20-F 1 d455612d20f.htm FORM 20-F Form 20-F
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 20-F

 

 

(Mark One)

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

x ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                     

For the transition period from                      to                     

Commission file number 1- 32479

 

 

TEEKAY LNG PARTNERS L.P.

(Exact name of Registrant as specified in its charter)

 

 

Republic of The Marshall Islands

(Jurisdiction of incorporation or organization)

4th Floor, Belvedere Building, 69 Pitts Bay Road, Hamilton, HM 08, Bermuda

Telephone: (441) 298-2530

(Address and telephone number of principal executive offices)

Mark Cave

4th Floor, Belvedere Building, 69 Pitts Bay Road, Hamilton, HM 08, Bermuda

Telephone: (441) 298-2530

Fax: (441) 292-3931

(Contact information for company contact person)

Securities registered, or to be registered, pursuant to Section 12(b) of the Act.

 

Title of each class

 

Name of each exchange on which registered

Common Units   New York Stock Exchange

Securities registered, or to be registered, pursuant to Section 12(g) of the Act.

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

 

 

Indicate the number of outstanding shares of each issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

69,683,763 Common Units

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

Indicate by check mark if the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if the registrant (1) has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer  x   Accelerated Filer  ¨   Non-Accelerated Filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  x   International Financial Reporting Standards as issued
by the International Accounting Standards Board  ¨
  Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:    Item 17  ¨    Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

 

 


Table of Contents

TEEKAY LNG PARTNERS L.P.

INDEX TO REPORT ON FORM 20-F

 

           Page  

PART I.

    
Item 1.  

Identity of Directors, Senior Management and Advisors

     5   
Item 2.  

Offer Statistics and Expected Timetable

     5   
Item 3.  

Key Information

     5   
 

Selected Financial Data

     5   
 

Risk Factors

     9   
Item 4.  

Information on the Partnership

     22   
 

A. Overview, History and Development

     22   
 

B. Operations

     23   
 

Our Charters

     23   
 

Liquefied Gas Segment

     23   
 

Conventional Tanker Segment

     26   
 

Business Strategies

     26   
 

Safety, Management of Ship Operations and Administration

     27   
 

Risk of Loss, Insurance and Risk Management

     27   
 

Flag, Classification, Audits and Inspections

     28   
 

C. Regulations

     29   
 

D. Properties

     32   
 

E. Organizational Structure

     32   
Item 4A.  

Unresolved Staff Comments

     32   
Item 5.  

Operating and Financial Review and Prospects

     33   
 

General

     33   
 

Significant Developments in 2012 and Early 2013

     33   
 

Important Financial and Operational Terms and Concepts

     34   
 

Results of Operations

     35   
 

Year Ended December 31, 2012 versus Year Ended December 31, 2011

     35   
 

Year Ended December 31, 2011 versus Year Ended December 31, 2010

     40   
 

Liquidity and Cash Needs

     44   
 

Credit Facilities

     46   
 

Contractual Obligations and Contingencies

     47   
 

Off-Balance Sheet Arrangements

     47   
 

Critical Accounting Estimates

     48   
Item 6.  

Directors, Senior Management and Employees

     50   
 

Management of Teekay LNG Partners L.P.

     50   
 

Directors, Executive Officers and Key Employees

     51   
 

Annual Executive Compensation

     52   
 

Compensation of Directors

     52   
 

2005 Long-Term Incentive Plan

     52   
 

Board Practices

     53   
 

Crewing and Staff

     53   
 

Unit Ownership

     54   
Item 7.  

Major Unitholders and Related Party Transactions

     54   
 

Major Unitholders

     54   

 

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Related Party Transactions

     55   
Item 8.  

Financial Information

     57   
 

A.      Consolidated Financial Statements and Other Financial Information

     57   
 

Consolidated Financial Statements and Notes

     57   
 

Legal Proceedings

     57   
 

Cash Distribution Policy

     57   
 

B.      Significant Changes

     58   
Item 9.  

The Offer and Listing

     59   
Item 10.  

Additional Information

     59   
 

Memorandum and Articles of Association

     59   
 

Material Contracts

     59   
 

Exchange Controls and Other Limitations Affecting Unitholders

     61   
 

Taxation

     61   
 

Marshall Islands Tax Consequences

     61   
 

United States Tax Consequences

     61   
 

Canadian Federal Income Tax Consequences

     70   
 

Documents on Display

     71   
Item 11.  

Quantitative and Qualitative Disclosures About Market Risk

     72   
Item 12.  

Description of Securities Other than Equity Securities

     74   

PART II.

    
Item 13.  

Defaults, Dividend Arrearages and Delinquencies

     74   
Item 14.  

Material Modifications to the Rights of Unitholders and Use of Proceeds

     74   
Item 15.  

Controls and Procedures

     74   
Item 16A.  

Audit Committee Financial Expert

     75   
Item 16B.  

Code of Ethics

     75   
Item 16C.  

Principal Accountant Fees and Services

     75   
Item 16D.  

Exemptions from the Listing Standards for Audit Committees

     75   
Item 16E.  

Purchases of Units by the Issuer and Affiliated Purchasers

     75   
Item 16F.  

Change in Registrant’s Certifying Accountant

     75   
Item 16G.  

Corporate Governance

     75   
Item 16H.  

Mine Safety Disclosure

     75   

PART III.

    
Item 17.  

Financial Statements

     76   
Item 18.  

Financial Statements

     76   
Item 19.  

Exhibits

     76   

Signature

     78   

 

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PART I

This annual report of Teekay LNG Partners L.P. on Form 20-F for the year ended December 31, 2012 (or Annual Report) should be read in conjunction with the consolidated financial statements and accompanying notes included in this report.

Unless otherwise indicated, references in this prospectus to “Teekay LNG Partners,” “we,” “us” and “our” and similar terms refer to Teekay LNG Partners L.P. and/or one or more of its subsidiaries, except that those terms, when used in this Annual Report in connection with the common units described herein, shall mean specifically Teekay LNG Partners L.P. References in this Annual Report to “Teekay Corporation” refer to Teekay Corporation and/or any one or more of its subsidiaries.

In addition to historical information, this Annual Report contains forward-looking statements that involve risks and uncertainties. Such forward-looking statements relate to future events and our operations, objectives, expectations, performance, financial condition and intentions. When used in this Annual Report, the words “expect,” “intend,” “plan,” “believe,” “anticipate,” “estimate” and variations of such words and similar expressions are intended to identify forward-looking statements. Forward-looking statements in this Annual Report include, in particular, statements regarding:

 

   

our ability to make cash distributions on our units or any increases in quarterly distributions;

 

   

our future financial condition and results of operations and our future revenues and expenses;

 

   

growth prospects of the liquefied natural gas (or LNG) and liquefied petroleum gas (or LPG) shipping and oil tanker markets;

 

   

LNG, LPG and tanker market fundamentals, including the balance of supply and demand in the LNG, LPG and tanker markets;

 

   

our ability to conduct and operate our business and the business of our subsidiaries in a manner than minimizes taxes imposed upon us and our subsidiaries;

 

   

the expected lifespan of our vessels;

 

   

the expected source of funds for short-term and long-term liquidity needs;

 

   

estimated capital expenditures and our ability to fund them;

 

   

our ability to maintain long-term relationships with major LNG and LPG importers and exporters and major crude oil companies;

 

   

our ability to leverage to our advantage Teekay Corporation’s relationships and reputation in the shipping industry;

 

   

our continued ability to enter into long-term, fixed-rate time-charters with our LNG and LPG customers;

 

   

our expectation of not earning revenues from voyage charters in the foreseeable future;

 

   

the recent economic downturn and financial crisis in the global market and potential negative effects on our customers’ ability to charter our vessels and pay for our services;

 

   

obtaining LNG and LPG projects that we or Teekay Corporation bid on or that Teekay Corporation has been awarded;

 

   

our ability to maximize the use of our vessels, including the re-deployment or disposition of vessels no longer under long-term charter;

 

   

expected purchases and deliveries of newbuilding vessels and commencement of service of newbuildings under long-term contracts and our ability to obtain long-term contracts on our newbuildings;

 

   

the expected timing, amount and method of financing for the purchase of five of our leased Suezmax tankers;

 

   

our expected financial flexibility to pursue acquisitions and other expansion opportunities;

 

   

our ability to continue to obtain all permits, licenses, and certificates material to our operations;

 

   

the expected cost of, and our ability to comply with, governmental regulations and maritime self-regulatory organization standards applicable to our business;

 

   

the expected cost to install ballast water treatment systems on our tankers in compliance with IMO proposals;

 

   

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

 

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the adequacy of our insurance coverage for accident-related risks, environmental damage and pollution;

 

   

the future valuation of goodwill;

 

   

our expectations as to any impairment of our vessels;

 

   

our involvement in any EU anti-trust investigation of container line operators;

 

   

our expectation regarding our vessels’ ability to perform to specifications and maintain their hire rates;

 

   

anticipated taxation of our partnership and its subsidiaries; and

 

   

our business strategy and other plans and objectives for future operations.

Forward-looking 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 those factors discussed in Item 3: “Key Information – Risk Factors”, and other factors detailed from time to time in other reports we file with or furnish to the U.S. Securities and Exchange Commission (or the SEC).

We do not intend to revise any forward-looking statements in order to reflect any change in our expectations or events or circumstances that may subsequently arise. You should carefully review and consider the various disclosures included in this Annual Report and in our other filings made with the SEC that attempt to advise interested parties of the risks and factors that may affect our business prospects and results of operations.

Item 1. Identity of Directors, Senior Management and Advisors

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

Selected Financial Data

Set forth below is selected consolidated financial and other data of Teekay LNG Partners and its subsidiaries for the fiscal years 2008 through 2012, which have been derived from our consolidated financial statements. The following table should be read together with, and is qualified in its entirety by reference to, (a) Item 5. “Operating and Financial Review and Prospects,” included herein, and (b) the historical consolidated financial statements and the accompanying notes and the Report of Independent Registered Public Accounting Firm therein (which are included herein), with respect to the consolidated financial statements for the years ended December 31, 2012, 2011 and 2010.

From time to time we purchase vessels from Teekay Corporation. In 2008 and 2010, we acquired two LNG carriers and three conventional tankers from Teekay Corporation, respectively. These transactions were deemed to be business acquisitions between entities under common control. Accordingly, we have accounted for these transactions in a manner similar to the pooling of interest method whereby our financial statements prior to the date these vessels were acquired by us are retroactively adjusted to include the results of these acquired vessels. The periods retroactively adjusted include all periods that we and the acquired vessels were both under the common control of Teekay Corporation and had begun operations. As a result, our consolidated statements of income (loss) for the years ended December 31, 2010, 2009 and 2008 reflect the results of operations of these five vessels, referred to herein as the Dropdown Predecessor, as if we had acquired them when each respective vessel began operations under the ownership of Teekay Corporation, which were December 13 and 14, 2007 for the two LNG carriers, and between May 2009 and September 2009 for the three conventional tankers. Please refer to Item 5 – “Operating and Financial Review and Prospects: Results of Operations – Items You Should Consider When Evaluating Our Results of Operations”.

Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (or GAAP).

 

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(in thousands of U.S. Dollars, except per unit and fleet data)    Year Ended
December 31,
2008

$
    Year Ended
December 31,
2009

$
    Year Ended
December 31,
2010

$
    Year Ended
December 31,
2011

$
    Year Ended
December 31,
2012

$
 

Income Statement Data:

          

Voyage revenues

     314,404       343,048       374,008       379,975       392,251  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Voyage expenses(1)

     3,253       2,034       2,042       1,387       1,772  

Vessel operating expenses(2)

     77,113       82,374       84,577       89,046       86,347  

Depreciation and amortization

     76,880       82,686       89,347       91,919       99,825  

General and administrative

     20,201       19,764       23,247       24,120       27,149  

Write down of vessels

     —         —         —         —         29,367  

Gain on sale of vessel

     —         —         (4,340     —         —    

Restructuring charge

     —         3,250       175       —         —    

Goodwill impairment

     3,648       —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     181,095       190,108       195,048       206,472       244,460  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from vessel operations

     133,309       152,940       178,960       173,503       147,791  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity income(3)

     136       27,639       8,043       20,584       78,866  

Interest expense

     (138,317     (60,457     (49,019     (49,880     (54,211

Interest income

     64,325       13,873       7,190       6,687       3,502  

Realized and unrealized loss on derivative instruments(4)

     (99,954     (40,950     (78,720     (63,030     (29,620

Foreign currency exchange gain (loss)(5)

     18,244       (10,806     27,545       10,310       (8,244

Other income (expense)

     1,250       392       615       (37     1,683  

Income tax expense

     (205     (694     (1,670     (781     (625
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (21,212     81,937       92,944       97,356       139,142  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-controlling interest in net (loss) income

     (40,698     29,310       3,062       7,508       15,437  

Dropdown Predecessor’s interest in net (loss) income

     894       5,302       2,258       —         —    

General Partner’s interest in net (loss) income

     11,989       5,180       8,896       11,474       21,303  

Limited partners’ interest in net (loss) income

     6,603       42,145       78,728       78,374       102,402  

Limited partners’ interest in net (loss) income per:

          

Common unit (basic and diluted)

     0.63       0.86       1.46       1.33       1.54  

Subordinated unit (basic and diluted)

     (0.29     0.80       2.04       —         —    

Total unit (basic and diluted)

     0.36       0.85       1.48       1.33       1.54  

Cash distributions declared per unit

     2.1800       2.2800       2.3700       2.5200       2.6550  

Balance Sheet Data (at end of period):

          

Cash and cash equivalents

     117,641       108,350       81,055       93,627       113,577  

Restricted cash(6)

     642,949       611,520       572,138       495,634       528,589  

Vessels and equipment(7)

     2,207,878       2,077,604       2,019,576       2,021,125       1,949,640  

Net investments in direct financing leases(8)

     —          421,441       415,695       409,541       403,386  

Total assets(6)

     3,432,849       3,578,411       3,547,395       3,588,734       3,785,446  

Total debt and capital lease obligations(6)

     2,199,952       2,257,604       2,137,249       1,962,278       2,050,927  

Partners’ and Dropdown Predecessor equity

     805,851       903,231       896,200       1,113,467       1,212,980  

Common units outstanding

     33,338,320       44,972,563       55,106,100       64,857,900       69,683,763  

Subordinated units outstanding

     11,050,929       7,367,286       —          —          —     

Cash Flow Data:

          

Net cash provided by (used in):

          

Operating activities

     149,570       171,384       174,970       122,046       192,013  

Financing activities

     403,262       (10,060     (167,746     7,174       30,374  

Investing activities

     (527,082     (170,615     (34,519     (116,648     (202,437

Other Financial Data:

          

Net voyage revenues(9)

     311,151       341,014       371,966       378,588       390,479  

EBITDA(10)

     129,865       211,901       225,790       233,249       290,301  

Adjusted EBITDA(10)

     206,603       255,031       277,334       291,706       352,890  

Capital expenditures:

          

Expenditures for vessels and equipment

     172,093       134,926       26,652       64,685       39,894  

Expenditures for dry docking

     11,966       9,729       12,727       19,638       7,493  

Liquefied Gas Fleet Data:(11)

          

Calendar-ship-days (12)

     3,701       4,637       5,051       5,126       5,856  

Average age of our fleet (in years at end of period)

     4.4       4.6       5.3       5.8       6.6  

Vessels at end of period

     11       14       13       16       16  


Conventional Fleet Data:

          

Calendar-ship-days(12)

     2,928       3,448       4,015       4,015       4,026  

Average age of our fleet (in years at end of period)

     5.5       5.1       6.1       6.9       7.9  

Vessels at end of period

     8       11       11       11       11  

 

(1) Voyage expenses are all expenses unique to a particular voyage, including any bunker fuel expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and commissions.
(2) Vessel operating expenses include crewing, repairs and maintenance, insurance, stores, lube oils and communication expenses.

 

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(3) Equity income includes unrealized gains (losses) on derivative instruments of nil, $10.9 million, ($6.5) million, ($5.8) million and $5.5 million, for the years ended December 31, 2008, 2009, 2010, 2011 and 2012, respectively.
(4) We entered into interest rate swaps to mitigate our interest rate risk from our floating-rate debt, leases and restricted cash. We also have entered into an agreement with Teekay Corporation relating to the Toledo Spirit time-charter contract under which Teekay Corporation pays us any amounts payable to the charterer as a result of spot rates being below the fixed rate, and we pay Teekay Corporation any amounts payable to us as a result of spot rates being in excess of the fixed rate. Changes in the fair value of our derivatives are recognized immediately into income and are presented as realized and unrealized loss on derivative instruments in the consolidated statements of income (loss). Please see Item 18 – Financial Statements: Note 13 – Derivative Instruments.
(5) Substantially all of these foreign currency exchange gains and losses were unrealized and not settled in cash. Under GAAP, all foreign currency-denominated monetary assets and liabilities, such as cash and cash equivalents, accounts receivable, restricted cash, accounts payable, accrued liabilities, unearned revenue, advances from affiliates, long-term debt and capital lease obligations, are revalued and reported based on the prevailing exchange rate at the end of the period. Starting in May 2012, foreign exchange gains and losses included realized and unrealized gains and losses on our cross currency swaps. Our primary sources for the foreign currency exchange gains and losses are our Euro-denominated term loans and Norwegian Kroner-denominated (or NOK) bonds. Euro-denominated term loans totaled 296.4 million Euros ($414.1 million) at December 31, 2008, 288.0 million Euros ($412.4 million) at December 31, 2009, 278.9 million Euros ($373.3 million) at December 31, 2010, 269.2 million Euros ($348.9 million) at December 31, 2011 and 258.8 million Euros ($341.4 million) at December 31, 2012. NOK-denominated bonds were issued in 2012 and totaled 700.0 million NOK ($125.8 million).
(6) We operate certain of our LNG carriers under tax lease arrangements. Under these arrangements, we borrow under term loans and deposit the proceeds into restricted cash accounts. Concurrently, we enter into capital leases for the vessels, and the vessels are recorded as assets on our consolidated balance sheets. The restricted cash deposits, plus the interest earned on the deposits, will equal the remaining amounts we owe under the capital lease arrangements, including our obligations to purchase the vessels at the end of the lease term where applicable. Therefore, the payments under our capital leases are fully funded through our restricted cash deposits, and our continuing obligation is the repayment of the term loans. However, under GAAP we record both the obligations under the capital leases and the term loans as liabilities, and both the restricted cash deposits and our vessels under capital leases as assets. This accounting treatment has the effect of increasing our assets and liabilities by the amount of restricted cash deposits relating to the corresponding capital lease obligations.
(7) Vessels and equipment consist of (a) our vessels, at cost less accumulated depreciation, (b) vessels under capital leases, at cost less accumulated depreciation and (c) advances on our newbuildings.
(8) The external charters that commenced in 2009 with The Tangguh Production Sharing Contractors have been accounted for as direct financing leases. As a result, the two LNG vessels chartered to The Tangguh Production Sharing Contractors are not included as part of vessels and equipment.
(9) Consistent with general practice in the shipping industry, we use net voyage revenues (defined as voyage revenues less voyage expenses) as a measure of equating revenues generated from voyage charters to revenues generated from time-charters, which assists us in making operating decisions about the deployment of our vessels and their performance. Under time-charters the charterer pays the voyage expenses, whereas under voyage charter contracts the ship owner pays these expenses. Some voyage expenses are fixed, and the remainder can be estimated. If we, as the ship owner, pay the voyage expenses, we typically pass the approximate amount of these expenses on to our customers by charging higher rates under the contract or billing the expenses to them. As a result, although voyage revenues from different types of contracts may vary, the net voyage revenues are comparable across the different types of contracts. We principally use net voyage revenues, a non-GAAP financial measure, because it provides more meaningful information to us than voyage revenues, the most directly comparable GAAP financial measure. Net voyage revenues are also widely used by investors and analysts in the shipping industry for comparing financial performance between companies and to industry averages. The following table reconciles net voyage revenues with voyage revenues.

