Voyage expenses

Vessel operating expenses (note 10b)

Depreciation and amortization

General and administrative (notes 10a and 10b)

Restructuring charge

 

 

 

Interest expense (notes 8 and 10a)

Interest income

Realized and unrealized loss on derivative instruments (note 11)

Foreign currency exchange gain (loss) (note 8)

Equity income (loss)

Other income (expense)

 

 

Net income (loss) before income tax recovery (expense)

Income tax recovery (expense) (note 9)

 

 

Non-controlling interest in net income (loss)

Dropdown Predecessor’s interest in net income (loss) (note 2)

General Partner’s interest in net income (loss) (note 13)

Limited partners’ interest in net income (loss) (note 13)

Limited partners’ interest in net income (loss) per unit (note 13)

• Common unit (basic and diluted)

• Subordinated unit (basic and diluted)

• Total unit (basic and diluted)

 

Weighted-average number of units outstanding:

• Common units (basic and diluted)

• Subordinated units (basic and diluted)

• Total units (basic and diluted)

 

Cash distributions declared per unit

 

Related party transactions (note 10)

Cash and cash equivalents

Restricted cash — current (note 6)

Accounts receivable, including non-trade of $9,994 (2010 — $12,832) (note 11)

Prepaid expenses

Current portion of derivative assets (note 11)

Current portion of net investments in direct financing leases (note 6)

Advances to affiliates (note 10c)

 

 

 

 

Restricted cash — long-term (note 6)

 

At cost, less accumulated depreciation of $235,681 (2010 — $200,708)

Vessels under capital leases, at cost, less accumulated depreciation of $197,849 (2010 — $172,113)

Advances on newbuilding contracts (note 12)

 

 

Investments in joint ventures (notes 10f and 16)

Net investments in direct financing leases (note 6)

Advances to joint venture partner (note 7)

Other assets

Derivative assets (note 11)

Intangible assets — net

Goodwill — liquefied gas segment

 

 

 

 

Accounts payable (includes $415 and $567 for 2011 and 2010, respectively, owing to related parties) (note 10c)

Accrued liabilities (includes $3,553 and $3,020 for 2011 and 2010, respectively, owing to related parties) (notes 10c and 11)

Unearned revenue

Current portion of long-term debt (note 8)

Current obligations under capital lease

Current portion of derivative liabilities (note 11)

Advances from joint venture partner

Advances from affiliates (note 10c)

 

 

 

Long-term debt (note 8)

Long-term obligations under capital lease

Long-term unearned revenue

Other long-term liabilities (note 6)

Derivative liabilities (note 11)

 

 

 

Commitments and contingencies (notes 6, 8, 11 and 12)

 

Non-controlling interest

Partners’ equity

 

 

 

 

 

 

Consolidation of variable interest entities (note 12)

Cash and cash equivalents provided by (used for)

 

Non-cash items:

Unrealized loss on derivative instruments (note 11)

Depreciation and amortization

Unrealized foreign currency exchange loss (gain)

Equity (income) loss, net of dividends received of $3.4 million (2010 — nil)

Amortization of deferred debt issuance costs and other

Change in operating assets and liabilities

Accrued interest

Expenditures for dry docking

 

 

 

 

Distribution to Teekay Corporation for the acquisition of Alexander Spirit LLC, Bermuda Spirit LLC and Hamilton Spirit LLC (note 2)

Proceeds from issuance of long-term debt

Scheduled repayments of long-term debt

Prepayments of long-term debt

Scheduled repayments of capital lease obligations and other long-term liabilities

Proceeds from equity offering, net of offering costs (note 13)

Advances to and from affiliates

(Increase) decrease in restricted cash

Equity contribution from Teekay Corporation to Dropdown Predecessor

Cash distributions paid

Purchase of Skaugen Multigas Subsidiary (note 10e)

Proceeds on sale of 1% interest in Skaugen LPG Carriers and Skaugen Multigas Subsidiaries (note 10g)

Repayment of joint venture partners’ advances

Other

 

 

 

 

Purchase of equity investment in two Angola LNG Carriers (note 10f)

Advances to joint venture partner and to joint venture

Receipts from direct financing leases

Expenditures for vessels and equipment

 

 

 

 

Increase (decrease) in cash and cash equivalents

Cash and cash equivalents, beginning of the period

 

 

 

 

Supplemental cash flow information (note 14)

Net income and comprehensive income

Cash distributions

Equity based compensation

Proceeds from follow-on public offering of units, net of offering costs of $7.0 million (note 13)

