offshore
GP
L.L.C. (1)
|
3.5
|
Certificate
of Limited Partnership of Teekay Offshore Operating L.P.
(1)
|
3.6
|
Amended
and Restated Agreement of Limited Partnership of Teekay Offshore
Operating
Partners L.P. (1)
|
3.7
|
Certificate
of Formation of Teekay Offshore Operating GP L.L.C. (1)
|
3.8
|
Amended
and Restated Limited Liability Company Agreement of Teekay Offshore
Operating GP L.L.C. (1)
|
15.1
|
Acknowledgement
of Independent Registered Public Accounting
Firm
|
(1)
|
Previously
filed as an exhibit to the Partnership’s Registration Statement on Form
F-1 (File No. 333-139116), filed with the SEC on December 4, 2006,
and
hereby incorporated by reference to such Registration
Statement.
|
(2)
|
Previously
filed as Appendix A to the Partnership’s Rule 424(b)(4) Prospectus filed
with the SEC on December 14, 2006, and hereby incorporated by reference
to
such Prospectus.
|
THIS
REPORT ON FORM 6-K IS HEREBY INCORPORATED BY REFERENCE INTO THE FOLLOWING
REGISTRATION STATEMENT OF THE PARTNERSHIP:
·
REGISTRATION
STATEMENT ON FORM S-8 (NO. 333-147682) FILED WITH THE SEC ON NOVEMBER 28,
2007