 

(in thousands of U.S. Dollars)    Year Ended
December 31,
2008
    Year Ended
December 31,
2009
    Year Ended
December 31,
2010
    Year Ended
December 31,
2011
    Year Ended
December 31,
2012
 

Voyage revenues

     314,404       343,048       374,008       379,975       392,251  

Voyage expenses

     (3,253     (2,034     (2,042     (1,387     (1,772
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net voyage revenues

     311,151       341,014       371,966       378,588       390,479  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(10) EBITDA and Adjusted EBITDA are used as a supplemental financial measure by management and by external users of our financial statements, such as investors, as discussed below:

 

   

Financial and operating performance. EBITDA and Adjusted EBITDA assist our management and investors by increasing the comparability of our fundamental performance from period to period and against the fundamental performance of other companies in our industry that provide EBITDA and Adjusted EBITDA information. This increased comparability is achieved by excluding the potentially disparate effects between periods or companies of interest expense, taxes, depreciation or amortization and realized and unrealized loss on derivative instruments relating to interest rate swaps and cross currency swaps, which items are affected by various and possibly changing financing methods, capital structure and historical cost basis and which items may significantly affect net (loss) income between periods. We believe that including EBITDA and Adjusted EBITDA as financial and operating measures benefits investors in (a) selecting between investing in us and other investment alternatives and (b) monitoring our ongoing financial and operational strength and health in assessing whether to continue to hold our common units.

 

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Liquidity. EBITDA and Adjusted EBITDA allow us to assess the ability of assets to generate cash sufficient to service debt, pay distributions and undertake capital expenditures. By eliminating the cash flow effect resulting from our existing capitalization and other items such as dry-docking expenditures, working capital changes and foreign currency exchange gains and losses, EBITDA and Adjusted EBITDA provides a consistent measure of our ability to generate cash over the long term. Management uses this information as a significant factor in determining (a) our proper capitalization (including assessing how much debt to incur and whether changes to the capitalization should be made) and (b) whether to undertake material capital expenditures and how to finance them, all in light of our cash distribution policy. Use of EBITDA and Adjusted EBITDA as liquidity measures also permits investors to assess the fundamental ability of our business to generate cash sufficient to meet cash needs, including distributions on our common units.

Neither EBITDA nor Adjusted EBITDA, which are non-GAAP measures, should be considered as an alternative to net (loss) income, income from vessel operations, cash flow from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. EBITDA and Adjusted EBITDA exclude some, but not all, items that affect net (loss) income and operating income, and these measures may vary among other companies. Therefore, EBITDA and Adjusted EBITDA as presented in this Annual Report may not be comparable to similarly titled measures of other companies.

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

 

(in thousands of U.S. Dollars)    Year Ended
December 31,
2008
    Year Ended
December 31,
2009
    Year Ended
December 31,
2010
    Year Ended
December 31,
2011
    Year Ended
December 31,
2012
 

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

          

Net (loss) income

     (21,212     81,937       92,944       97,356       139,142  

Depreciation and amortization

     76,880       82,686       89,347       91,919       99,825  

Interest expense, net of interest income

     73,992       46,584       41,829       43,193       50,709  

Income tax expense

     205       694       1,670       781       625  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     129,865       211,901       225,790       233,249       290,301  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Restructuring charge

     —         3,250       175       —         —    

Write down of vessels

     —         —         —         —         29,367  

Foreign currency exchange (gain) loss

     (18,244     10,806       (27,545     (10,310     8,244  

Gain on sale of vessel

     —         —         (4,340     —         —    

Goodwill impairment

     3,648       —         —         —         —    

Unrealized loss (gain) on derivative instruments

     84,546       3,788       34,306       277       (6,900

Realized loss on interest rate swaps

     6,788       36,222       42,495       62,660       37,427  

Unrealized (gain) loss on interest rate swaps in equity accounted joint ventures included in equity income

     —         (10,936     6,453       5,830       (5,549
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     206,603       255,031       277,334       291,706       352,890  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

          

Net operating cash flow

     149,570       171,384       174,970       122,046       192,013  

Expenditures for dry docking

     11,966       9,729       12,727       19,638       7,493  

Interest expense, net of interest income

     73,992       46,584       41,829       43,193       50,709  

Income tax expense

     205       694       1,670       781       625  

Change in operating assets and liabilities

     (34,450     (28,788     (6,657     33,458       7,307  

Equity income from joint ventures

     136       27,639       8,043       20,584       78,866  

Restructuring charge

     —         3,250       175       —         —    

Realized loss on interest rate swaps

     6,788       36,222       42,495       62,660       37,427  

Unrealized (gain) loss on interest rate swaps in equity accounted joint ventures included in equity income (loss)

     —         (10,936     6,453       5,830       (5,549

Dividends received from equity accounted joint ventures

     —         —         —         (15,340     (14,700

Other, net

     (1,604     (747     (4,371     (1,144     (1,301
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     206,603       255,031       277,334       291,706       352,890  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(11) Fleet data does not include six LNG carriers (or the MALT LNG Carriers) relating to our joint venture with Marubeni Corporation, four LNG carriers (or the RasGas 3 LNG Carriers) relating to our joint venture with QGTC Nakilat (1643-6) Holdings Corporation, four LNG carriers relating to the Angola Project (or the Angola LNG Carriers) and two LNG carriers relating to our joint ventures with Exmar NV (or the Exmar LNG Carriers), all of which are accounted for under the equity method.
(12) Calendar-ship-days are equal to the aggregate number of calendar days in a period that our vessels were in our possession during that period (including five vessels deemed to be in our possession for accounting purposes as a result of the impact of the Dropdown Predecessor prior to our actual acquisition of such vessels).

 

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RISK FACTORS

We may not have sufficient cash from operations to enable us to pay the current level of quarterly distributions on our common units following the establishment of cash reserves and payment of fees and expenses.

We may not have sufficient cash available each quarter to pay the current level of quarterly distributions on our common units. The amount of cash we can distribute on our common units principally depends upon the amount of cash we generate from our operations, which may fluctuate based on, among other things:

 

   

the rates we obtain from our charters;

 

   

the charterers options to terminate charter contracts;

 

   

the level of our operating costs, such as the cost of crews and insurance;

 

   

the continued availability of LNG and LPG production, liquefaction and regasification facilities;

 

   

the number of unscheduled off-hire days for our fleet and the timing of, and number of days required for, scheduled dry docking of our vessels;

 

   

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

 

   

prevailing global and regional economic and political conditions;

 

   

currency exchange rate fluctuations; and

 

   

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

The actual amount of cash we will have available for distribution also will depend on factors such as:

 

   

the level of capital expenditures we make, including for maintaining vessels, building new vessels, acquiring existing vessels and complying with regulations;

 

   

our debt service requirements and restrictions on distributions contained in our debt instruments;

 

   

fluctuations in our working capital needs;

 

   

our ability to make working capital borrowings, including to pay distributions to unitholders; and

 

   

the amount of any cash reserves, including reserves for future capital expenditures and other matters, established by Teekay GP L.L.C., our general partner (or the General Partner) in its discretion.

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

We make substantial capital expenditures to maintain the operating capacity of our fleet, which reduce our cash available for distribution. In addition, each quarter our General Partner is required to deduct estimated maintenance capital expenditures from operating surplus, which may result in less cash available to unitholders than if actual maintenance capital expenditures were deducted.

We must make substantial capital expenditures to maintain, over the long term, the operating capacity of our fleet. These maintenance capital expenditures include capital expenditures associated with dry docking a vessel, modifying an existing vessel or acquiring a new vessel to the extent these expenditures are incurred to maintain the operating capacity of our fleet. These expenditures could increase as a result of changes in:

 

   

the cost of labor and materials;

 

   

customer requirements;

 

   

increases in the size of our fleet;

 

   

governmental regulations and maritime self-regulatory organization standards relating to safety, security or the environment; and

 

   

competitive standards.

 

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Our significant maintenance capital expenditures reduce the amount of cash we have available for distribution to our unitholders.

In addition, our actual maintenance capital expenditures vary significantly from quarter to quarter based on, among other things, the number of vessels dry docked during that quarter. Our partnership agreement requires our General Partner to deduct estimated, rather than actual, maintenance capital expenditures from operating surplus (as defined in our partnership agreement) each quarter in an effort to reduce fluctuations in operating surplus. The amount of estimated maintenance capital expenditures deducted from operating surplus is subject to review and change by the conflicts committee of our General Partner’s board of directors at least once a year. In years when estimated maintenance capital expenditures are higher than actual maintenance capital expenditures — as we expect will be the case in the years we are not required to make expenditures for mandatory dry dockings — the amount of cash available for distribution to unitholders will be lower than if actual maintenance capital expenditures were deducted from operating surplus. If our General Partner underestimates the appropriate level of estimated maintenance capital expenditures, we may have less cash available for distribution in future periods when actual capital expenditures begin to exceed our previous estimates.

We will be required to make substantial capital expenditures to expand the size of our fleet. We generally will be required to make significant installment payments for acquisitions of newbuilding vessels prior to their delivery and generation of revenue. Depending on whether we finance our expenditures through cash from operations or by issuing debt or equity securities, our ability to make required payments on our debt securities and cash distributions on our common units may be diminished or our financial leverage could increase or our unitholders could be diluted.

We make substantial capital expenditures to increase the size of our fleet. For example, on February 12, 2013, we acquired a 50% interest, through a joint venture with Exmar NV (or Exmar), to own and charter-in LPG carriers with a primary focus on the mid-size gas carrier segment. The joint venture entity, called Exmar LPG BVBA includes 20 owned LPG carriers (including eight newbuildings) and five chartered-in LPG carriers. In addition, on December 12, 2012, we entered into an agreement for the construction of two 173,400 cubic meter LNG carrier newbuildings, with options to order up to three additional vessels. We expect these newbuildings to deliver in 2016. Please read Item 5 – Operating and Financial Review and Prospects, for additional information about these acquisitions. We may also be obligated to purchase five of our leased Suezmax tankers upon the charterer’s option, which may occur at various times from 2014 through to 2018 and which have an aggregate purchase price of approximately $165.5 million at December 31, 2012.

We and Teekay Corporation regularly evaluate and pursue opportunities to provide the marine transportation requirements for new or expanding LNG and LPG projects. The award process relating to LNG transportation opportunities typically involves various stages and takes several months to complete. Neither we nor Teekay Corporation may be awarded charters relating to any of the projects we or it pursues. If any LNG project charters are awarded to Teekay Corporation, it must offer them to us pursuant to the terms of an omnibus agreement entered into in connection with our initial public offering. If we elect pursuant to the omnibus agreement to obtain Teekay Corporation’s interests in any projects Teekay Corporation may be awarded, or if we bid on and are awarded contracts relating to any LNG and LPG project, we will need to incur significant capital expenditures to buy Teekay Corporation’s interest in these LNG and LPG projects or to build the LNG and LPG carriers.

To fund the remaining portion of existing or future capital expenditures, we will be required to use cash from operations or incur borrowings or raise capital through the sale of debt or additional equity securities. Use of cash from operations will reduce cash available for distributions to unitholders. Our ability to obtain bank financing or to access the capital markets for future offerings may be limited by our financial condition at the time of any such financing or offering as well as by adverse market conditions resulting from, among other things, general economic conditions and contingencies and uncertainties that are beyond our control. Our failure to obtain the funds for necessary future capital expenditures could have a material adverse effect on our business, results of operations and financial condition and on our ability to make cash distributions. Even if we are successful in obtaining necessary funds, the terms of such financings could limit our ability to pay cash distributions to unitholders. In addition, incurring additional debt may significantly increase our interest expense and financial leverage, and issuing additional equity securities may result in significant unitholder dilution and would increase the aggregate amount of cash required to maintain our level of quarterly distributions to unitholders, which could have a material adverse effect on our ability to make cash distributions.

A shipowner typically is required to expend substantial sums as progress payments during construction of a newbuilding, but does not derive any income from the vessel until after its delivery. If we were unable to obtain financing required to complete payments on any future newbuilding orders, we could effectively forfeit all or a portion of the progress payments previously made.

Our ability to grow may be adversely affected by our cash distribution policy.

Our cash distribution policy, which is consistent with our partnership agreement, requires us to distribute all of our available cash (as defined in our partnership agreement) each quarter. Accordingly, our growth may not be as fast as businesses that reinvest their available cash to expand ongoing operations.

Our substantial debt levels may limit our flexibility in obtaining additional financing and in pursuing other business opportunities.

As at December 31, 2012, our consolidated debt, capital lease obligations and advances from affiliates totaled $2.1 billion and we had the capacity to borrow an additional $381.4 million under our credit facilities. These facilities may be used by us for general partnership purposes. If we are awarded contracts for new LNG or LPG projects, our consolidated debt and capital lease obligations will increase, perhaps significantly. We will continue to have the ability to incur additional debt, subject to limitations in our credit facilities. Our level of debt could have important consequences to us, including the following:

 

   

our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be impaired or such financing may not be available on favorable terms;

 

   

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

 

   

our debt level may make us more vulnerable than our competitors with less debt to competitive pressures or a downturn in our industry or the economy generally; and

 

   

our debt level may limit our flexibility in responding to changing business and economic conditions.

 

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Our ability to service our debt depends upon, among other things, our future financial and operating performance, which is affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to service our current or future indebtedness, we will be forced to take actions such as reducing distributions, reducing or delaying our business activities, acquisitions, investments or capital expenditures, selling assets, restructuring or refinancing our debt, or seeking additional equity capital or bankruptcy protection. We may not be able to effect any of these remedies on satisfactory terms, or at all.

Financing agreements containing operating and financial restrictions may restrict our business and financing activities.

The operating and financial restrictions and covenants in our financing arrangements and any future financing agreements for us could adversely affect our ability to finance future operations or capital needs or to engage, expand or pursue our business activities. For example, the arrangements may restrict our ability to:

 

   

incur or guarantee indebtedness;

 

   

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

 

   

make dividends or distributions when in default of the relevant loans;

 

   

make certain negative pledges and grant certain liens;

 

   

sell, transfer, assign or convey assets;

 

   

make certain investments; and

 

   

enter into a new line of business.

Some of our financing arrangements require us to maintain a minimum level of tangible net worth, to maintain certain ratios of vessel values as it relates to the relevant outstanding principal balance, a minimum level of aggregate liquidity, a maximum level of leverage and require one of our subsidiaries to maintain restricted cash deposits. Our ability to comply with covenants and restrictions contained in debt instruments may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, compliance with these covenants may be impaired. If restrictions, covenants, ratios or tests in the financing agreements are breached, a significant portion of the obligations may become immediately due and payable, and the lenders’ commitment to make further loans may terminate. We might not have or be able to obtain sufficient funds to make these accelerated payments. In addition, our obligations under our existing credit facilities are secured by certain of our vessels, and if we are unable to repay debt under the credit facilities, the lenders could seek to foreclose on those assets.

Restrictions in our debt agreements may prevent us from paying distributions.

The payment of principal and interest on our debt and capital lease obligations reduces cash available for distribution to us and on our units. In addition, our financing agreements prohibit the payment of distributions upon the occurrence of the following events, among others:

 

   

failure to pay any principal, interest, fees, expenses or other amounts when due;

 

   

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

 

   

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

 

   

breach of certain financial covenants;

 

   

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

 

   

default under other indebtedness;

 

   

bankruptcy or insolvency events;

 

   

failure of any representation or warranty to be materially correct;

 

   

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

 

   

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

We derive a substantial majority of our revenues from a limited number of customers, and the loss of any customer, charter or vessel, or any adjustment to our charter contracts could result in a significant loss of revenues and cash flow.

We have derived, and believe that we will continue to derive, a significant portion of our revenues and cash flow from a limited number of customers. Please read Item 18 – Financial Statements: Note 5 Segment Reporting.

We could lose a customer or the benefits of a time-charter if:

 

   

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

 

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the customer exercises certain rights to terminate the charter, purchase or cause the sale of the vessel or, under some of our charters, convert the time-charter to a bareboat charter (some of which rights are exercisable at any time);

 

   

we decrease charter payments due under a charter because of the customer’s inability to continue making the original payments;

 

   

the customer terminates the charter because we fail to deliver the vessel within a fixed period of time, the vessel is lost or damaged beyond repair, there are serious deficiencies in the vessel or prolonged periods of off-hire, or we default under the charter; or

 

   

under some of our time-charters, the customer terminates the charter because of the termination of the charterer’s sales agreement or a prolonged force majeure event affecting the customer, including damage to or destruction of relevant facilities, war or political unrest preventing us from performing services for that customer.