Acquisition of Skaugen Multigas Subsidiary (note 10e)

Acquisition of equity investment in two Angola LNG Carriers (note 10f)

Sale of 1% interest in Skaugen LPG and Multigas subsidiaries to Teekay GP L.L.C. (note 10g)

 

 

The unaudited interim consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (or GAAP). These financial statements include the accounts of Teekay LNG Partners L.P., which is a limited partnership organized under the laws of the Republic of The Marshall Islands, its wholly owned or controlled subsidiaries, the Dropdown Predecessor, as described in Note 2 below, and variable interest entities for which Teekay LNG Partners L.P. or its subsidiaries are the primary beneficiaries (see Note 12) (collectively, the Partnership). 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.

Certain information and footnote disclosures required by GAAP for complete annual financial statements have been omitted; therefore, these interim financial statements should be read in conjunction with the Partnership’s audited consolidated financial statements for the year ended December 31, 2010. In the opinion of management of Teekay GP L.L.C., the general partner of Teekay LNG Partners L.P. (or the General Partner), these interim consolidated financial statements reflect all adjustments consisting solely of a normal recurring nature, necessary to present fairly, in all material respects, the Partnership’s consolidated financial position, results of operations, and changes in total 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.

On March 17, 2010, the Partnership acquired from Teekay Corporation two 2009-built Suezmax tankers, the Bermuda Spirit and the Hamilton Spirit (or the Centrofin Suezmaxes), and a 2007-built Handymax Product tanker, the Alexander Spirit, and the related long-term, fixed-rate time-charter contracts. These transactions were deemed to be business acquisitions between entities under common control. As a result, the Partnership’s consolidated statements of income (loss) and cash flows for the nine months ended September 30, 2010 reflect these three vessels and their results of operations, referred to herein as the Dropdown Predecessor, as if the Partnership had acquired them when each respective vessel began operations under the ownership of Teekay Corporation. These vessels began operations under the ownership of Teekay Corporation on May 27, 2009 (Bermuda Spirit), June 24, 2009 (Hamilton Spirit) and September 3, 2009 (Alexander Spirit). The effect of adjusting the Partnership’s financial statements to account for these common control exchanges up to March 17, 2010, increased the Partnership’s net income by $2.3 million for the nine months ended September 30, 2010.

The Partnership’s consolidated financial statements include the financial position, results of operations and cash flows of the Dropdown Predecessor. In the preparation of these consolidated financial statements, general and administrative expenses and interest expense were not identifiable as relating solely to the vessels. General and administrative expenses (consisting primarily of salaries and other employee related costs, office rent, legal and professional fees, and travel and entertainment) were allocated based on the Dropdown Predecessor’s proportionate share of Teekay Corporation’s total ship-operating (calendar) days for the period presented. In addition, the Dropdown Predecessor was capitalized in part with non-interest bearing loans or equity from Teekay Corporation and its subsidiaries. These intercompany loans and equity were generally used to finance the acquisition of the vessels. Interest expense includes the allocation of interest to the Dropdown Predecessor from Teekay Corporation and its subsidiaries based upon the weighted-average outstanding balance of these intercompany loans and equity and the weighted-average interest rate outstanding on Teekay Corporation’s loan facilities that were used to finance these intercompany loans and equity. Management believes these allocations reasonably present the general and administrative expenses and interest expense of the Dropdown Predecessor.

In January 2011, the Partnership adopted an amendment to Financial Accounting Standards Board (or FASB) Accounting Standards Codification (or ASC) 605, Revenue Recognition, that provides for a new methodology for establishing the fair value for a deliverable in a multiple-element arrangement. When vendor specific objective or third-party evidence for deliverables in a multiple-element arrangement cannot be determined, the Partnership will be required to develop a best estimate of the selling price of separate deliverables and to allocate the arrangement consideration using the relative selling price method. The adoption of this amendment did not have an impact on the Partnership’s consolidated financial statements.

On September 30, 2011, the Partnership adopted an amendment to FASB ASC 350, Intangibles — Goodwill and Other, that provides entities with the option of performing a qualitative assessment before performing the first step of the current two-step goodwill impairment test. If entities determine, on the basis of qualitative factors, it is not more likely than not that the fair value of the reporting unit is less than the carrying amount, then performing the two-step impairment test is not required. However, if an entity concludes otherwise, the existing two-step goodwill impairment test is performed. ASU 2011-08 also provides entities with the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to the first step of the two-step impairment test. The adoption of this amendment did not have an impact on the Partnership’s consolidated financial statements.