If we lose a key LNG time-charter, we may be unable to re-deploy the related vessel on terms as favorable to us due to the long-term nature of most LNG time-charters and the lack of an established LNG spot market. If we are unable to re-deploy a LNG carrier, we will not receive any revenues from that vessel, but we may be required to pay expenses necessary to maintain the vessel in proper operating condition. In addition, if a customer exercises its right to purchase a vessel, we would not receive any further revenue from the vessel and may be unable to obtain a substitute vessel and charter. This may cause us to receive decreased revenue and cash flows from having fewer vessels operating in our fleet. Any compensation under our charters for a purchase of the vessels may not adequately compensate us for the loss of the vessel and related time-charter.

If we lose a key conventional tanker customer, we may be unable to obtain other long-term conventional charters and may become subject to the volatile spot market, which is highly competitive and subject to significant price fluctuations. If a customer exercises its right under some charters to purchase or force a sale of the vessel, we may be unable to acquire an adequate replacement vessel or may be forced to construct a new vessel. Any replacement newbuilding would not generate revenues during its construction and we may be unable to charter any replacement vessel on terms as favorable to us as those of the terminated charter.

The loss of certain of our customers, time-charters or vessels, or a decline in payments under our charters, could have a material adverse effect on our business, results of operations and financial condition and our ability to make cash distributions.

We depend on Teekay Corporation and certain of our joint venture partners to assist us in operating our business and competing in our markets.

Pursuant to certain services agreements between us and certain of our operating subsidiaries, on the one hand, and certain subsidiaries of Teekay Corporation and certain of our joint venture partners, on the other hand, the Teekay Corporation subsidiaries and certain of our joint venture partners provide to us administrative and business development services and to our operating subsidiaries significant operational services (including vessel maintenance, crewing for some of our vessels, purchasing, shipyard supervision, insurance and financial services) and other technical, advisory and administrative services. Our operational success and ability to execute our growth strategy depend significantly upon Teekay Corporation’s and certain of our joint venture partners’ satisfactory performance of these services. Our business will be harmed if Teekay Corporation or certain of our joint venture partners fails to perform these services satisfactorily or if Teekay Corporation or certain of our joint venture partners stops providing these services to us.

Our ability to compete for the transportation requirements of LNG and oil projects and to enter into new time-charters and expand our customer relationships depends largely on our ability to leverage our relationship with Teekay Corporation and its reputation and relationships in the shipping industry. Our ability to compete for the transportation requirement of LPG projects and to enter into new charters and expand our customer relationships depends largely on our ability to leverage our relationship with certain of our joint venture partners and their reputation and relationships in the shipping industry. If Teekay Corporation or certain of our joint venture partners suffer material damage to its reputation or relationships it may harm our ability to:

 

   

renew existing charters upon their expiration;

 

   

obtain new charters;

 

   

successfully interact with shipyards during periods of shipyard construction constraints;

 

   

obtain financing on commercially acceptable terms; or

 

   

maintain satisfactory relationships with our employees and suppliers.

If our ability to do any of the things described above is impaired, it could have a material adverse effect on our business, results of operations and financial condition and our ability to make cash distributions.

Our operating subsidiaries may also contract with certain subsidiaries of Teekay Corporation for the Teekay Corporation subsidiaries and certain of our joint venture partners for the subsidiaries to have newbuildings constructed on behalf of our operating subsidiaries and to incur the construction-related financing. Our operating subsidiaries would purchase the vessels on or after delivery based on an agreed-upon price. None of our operating subsidiaries currently has this type of arrangement with Teekay Corporation or any of its affiliates.

Our main growth depends on continued growth in demand for LNG and LPG shipping.

Our growth strategy focuses on continued expansion in the LNG and LPG shipping sectors. Accordingly, our growth depends on continued growth in world and regional demand for LNG and LPG shipping, which could be negatively affected by a number of factors, such as:

 

   

increases in the cost of natural gas derived from LNG relative to the cost of natural gas generally;

 

   

increase in the cost of LPG relative to the cost of naphtha and other competing petrochemicals;

 

   

increases in the production of natural gas in areas linked by pipelines to consuming areas, the extension of existing, or the development of new, pipeline systems in markets we may serve, or the conversion of existing non-natural gas pipelines to natural gas pipelines in those markets;

 

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decreases in the consumption of natural gas due to increases in its price relative to other energy sources or other factors making consumption of natural gas less attractive;

 

   

additional sources of natural gas, including shale gas;

 

   

availability of alternative energy sources; and

 

   

negative global or regional economic or political conditions, particularly in LNG and LPG consuming regions, which could reduce energy consumption or its growth.

Reduced demand for LNG and LPG shipping would have a material adverse effect on our future growth and could harm our business, results of operations and financial condition.

Changes in the oil markets could result in decreased demand for our conventional vessels and services in the future.

Demand for our vessels and services in transporting oil depends upon world and regional oil markets. Any decrease in shipments of crude oil in those markets could have a material adverse effect on our conventional tanker business. Upon completion of the remaining charter terms for our conventional tankers, any adverse changes in the oil markets may affect our ability to enter into long-term fixed-rate contracts for our conventional tankers. Historically, those markets have been volatile as a result of the many conditions and events that affect the price, production and transport of oil, including competition from alternative energy sources. Past slowdowns of the U.S. and world economies have resulted in reduced consumption of oil products and decreased demand for our vessels and services, which reduced vessel earnings. Additional slowdowns could have similar effects on our operating results.

Growth of the LNG market may be limited by infrastructure constraints and community environmental group resistance to new LNG infrastructure over concerns about the environment, safety and terrorism.

A complete LNG project includes production, liquefaction, regasification, storage and distribution facilities and LNG carriers. Existing LNG projects and infrastructure are limited, and new or expanded LNG projects are highly complex and capital-intensive, with new projects often costing several billion dollars. Many factors could negatively affect continued development of LNG infrastructure or disrupt the supply of LNG, including:

 

   

increases in interest rates or other events that may affect the availability of sufficient financing for LNG projects on commercially reasonable terms;

 

   

decreases in the price of LNG, which might decrease the expected returns relating to investments in LNG projects;

 

   

the inability of project owners or operators to obtain governmental approvals to construct or operate LNG facilities;

 

   

local community resistance to proposed or existing LNG facilities based on safety, environmental or security concerns;

 

   

any significant explosion, spill or similar incident involving an LNG facility or LNG carrier; and

 

   

labor or political unrest affecting existing or proposed areas of LNG production.

If the LNG supply chain is disrupted or does not continue to grow, or if a significant LNG explosion, spill or similar incident occurs, it could have a material adverse effect on our business, results of operations and financial condition and our ability to make cash distributions.

Our growth depends on our ability to expand relationships with existing customers and obtain new customers, for which we will face substantial competition.

One of our principal objectives is to enter into additional long-term, fixed-rate LNG, LPG and oil charters. The process of obtaining new long-term charters is highly competitive and generally involves an intensive screening process and competitive bids, and often extends for several months. Shipping contracts are awarded based upon a variety of factors relating to the vessel operator, including:

 

   

shipping industry relationships and reputation for customer service and safety;

 

   

shipping experience and quality of ship operations (including cost effectiveness);

 

   

quality and experience of seafaring crew;

 

   

the ability to finance carriers at competitive rates and financial stability generally;

 

   

relationships with shipyards and the ability to get suitable berths;

 

   

construction management experience, including the ability to obtain on-time delivery of new vessels according to customer specifications;

 

   

willingness to accept operational risks pursuant to the charter, such as allowing termination of the charter for force majeure events; and

 

   

competitiveness of the bid in terms of overall price.

 

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We compete for providing marine transportation services for potential energy projects with a number of experienced companies, including state-sponsored entities and major energy companies affiliated with the energy project requiring energy shipping services. Many of these competitors have significantly greater financial resources than we do or Teekay Corporation does. We anticipate that an increasing number of marine transportation companies – including many with strong reputations and extensive resources and experience – will enter the energy transportation sector. This increased competition may cause greater price competition for time-charters. As a result of these factors, we may be unable to expand our relationships with existing customers or to obtain new customers on a profitable basis, if at all, which would have a material adverse effect on our business, results of operations and financial condition and our ability to make cash distributions.

Delays in deliveries of newbuildings could harm our operating results and lead to the termination of related charters.

The delivery of newbuildings we may order or otherwise acquire, could be delayed, which would delay our receipt of revenues under the charters for the vessels. In addition, under some of our charters if delivery of a vessel to our customer is delayed, we may be required to pay liquidated damages in amounts equal to or, under some charters, almost double, the hire rate during the delay. For prolonged delays, the customer may terminate the time-charter and, in addition to the resulting loss of revenues, we may be responsible for additional, substantial liquidated damages.

Our receipt of newbuildings could be delayed because of:

 

   

quality or engineering problems;

 

   

changes in governmental regulations or maritime self-regulatory organization standards;

 

   

work stoppages or other labor disturbances at the shipyard;

 

   

bankruptcy or other financial crisis of the shipbuilder;

 

   

a backlog of orders at the shipyard;

 

   

political or economic disturbances where our vessels are being or may be built;

 

   

weather interference or catastrophic event, such as a major earthquake or fire;

 

   

our requests for changes to the original vessel specifications;

 

   

shortages of or delays in the receipt of necessary construction materials, such as steel;

 

   

our inability to finance the purchase or construction of the vessels; or

 

   

our inability to obtain requisite permits or approvals.

If delivery of a vessel is materially delayed, it could adversely affect our results or operations and financial condition and our ability to make cash distributions.

We may be unable to secure long-term charters for our LNG newbuildings before their scheduled deliveries.

On December 12, 2012, we entered into an agreement with Daewoo Shipbuilding & Marine Engineering Co., Ltd. of South Korea for the construction of two LNG newbuildings (with the option to order up to three additional vessels), without having secured corresponding long-term charters. The process of obtaining new long-term charters is highly competitive. Consequently, we may be unable to secure long-term charters for these or other newbuildings we may order before their scheduled delivery, if at all, which could harm our business, results of operations and financial condition and our ability to make cash distributions.

We may have more difficulty entering into long-term, fixed-rate LNG time-charters if an active short-term, medium-term or spot LNG shipping market develops.

LNG shipping historically has been transacted with long-term, fixed-rate time-charters, usually with terms ranging from 20 to 25 years. One of our principal strategies is to enter into additional long-term, fixed-rate LNG time-charters. In recent years the number of spot, short-term and medium-term LNG charters of under four years has been increasing. In 2012, they accounted for approximately 25% of global LNG trade.

If an active spot, short-term or medium-term market continues to develop, we may have increased difficulty entering into long-term, fixed-rate time-charters for our LNG carriers and, as a result, our cash flow may decrease and be less stable. In addition, an active short-term, medium-term or spot LNG market may require us to enter into charters based on changing market prices, as opposed to contracts based on a fixed rate, which could result in a decrease in our cash flow in periods when the market price for shipping LNG is depressed.

Over time vessel values may fluctuate substantially and, if these values are lower at a time when we are attempting to dispose of a vessel, we may incur a loss.

Vessel values for LNG and LPG carriers and conventional tankers can fluctuate substantially over time due to a number of different factors, including:

 

   

prevailing economic conditions in natural gas, oil and energy markets;

 

   

a substantial or extended decline in demand for natural gas, LNG, LPG or oil;

 

   

increases in the supply of vessel capacity; and

 

   

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

 

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Vessel values have declined over the past few years. If a charter terminates, we may be unable to re-deploy the vessel at attractive rates and, rather than continue to incur costs to maintain and finance it, may seek to dispose of it. Our inability to dispose of the vessel at a reasonable value could result in a loss on its sale and adversely affect our results of operations and financial condition.

We may be unable to make or realize expected benefits from acquisitions, and implementing our growth strategy through acquisitions may harm our business, financial condition and operating results.

Our growth strategy includes selectively acquiring existing LNG and LPG carriers or LNG and LPG shipping businesses. Historically, there have been very few purchases of existing vessels and businesses in the LNG and LPG shipping industries. Factors that may contribute to a limited number of acquisition opportunities in the LNG and LPG industries in the near term include the relatively small number of independent LNG and LPG fleet owners and the limited number of LNG and LPG carriers not subject to existing long-term charter contracts. In addition, competition from other companies could reduce our acquisition opportunities or cause us to pay higher prices.

Any acquisition of a vessel or business may not be profitable to us at or after the time we acquire it and may not generate cash flow sufficient to justify our investment. In addition, our acquisition growth strategy exposes us to risks that may harm our business, financial condition and operating results, including risks that we may:

 

   

fail to realize anticipated benefits, such as new customer relationships, cost-savings or cash flow enhancements;

 

   

be unable to hire, train or retain qualified shore and seafaring personnel to manage and operate our growing business and fleet;

 

   

decrease our liquidity by using a significant portion of our available cash or borrowing capacity to finance acquisitions;

 

   

significantly increase our interest expense or financial leverage if we incur additional debt to finance acquisitions;

 

   

incur or assume unanticipated liabilities, losses or costs associated with the business or vessels acquired; or

 

   

incur other significant charges, such as impairment of goodwill or other intangible assets, asset devaluation or restructuring charges.

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

Our insurance may be insufficient to cover losses that may occur to our property or result from our operations.

The operation of LNG and LPG carriers and oil tankers is inherently risky. Although we carry hull and machinery (marine and war risks) and protection and indemnity insurance, all risks may not be adequately insured against, and any particular claim may not be paid. In addition, only certain of our LNG carriers carry insurance covering the loss of revenues resulting from vessel off-hire time based on its cost compared to our off-hire experience. Any claims covered by insurance would be subject to deductibles, and since it is possible that a large number of claims may be brought, the aggregate amount of these deductibles could be material. Certain of our insurance coverage is maintained through mutual protection and indemnity associations, and as a member of such associations we may be required to make additional payments over and above budgeted premiums if member claims exceed association reserves.

We may be unable to procure adequate insurance coverage at commercially reasonable rates in the future. For example, more stringent environmental regulations have led in the past to increased costs for, and in the future may result in the lack of availability of, insurance against risks of environmental damage or pollution. A catastrophic oil spill, marine disaster or natural disasters could result in losses that exceed our insurance coverage, which could harm our business, financial condition and operating results. Any uninsured or underinsured loss could harm our business and financial condition. In addition, our insurance may be voidable by the insurers as a result of certain of our actions, such as our ships failing to maintain certification with applicable maritime self-regulatory organizations.

Changes in the insurance markets attributable to terrorist attacks may also make certain types of insurance more difficult for us to obtain. In addition, the insurance that may be available may be significantly more expensive than our existing coverage.

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

Terrorist attacks, piracy, and the current conflicts in the Middle East, and other current and future conflicts, may adversely affect our business, operating results, financial condition, ability to raise capital and future growth. Continuing hostilities in the Middle East may lead to additional armed conflicts or to further acts of terrorism and civil disturbance in the United States, or elsewhere, which may contribute to economic instability and disruption of LNG, LPG and oil production and distribution, which could result in reduced demand for our services.

In addition, LNG, LPG and oil facilities, shipyards, vessels, pipelines and oil and gas fields could be targets of future terrorist attacks and our vessels could be targets of pirates or hijackers. Any such attacks could lead to, among other things, bodily injury or loss of life, vessel or other property damage, increased vessel operational costs, including insurance costs, and the inability to transport LNG, LPG and oil to or from certain locations. Terrorist attacks, war, piracy, hijacking or other events beyond our control that adversely affect the distribution, production or transportation of LNG, LPG or oil to be shipped by us could entitle our customers to terminate our charter contracts, which would harm our cash flow and our business.

 

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Terrorist attacks, or the perception that LNG or LPG facilities and carriers are potential terrorist targets, could materially and adversely affect expansion of LNG and LPG infrastructure and the continued supply of LNG and LPG to the United States and other countries. Concern that LNG or LPG facilities may be targeted for attack by terrorists has contributed to significant community and environmental resistance to the construction of a number of LNG or LPG facilities, primarily in North America. If a terrorist incident involving an LNG or LPG facility or LNG or LPG carrier did occur, in addition to the possible effects identified in the previous paragraph, the incident may adversely affect construction of additional LNG or LPG facilities in the United States and other countries or lead to the temporary or permanent closing of various LNG or LPG facilities currently in operation.

Acts of piracy on ocean-going vessels have recently increased in frequency, which could adversely affect our business.

Acts of piracy have historically affected ocean-going vessels trading in regions of the world such as the South China Sea and the Gulf of Aden off the coast of Somalia. In recent years, the frequency and severity of piracy incidents has significantly increased, particularly in the Gulf of Aden and Indian Ocean. If these piracy attacks result in regions in which our vessels are deployed being named on the Joint War Committee Listed Areas, war risk insurance premiums payable for such coverage can increase significantly and such insurance coverage may be more difficult to obtain. In addition, crew costs, including costs which may be incurred to the extent we employ onboard security guards, could increase in such circumstances. We may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on us. In addition, detention hijacking as a result of an act of piracy against our vessels, or an increase in cost or unavailability of insurance for our vessels, could have a material adverse impact on our business, financial condition and results of operations

Our substantial operations outside the United States expose us to political, governmental and economic instability, which could harm our operations.

Because our operations are primarily conducted outside of the United States, they may be affected by economic, political and governmental conditions in the countries where we engage in business. Any disruption caused by these factors could harm our business, including by reducing the levels of oil and gas exploration, development and production activities in these areas. We derive some of our revenues from shipping oil, LNG and LPG from politically and economically unstable regions, such as Angola and Yemen. Hostilities, strikes, or other political or economic instability in regions where we operate or where we may operate could have a material adverse effect on the growth of our business, results of operations and financial condition and ability to make cash distributions. In addition, tariffs, trade embargoes and other economic sanctions by the United States or other countries against countries in which we operate or to which we trade may harm our business and ability to make cash distributions. Finally, a government could requisition one or more of our vessels, which is most likely during war or national emergency. Any such requisition would cause a loss of the vessel and could harm our cash flow and financial results.

We assume a credit risk by entering into charter agreements with unrated entities.