Fair Value Measurements

For a description of how fair value is estimated, see Note 2 in the Partnership’s audited consolidated financial statements filed on Form 20-F for the year ended December 31, 2010. The estimated fair value of the Partnership’s financial instruments and categorization using the fair value hierarchy for those financial instruments that are measured at fair value on a recurring basis are as follows:

 

Cash and cash equivalents and restricted cash

Advances to and from affiliates

Long-term debt (note 8)

Advances to and from joint venture partners (note 7)

Derivative instruments (note 11)

Interest rate swap agreements — assets

Interest rate swap agreements — liabilities

Other derivative

The fair value hierarchy level is only applicable to financial instruments on the consolidated balance sheets that are recorded at fair value on a recurring basis.

The fair value of the Partnership’s advances to its joint venture partner as at September 30, 2011 and December 31, 2010 was not determinable given the amounts are non-current with no fixed repayment terms.

Changes in fair value during the nine months ended September 30, 2011 for assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) are as follows:

 

Fair value at December 31, 2010

Total unrealized gains

 

Fair value at September 30, 2011

 

Financing Receivables

The following table contains a summary of the Partnership’s loan receivables and other financing receivables by type of borrower and the method by which the Partnership monitors the credit quality of its financing receivables on a quarterly basis.

 

Direct financing leases

Other receivables

Long-term receivable included in other assets

Advances to joint venture partner

 

 

 

The following tables include results for the Partnership’s segments for the periods presented in these consolidated financial statements.

Voyage revenues

Voyage expenses (recoveries)

Vessel operating expenses

Depreciation and amortization

General and administrative⁽¹⁾

 

Income from vessel operations

 

 

Voyage revenues

Voyage expenses

Vessel operating expenses

Depreciation and amortization

General and administrative⁽¹⁾

Restructuring charge

 

Income from vessel operations

 

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:

 

Total assets of the liquefied gas segment

Total assets of the conventional tanker segment

Unallocated:

Cash and cash equivalents

Accounts receivable and prepaid expenses

Advances to affiliates

 

Consolidated total assets

 

The minimum estimated charter hire payments in the next five fiscal years, as at September 30, 2011, for the Partnership’s vessels chartered-in and vessels chartered-out are as follows:

Charters-in — capital leases^(2)(3)(4)

 

 

Charters-out — operating leases⁽⁵⁾

Charters-out — direct financing leases

 

 

 

The table does not include the Partnership’s minimum charter hire payments to be paid and received under its operating leases (or Head Lease and Sublease) for the Tangguh Hiri and the Tangguh Sago LNG carriers (or the Tangguh LNG Carriers), which are described in more detail in Note 5 to the Partnership’s audited consolidated financial statements filed on Form 20-F for the year ended December 31, 2010.

As at September 30, 2011 and December 31, 2010, the Partnership had $564.8 million and $559.8 million, respectively of cash which, including any interest earned on such amounts, are restricted to being used for charter hire payments of certain vessels chartered-in under capital leases. The Partnership also maintains restricted cash deposits relating to certain term loans, which cash totaled $13.8 million and $12.3 million as at September 30, 2011 and December 31, 2010, respectively.

As described in Note 5 in the Partnership’s audited consolidated financial statements filed on Form 20-F for the year ended December 31, 2010, the Partnership has leasing arrangements relating to five of its LNG carriers (three through Teekay Nakilat Corporation (or the RasGas II LNG Carriers) and two through Teekay BLT Corporation, relating to the Tangguh LNG Carriers, in which the Partnership owns a 70% and 69% ownership interest, respectively) whereby it is the lessee and the lessors claim tax depreciation on the capital expenditures they incurred to acquire these vessels. As is typical in these leasing arrangements, tax and change of law risks are assumed by the lessee. Lease payments under the lease arrangements are based on certain tax and financial assumptions at the commencement of the leases. If an assumption proves to be incorrect, the lessor is entitled to increase the lease payments to maintain its agreed after-tax margin.

The tax indemnification is for the duration of the lease contracts with the third parties plus the years it would take for the lease payments to be statute barred, and ends in 2033 for two vessels and 2041 for three vessels. Although there is no maximum potential amount of future payments, Teekay Nakilat Corporation and the Teekay BLT Corporation may terminate the lease arrangements on a voluntary basis at any time. If the lease arrangements terminate, Teekay Nakilat Corporation and the Teekay BLT Corporation will be required to pay termination sums to the lessor sufficient to repay the lessor’s investment in the vessels and to compensate it for the tax effect of the terminations, including recapture of any tax depreciation.