Some of our vessels are chartered to unrated entities, such as the four LNG carriers chartered to Angola LNG Supply Services LLC and the two LNG carriers chartered to Yemen LNG Company Limited. Some of these unrated entities will use revenue generated from the sale of the shipped gas to pay their shipping and other operating expenses, including the charter fees. The price of the gas may be subject to market fluctuations and the LNG supply may be curtailed by start-up delays and stoppages. If the revenue generated by the charterer is insufficient to pay the charter fees, we may be unable to realize the expected economic benefit from these charter agreements.

 

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Marine transportation is inherently risky, and an incident involving significant loss of or environmental contamination by any of our vessels could harm our reputation and business.

Our vessels and their cargoes are at risk of being damaged or lost because of events such as:

 

   

marine disasters;

 

   

bad weather or natural disasters;

 

   

mechanical failures;

 

   

grounding, fire, explosions and collisions;

 

   

piracy;

 

   

human error; and

 

   

war and terrorism.

An accident involving any of our vessels could result in any of the following:

 

   

death or injury to persons, loss of property or environmental damage;

 

   

delays in the delivery of cargo;

 

   

loss of revenues from or termination of charter contracts;

 

   

governmental fines, penalties or restrictions on conducting business;

 

   

higher insurance rates; and

 

   

damage to our reputation and customer relationships generally.

Any of these results could have a material adverse effect on our business, financial condition and operating results.

The marine energy transportation industry is subject to substantial environmental and other regulations, which may significantly limit our operations or increase our expenses.

Our operations are affected by extensive and changing international, national and local environmental protection laws, regulations, treaties and conventions in force in international waters, the jurisdictional waters of the countries in which our vessels operate, as well as the countries of our vessels’ registration, including those governing oil spills, discharges to air and water, and the handling and disposal of hazardous substances and wastes. Many of these requirements are designed to reduce the risk of oil spills and other pollution. In addition, we believe that the heightened environmental, quality and security concerns of insurance underwriters, regulators and charterers will lead to additional regulatory requirements, including enhanced risk assessment and security requirements and greater inspection and safety requirements on vessels. We expect to incur substantial expenses in complying with these laws and regulations, including expenses for vessel modifications and changes in operating procedures.

These requirements can affect the resale value or useful lives of our vessels, require a reduction in cargo capacity, ship modifications or operational changes or restrictions, lead to decreased availability of insurance coverage for environmental matters or result in the denial of access to certain jurisdictional waters or ports, or detention in, certain ports. Under local, national and foreign laws, as well as international treaties and conventions, we could incur material liabilities, including cleanup obligations, in the event that there is a release of petroleum or other hazardous substances from our vessels or otherwise in connection with our operations. We could also become subject to personal injury or property damage claims relating to the release of or exposure to hazardous materials associated with our operations. In addition, failure to comply with applicable laws and regulations may result in administrative and civil penalties, criminal sanctions or the suspension or termination of our operations, including, in certain instances, seizure or detention of our vessels. For further information about regulations affecting our business and related requirements on us, please read Item 4 – Information on the Partnership: C. Regulations.

Climate change and greenhouse gas restrictions may adversely impact our operations and markets.

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

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

 

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

We are paid in Euros under some of our charters, and certain of our vessel operating expenses and general and administrative expenses currently are denominated in Euros, which is primarily a function of the nationality of our crew and administrative staff. We also make payments under two Euro-denominated term loans. If the amount of our Euro-denominated obligations exceeds our Euro-denominated revenues, we must convert other currencies, primarily the U.S. Dollar, into Euros. An increase in the strength of the Euro relative to the U.S. Dollar would require us to convert more U.S. Dollars to Euros to satisfy those obligations, which would cause us to have less cash available for distribution. In addition, if we do not have sufficient U.S. Dollars, we may be required to convert Euros into U.S. Dollars for distributions to unitholders. An increase in the strength of the U.S. Dollar relative to the Euro could cause us to have less cash available for distribution in this circumstance. We have not entered into currency swaps or forward contracts or similar derivatives to mitigate this risk.

Because we report our operating results in U.S. Dollars, changes in the value of the U.S. Dollar relative to the Euro also result in fluctuations in our reported revenues and earnings. In addition, under U.S. accounting guidelines, all foreign currency-denominated monetary assets and liabilities such as cash and cash equivalents, accounts receivable, restricted cash, accounts payable, long-term debt and capital lease obligations, are revalued and reported based on the prevailing exchange rate at the end of the period. This revaluation historically has caused us to report significant non-monetary foreign currency exchange gains or losses each period. The primary source for these gains and losses is our Euro-denominated term loans.

Many of our seafaring employees are covered by collective bargaining agreements and the failure to renew those agreements or any future labor agreements may disrupt our operations and adversely affect our cash flows.

A significant portion of our seafarers, and the seafarers employed by Teekay Corporation and its other affiliates that crew some of our vessels, are employed under collective bargaining agreements. While some of our labor agreements have recently been renewed, crew compensation levels under future collective bargaining agreements may exceed existing compensation levels, which would adversely affect our results of operations and cash flows. We may be subject to labor disruptions in the future if our relationships deteriorate with our seafarers or the unions that represent them. Our collective bargaining agreements may not prevent labor disruptions, particularly when the agreements are being renegotiated. Any labor disruptions could harm our operations and could have a material adverse effect on our business, results of operations and financial condition and our ability to make cash distributions.

Teekay Corporation and certain of our joint venture partners may be unable to attract and retain qualified, skilled employees or crew necessary to operate our business, or may have to pay substantially increased costs for its employees and crew.

Our success depends in large part on Teekay Corporation’s and certain of our joint venture partners’ ability to attract and retain highly skilled and qualified personnel. In crewing our vessels, we require technically skilled employees with specialized training who can perform physically demanding work. The ability to attract and retain qualified crew members under a competitive industry environment continues to put upward pressure on crew manning costs.

If we are not able to increase our charter rates to compensate for any crew cost increases, our financial condition and results of operations may be adversely affected. Any inability we experience in the future to hire, train and retain a sufficient number of qualified employees could impair our ability to manage, maintain and grow our business.

Due to our lack of diversification, adverse developments in our LNG, LPG or oil marine transportation businesses could reduce our ability to make distributions to our unitholders.

We rely exclusively on the cash flow generated from our LNG and LPG carriers and conventional oil tankers that operate in the LNG, LPG and oil marine transportation business. Due to our lack of diversification, an adverse development in the LNG, LPG or oil shipping industry would have a significantly greater impact on our financial condition and results of operations than if we maintained more diverse assets or lines of business.

Teekay Corporation and its affiliates may engage in competition with us.

Teekay Corporation and its affiliates, including Teekay Offshore Partners L.P. (or Teekay Offshore), may engage in competition with us. Pursuant to an omnibus agreement between Teekay Corporation, Teekay Offshore, us and other related parties, Teekay Corporation, Teekay Offshore and their respective controlled affiliates (other than us and our subsidiaries) generally have agreed not to own, operate or charter LNG carriers without the consent of our General Partner. The omnibus agreement, however, allows Teekay Corporation, Teekay Offshore or any of such controlled affiliates to:

 

   

acquire LNG carriers and related time-charters as part of a business if a majority of the value of the total assets or business acquired is not attributable to the LNG carriers and time-charters, as determined in good faith by the board of directors of Teekay Corporation or the board of directors of Teekay Offshore’s general partner; however, if at any time Teekay Corporation or Teekay Offshore completes such an acquisition, it must offer to sell the LNG carriers and related time-charters to us for their fair market value plus any additional tax or other similar costs to Teekay Corporation or Teekay Offshore that would be required to transfer the LNG carriers and time-charters to us separately from the acquired business; or

 

   

own, operate and charter LNG carriers that relate to a bid or award for an LNG project that Teekay Corporation or any of its subsidiaries submits or receives; however, at least 180 days prior to the scheduled delivery date of any such LNG carrier, Teekay Corporation must offer to sell the LNG carrier and related time-charter to us, with the vessel valued at its “fully-built-up cost,” which represents the aggregate expenditures incurred (or to be incurred prior to delivery to us) by Teekay Corporation to acquire or construct and bring such LNG carrier to the condition and location necessary for our intended use, plus a reasonable allocation of overhead costs related to the development of such a project and other projects that would have been subject to the offer rights set forth in the omnibus agreement but were not completed.

 

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If we decline the offer to purchase the LNG carriers and time-charters described above, Teekay Corporation or Teekay Offshore may own and operate the LNG carriers, but may not expand that portion of its business.

In addition, pursuant to the omnibus agreement, Teekay Corporation, Teekay Offshore or any of their respective controlled affiliates (other than us and our subsidiaries) may:

 

   

acquire, operate or charter LNG carriers if our General Partner has previously advised Teekay Corporation or Teekay Offshore that the board of directors of our General Partner has elected, with the approval of the conflicts committee of its board of directors, not to cause us or our subsidiaries to acquire or operate the carriers;

 

   

acquire up to a 9.9% equity ownership, voting or profit participation interest in any publicly traded company that owns or operate LNG carriers; and

 

   

provide ship management services relating to LNG carriers.

If there is a change of control of Teekay Corporation or Teekay Offshore, the non-competition provisions of the omnibus agreement may terminate, which termination could have a material adverse effect on our business, results of operations and financial condition and our ability to make cash distributions.

Our General Partner and its other affiliates have conflicts of interest and limited fiduciary duties, which may permit them to favor their own interests to those of unitholders.

Teekay Corporation, which owns and controls our General Partner, indirectly owns our 2% General Partner interest and as at December 31, 2012 owned a 36.2% limited partner interest in us. Conflicts of interest may arise between Teekay Corporation and its affiliates, including our General Partner, on the one hand, and us and our unitholders, on the other hand. As a result of these conflicts, our General Partner may favor its own interests and the interests of its affiliates over the interests of our unitholders. These conflicts include, among others, the following situations:

 

   

neither our partnership agreement nor any other agreement requires our General Partner or Teekay Corporation to pursue a business strategy that favors us or utilizes our assets, and Teekay Corporation’s officers and directors have a fiduciary duty to make decisions in the best interests of the stockholders of Teekay Corporation, which may be contrary to our interests;

 

   

the executive officers and three of the directors of our General Partner also currently serve as executive officers or directors of Teekay Corporation;

 

   

our General Partner is allowed to take into account the interests of parties other than us, such as Teekay Corporation, in resolving conflicts of interest, which has the effect of limiting its fiduciary duty to our unitholders;

 

   

our General Partner has limited its liability and reduced its fiduciary duties under the laws of the Marshall Islands, while also restricting the remedies available to our unitholders, and as a result of purchasing common units, unitholders are treated as having agreed to the modified standard of fiduciary duties and to certain actions that may be taken by our General Partner, all as set forth in our partnership agreement;

 

   

our General Partner determines the amount and timing of our asset purchases and sales, capital expenditures, borrowings, issuances of additional partnership securities and reserves, each of which can affect the amount of cash that is available for distribution to our unitholders;

 

   

in some instances our General Partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make incentive distributions to affiliates to Teekay Corporation;

 

   

our General Partner determines which costs incurred by it and its affiliates are reimbursable by us;

 

   

our partnership agreement does not restrict our General Partner from causing us to pay it or its affiliates for any services rendered to us on terms that are fair and reasonable or entering into additional contractual arrangements with any of these entities on our behalf;

 

   

our General Partner controls the enforcement of obligations owed to us by it and its affiliates; and

 

   

our General Partner decides whether to retain separate counsel, accountants or others to perform services for us.

Certain of our lease arrangements contain provisions whereby we have provided a tax indemnification to third parties, which may result in increased lease payments or termination of favorable lease arrangements.

We and a joint venture partner are the lessee under 30-year capital lease arrangements with a third party for three LNG carriers. Under the terms of these capital lease arrangements, the lessor claims tax depreciation on the capital expenditures it incurred to acquire these vessels. As is typical in these leasing arrangements, tax and change of law risks are assumed by the lessee. The rentals payable under the lease arrangements are predicated on the basis of certain tax and financial assumptions at the commencement of the leases. If an assumption proves to be incorrect or there is a change in the applicable tax legislation or the interpretation thereof by the United Kingdom (U.K.) taxing authority, the lessor is entitled to increase the rentals so as to maintain its agreed after-tax margin. We do not have the ability to pass these increased rentals onto our charter party. However, the terms of the lease arrangements enable us and our joint venture partner jointly to terminate the lease arrangement on a voluntary basis at any time. In the event of an early termination of the lease arrangements, the joint venture may be obliged to pay termination sums to the lessor sufficient to repay its investment in the vessels and to compensate it for the tax effect of the terminations, including recapture of tax depreciation, if any. Although the exact amount of any such payments upon termination would be negotiated between us and the lessor, we expect the amount would be significant.

 

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As described in Item 18 – Financial Statements: Note 6 – Leases and Restricted Cash, the Teekay Nakilat Joint Venture is the lessee under 30-year capital lease arrangements with a third party for the three RasGas II LNG Carriers (or the RasGas II Leases). The UK taxing authority (or HMRC) has been urging the lessor as well as other lessors under capital lease arrangements that have tax benefits similar to the ones provided by the RasGas II Leases, to terminate such finance lease arrangements and has in other circumstances challenged the use of similar structures. As a result, the lessor has requested that the Teekay Nakilat Joint Venture enter into negotiations to terminate the RasGas II Leases. The Teekay Nakilat Joint Venture has declined this request as it does not believe that HRMC would be able to successfully challenge the availability of the tax benefits of these leases to the lessor. This assessment is partially based on a January 2012 court decision, regarding a similar financial lease of an LNG carrier, that ruled in favor of the taxpayer. However, the HMRC is appealing that decision and the appeal is expected to be heard in May 2013. If the HMRC were able to successfully challenge the RasGas II Leases, the Teekay Nakilat Joint Venture could be subject to significant costs associated with the termination of the lease or increased lease payments to compensate the lessor for the lost tax benefits. The Partnership estimates its 70% share of the potential exposure to be approximately $29 million, exclusive of potential financing and interest rate swap termination costs.

The Teekay Nakilat Joint Venture has received notification from the lessor of the three vessels of a credit rating downgrade to the bank that was providing the letter of credit (or LC Bank) to Teekay Nakilat Joint Venture’s tax lease. As a result, the lessor has claimed an increase to the lease rentals over the remaining term of the RasGas II Leases and instructed that an estimated $12 million additional amount of cash be placed on deposit by the Teekay Nakilat Joint Venture. The Teekay Nakilat Joint Venture has engaged external legal counsel to assess these claims. Our 70% share of the present value of the lease rental increase claim is approximately $10 million; however, the final amount is dependent on external legal counsel’s review. The Teekay Nakilat Joint Venture is also looking at other alternatives to mitigate the impact of the downgrade to the LC Bank’s credit rating.

In addition, the subsidiaries of another joint venture formed to service the Tangguh LNG project in Indonesia have entered into lease arrangements with a third party for two LNG carriers. We purchased Teekay Corporation’s interest in this joint venture in 2009. The terms of the lease arrangements provide similar tax and change of law risk assumption by this joint venture as we have with the three LNG carriers above.

Our joint venture arrangements impose obligations upon us but limit our control of the joint ventures, which may affect our ability to achieve our joint venture objectives.

For financial or strategic reasons, we conduct a portion of our business through joint ventures. Generally, we are obligated to provide proportionate financial support for the joint ventures although our control of the business entity may be substantially limited. Due to this limited control, we generally have less flexibility to pursue our own objectives through joint ventures than we would with our own subsidiaries. There is no assurance that our joint venture partners will continue their relationships with us in the future or that we will be able to achieve our financial or strategic objectives relating to the joint ventures and the markets in which they operate. In addition, our joint venture partners may have business objectives that are inconsistent with ours, experience financial and other difficulties that may affect the success of the joint venture, or be unable or unwilling to fulfill their obligations under the joint ventures, which may affect our financial condition or results of operations.

TAX RISKS

United States common unitholders will be required to pay U.S. taxes on their share of our income even if they do not receive any cash distributions from us.

U.S. citizens, residents or other U.S. taxpayers will be required to pay U.S. federal income taxes and, in some cases, U.S. state and local income taxes on their share of our taxable income, whether or not they receive cash distributions from us. U.S. common unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability that results from their share of our taxable income.

Because distributions may reduce a common unitholder’s tax basis in our common units, common unitholders may realize greater gain on the disposition of their units than they otherwise may expect, and common unitholders may have a tax gain even if the price they receive is less than their original cost.

If common unitholders sell their common units, they will recognize gain or loss for U.S. federal income tax purposes that is equal to the difference between the amount realized and their tax basis in those common units. Prior distributions in excess of the total net taxable income allocated decrease a common unitholder’s tax basis and will, in effect, become taxable income if common units are sold at a price greater than their tax basis, even if the price received is less than the original cost. Assuming we are not treated as a corporation for U.S. federal income tax purposes, a substantial portion of the amount realized on a sale of units, whether or not representing gain, may be ordinary income.

The decision of the United States Court of Appeals for the Fifth Circuit in Tidewater Inc. v. United States creates some uncertainty as to whether we will be classified as a partnership for U.S. federal income tax purposes.

In order for us to be classified as a partnership for U.S. federal income tax purposes, more than 90.0 percent of our gross income each year must be “qualifying income” under Section 7704 of the U.S. Internal Revenue Code of 1986, as amended (the Code). For this purpose, “qualifying income” includes income from providing marine transportation services to customers with respect to crude oil, natural gas and certain products thereof but does not include rental income from leasing vessels to customers.

The decision of the United States Court of Appeals for the Fifth Circuit in Tidewater Inc. v. United States, 565 F.3d 299 (5th Cir. 2009) held that income derived from certain time chartering activities should be treated as rental income rather than service income for purposes of a foreign sales corporation provision of the Code. However, the Internal Revenue Service (or IRS) stated in an Action on Decision (AOD 2010-001) that it disagrees with, and will not acquiesce to, the way that the rental versus services framework was applied to the facts in the Tidewater decision, and in its discussion stated that the time charters at issue in Tidewater would be treated as producing services income for purposes of the passive foreign investment company provisions of the Code. The IRS’s statement with respect to Tidewater cannot be relied upon or otherwise cited as precedent by taxpayers. Consequently, in the absence of any binding legal authority specifically relating to the statutory provisions governing “qualifying

 

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income” under Section 7704 of the Code, there can be no assurance that the IRS or a court would not follow the Tidewater decision in interpreting the “qualifying income” provisions under Section 7704 of the Code. Nevertheless, we intend to take the position that our time charter income is “qualifying income” within the meaning of Section 7704 of the Code. No assurance can be given, however, that the IRS, or a court of law, will accept our position. As such, there is some uncertainty regarding the status of our time charter income as “qualifying income” and therefore some uncertainty as to whether we will be classified as a partnership for federal income tax purposes. Please read “Item 10 – Additional Information – Taxation — United States Tax Consequences – Classification as a Partnership.”