Excludes estimated charter hire payments of $905.1 million for the period from 2016 to 2037.

The minimum scheduled future charter hire receipts for vessels chartered out should not be construed to reflect total charter hire revenues for any of the periods. In addition, minimum scheduled future revenues have been reduced by estimated off-hire time for period maintenance. The amounts may vary given unscheduled future events such as vessel maintenance. Excludes estimated charter hire receipts of $2.5 billion for the period from 2016 to 2029.

Advances to joint venture partner of $10.2 million as at September 30, 2011 and December 31, 2010 are non-interest bearing without specific terms of repayment and unsecured. The Partnership did not recognize any interest income from the advances during the three and nine months ended September 30, 2011 and 2010.

 

U.S. Dollar-denominated Revolving Credit Facilities due through 2018

U.S. Dollar-denominated Term Loans due through 2019

U.S. Dollar-denominated Term Loans due through 2021

U.S. Dollar-denominated Term Loans due through 2021

U.S. Dollar-denominated Term Loans due through 2018

U.S. Dollar-denominated Unsecured Demand Loan

Euro-denominated Term Loans due through 2023

 

Total

Less current portion

 

Total

 

As at September 30, 2011, the Partnership had three long-term revolving credit facilities available, which, as at such date, provided for borrowings of up to $504.9 million, of which $356.2 million was undrawn. Interest payments are based on LIBOR plus margins. The amount available under the revolving credit facilities reduces by $10.5 million (remainder of 2011), $32.9 million (2012), $33.7 million (2013), $34.5 million (2014), $84.1 million (2015) and $309.2 million (thereafter). All the revolving credit facilities may be used by the Partnership to fund general partnership purposes and to fund cash distributions. The Partnership is required to repay all borrowings used to fund cash distributions within 12 months of their being drawn, from a source other than further borrowings. The revolving credit facilities are collateralized by first-priority mortgages granted on seven of the Partnership’s vessels, together with other related security, and include a guarantee from the Partnership or its subsidiaries of all outstanding amounts.

The Partnership has a U.S. Dollar-denominated term loan outstanding, which, as at September 30, 2011, totaled $353.0 million, of which $184.8 million bears interest at a fixed-rate of 5.39% and requires quarterly payments. The remaining $168.2 million bears interest based on LIBOR plus 0.675% and will require bullet repayments of approximately $56.0 million per vessel due at maturity in 2018 and 2019. The term loan is collateralized by first-priority mortgages on three vessels, together with certain other related security and certain guarantees from the Partnership.

The Partnership owns a 69% interest in Teekay BLT Corporation, (or the Teekay Tangguh Joint Venture) a consolidated entity. The Teekay Tangguh Joint Venture has a U.S. Dollar-denominated term loan outstanding, which, as at September 30, 2011, totaled $324.1 million. Interest payments on the loan are based on LIBOR plus margins. Interest payments on one tranche under the loan facility are based on LIBOR plus 0.30%, while interest payments on the second tranche are based on LIBOR plus 0.625%. One tranche (total value of up to $324.5 million) reduces in quarterly payments while the other tranche (total value of up to $190.0 million) correspondingly is drawn up with a final $95.0 million bullet payment per vessel due in 2021. This loan facility is collateralized by first-priority mortgages on the two vessels to which the loan relates, together with certain other security and is guaranteed by the Partnership.

At September 30, 2011, the Partnership had a U.S. Dollar-denominated term loan outstanding in the amount of $117.8 million. Interest payments on one tranche under the loan facility are based on LIBOR plus 0.3%, while interest payments on the second tranche are based on LIBOR plus 0.7%. One tranche reduces in semi-annual payments while the other tranche correspondingly is drawn up every six months with a final $20 million bullet payment per vessel due 12 years and six months from each vessel delivery date. This loan facility is collateralized by first-priority mortgages on the two vessels to which the loan relates, together with certain other related security and is guaranteed by Teekay Corporation.