The after-tax benefit of an investment in the common units may be reduced if we are not treated as a partnership for U.S. federal income tax purposes.

The anticipated after-tax benefit of an investment in common units may be reduced if we are not treated as a partnership for U.S. federal income tax purposes. If we are not treated as a partnership for U.S. federal income tax purposes, we would be treated as a corporation for such purposes, and common unitholders could suffer material adverse tax or economic consequences, including the following:

 

   

The ratio of taxable income to distributions with respect to common units would increase because items would not be allocated to account for any differences between the fair market value and the basis of our assets at the time our common units are issued.

 

   

Common unitholders may recognize income or gain on any change in our status from a partnership to a corporation that occurs while they hold units.

 

   

We would not be permitted to adjust the tax basis of a secondary market purchaser in our assets under Section 743(b) of the Code. As a result, a person who purchases common units from a common unitholder in the secondary market may realize materially more taxable income each year with respect to the units. This could reduce the value of common unitholders’ common units.

 

   

Common unitholders would not be entitled to claim any credit against their U.S. federal income tax liability for non-U.S. income tax liabilities incurred by us.

 

   

As to the U.S. source portion of our income attributable to transportation that begins or ends (but not both) in the United States, we will be subject to U.S. tax on such income on a gross basis (that is, without any allowance for deductions) at a rate of 4.0 percent. The imposition of this tax would have a negative effect on our business and would result in decreased cash available for distribution to common unitholders.

 

   

We also may be considered a passive foreign investment company (or PFIC) for U.S. federal income tax purposes. U.S. shareholders of a PFIC are subject to an adverse U.S. federal income tax regime with respect to the income derived by the PFIC, the distributions they receive from the PFIC, and the gain, if any, they derive from the sale or other disposition of their interests in the PFIC.

Please read “Item 10 – Additional Information – Taxation – United States Tax Consequences — Possible Classification as a Corporation.”

U.S. tax-exempt entities and non-U.S. persons face unique U.S. tax issues from owning common units that may result in adverse U.S. tax consequences to them.

Investments in common units by U.S. tax-exempt entities, including individual retirement accounts (known as IRAs), other retirements plans and non-U.S. persons raise issues unique to them. Assuming we are classified as a partnership for U.S. federal income tax purposes, virtually all of our income allocated to organizations exempt from U.S. federal income tax will be unrelated business taxable income and generally will be subject to U.S. federal income tax. In addition, non-U.S. persons may be subject to a 4.0 percent U.S. federal income tax on the U.S. source portion of our gross income attributable to transportation that begins or ends (but not both) in the United States, or distributions to them may be reduced on account of withholding of U.S. federal income tax by us in the event we are treated as having a fixed place of business in the United States or otherwise earn U.S. effectively connected income, unless an exemption applies and they file U.S. federal income tax returns to claim such exemption.

The sale or exchange of 50.0 percent or more of our capital or profits interests in any 12-month period will result in the termination of our partnership for U.S. federal income tax purposes.

We will be considered to have been terminated for U.S. federal income tax purposes if there is a sale or exchange of 50.0 percent or more of the total interests in our capital or profits within any 12-month period. Our termination would, among other things, result in the closing of our taxable year for all unitholders and could result in a deferral of depreciation deductions allowable in computing our taxable income. Please read “Item 10 – Additional Information – Taxation – United States Tax Consequences — Disposition of Common Units — Constructive Termination.”

Some of our subsidiaries that are classified as corporations for U.S. federal income tax purposes might be treated as “passive foreign investment companies,” which could result in additional taxes to our unitholders.

Certain of our subsidiaries that are classified as corporations for U.S. federal income tax purposes could be treated as “passive foreign investment companies” (or PFICs) for U.S. federal income tax purposes. U.S. shareholders of a PFIC are subject to an adverse U.S. federal income tax regime with respect to the income derived by the PFIC, the distributions they receive from the PFIC, and the gain, if any, they derive from the sale or other disposition of their interests in the PFIC. We have received a ruling from the IRS that our subsidiary Teekay LNG Holdco L.L.C. will be classified as a CFC rather than a PFIC as long as it is wholly-owned by a U.S. partnership. Our subsidiaries DHJS Hull No. 2007-001 L.L.C. and DHJS Hull No. 2007-002 L.L.C. are also owned by our U.S. partnership and we intend to take the position that these subsidiaries should also be treated as CFCs rather than PFICs. Moreover, we believe and intend to take the position that these subsidiaries were not PFICs at any time prior to the restructuring. No assurance can be given, however, that the IRS, or a court of law, will accept this position. Please read “Item 10 – Additional Information – Taxation – United States Tax Consequences – Taxation of our Subsidiary Corporations.”

 

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Teekay Corporation owns less than 50.0 percent of our outstanding equity interests, which could cause certain of our subsidiaries and us to be subject to additional tax.

Certain of our subsidiaries are classified as corporations for U.S. federal income tax purposes. As such, these subsidiaries will be subject to U.S. federal income tax on the U.S. source portion of our income attributable to transportation that begins or ends (but not both) in the United States if they fail to qualify for an exemption from U.S. federal income tax (the Section 883 Exemption). Teekay Corporation indirectly owns less than 50.0 percent of certain of our subsidiaries’ and our outstanding equity interests. Consequently, we expect these subsidiaries failed to qualify for the Section 883 Exemption in 2012 and will fail to qualify for the Section 883 Exemption in subsequent tax years. Any resulting imposition of U.S. federal income taxes will result in decreased cash available for distribution to common unitholders. Please read “Item 10 – Additional Information –Taxation – United States Tax Consequences –Taxation of our Subsidiary Corporations.”

In addition, if we are not treated as a partnership for U.S. federal income tax purposes, we expect that we also would fail to qualify for the Section 883 Exemption in subsequent tax years and that any resulting imposition of U.S. federal income taxes would result in decreased cash available for distribution to common unitholders.

The Internal Revenue Service (or IRS) may challenge the manner in which we value our assets in determining the amount of income, gain, loss and deduction allocable to the unitholders, which could adversely affect the value of the common units.

A unitholder’s taxable income or loss with respect to a common unit each year will depend upon a number of factors, including the nature and fair market value of our assets at the time the holder acquired the common unit, whether we issue additional units or whether we engage in certain other transactions, and the manner in which our items of income, gain, loss and deduction are allocated among our partners. For this purpose, we determine the value of our assets and the relative amounts of our items of income, gain, loss and deduction allocable to our unitholders and our general partner as holder of the incentive distribution rights by reference to the value of our interests, including the incentive distribution rights. The IRS may challenge any valuation determinations that we make, particularly as to the incentive distribution rights, for which there is no public market. In addition, the IRS could challenge certain other aspects of the manner in which we determine the relative allocations made to our unitholders and to the general partner as holder of our incentive distribution rights. A successful IRS challenge to our valuation or allocation methods could increase the amount of net taxable income and gain realized by a unitholder with respect to a common unit. Any such IRS challenge, whether or not successful, could adversely affect the value of our common units.

Common unitholders may be subject to income tax in one or more non-U.S. countries, including Canada, as a result of owning our common units if, under the laws of any such country, we are considered to be carrying on business there. Such laws may require common unitholders to file a tax return with, and pay taxes to, those countries. Any foreign taxes imposed on us or any of our subsidiaries will reduce our cash available for distribution to common unitholders.

We intend that our affairs and the business of each of our subsidiaries is conducted and operated in a manner that minimizes foreign income taxes imposed upon us and our subsidiaries or which may be imposed upon you as a result of owning our common units. However, there is a risk that common unitholders will be subject to tax in one or more countries, including Canada, as a result of owning our common units if, under the laws of any such country, we are considered to be carrying on business there. If common unitholders are subject to tax in any such country, common unitholders may be required to file a tax return with, and pay taxes to, that country based on their allocable share of our income. We may be required to reduce distributions to common unitholders on account of any withholding obligations imposed upon us by that country in respect of such allocation to common unitholders. The United States may not allow a tax credit for any foreign income taxes that common unitholders directly or indirectly incur. Any foreign taxes imposed on us or any of our subsidiaries will reduce our cash available for common unitholders.

Item 4. Information on the Partnership

A. Overview, History and Development

Overview and History

Teekay LNG Partners L.P. is an international provider of marine transportation services for LNG, LPG and crude oil. We were formed in 2004 by Teekay Corporation (NYSE: TK), a leading provider of marine services to the global oil and natural gas industries, to expand its operations in the LNG shipping sector. Our primary growth strategy focuses on expanding our fleet of LNG and LPG carriers under long-term, fixed-rate charters. In executing our growth strategy, we may engage in vessel or business acquisitions or enter into joint ventures and partnerships with companies that may provide increased access to emerging opportunities from global expansion of the LNG and LPG sectors. We seek to leverage the expertise, relationships and reputation of Teekay Corporation and its affiliates to pursue these opportunities in the LNG and LPG sectors and may consider other opportunities to which our competitive strengths are well suited. Although we may acquire additional crude oil tankers from time to time, we view our conventional tanker fleet primarily as a source of stable cash flow as we seek to continue to expand our LNG and LPG operations.

As of December 31, 2012, our fleet, excluding newbuildings, consisted of 27 LNG carriers (including the six MALT LNG Carriers, four RasGas 3 LNG Carriers, the four Angola LNG Carriers and the two Exmar LNG carriers that are all accounted for under the equity method), ten Suezmax-class crude oil tankers, five LPG carriers and one Handymax product tanker, all of which are double-hulled. Our fleet is young, with an average age of approximately six years for our LNG carriers, approximately eight years for our conventional tankers (Suezmax and Handymax), and approximately two years for our LPG carriers, compared to world averages of 11, 8 and 16 years, respectively, as of December 31, 2012.

Our fleets of LNG and LPG carriers currently have approximately 4.2 million and 0.1 million cubic meters of total capacity, respectively. The aggregate capacity of our conventional tanker fleet is approximately 1.6 million deadweight tonnes (dwt).

Subsequent to December 31, 2012, we entered into a joint venture agreement with Belgium-based Exmar NV (or Exmar) to own and charter-in LPG carriers with a primary focus on the mid-size gas carrier segment. The joint venture entity, called Exmar LPG BVBA, took economic effect as of November 1, 2012 and includes 20 owned LPG carriers (including eight newbuildings scheduled for delivery between 2014 and 2016) and five chartered-in LPG carriers.

 

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We were formed in connection with our initial public offering on May 10, 2005 and began trading as a publicly-traded limited partnership. Upon our formation, we acquired Teekay Corporation’s LNG business which it acquired in 2004 from Naviera F. Tapias S.A.

We are incorporated under the laws of the Republic of The Marshall Islands as Teekay LNG Partners L.P. and maintain our principal executive headquarters at 4th Floor, Belvedere Building, 69 Pitts Bay Road, Hamilton, HM 08, Bermuda. Our telephone number at such address is (441) 298-2530.

B. Operations

Our Charters

We generate revenues by charging customers for the transportation of their LNG, LPG and crude oil using our vessels. These services are provided through either a time-charter or bareboat charter contract, where vessels are chartered to customers for a fixed period of time at rates that are generally fixed but may contain a variable component based on inflation, interest rates or current market rates. The two newbuildings which are scheduled for delivery in the first half of 2016 are currently without contracts; however, we intend to secure long-term contract employment for both vessels prior to their delivery.

Our vessels mainly operate under long-term, fixed-rate charters primarily with major energy and utility companies and Teekay Corporation. The average remaining term for these charters is approximately 14 years for our LNG carriers, approximately 4 years for our conventional tankers (Suezmax and Handymax), and approximately 13 years for our LPG carriers, subject, in certain circumstances, to termination or vessel purchase rights.

“Hire” rate refers to the basic payment from the customer for the use of a vessel. Hire is payable monthly, in advance, in U.S. Dollars or Euros, as specified in the charter. The hire rate generally includes two components – a capital cost component and an operating expense component. The capital component typically approximates the amount we are required to pay under vessel financing obligations and, for five of our existing conventional tankers, adjusts for changes in the floating interest rates relating to the underlying vessel financing. The operating component, which adjusts annually for inflation, is intended to compensate us for vessel operating expenses.

In addition, we may receive additional revenues beyond the fixed hire rate when current market rates exceed specified amounts under our time-charter for four Suezmax tankers.

Hire payments may be reduced or, under some charters, we must pay liquidated damages, if the vessel does not perform to certain of its specifications, such as if the average vessel speed falls below a guaranteed speed or the amount of fuel consumed to power the vessel under normal circumstances exceeds a guaranteed amount. Historically, we have had few instances of hire rate reductions and only one in our joint venture with Exmar that had an impact on our operating results.

When a vessel is “off-hire”—or not available for service— the customer generally is not required to pay the hire rate and we are responsible for all costs. Prolonged off-hire may lead to vessel substitution or termination of the time-charter. A vessel will be deemed to be off-hire if it is in dry dock. We must periodically dry dock each of our vessels for inspection, repairs and maintenance and any modifications to comply with industry certification or governmental requirements. In addition, a vessel generally will be deemed off-hire if there is a loss of time due to, among other things: operational deficiencies; equipment breakdowns; delays due to accidents, crewing strikes, certain vessel detentions or similar problems; or our failure to maintain the vessel in compliance with its specifications and contractual standards or to provide the required crew.

Liquefied Gas Segment

LNG Carriers

The LNG carriers in our liquefied gas segment compete in the LNG market. LNG carriers are usually chartered to carry LNG pursuant to time-charter contracts, where a vessel is hired for a fixed period of time, usually between 20 and 25 years, and the charter rate is payable to the owner on a monthly basis. LNG shipping historically has been transacted with long-term, fixed-rate time-charter contracts. LNG projects require significant capital expenditures and typically involve an integrated chain of dedicated facilities and cooperative activities. Accordingly, the overall success of an LNG project depends heavily on long-range planning and coordination of project activities, including marine transportation. Most shipping requirements for new LNG projects continue to be provided on a long-term basis, though the level of spot voyages (typically consisting of a single voyage), short-term time-charters and medium-term time-charters have grown in the past few years.

In the LNG market, we compete principally with other private and state-controlled energy and utilities companies that generally operate captive fleets, and independent ship owners and operators. Many major energy companies compete directly with independent owners by transporting LNG for third parties in addition to their own LNG. Given the complex, long-term nature of LNG projects, major energy companies historically have transported LNG through their captive fleets. However, independent fleet operators have been obtaining an increasing percentage of charters for new or expanded LNG projects as some major energy companies have continued to divest non-core businesses.

LNG carriers transport LNG internationally between liquefaction facilities and import terminals. After natural gas is transported by pipeline from production fields to a liquefaction facility, it is supercooled to a temperature of approximately negative 260 degrees Fahrenheit. This process reduces its volume to approximately 1/600th of its volume in a gaseous state. The reduced volume facilitates economical storage and transportation by ship over long distances, enabling countries with limited natural gas reserves or limited access to long-distance transmission pipelines to import natural gas. LNG carriers include a sophisticated containment system that holds the LNG and provides insulation to reduce the amount of LNG that boils off naturally. The natural boil off is either used as fuel to power the engines on the ship or it can be reliquefied and put back into the tanks. LNG is transported overseas in specially built tanks on double-hulled ships to a receiving terminal, where it is offloaded and stored in insulated tanks. In regasification facilities at the receiving terminal, the LNG is returned to its gaseous state (or regasified) and then shipped by pipeline for distribution to natural gas customers.

 

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With the exception of the Arctic Spirit and Polar Spirit which are the only two ships in the world that utilize the Ishikawajima Harima Heavy Industries Self Supporting Prismatic Tank IMO Type B (or IHI SPB) independent tank technology, the remainder of our fleet makes use of one of the Gaz Transport and Technigaz (or GTT) membrane containment systems. The GTT membrane systems are used in the majority of LNG tankers now being constructed. New LNG carriers are generally expected to have a lifespan of approximately 35 to 40 years. Unlike the oil tanker industry, there currently are no regulations that require the phase-out from trading of LNG carriers after they reach a certain age. As at December 31, 2012, our LNG carriers had an average age of approximately six years, compared to the world LNG carrier fleet average age of approximately 11 years. In addition, as at that date, there were approximately 373 vessels in the world LNG fleet and approximately 86 additional LNG carriers under construction or on order for delivery through 2017.

The following table provides additional information about our LNG carriers as of December 31, 2012:

 

Vessel

   Capacity      Delivery    Our Ownership    

Charterer

   Expiration  of
Charter
(1)
 
     (cubic meters)                         

Operating LNG carriers:

             

Hispania Spirit

     137,814      2002      100   Repsol YPF, S.A.      Sep. 2022 (4) 

Catalunya Spirit

     135,423      2003      100   Gas Natural SDG      Aug. 2023 (4) 

Galicia Spirit

     137,814      2004      100   Uniòn Fenosa Gas      Jun. 2029 (3) 

Madrid Spirit

     135,423      2004      100   Repsol YPF, S.A.      Dec. 2024 (4) 

Al Marrouna

     149,539      2006      70% - capital lease (2)    Ras Laffan Liquefied Natural Gas Company Ltd.      Oct. 2026 (5) 

Al Areesh

     148,786      2007      70% - capital lease (2)    Ras Laffan Liquefied Natural Gas Company Ltd.      Jan. 2027 (5) 

Al Daayen

     148,853      2007      70% - capital  lease (2)    Ras Laffan Liquefied Natural Gas Company Ltd.      Apr. 2027 (5) 

Tangguh Hiri

     151,885      2008      69   The Tangguh Production Sharing Contractors      Jan. 2029   

Tangguh Sago

     155,000      2009      69   The Tangguh Production Sharing Contractors      May 2029   

Al Huwaila

     214,176      2008      40 %(9)    Ras Laffan Liquefied Natural Gas Company Ltd.      Apr. 2033 (4) 

Al Kharsaah

     214,198      2008      40 %(9)    Ras Laffan Liquefied Natural Gas Company Ltd.      Apr. 2033 (4) 

Al Shamal

     213,536      2008      40 %(9)    Ras Laffan Liquefied Natural Gas Company Ltd.      May 2033 (4) 

Al Khuwair

     213,101      2008      40 %(9)    Ras Laffan Liquefied      Jul. 2033 (4) 

Arctic Spirit

     87,305      1993      99   Natural Gas Company Ltd. Teekay Corporation      Apr. 2018 (5) 

Polar Spirit

     87,305      1993      99   Teekay Corporation      Apr. 2018 (5) 

Excelsior

     138,087      2005      50 %(10)    Excelerate Energy LP      Jan. 2025 (4) 

Excalibur

     138,000      2002      50% - capital lease (10)    Excelerate Energy LP      Mar. 2022   

Soyo

     160,400      2011      33 %(11)    Angola LNG Supply Services LLC      Aug. 2031 (4) 

Malanje

     160,400      2011      33 %(11)    Angola LNG Supply Services LLC      Sep. 2031 (4) 

Lobito

     160,400      2011      33 %(11)    Angola LNG Supply Services LLC      Oct. 2031 (4) 

Cubal

     160,400      2012      33 %(11)    Angola LNG Supply Services LLC      Jan. 2032 (4) 

Meridian Spirit

     165,700      2010      52 %(12)    Total E&P Norge AS Mansel Limited      Oct. 2030 (7) 

Magellan Spirit

     165,700      2009      52 %(12)    Qatar Gas Transport Company Limited      Sep. 2016   

Marib Spirit

     165,500      2008      52 %(12)    Yemen LNG Company Limited      Mar. 2029 (7) 

Arwa Spirit

     165,500      2008      52 %(12)    Yemen LNG Company Limited      Apr. 2029 (7) 

Methane Spirit

     165,500      2008      52 %(12)    BP Shipping Limited      Apr. 2015 (8) 

Woodside Donaldson

     165,500      2009      52 %(12)    Pluto LNG Party Limited      Oct. 2026 (6) 
  

 

 

            

Total Capacity:

     4,241,245             
  

 

 

            

 

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(1) Each of our time-charters are subject to certain termination and purchase provisions.
(2) We lease the vessel under a tax lease arrangement and have an ownership interest of 70%. Please read Item 18 - Financial Statements: Note 6 – Leases and Restricted Cash.
(3) The charterer has one option to extend the term for an additional five years.
(4) The charterer has two options to extend the term for an additional five years each.
(5) The charterer has three options to extend the term for an additional five years each.
(6) The charterer has four options to extend the term for an additional five years each.
(7) The charterer has three options to extend the term for one, five and five additional years, respectively.
(8) The charterer has one option to extend the term for one additional year.
(9) The RasGas 3 LNG Carriers are accounted for under the equity method.
(10) The Exmar LNG Carriers are accounted for under the equity method.
(11) The Angola LNG Carriers are accounted for under the equity method.
(12) The MALT LNG Carriers are accounted for under the equity method.

The following table presents the percentage of our consolidated voyage revenues from LNG customers that accounted for more than 10% of our consolidated voyage revenues during 2012, 2011 and 2010.

 

     Year Ended December 31,  
     2012     2011     2010  

Ras Laffan Liquefied Natural Gas Company Ltd.

     18     18     18

Repsol YPF, S.A.

     13     14     14

The Tangguh Production Sharing Contractors

     12     12     11

Teekay Corporation

     10     Less than 10     10

No other LNG customer accounted for 10% or more of our revenues during any of these periods. The loss of any significant customer or a substantial decline in the amount of services requested by a significant customer could harm our business, financial condition and results of operations.

Each LNG carrier that is owned by us is encumbered by a mortgage relating to the vessel’s financing. Each of the Al Marrouna, Al Areesh, Al Daayen and Excalibur is considered to be subject to a capital lease. Please read Item 18 – Financial Statements: Note 6 – Leases and Restricted Cash.

LPG Carriers

LPG shipping involves the transportation of three main categories of cargo: liquid petroleum gases including propane, butane and ethane; petrochemical gases including ethylene, propylene and butadiene; and ammonia.

As of December 31, 2012, the worldwide LPG tanker fleet consisted of approximately 1,236 vessels with an average age of approximately 16 years and approximately 97 additional LPG vessels were on order for delivery through 2016. LPG carriers range in size from approximately 250 to approximately 85,000 cubic meters. Approximately 53% of the number of vessels in the worldwide fleet are less than 5,000 cubic meters in size. New LPG carriers are generally expected to have a lifespan of approximately 30 to 35 years.

LPG carriers are mainly chartered to carry LPG on time-charters, on contracts of affreightment or spot voyage charters. The two largest consumers of LPG are residential users and the petrochemical industry. Residential users, particularly in developing regions where electricity and gas pipelines are not developed, do not have fuel switching alternatives and generally are not LPG price sensitive. The petrochemical industry, however, has the ability to switch between LPG and other feedstock fuels depending on price and availability of alternatives.

The following table provides additional information about our LPG carriers as of December 31, 2012, which does not include our 50% ownership interest in 20 owned LPG carriers (including eight newbuildings scheduled for delivery between 2014 and 2016) and five chartered-in LPG carriers acquired subsequent to December 31, 2012 as described in Item 18 – Financial Statements: Note 21 – Subsequent Events:

 

Vessel

   Capacity      Delivery    Ownership    

Charterer

  

Expiration of Charter

     (cubic meters)                       

Operating LPG carriers:

             

Norgas Pan

     10,000      2009      99   I.M. Skaguen ASA    Mar. 2024

Norgas Cathinka

     10,000      2009      99   I.M. Skaguen ASA    Oct. 2024

Norgas Camilla

     10,000      2011      99   I.M. Skaguen ASA    Sep. 2026

Norgas Unikum

     12,000      2011      99   I.M. Skaguen ASA    Jun. 2026

Norgas Vision

     12,000      2011      99   I.M. Skaguen ASA    Oct. 2026
  

 

 

            

Total Capacity:

     54,000             
  

 

 

            

 

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Conventional Tanker Segment

Oil has been the world’s primary energy source for decades. Seaborne crude oil transportation is a mature industry. The two main types of oil tanker operators are major oil companies (including state-owned companies) that generally operate captive fleets, and independent operators that charter out their vessels for voyage or time-charter use. Most conventional oil tankers controlled by independent fleet operators are hired for one or a few voyages at a time at fluctuating market rates based on the existing tanker supply and demand. These charter rates are extremely sensitive to this balance of supply and demand, and small changes in tanker utilization have historically led to relatively large short-term rate changes. Long-term, fixed-rate charters for crude oil transportation, such as those applicable to our conventional tanker fleet, are less typical in the industry. As used in this discussion, “conventional” oil tankers exclude those vessels that can carry dry bulk and ore, tankers that currently are used for storage purposes and shuttle tankers that are designed to transport oil from offshore production platforms to onshore storage and refinery facilities.

Oil tanker demand is primarily a function of several factors, primarily the locations of oil production, refining and consumption and world oil demand and supply, while oil tanker supply is primarily a function of new vessel deliveries, vessel scrapping and the conversion or loss of tonnage.

The majority of crude oil tankers range in size from approximately 80,000 to approximately 320,000 dwt. Suezmax tankers, which typically range from 120,000 to 200,000 dwt, are the mid-size of the various primary oil tanker types. As of December 31, 2012, the world tanker fleet included 437 conventional Suezmax tankers, representing approximately 14% of worldwide oil tanker capacity, excluding tankers under 10,000 dwt.

As of December 31, 2012, our conventional tankers had an average age of approximately eight years, which is consistent with the average age for the world conventional tanker fleet. New conventional tankers generally are expected to have a lifespan of approximately 25 to 30 years, based on estimated hull fatigue life.

The following table provides additional information about our conventional oil tankers as of December 31, 2012:

 

Tanker(1)

   Capacity      Delivery    Our Ownership    

Charterer

   Expiration  of
Charter
 
     (dwt)                         

Operating Conventional tankers:

             

Tenerife Spirit

     149,999      2000      Capital lease (2)    CEPSA      Aug. 2013 (3) 

Algeciras Spirit

     149,999      2000      Capital lease (2)    CEPSA      Nov. 2013 (3) 

Huelva Spirit

     149,999      2001      Capital lease (2)    CEPSA      Apr. 2014 (3) 

Teide Spirit

     149,999      2004      Capital lease (2)    CEPSA      Oct. 2017 (3) 

Toledo Spirit

     159,342      2005      Capital lease (2)    CEPSA      Jul. 2018 (3) 

European Spirit

     151,849      2003      100   ConocoPhillips Shipping LLC      Sep. 2015 (4) 

African Spirit

     151,736      2003      100   ConocoPhillips Shipping LLC      Nov. 2015 (4) 

Asian Spirit

     151,693      2004      100   ConocoPhillips Shipping LLC      Jan. 2016 (4) 

Bermuda Spirit

     159,000      2009      100   Centrofin Management Inc.      May. 2021 (5) 

Hamilton Spirit

     159,000      2009      100   Centrofin Management Inc.      Jun. 2021 (5) 

Alexander Spirit

     40,083      2007      100   Caltex Australian Petroleum Pty Ltd.      Mar. 2020   
  

 

 

            

Total Capacity:

     1,572,699             
  

 

 

            

 

(1) The conventional tankers listed in the table are all Suezmax tankers, with the exception of the Alexander Spirit which is a Handymax tanker.
(2) We are the lessee under a capital lease arrangement and may be required to purchase the vessel after the end of the lease terms for a fixed price. Please read Item 18 - Financial Statements: Note 6 – Leases and Restricted Cash.
(3) Compania Espanole de Petroleos, S.A. (or CEPSA) has the right to terminate the time-charter 13 years after the original delivery date without penalty. Expiration date assumes the termination at the end of year 13 of the charter contract; however, if the charterer does not exercise its annual termination rights, from the end of year 13 onwards, the charter contract could extend to 20 years after the original delivery date.
(4) The term of the time-charter is 12 years from the original delivery date, which may be extended at the customer’s option for up to an additional six years. In addition, the customer has the right to terminate the time-charter upon notice and payment of a cancellation fee. Either party also may require the sale of the vessel to a third party at any time, subject to the other party’s right of first refusal to purchase the vessel.
(5) Centrofin Management Inc. has the option to purchase the two vessels, which right is exercisable after the end of five years and every year thereafter until the end of the charter agreement. Each purchase option ranges between $53.8 million after five years to $29.4 million at the end of the charter.

CEPSA accounted for 12% of our 2012, 2011 and 2010 consolidated voyage revenues. No other conventional tanker customer accounted for 10% or more of our revenues during any of these periods. The loss of any significant customer or a substantial decline in the amount of services requested by a significant customer could harm our business, financial condition and results of operations.

Business Strategies

Our primary business objective is to increase distributable cash flow per unit by executing the following strategies:

 

   

Expand our LNG and LPG business globally. We seek to capitalize on opportunities emerging from the global expansion of the LNG and LPG sectors by selectively targeting:

 

   

projects which involve medium-to long-term, fixed-rate charters;

 

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joint ventures and partnerships with companies that may provide increased access to opportunities in attractive LNG and LPG importing and exporting geographic regions;

 

   

strategic vessel and business acquisitions; and

 

   

specialized projects in adjacent areas of the business, including floating storage and regasification units (or FSRUs).

 

   

Provide superior customer service by maintaining high reliability, safety, environmental and quality standards. LNG and LPG project operators seek LNG and LPG transportation partners that have a reputation for high reliability, safety, environmental and quality standards. We seek to leverage our own and Teekay Corporation’s operational expertise to create a sustainable competitive advantage with consistent delivery of superior customer service.

 

   

Manage our conventional tanker fleet to provide stable cash flows. The remaining terms for our existing long-term conventional tanker charters are 1 to 9 years. We believe the fixed-rate time-charters for our tanker fleet provide us stable cash flows during their terms and a source of funding for expanding our LNG and LPG operations. Depending on prevailing market conditions during and at the end of each existing charter, we may seek to extend the charter, enter into a new charter, operate the vessel on the spot market or sell the vessel, in an effort to maximize returns on our conventional tanker fleet while managing residual risk.

Safety, Management of Ship Operations and Administration

Teekay Corporation, through its subsidiaries, assists us in managing our ship operations. Safety and environmental compliance are our top operational priorities. We operate our vessels in a manner intended to protect the safety and health of the employees, the general public and the environment. We seek to manage the risks inherent in our business and are committed to eliminating incidents that threaten the safety and integrity of our vessels, such as groundings, fires, collisions and petroleum spills. In 2007, Teekay Corporation introduced a behavior-based safety program called “Safety in Action” to further enhance the safety culture in our fleet. We are also committed to reducing our emissions and waste generation. In 2008, Teekay Corporation introduced the Quality Assurance and Training Officers (or QATO) Program to conduct rigorous internal audits of our processes and provide the seafarers with onboard training.

Teekay Corporation has achieved certification under the standards reflected in International Standards Organization’s (or ISO) 9001 for Quality Assurance, ISO 14001 for Environment Management Systems, Occupational Health and Safety Advisory Services 18001 for Occupational Health and Safety, and the IMO’s International Management Code for the Safe Operation of Ships and Pollution Prevention (or ISM Code) conforming to the definition of ISM Code in Item 4—Information on the Partnership: C – Regulations—International Maritime Organization on a fully integrated basis. As part of Teekay Corporation’s compliance with the ISM Code, all of our vessels’ safety management certificates are maintained through ongoing internal audits performed by our certified internal auditors and intermediate external audits performed by the classification society Det Norske Veritas. Subject to satisfactory completion of these internal and external audits, certification is valid for five years.

We have established key performance indicators to facilitate regular monitoring of our operational performance. We set targets on an annual basis to drive continuous improvement, and we review performance indicators quarterly to determine if remedial action is necessary to reach our targets.

In addition to our operational experience, Teekay Corporation’s in-house global shore staff performs, through its subsidiaries, the full range of technical, commercial and business development services for our LNG and LPG operations. This staff also provides administrative support to our operations in finance, accounting and human resources. We believe this arrangement affords a safe, efficient and cost-effective operation.

Critical ship management functions undertaken by subsidiaries of Teekay Corporation are:

 

   

vessel maintenance;

 

   

crewing;

 

   

purchasing;

 

   

shipyard supervision;

 

   

insurance; and

 

   

financial management services.

These functions are supported by onboard and onshore systems for maintenance, inventory, purchasing and budget management.

In addition, Teekay Corporation’s day-to-day focus on cost control is applied to our operations. In 2003, Teekay Corporation and two other shipping companies established a purchasing cooperation agreement called the TBW Alliance, which leverages the purchasing power of the combined fleets, mainly in such commodity areas as marine lubricants, coatings and chemicals and gases. Through our arrangements with Teekay Corporation, we benefit from this purchasing alliance.

We believe that the generally uniform design of some of our existing and newbuilding vessels and the adoption of common equipment standards provides operational efficiencies, including with respect to crew training and vessel management, equipment operation and repair, and spare parts ordering.

Risk of Loss, Insurance and Risk Management

The operation of any ocean-going vessel carries an inherent risk of catastrophic marine disasters, death or injury of persons and property losses caused by adverse weather conditions, mechanical failures, human error, war, terrorism, piracy and other circumstances or events. In addition, the

 

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transportation of crude oil, petroleum products, LNG and LPG is subject to the risk of spills and to business interruptions due to political circumstances in foreign countries, hostilities, labor strikes and boycotts. The occurrence of any of these events may result in loss of revenues or increased costs.

We carry hull and machinery (marine and war risks) and protection and indemnity insurance coverage to protect against most of the accident-related risks involved in the conduct of our business. Hull and machinery insurance covers loss of or damage to a vessel due to marine perils such as collision, grounding and weather. Protection and indemnity insurance indemnifies us against liabilities incurred while operating vessels, including injury to our crew or third parties, cargo loss and pollution. The current maximum amount of our coverage for pollution is $1 billion per vessel per incident. We also carry insurance policies covering war risks (including piracy and terrorism) and, for some of our LNG carriers, loss of revenues resulting from vessel off-hire time due to a marine casualty. We believe that our current insurance coverage is adequate to protect against most of the accident-related risks involved in the conduct of our business and that we maintain appropriate levels of environmental damage and pollution insurance coverage. However, we cannot guarantee that all covered risks are adequately insured against, that any particular claim will be paid or that we will be able to procure adequate insurance coverage at commercially reasonable rates in the future. More stringent environmental regulations have resulted in increased costs for, and may result in the lack of availability of, insurance against risks of environmental damage or pollution.

We use in our operations Teekay Corporation’s thorough risk management program that includes, among other things, risk analysis tools, maintenance and assessment programs, a seafarers competence training program, seafarers workshops and membership in emergency response organizations. We believe we benefit from Teekay Corporation’s commitment to safety and environmental protection as certain of its subsidiaries assist us in managing our vessel operations.

Flag, Classification, Audits and Inspections

Our vessels are registered with reputable flag states, and the hull and machinery of all of our vessels have been “Classed” by one of the major classification societies and members of International Association of Classification Societies ltd (or IACS): BV, Lloyd’s Register of Shipping or American Bureau of Shipping.

The applicable classification society certifies that the vessel’s design and build conforms to the applicable Class rules and meets the requirements of the applicable rules and regulations of the country of registry of the vessel and the international conventions to which that country is a signatory. The classification society also verifies throughout the vessel’s life that it continues to be maintained in accordance with those rules. In order to validate this, the vessels are surveyed by the classification society, in accordance to the classification society rules, which in the case of our vessels follows a comprehensive five year special survey cycle, renewed every fifth year. During each five-year period the vessel undergoes annual and intermediate surveys, the scrutiny and intensity of which is primarily dictated by the age of the vessel. As our vessels are modern and we have enhanced the resiliency of the underwater coatings of each vessel hull and marked the hull to facilitate underwater inspections by divers, their underwater areas are inspected in a dry-dock at five year intervals. In-water inspection is carried out during the second or third annual inspection (i.e. during an Intermediate Survey).