Also at September 30, 2011, the Partnership had a credit facility of $122.0 million relating to three liquefied petroleum gas (or LPG) carriers (or the Skaugen LPG Carriers), and two multigas carriers (or the Skaugen Multigas Carriers). This facility will mature, with respect to each vessel, in 2018, seven years after each vessel’s first drawdown date. The facility is collateralized by the vessels to which the loan relates. The Partnership drew $71.0 million on this facility on September 15, 2011 to repay a portion of the amount it borrowed under its existing revolving credit facilities to purchase two Skaugen LPG Carriers in 2009, one Skaugen Multigas Carrier in June 2011, and to fund the acquisition of the third Skaugen LPG Carrier in September 2011. As at September 30, 2011, the Partnership had access to draw an additional $20 million on this facility. The Partnership intends to use the remaining available funds from the facility to assist in purchasing the remaining Skaugen Multigas Carrier, which was delivered on October 17, 2011.

The Partnership has a U.S. Dollar-denominated demand loan outstanding owing to Qatar Gas Transport Company Ltd. (Nakilat), which, as at September 30, 2011, totaled $13.3 million. Interest payments on this loan, which are based on a fixed interest rate of 4.84%, commenced in February 2008. The loan is repayable on demand no earlier than February 27, 2027.

The Partnership has two Euro-denominated term loans outstanding, which as at September 30, 2011 totaled 271.7 million Euros ($363.7 million). Interest payments are based on EURIBOR plus a margin, which margins ranged from 0.60% to 0.66% as of September 30, 2011. The term loans have varying maturities through 2023. The term loans are collateralized by first-priority mortgages on two vessels to which the loans relate, together with certain other related security and guarantees from one of the Partnership’s subsidiaries. One of the term loans outstanding in the amount of 150.4 million Euros ($201.3 million) is repayable in January 2012 and was refinanced during the quarter. The Partnership expects to draw on the new term loan to pay out the old term loan by the end of November 2011. The new term loan bears interest at 1-month EURIBOR plus 2.25% and matures in 2018.

The weighted-average effective interest rate for the Partnership’s long-term debt outstanding at September 30, 2011 and December 31, 2010 was 1.8%. This rate does not reflect the effect of related interest rate swaps that the Partnership has used to economically hedge certain of its floating-rate debt (see Note 11). At September 30, 2011, the margins on the Partnership’s long-term debt that had been drawn ranged from 0.3% to 2.75%.

All Euro-denominated term loans are revalued at the end of each period using the then-prevailing Euro/U.S. Dollar exchange rate. Due primarily to the revaluation of the Partnership’s Euro-denominated term loans, capital leases and restricted cash, the Partnership recognized foreign exchange gains (losses), substantially all of which were unrealized, of $29.5 million and ($39.8) million, and ($0.4) million and $20.0 million for the three months ended September 30, 2011 and 2010 and the nine months ended September 30, 2011 and 2010, respectively.

The aggregate annual long-term debt principal repayments required for periods subsequent to September 30, 2011 are $27.3 million (remainder of 2011), $90.5 million (2012), $91.8 million (2013), $93.2 million (2014), $143.5 million (2015) and $945.3 million (thereafter).

Certain loan agreements require that minimum levels of tangible net worth and aggregate liquidity be maintained, provide for a maximum level of leverage, and require one of the Partnership’s subsidiaries to maintain restricted cash deposits. The Partnership’s ship-owning subsidiaries may not, among other things, pay dividends or distributions if the Partnership is in default under its term loans or revolving credit facilities. One of the Partnership’s term loans is guaranteed by Teekay Corporation and contains covenants that require Teekay Corporation to maintain the greater of a minimum liquidity (cash and cash equivalents) of at least $50.0 million and 5.0% of Teekay Corporation’s total consolidated debt which has recourse to Teekay Corporation. As at September 30, 2011, the Partnership and its affiliates were in compliance with all covenants relating to the Partnership’s credit facilities and capital leases.

The components of the provision for income taxes were as follows:

Current

Deferred

 

Income tax recovery (expense)

 

a) On March 17, 2010, the Partnership acquired from Teekay Corporation the two 2009-built Centrofin Suezmaxes, and a 2007-built Handymax Product tanker (the Alexander Spirit) and the associated long-term fixed-rate time-charter contracts for a total cost of $160 million. As described in Note 2, the acquisition was accounted for as a reorganization of entities under common control and accounted for on a basis similar to the pooling of interest basis. The Partnership financed the acquisition by assuming $126 million of debt, drawing $24 million on its existing revolving credit facilities and using $10 million of cash. In addition, the Partnership acquired approximately $15 million of working capital in exchange for a short-term vendor loan from Teekay Corporation. The excess of the purchase price over the historical carrying value of the assets acquired was $3.6 million and is reflected as a distribution of capital to Teekay Corporation.