In addition to class surveys, the vessel’s flag state also verifies the condition of the vessel during annual flag state inspections, either independently or by additional authorization to class. Also, port state authorities of a vessel’s port of call are authorized under international conventions to undertake regular and spot checks of vessels visiting their jurisdiction.

Processes followed onboard are audited by either the flag state or classification society acting on behalf of the flag state to ensure that they meet the requirements of the ISM Code. DNV typically carries out this task. We also follow an internal process of internal audits undertaken at each office and vessel annually.

We follow a comprehensive inspections scheme supported by our sea staff, shore-based operational and technical specialists and members of our QATO program. We carry out a minimum of two such inspections annually, which helps ensure us that:

 

   

our vessels and operations adhere to our operating standards;

 

   

the structural integrity of the vessel is being maintained;

 

   

machinery and equipment is being maintained to give reliable service;

 

   

we are optimizing performance in terms of speed and fuel consumption; and

 

   

the vessel’s appearance supports our brand and meets customer expectations.

Our customers also often carry out vetting inspections under the Ship inspection Report Program, which is a significant safety initiative introduced by the Oil Companies International Marine Forum to specifically address concerns about sub-standard vessels. The inspection results permit charterers to screen a vessel to ensure that it meets their general and specific risk-based shipping requirements.

We believe that the heightened environmental and quality concerns of insurance underwriters, regulators and charterers will generally lead to greater scrutiny, inspection and safety requirements on all vessels in the oil tanker and LNG and LPG carrier markets and will accelerate the scrapping or phasing out of older vessels throughout these markets.

Overall we believe that our relatively new, well-maintained and high-quality vessels provide us with a competitive advantage in the current environment of increasing regulation and customer emphasis on quality of service.

 

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C. Regulations

General

Our business and the operation of our vessels are significantly affected by international conventions and national, state and local laws and regulations in the jurisdictions in which our vessels operate, as well as in the country or countries of their registration. Because these conventions, laws and regulations change frequently, we cannot predict the ultimate cost of compliance or their impact on the resale price or useful life of our vessels. Additional conventions, laws, and regulations may be adopted that could limit our ability to do business or increase the cost of our doing business and that may materially adversely affect our operations. We are required by various governmental and quasi-governmental agencies to obtain permits, licenses and certificates with respect to our operations. Subject to the discussion below and to the fact that the kinds of permits, licenses and certificates required for the operations of the vessels we own will depend on a number of factors, we believe that we will be able to continue to obtain all permits, licenses and certificates material to the conduct of our operations.

International Maritime Organization (or IMO)

The IMO is the United Nations’ agency for maritime safety. IMO regulations relating to pollution prevention for oil tankers have been adopted by many of the jurisdictions in which our tanker fleet operates. Under IMO regulations and subject to limited exceptions, a tanker must be of double-hull construction, be of a mid-deck design with double-side construction or be of another approved design ensuring the same level of protection against oil pollution. All of our tankers are double hulled.

Many countries, but not the United States, have ratified and follow the liability regime adopted by the IMO and set out in the International Convention on Civil Liability for Oil Pollution Damage, 1969, as amended (or CLC). Under this convention, a vessel’s registered owner is strictly liable for pollution damage caused in the territorial waters of a contracting state by discharge of persistent oil (e.g. crude oil, fuel oil, heavy diesel oil or lubricating oil), subject to certain defenses. The right to limit liability to specified amounts that are periodically revised is forfeited under the CLC when the spill is caused by the owner’s actual fault or when the spill is caused by the owner’s intentional or reckless conduct. Vessels trading to contracting states must provide evidence of insurance covering the limited liability of the owner. In jurisdictions where the CLC has not been adopted, various legislative regimes or common law governs, and liability is imposed either on the basis of fault or in a manner similar to the CLC.

IMO regulations also include the International Convention for Safety of Life at Sea (or SOLAS), including amendments to SOLAS implementing the International Ship and Port Facility Security Code (or ISPS), the ISM Code, the International Convention on Load Lines of 1966, and, specifically with respect to LNG and LPG carriers, the International Code for Construction and Equipment of Ships Carrying Liquefied Gases in Bulk (the IGC Code). SOLAS provides rules for the construction of and equipment required for commercial vessels and includes regulations for safe operation. Flag states which have ratified the convention and the treaty generally employ the classification societies, which have incorporated SOLAS requirements into their class rules, to undertake surveys to confirm compliance.

SOLAS and other IMO regulations concerning safety, including those relating to treaties on training of shipboard personnel, lifesaving appliances, radio equipment and the global maritime distress and safety system, are applicable to our operations. Non-compliance with IMO regulations, including SOLAS, the ISM Code, ISPS and the IGC Code, may subject us to increased liability or penalties, may lead to decreases in available insurance coverage for affected vessels and may result in the denial of access to or detention in some ports. For example, the U.S. Coast Guard and European Union authorities have indicated that vessels not in compliance with the ISM Code will be prohibited from trading in U.S. and European Union ports. The ISM Code requires vessel operators to obtain a safety management certification for each vessel they manage, evidencing the shipowner’s development and maintenance of an extensive safety management system. Each of the existing vessels in our fleet is currently ISM Code-certified, and we expect to obtain safety management certificates for each newbuilding vessel upon delivery.

LNG and LPG carriers are also subject to regulation under the IGC Code. Each LNG and LPG carrier must obtain a certificate of compliance evidencing that it meets the requirements of the IGC Code, including requirements relating to its design and construction. Each of our LNG and LPG carriers is currently IGC Code certified.

Annex VI to the IMO’s International Convention for the Prevention of Pollution from Ships (or Annex VI) sets limits on sulfur oxide and nitrogen oxide emissions from ship exhausts and prohibits emissions of ozone depleting substances, emissions of volatile compounds from cargo tanks and the incineration of specific substances. Annex VI also includes a world-wide cap on the sulfur content of fuel oil and allows for special areas to be established with more stringent controls on sulfur emissions.

The IMO has issued guidance regarding protecting against acts of piracy off the coast of Somalia. We comply with these guidelines.

In addition, the IMO has proposed that all tankers of the size we operate that are built starting in 2012 contain ballast water treatment systems, and that all other similarly sized tankers install treatment systems by 2016. This convention has not yet been ratified, but when it becomes effective, we estimate that the installation of ballast water treatment systems on our tankers may cost between $2 million and $3 million per vessel.

European Union (or EU)

Like the IMO, the EU has adopted regulations phasing out single-hull tankers. All of our tankers are double-hulled. On May 17, 2011 the European commission carried out a number of “dawn raids”, or unannounced inspections, at the offices of some of the world’s largest container line operators starting an antitrust investigation. We are not directly affected by this investigation and believe that we are compliant with antitrust rules. Nevertheless, it is possible that the investigation could be widened and new companies and practices come under scrutiny within the EU.

The EU has also adopted legislation (directive 2009/16/Econ Port State Control) that: bans from European waters manifestly sub-standard vessels (defined as vessels that have been detained twice by EU port authorities, in the preceding two years); creates obligations on the part of EU member port states to inspect at least 24% of vessels using these ports annually; provides for increased surveillance of vessels posing a high risk to maritime safety or the marine environment; and provides the EU with greater authority and control over classification societies, including the ability to seek to suspend or revoke the authority of negligent societies. Two new regulations were introduced by the European Commission in September 2010, as part of the implementation of the Port State Control Directive. These came into force on January 1, 2011 and introduce a ranking system (published on a public website and updated daily) displaying shipping companies operating in the EU with the worst safety records. The ranking is

 

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judged upon the results of the technical inspections carried out on the vessels owned be a particular shipping company. Those shipping companies that have the most positive safety records are rewarded by subjecting them to fewer inspections, whilst those with the most safety shortcomings or technical failings recorded upon inspection will in turn be subject to a greater frequency of official inspections to their vessels.

The EU has, by way of Directive 2005/35/EC, which has been amended by Directive 2009/123/EC created a legal framework for imposing criminal penalties in the event of discharges of oil and other noxious substances from ships sailing in its waters, irrespective of their flag. This relates to discharges of oil or other noxious substances from vessels. Minor discharges shall not automatically be considered as offences, except where repetition leads to deterioration in the quality of the water. The persons responsible may be subject to criminal penalties if they have acted with intent, recklessly or with serious negligence and the act of inciting, aiding and abetting a person to discharge a polluting substance may also lead to criminal penalties.

The EU has adopted regulations requiring the use of low sulfur fuel. Currently, vessels are required to burn fuel with sulfur content not exceeding 1%. Beginning January 1, 2015, vessels are required to burn fuel with sulfur content not exceeding 0.1% while within EU member states’ territorial seas, exclusive economic zones and pollution control zones that are included in SOX Emission Control Areas. Other jurisdictions have also adopted regulations requiring the use of low sulfur fuel. The California Air Resources Board (or CARB) requires vessels to burn fuel with 0.1% sulfur content or less within 24 nautical miles of California as of January 1, 2014. IMO regulations require that, as of January 1, 2015, all vessels operating within Emissions control Areas (or ECA) worldwide must comply with 0.1% sulfur requirements. Currently, the only grade of fuel meeting this low sulfur content requirement is low sulfur marine gas oil (or LSMGO). Since July 1, 2010, the applicable sulfur content limits in the North Sea, the Baltic Sea and the English Channel sulfur control areas have been 0.1%. Certain modifications were completed on our Suezmax tankers in order to optimize operation on LSMGO of equipment originally designed to operate on Heavy Fuel Oil (or HFO), and to ensure our compliance with the Directive. In addition, LSMGO is more expensive than HFO and this impacts the costs of operations. However, for vessels employed on fixed-term business, all fuel costs, including any increases, are borne by the charterer.

United States

The United States has enacted an extensive regulatory and liability regime for the protection and cleanup of the environment from oil spills, including discharges of oil cargoes, bunker fuels or lubricants, primarily through the Oil Pollution Act of 1990 (or OPA 90) and the Comprehensive Environmental Response, Compensation and Liability Act (or CERCLA). OPA 90 affects all owners, bareboat charterers, and operators whose vessels trade to the United States or its territories or possessions or whose vessels operate in United States waters, which include the U.S. territorial sea and 200-mile exclusive economic zone around the United States. CERCLA applies to the discharge of “hazardous substances” rather than “oil” and imposes strict joint and several liability upon the owners, operators or bareboat charterers of vessels for cleanup costs and damages arising from discharges of hazardous substances. We believe that petroleum products and LNG and LPG should not be considered hazardous substances under CERCLA, but additives to oil or lubricants used on LNG or LPG carriers might fall within its scope.

Under OPA 90, vessel owners, operators and bareboat charters are “responsible parties” and are jointly, severally and strictly liable (unless the oil spill results solely from the act or omission of a third party, an act of God or an act of war and the responsible party reports the incident and reasonably cooperates with the appropriate authorities) for all containment and cleanup costs and other damages arising from discharges or threatened discharges of oil from their vessels. These other damages are defined broadly to include:

 

   

natural resources damages and the related assessment costs;

 

   

real and personal property damages;

 

   

net loss of taxes, royalties, rents, fees and other lost revenues;

 

   

lost profits or impairment of earning capacity due to property or natural resources damage;

 

   

net cost of public services necessitated by a spill response, such as protection from fire, safety or health hazards; and

 

   

loss of subsistence use of natural resources.

OPA 90 limits the liability of responsible parties in an amount it periodically updates. The liability limits do not apply if the incident was proximately caused by violation of applicable U.S. federal safety, construction or operating regulations, including IMO conventions to which the United States is a signatory, or by the responsible party’s gross negligence or willful misconduct, or if the responsible party fails or refuses to report the incident or to cooperate and assist in connection with the oil removal activities. Liability under CERCLA is also subject to limits unless the incident is caused by gross negligence, willful misconduct or a violation of certain regulations. We currently maintain for each of our vessel’s pollution liability coverage in the maximum coverage amount of $1 billion per incident. A catastrophic spill could exceed the coverage available, which could harm our business, financial condition and results of operations.

Under OPA 90, with limited exceptions, all newly built or converted tankers delivered after January 1, 1994 and operating in U.S. waters must be double-hulled. All of our tankers are double-hulled.

OPA 90 also requires owners and operators of vessels to establish and maintain with the United States Coast Guard (or Coast Guard ) evidence of financial responsibility in an amount at least equal to the relevant limitation amount for such vessels under the statute. The Coast Guard has implemented regulations requiring that an owner or operator of a fleet of vessels must demonstrate evidence of financial responsibility in an amount sufficient to cover the vessel in the fleet having the greatest maximum limited liability under OPA 90 and CERCLA. Evidence of financial responsibility may be demonstrated by insurance, surety bond, self-insurance, guaranty or an alternate method subject to approval by the Coast Guard. Under the self-insurance provisions, the shipowner or operator must have a net worth and working capital, measured in assets located in the United States against liabilities located anywhere in the world, that exceeds the applicable amount of financial responsibility. We have complied with the Coast Guard regulations by using self-insurance for certain vessels and obtaining financial guaranties from a third party for the remaining vessels. If other vessels in our fleet trade into the United States in the future, we expect to obtain guaranties from third-party insurers.

 

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OPA 90 and CERCLA permit individual U.S. states to impose their own liability regimes with regard to oil or hazardous substance pollution incidents occurring within their boundaries, and some states have enacted legislation providing for unlimited strict liability for spills. Several coastal states, such as California and Alaska require state-specific evidence of financial responsibility and vessel response plans. We intend to comply with all applicable state regulations in the ports where our vessels call.

Owners or operators of vessels, including tankers operating in U.S. waters are required to file vessel response plans with the Coast Guard, and their tankers are required to operate in compliance with their Coast Guard approved plans. Such response plans must, among other things:

 

   

address a “worst case” scenario and identify and ensure, through contract or other approved means, the availability of necessary private response resources to respond to a “worst case discharge”;

 

   

describe crew training and drills; and

 

   

identify a qualified individual with full authority to implement removal actions.

We have filed vessel response plans with the Coast Guard and have received its approval of such plans. In addition, we conduct regular oil spill response drills in accordance with the guidelines set out in OPA 90. The Coast Guard has announced it intends to propose similar regulations requiring certain vessels to prepare response plans for the release of hazardous substances.

OPA 90 and CERCLA do not preclude claimants from seeking damages resulting from the discharge of oil and hazardous substances under other applicable law, including maritime tort law. Such claims could include attempts to characterize the transportation of LNG or LPG aboard a vessel as an ultra-hazardous activity under a doctrine that would impose strict liability for damages resulting from that activity. The application of this doctrine varies by jurisdiction.

The United States Clean Water Act also prohibits the discharge of oil or hazardous substances in U.S. navigable waters and imposes strict liability in the form of penalties for unauthorized discharges. The Clean Water Act imposes substantial liability for the costs of removal, remediation and damages and complements the remedies available under OPA 90 and CERCLA discussed above.

Our vessels that discharge certain effluents, including ballast water, in U.S. waters must obtain a Clean Water Act permit from the Environmental Protection Agency (or EPA) titled the “Vessel General Permit” and comply with a range of effluent limitations, best management practices, reporting, inspections and other requirements. The current Vessel General Permit was issued in December 2008 and expires on December 19, 2013. A new Vessel General Permit was issued in March 2013 and will become effective on December 19, 2013. In addition to the ballast water best management practices required under the 2008 Vessel General Permit, the 2013 Vessel General Permit contains numeric technology-based ballast water effluent limitations that will apply to certain commercial vessels with ballast water tanks. For certain existing vessels, the EPA has adopted a staggered implementation schedule to require vessels to meet the ballast water effluent limitations by the first dry docking after January 1, 2014 or January 1, 2016, depending on the vessel size. Vessels that are constructed after December 1, 2013 are subject to the ballast water numeric effluent limitations immediately upon the effective date of the 2013 Vessel General Permit.

Since 2009, several environmental groups and industry associations have filed challenges in U.S. federal court to the EPA’s issuance of the Vessel General Permit. The EPA issued a final revised Vessel General Permit in March 2013 with an effective date of December 19, 2013.

Greenhouse Gas Regulation

In February 2005, the Kyoto Protocol to the United Nations Framework Convention on Climate Change (or the Kyoto Protocol) entered into force. Pursuant to the Kyoto Protocol, adopting countries are required to implement national programs to reduce emissions of greenhouse gases. In December 2009, more than 27 nations, including the United States, entered into the Copenhagen Accord. The Copenhagen Accord is non-binding, but is intended to pave the way for a comprehensive, international treaty on climate change. The IMO is evaluating various mandatory measures to reduce greenhouse gas emissions from international shipping, which may include market-based instruments or a carbon tax. The EU also has indicated that it intends to propose an expansion of an existing EU emissions trading regime to include emissions of greenhouse gases from vessels, and individual countries in the EU may impose additional requirements. In the United States, the EPA issued an “endangerment finding” regarding greenhouse gases under the Clean Air Act. While this finding in itself does not impose any requirements on our industry, it authorizes the EPA to regulate directly greenhouse gas emissions through a rule-making process. In addition, climate change initiatives are being considered in the United States Congress and by individual states. Any passage of new climate control legislation or other regulatory initiatives by the IMO, EU, the United States or other countries or states where we operate that restrict emissions of greenhouse gases could have a significant financial and operational impact on our business that we cannot predict with certainty at this time.

 

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Vessel Security

The ISPS was adopted by the IMO in December 2002 in the wake of heightened concern over worldwide terrorism and became effective on July 1, 2004. The objective of ISPS is to enhance maritime security by detecting security threats to ships and ports and by requiring the development of security plans and other measures designed to prevent such threats. Each of the existing vessels in our fleet currently complies with the requirements of ISPS and MTSA.

D. Properties

Other than our vessels, we do not have any material property.

E. Organizational Structure

Our sole general partner is Teekay GP L.L.C., which is a wholly-owned subsidiary of Teekay Corporation (NYSE: TK). Teekay Corporation also controls its public subsidiaries Teekay Offshore Partners L.P. (NYSE: TOO) and Teekay Tankers Ltd. (NYSE: TNK).

The following is a list of our significant subsidiaries as at December 31, 2012:

 

Name of Significant Subsidiary

   Ownership    

State or Jurisdiction of Incorporation

Teekay LNG Operating L.L.C.