During the nine months ended September 30, 2010, $0.7 million of general and administrative expenses attributable to the operations of the Centrofin Suezmaxes and Alexander Spirit were incurred by Teekay Corporation and have been allocated to the Partnership as part of the results of the Dropdown Predecessor.

During the nine months ended September 30, 2010, $0.3 million of interest expense attributable to the operations of the Alexander Spirit was incurred by Teekay Corporation and has been allocated to the Partnership as part of the results of the Dropdown Predecessor.

b) Two of the Partnership’s LNG carriers, the Arctic Spirit and Polar Spirit (or the Kenai LNG Carriers), are employed on long-term charter contracts with subsidiaries of Teekay Corporation. In addition, the Partnership and certain of its operating subsidiaries have entered into services agreements with certain subsidiaries of Teekay Corporation pursuant to which the Teekay Corporation subsidiaries provide the Partnership and its subsidiaries with administrative, crew training, advisory, technical and strategic consulting services. Finally, the Partnership reimburses the General Partner for expenses incurred by the General Partner that are necessary for the conduct of the Partnership’s business. Such related party transactions, excluding expenses allocated to the Partnership as part of the result of the Dropdown Predecessor, were as follows for the periods indicated:

Revenues⁽¹⁾

Vessel operating expenses⁽²⁾

General and administrative^(3)(4)(5)

Commencing in 2008, two of the Partnership’s LNG carriers were time-chartered to Teekay Corporation at a fixed-rate for a period of ten years, (plus options exercisable by Teekay Corporation to extend up to an additional 15 years).

Teekay Corporation’s crew salaries and training.

Teekay Corporation’s administrative, advisory, technical and strategic management fees.

Includes $0.2 million and $0.1 million, and $0.8 million and $0.6 million of costs incurred by the General Partner during the three months ended September 30, 2011 and 2010 and the nine months ended September 30, 2011 and 2010, respectively.

Amounts are net of $0.2 million and $0.4 million, and $0.7 million and $0.9 million for the three months ended September 30, 2011 and 2010 and the nine months ended September 30, 2011 and 2010, respectively, which consist of the amortization of $3.0 million paid to the Partnership by Teekay Corporation in March 2009 for the right to provide ship management services to certain of the Partnership’s vessels.

c) As at September 30, 2011 and December 31, 2010, crewing and manning costs of $4.0 million and $3.6 million were payable to affiliates and were included as part of accounts payable and accrued liabilities in the Partnership’s consolidated balance sheets. In addition, as at September 30, 2011 and December 31, 2010, non-interest bearing advances to affiliates totaled $3.5 million and $6.1 million, respectively, and non-interest bearing advances from affiliates totaled $78.5 million and $133.4 million, respectively. These advances are unsecured and have no fixed repayment terms.

d) The Partnership’s Suezmax tanker the Toledo Spirit, operates pursuant to a time-charter contract that increases or decreases the otherwise fixed-hire rate established in the charter depending on the spot charter rates that the Partnership would have earned had it traded the vessel in the spot tanker market. The remaining term of the time-charter contract is 15 years, although the charterer has the right to terminate the time-charter in July 2018. The Partnership has entered into an agreement with Teekay Corporation under which Teekay Corporation pays the Partnership any amounts payable to the charterer as a result of spot rates being below the fixed rate, and the Partnership pays Teekay Corporation any amounts payable to the Partnership as a result of spot rates being in excess of the fixed rate. The amounts payable to or receivable from Teekay Corporation are recognized at the end of each year (see Note 11).

e) In July 2008, subsidiaries of Teekay Corporation (or the Skaugen Multigas Subsidiaries) signed contracts to purchase the Skaugen Multigas Carriers from I.M. Skaugen ASA (or Skaugen), which are two technically advanced 12,000-cubic meter newbuilding ships capable of carrying LNG, LPG or ethylene. The Partnership agreed to acquire the Skaugen Multigas Subsidiaries from Teekay Corporation upon delivery of the vessels.

On June 15, 2011, the first Skaugen Multigas Carrier, the Norgas Unikum, was delivered and commenced service under a 15-year, fixed-rate charter to Skaugen. On delivery, the Partnership concurrently acquired Teekay Corporation’s 100% ownership interest in the first Skaugen Multigas Subsidiary for a purchase price of $55.3 million. This transaction was concluded between two entities under common control and, thus, the assets acquired were recorded at historical book value. The excess of the purchase price over the book value of the assets of $3.2 million was accounted for as an equity distribution to Teekay Corporation. The second Skaugen Multigas Carrier was delivered on October 17, 2011 for a cost of approximately $55 million and commenced service under a 15-year, fixed-rate charter to Skaugen (see Note 17b).

f) In December 2007, a consortium in which Teekay Corporation has a 33% ownership interest agreed to charter four newbuilding 160,400-cubic meter LNG carriers (or the Angola LNG Carriers) for a period of 20 years to Angola LNG Supply Services LLC. The consortium entered into agreements to construct the four LNG carriers at a total cost of approximately $906.0 million (of which Teekay Corporation’s 33% portion is $299.0 million), excluding capitalized interest. The vessels will be chartered at fixed rates, with inflation adjustments, commencing upon delivery of the vessels. In March 2011, the Partnership agreed to acquire Teekay Corporation’s 33% ownership interest in these vessels and related charter contracts upon delivery of each vessel.

During August and September 2011, two of the Angola LNG Carriers delivered and commenced their 20-year, fixed-rate charter to Angola LNG Supply Services. Concurrently, the Partnership acquired Teekay Corporation’s 33% ownership interest in these two vessels and related charter contracts for a total equity purchase price of $38.4 million (net of assumed debt of $128.9 million). This transaction was concluded between two entities under common control and, thus, the assets acquired were recorded at historical book value. The excess of the purchase price over the book value of the assets of $31.2 million was accounted for as an equity distribution to Teekay Corporation. The Partnership’s investments in the Angola LNG Carriers are accounted for using the equity method. The remaining two Angola LNG Carriers are expected to be delivered in October 2011 (see Note 17c) and January 2012 for an aggregate equity purchase price of approximately $38 million (net of assumed debt of $129 million) subject to adjustment based on actual costs incurred at the time of delivery.

g) On September 15, 2011, the Partnership sold 1% of its ownership interest in its first Skaugen Multigas Subsidiary and the Skaugen LPG Carriers to Teekay GP L.L.C. for approximately $1.2 million.

The Partnership uses derivative instruments in accordance with its overall risk management policy. The Partnership has not designated these derivative instruments as hedges for accounting purposes.

The Partnership enters into interest rate swaps which either exchange a receipt of floating interest for a payment of fixed interest or a payment of floating interest for a receipt of fixed interest to reduce the Partnership’s exposure to interest rate variability on its outstanding floating-rate debt and floating-rate restricted cash deposits. As at September 30, 2011, the Partnership was committed to the following interest rate swap agreements:

U.S. Dollar-denominated interest rate swaps⁽²⁾

U.S. Dollar-denominated interest rate swaps⁽²⁾

U.S. Dollar-denominated interest rate swaps

U.S. Dollar-denominated interest rate swaps

U.S. Dollar-denominated interest rate swaps⁽³⁾

 

U.S. Dollar-denominated interest rate swaps⁽²⁾

Euro-denominated interest rate swaps⁽⁴⁾

 

 

 

Excludes the margins the Partnership pays on its drawn floating-rate debt, which, at September 30, 2011, ranged from 0.3% to 2.75% (see Note 8).

Principal amount reduces quarterly.

Principal amount reduces semiannually.

Principal amount reduces monthly to 70.1 million Euros ($93.8 million) by the maturity dates of the swap agreements.

The Partnership is exposed to credit loss in the event of non-performance by the counterparties to the interest rate swap agreements. In order to minimize counterparty risk, the Partnership only enters into derivative transactions with counterparties that are rated A- or better by Standard & Poor’s or A3 or better by Moody’s at the time of the transactions. In addition, to the extent practical, interest rate swaps are entered into with different counterparties to reduce concentration risk.

In order to reduce the variability of its revenue, the Partnership has entered into an agreement with Teekay Corporation under which Teekay Corporation pays the Partnership any amounts payable to the charterer of the Toledo Spirit as a result of spot rates being below the fixed rate, and the Partnership pays Teekay Corporation any amounts payable to the Partnership by the charterer of the Toledo Spirit as a result of spot rates being in excess of the fixed rate. The fair value of the derivative at September 30, 2011 was a liability of $8.0 million (December 31, 2010 — liability of $10.0 million).

The following table presents the location and fair value amounts of derivative instruments, segregated by type of contract, on the Partnership’s balance sheets.

Interest rate swap agreements

Toledo Spirit time-charter derivative

 

 

 

 

Interest rate swap agreements

Toledo Spirit time-charter derivative

 

 

 

The following tables present the gains (losses) for those derivative instruments not designated or qualifying as hedging instruments. All gains (losses) are presented as realized and unrealized loss on derivative instruments in the Partnership’s consolidated statements of income (loss).

Interest rate swap agreements

Toledo Spirit time-charter derivative

 

 

 

Interest rate swap agreements

Toledo Spirit time-charter derivative

 

 

 

a) The Partnership consolidates certain variable interest entities (or VIEs). In general, a variable interest entity is a corporation, partnership, limited-liability company, trust or any other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb the majority of the losses or the right to receive returns generated by its operations. A party that is a variable interest holder is required to consolidate a VIE if it has both (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

In July 2008, the Skaugen Multigas Subsidiaries signed contracts for the purchase of the Skaugen Multigas Carriers from Skaugen. The Partnership agreed to acquire the Skaugen Multigas Subsidiaries from Teekay Corporation upon delivery of the vessels. Each vessel is scheduled to commence service under 15-year, fixed-rate charters to Skaugen upon delivery. Subsequent to July 2008 and prior to the delivery of the vessels, the Partnership has consolidated the Skaugen Multigas Subsidiaries as they are VIEs and the Partnership is the primary beneficiary during this period. The delivery of the first Skaugen Multigas Carrier and the Partnership’s acquisition of the first Skaugen Multigas Subsidiary was on June 15, 2011. The second vessel was delivered on October 17, 2011 for a total cost of approximately $55 million.

The following table summarizes the balance sheet of the second Skaugen Multigas Subsidiary as at September 30, 2011 and the Skaugen Multigas Subsidiaries as at December 31, 2010:

 

Advances on newbuilding contracts

Other assets

 

 

Accrued liabilities and other

Advances from affiliates

 

 

 

The assets and liabilities of the Skaugen Multigas Subsidiaries are reflected in the Partnership’s financial statements at historical cost as the Partnership and the VIEs are under common control. The Partnership’s maximum exposure to loss as of September 30, 2011, as a result of its commitment to purchase Teekay Corporation’s interests in the second Skaugen Multigas Subsidiary, was limited to the purchase price of its interest in the undelivered vessel, which was approximately $55 million. As at September 30, 2011, the assets of the second Skaugen Multigas Subsidiary could not be used by the Partnership and the creditors of the second Skaugen Multigas Subsidiary had no recourse to the general credit of the Partnership.

b) The Partnership had an agreement to acquire an LPG carrier from Skaugen upon delivery for $33.4 million. This vessel was delivered on September 15, 2011 and was chartered to Skaugen at fixed rates for a period of 15 years.

c) In December 2007, a consortium in which Teekay Corporation had a 33% ownership interest agreed to charter the four newbuilding Angola LNG Carriers for a period of 20 years to Angola LNG Supply Services. The consortium entered into agreements to construct the four LNG carriers at a total cost of approximately $906.0 million (of which Teekay Corporation’s 33% portion is $299.0 million), excluding capitalized interest. As at September 30, 2011, payments made towards these commitments by the joint venture companies totaled $634.2 million (of which Teekay Corporation’s 33% contribution was $209.3 million), excluding capitalized interest and other miscellaneous construction costs. As at September 30, 2011, the remaining payments required to be made under these contracts were $135.9 million (remainder of 2011) and $135.9 million (2012), of which the Teekay Corporation’s share is 33% of these amounts. The vessels will be chartered at fixed rates, with inflation adjustments, upon deliveries of the vessels.

In March 2011, the Partnership agreed to acquire Teekay Corporation’s 33% ownership interest in these vessels and related charter contracts for a total equity purchase price of approximately $76 million (net of assumed debt of approximately $258 million) subject to adjustment based on actual costs incurred at the time of delivery. During August and September 2011, two of the Angola LNG Carriers delivered and commenced their 20-year, fixed-rate charters to Angola LNG Supply Services, at which time the Partnership took ownership of the investment (see note 10f). The remaining two Angola LNG Carriers are expected to be delivered in October 2011 (see Note 17c) and January 2012 for a cost of approximately $38 million (net of assumed debt of approximately $129 million) subject to adjustment based on actual costs incurred at the time of delivery. It was determined that these vessel companies are VIEs; however, the Partnership is not the primary beneficiary.