     100   Marshall Islands

Teekay Luxembourg S.a.r.l.

     100   Luxembourg

Teekay Spain S.L.

     100   Spain

Teekay II Iberia S.L.

     100   Spain

Teekay Shipping Spain S.L.

     100   Spain

Teekay LNG Holdings L.P.

     99   United States

Teekay Nakilat Holdings Corporation

     100   Marshall Islands

Teekay Nakilat Corporation

     70   Marshall Islands

Teekay Nakilat (III) Holdings Corporation

     100   Marshall Islands

Teekay BLT Corporation

     69   Marshall Islands

Teekay Tangguh Holdings Corporation

     99   Marshall Islands

Teekay Tangguh Borrower L.L.C.

     99   Marshall Islands

Teekay LNG Holdco L.L.C.

     99   Marshall Islands

Item 4A. Unresolved Staff Comments

Not applicable.

 

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Item 5. Operating and Financial Review and Prospects

Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

Teekay LNG Partners L.P. is an international provider of marine transportation services for liquefied natural gas (or LNG), liquefied petroleum gas (or LPG) and crude oil. We were formed in 2004 by Teekay Corporation, the world’s largest owner and operator of medium sized crude oil tankers, to expand its operations in the LNG shipping sector. Our primary growth strategy focuses on expanding our fleet of LNG and LPG carriers under long-term, fixed-rate charters. In executing our growth strategy, we may engage in vessel or business acquisitions or enter into joint ventures and partnerships with companies that may provide increased access to emerging opportunities from global expansion of the LNG and LPG sectors. We seek to leverage the expertise, relationships and reputation of Teekay Corporation and its affiliates to pursue these opportunities in the LNG and LPG sectors and may consider other opportunities to which our competitive strengths are well suited. Although we may acquire additional crude oil tankers from time to time, we view our conventional tanker fleet primarily as a source of stable cash flow as we seek to expand our LNG and LPG operations.

SIGNIFICANT DEVELOPMENTS IN 2012 AND EARLY 2013

Exmar LPG Joint Venture

On February 12, 2013, we entered into a joint venture agreement with Belgium-based Exmar NV (or Exmar) to own and charter-in LPG carriers with a primary focus on the mid-size gas carrier segment. The joint venture entity, called Exmar LPG BVBA, took economic effect as of November 1, 2012 and includes 16 owned LPG carriers (including four newbuildings scheduled for delivery in 2014) and five chartered-in LPG carriers. In addition, the joint venture recently ordered another four medium-size gas carrier newbuildings with deliveries scheduled between 2015 and 2016, with options to order up to four additional vessels, which brings the total fleet size of Exmar LPG BVBA to 25 vessels, excluding options. For our 50% ownership interest in the joint venture, including newbuilding payments made prior to the November 1, 2012 economic effective date of the joint venture, we invested approximately $134 million of equity and assumed approximately $108 million of our pro rata share of the existing debt and lease obligations as of the economic effective date, secured by certain vessels in the Exmar LPG BVBA fleet. Exmar will continue to commercially and technically manage and operate the vessels. Since control of Exmar LPG BVBA will be shared jointly between Exmar and us, we expect to account for Exmar LPG BVBA using the equity method.

Two LNG Newbuildings

On December 12, 2012, we entered into an agreement with Daewoo Shipbuilding & Marine Engineering Co., Ltd. (or DSME) of South Korea for the construction of two 173,400 cubic meter LNG carrier newbuildings, with options to order up to three additional vessels. We intend to secure long-term contract employment for both vessels prior to their scheduled deliveries in the first half of 2016. The newbuildings will be constructed with M-type, Electronically Controlled, Gas Injection (or MEGI) twin engines, which are expected to be significantly more fuel-efficient and have lower emission levels than other engines currently being utilized in LNG shipping. The contract with DSME includes a favorable installment payment schedule, with the majority of the purchase price due upon delivery. We paid $38.6 million on the first installment payment and we intend to finance the future installment payments during construction with a portion of our existing liquidity, which was approximately $495.0 million as of December 31, 2012. We expect to secure long-term debt financing for the two vessels prior to their scheduled delivery.

Equity Offering

In September 2012, we completed a public offering of 4.8 million common units (including 225,863 common units issued upon exercise of the underwriters’ over-allotment option) at a price of $38.43 per unit, for gross proceeds of approximately $189.2 million (including our general partner’s 2% proportionate capital contribution). We used the net proceeds from the offering of approximately $182.3 million to prepay a portion of our outstanding debt under two of our revolving credit facilities.

Norwegian Bond Issuance

In May 2012, we issued in the Norwegian bond market Norwegian Kroner (or NOK) 700 million in senior unsecured bonds that mature in May 2017 and bear interest at NIBOR plus a margin of 5.25%. The aggregate principal amount of the bonds is equivalent to approximately $125 million and we entered into a cross currency swap agreement to swap all interest and principal payments into U.S. Dollars, with the interest payments fixed at a rate of 6.88%. We used the proceeds of the bonds to prepay outstanding debt under our revolving credit facilities and for general corporate purposes. The bonds are listed on the Oslo Stock Exchange.

Maersk LNG Carriers

In 2011, we and the Marubeni Corporation (or Marubeni) entered into an agreement to acquire, through a joint venture, ownership interests in six LNG carriers from Denmark-based A.P. Moller-Maersk A/S (or Maersk) for an aggregate purchase price of approximately $1.3 billion. We and Marubeni have 52% and 48% economic interests, respectively, but share control of the joint venture, MALT LNG Holdings ApS (or the Teekay LNG-Marubeni Joint Venture), that we formed to acquire the LNG carriers. In February 2012, the Teekay LNG-Marubeni Joint Venture acquired a 100% interest in the six LNG carriers (or the MALT LNG Carriers). Four of the six MALT LNG Carriers are currently operating under long-term, fixed-rate time-charter contracts, with an average remaining firm contract period of approximately 17 years, plus extension options. The other two vessels are currently operating under medium-term, fixed-rate time-charters with an average remaining firm contract period of approximately four years. Since control of the Teekay LNG-Marubeni Joint Venture is shared jointly between Marubeni and us, we account for our investment in the Teekay LNG-Marubeni Joint Venture using the equity method.

The Teekay LNG-Marubeni Joint Venture financed approximately $1.06 billion of the purchase price for the MALT LNG Carriers with secured loan facilities, and $266 million from equity contributions from us and Marubeni Corporation. We agreed to guarantee our 52% share of the secured loan facilities of the Teekay LNG-Marubeni Joint Venture and as a result, deposited $30 million in a restricted cash account as security. Our 52% share of the equity contribution was approximately $138 million. We financed this equity contribution by drawing on our existing credit facilities. Subsidiaries of Teekay Corporation provide technical management of the acquired vessels.

 

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Important Financial and Operational Terms and Concepts

We use a variety of financial and operational terms and concepts when analyzing our performance. These include the following:

Voyage Revenues. Voyage revenues currently include revenues from charters accounted for under operating and direct financing leases. Voyage revenues are affected by hire rates and the number of calendar-ship-days a vessel operates. Voyage revenues are also affected by the mix of business between time and voyage charters. Hire rates for voyage charters are more volatile, as they are typically tied to prevailing market rates at the time of a voyage.

Voyage Expenses. Voyage expenses are all expenses unique to a particular voyage, including any bunker fuel expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and commissions. Voyage expenses are typically paid by the customer under charters and by us under voyage charters.

Net Voyage Revenues. Net voyage revenues represent voyage revenues less voyage expenses. Because the amount of voyage expenses we incur for a particular charter depends upon the type of the charter, we use net voyage revenues to improve the comparability between periods of reported revenues that are generated by the different types of charters. We principally use net voyage revenues, a non-GAAP financial measure, because it provides more meaningful information to us about the deployment of our vessels and their performance than voyage revenues, the most directly comparable financial measure under GAAP.

Vessel Operating Expenses. Under all types of charters and contracts for our vessels, except for bareboat charters, we are responsible for vessel operating expenses, which include crewing, repairs and maintenance, insurance, stores, lube oils and communication expenses. The two largest components of our vessel operating expenses are crew costs and repairs and maintenance. We expect these expenses to increase as our fleet matures and to the extent that it expands.

Income from Vessel Operations. To assist us in evaluating our operations by segment, we sometimes analyze the income we receive from each segment after deducting operating expenses, but prior to the deduction of interest expense, taxes, foreign currency and derivative gains or losses and other income (expense). For more information, please read Item 18 – Financial Statements: Note 5 –Segment Reporting.

Dry docking. We must periodically dry dock each of our vessels for inspection, repairs and maintenance and any modifications required to comply with industry certification or governmental requirements. Generally, we dry dock each of our vessels every two and a half to five years, depending upon the type of vessel and its age. In addition, a shipping society classification intermediate survey is performed on our LNG carriers between the second and third year of a five-year dry-docking period. We capitalize a substantial portion of the costs incurred during dry docking and for the survey and amortize those costs on a straight-line basis from the completion of a dry docking or intermediate survey over the estimated useful life of the dry dock. We expense as incurred costs for routine repairs and maintenance performed during dry docking or intermediate survey that do not improve or extend the useful lives of the assets. The number of dry dockings undertaken in a given period and the nature of the work performed determine the level of dry-docking expenditures.

Depreciation and Amortization. Our depreciation and amortization expense typically consists of the following three components:

 

   

charges related to the depreciation of the historical cost of our fleet (less an estimated residual value) over the estimated useful lives of our vessels;

 

   

charges related to the amortization of dry-docking expenditures over the useful life of the dry dock; and

 

   

charges related to the amortization of the fair value of the time-charters acquired in a 2004 acquisition of LNG carriers (over the expected remaining terms of the charters).

Revenue Days. Revenue days are the total number of calendar days our vessels were in our possession during a period less the total number of off-hire days during the period associated with major repairs, dry dockings or special or intermediate surveys. Consequently, revenue days represents the total number of days available for the vessel to earn revenue. Idle days, which are days when the vessel is available to earn revenue, yet is not employed, are included in revenue days. We use revenue days to explain changes in our net voyage revenues between periods.

Calendar-Ship-Days. Calendar-ship-days are equal to the total number of calendar days that our vessels were in our possession during a period. As a result, we use calendar-ship-days primarily in explaining changes in vessel operating expenses and depreciation and amortization.

Utilization. Utilization is an indicator of the use of our fleet during a given period, and is determined by dividing our revenue days by our calendar-ship-days for the period.

Restricted Cash Deposits. Under capital lease arrangements for three of our LNG carriers, we (a) borrowed under term loans and deposited the proceeds into restricted cash accounts and (b) entered into capital leases, also referred to as “bareboat charters,” for the vessels. The restricted cash deposits, together with interest earned on the deposits, will equal the remaining amounts we owe under the lease arrangements, including our obligation to purchase the vessels at the end of the lease terms, where applicable. During 2012 and in connection with the acquisition of the MALT LNG Carriers, the Teekay LNG-Marubeni Joint Venture borrowed under an 18-month bridge loan which provided that we maintain a minimum of $30.0 million in restricted cash on deposit until maturity in August 2013. For more information, please read Item 18 – Financial Statements: Note 6 – Leases and Restricted Cash.

 

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RESULTS OF OPERATIONS

Items You Should Consider When Evaluating Our Results of Operations

Some factors that have affected our historical financial performance and may affect our future performance are listed below:

 

   

The amount and timing of dry docking of our vessels can significantly affect our revenues between periods. Our vessels are off-hire at various points of time due to scheduled and unscheduled maintenance. During the years ended December 31, 2012, 2011 and 2010, we had 23, 133 and 197 off-hire days relating to dry docking, respectively. The financial impact from these periods of off-hire, if material, is explained in further detail below. Five vessels, where there will be associated off-hire, are scheduled for dry docking in 2013.

 

   

The size of our fleet changes. Our historical results of operations reflect changes in the size and composition of our fleet due to certain vessel deliveries. Please read “Liquefied Gas Segment” below and “Significant Developments in 2012 and Early 2013” above for further details about certain prior and future vessel deliveries.

 

   

Vessel operating and other costs are facing industry-wide cost pressures. The shipping industry continues to experience a global manpower shortage of qualified seafarers due to growth in the world fleet, which in recent years has resulted in upward pressure on manning costs. Lately, the gap between demand and supply of officers has narrowed, which has allowed at least on a temporary basis, for wages in certain sectors to stabilize or have smaller increases than has previously been the case. Going forward, there may be increases in crew compensation as vessel and officer supply dynamics continue to change. In addition, factors such as pressure on commodity and raw material prices, as well as changes in regulatory requirements could also contribute to operating expenditure increases. We continue to take action aimed at improving operational efficiencies, and to temper the effect of inflationary and other price escalations, however increases to operational costs are still likely to occur in the future.

 

   

Our financial results are affected by fluctuations in the fair value of our derivative instruments. The change in fair value of our derivative instruments is included in our net income as our derivative instruments are not designated as hedges for accounting purposes. These changes may fluctuate significantly as interest rates and spot tanker rates fluctuate relating to our interest rate swaps and to the agreement we have with Teekay Corporation relating to the time charter contract for the Toledo Spirit Suezmax tanker. Please read Item 18 – Financial Statements: Note 12(e) – Related Party Transactions and Note 13 – Derivative Instruments. The unrealized gains or losses relating to changes in fair value of our derivative instruments do not impact our cash flows.

 

   

Our financial results are affected by fluctuations in currency exchange rates. Under GAAP, all foreign currency-denominated monetary assets and liabilities (including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, unearned revenue, advances from affiliates, obligations under capital lease and long-term debt) are revalued and reported based on the prevailing exchange rate at the end of the period. These foreign currency translations fluctuate based on the strength of the U.S. Dollar relative mainly to the Euro and NOK and are included in our results of operations. The translation of all foreign currency-denominated monetary assets and liabilities at each reporting date results in unrealized foreign currency exchange gains or losses but do not impact our cash flows.

 

   

Six of our Suezmax tankers earn revenues based partly on spot market rates. The time-charter contracts for six of our Suezmax tankers contain a component providing for additional revenues to us beyond the fixed-hire rate when spot market rates exceed certain threshold amounts. Accordingly, even though declining spot market rates will not result in our receiving less than the fixed-hire rate, our results of operations and cash flow from operations will be influenced, by the variable component of the charters in periods where the spot market rates exceed the threshold amounts.

 

   

Our financial results reflect the results of the interests in vessels acquired from Teekay Corporation for all periods the vessels were under common control. In March 2010, we acquired interests in two Suezmax vessels, the Bermuda Spirit and the Hamilton Spirit (collectively, the Centrofin Suezmaxes), and a Handymax product tanker, the Alexander Spirit, from Teekay Corporation. These transactions were deemed to be business acquisitions between entities under common control. Accordingly, we have accounted for these transactions in a manner similar to the pooling of interest method whereby our financial statements prior to the date these vessels were acquired by us are retroactively adjusted to include the results of these acquired vessels. The periods retroactively adjusted include all periods that we and the acquired vessels were both under common control of Teekay Corporation and had begun operations. As a result, our financial statements reflect these vessels and their results of operations (referred to herein as the Dropdown Predecessor) as if we had acquired them when each respective vessel began operations under the ownership of Teekay Corporation, which were May 27, 2009 (Bermuda Spirit), June 24, 2009 (Hamilton Spirit) and September 3, 2009 (Alexander Spirit).

 

   

Our financial results reflect the consolidation of the Skaugen Multigas Carriers prior to our purchase of interests in those entities that own those vessels. In July 2008, the Skaugen Multigas Subsidiaries signed contracts for the purchase of the two Skaugen Multigas Carriers from subsidiaries of Skaugen. As described below, we had agreed to acquire the Skaugen Multigas Subsidiaries that own the Skaugen Multigas Carriers from Teekay Corporation upon delivery of the vessels. After July 2008 and before the delivery of the vessels, we consolidated the Skaugen Multigas Subsidiaries as they were variable interest entities and we were the primary beneficiary during this period. We acquired 100% of the shares of the two Skaugen Multigas Carriers on June 15, 2011 and October 17, 2011, respectively. Please read Item 18 – Financial Statements: Notes 12(f) – Related Party Transactions and Note  14(a) – Commitments and Contingencies.

Year Ended December 31, 2012 versus Year Ended December 31, 2011

Liquefied Gas Segment

As of December 31, 2012, our liquefied gas segment fleet (in which our interests ranged from 33% to 100%) included 27 LNG carriers and five LPG/Multigas carriers. Our partial interests in LNG carriers included our 33% interest in the four Angola LNG Carriers, our 40% interest in Teekay Nakilat (III) Corporation, which owns the four RasGas 3 LNG Carriers, our 50% interest in our joint ventures with Exmar NV (or the Excalibur and

 

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Excelsior Joint Venture), which own two LNG carriers (or the Excalibur and Excelsior LNG Carriers), our 52% interest in the Teekay LNG-Marubeni Joint Venture, which owns the six MALT LNG Carriers, our 69% interest in the Teekay Tangguh Joint Venture (or Teekay BLT Corporation), which owns the Tangguh Hiri and the Tangguh Sago (or the Tangguh LNG Carriers), our 70% interest in Teekay Nakilat Corporation (or Teekay Nakilat), which is the lessee under 30-year capital lease arrangements relating to three LNG carriers (or the RasGas II LNG Carriers), our 99% interest in the Arctic Spirit and Polar Spirit LNG carriers (or the Kenai LNG Carriers) and our 99% interest in five LPG/Multigas carriers. The table below only includes 11 LNG carriers and five LPG carriers because it excludes the six MALT LNG Carriers, the four Angola LNG Carriers, the four RasGas 3 LNG Carriers and the Excalibur and Excelsior LNG Carriers, which are all accounted for under the equity method.

The following table compares our liquefied gas segment’s operating results for 2012 and 2011, and compares its net voyage revenues (which is a non-GAAP financial measure) for 2012 and 2011, to voyage revenues, the most directly comparable GAAP financial measure. The following table also provides a summary of the changes in calendar-ship-days and revenue days for our liquefied gas segment:

 

(in thousands of U.S. Dollars, except revenue days, calendar-ship-days and percentages)    Year Ended December 31,        
   2012     2011     % Change  

Voyage revenues

     278,511       269,408       3.4  

Voyage expenses (recoveries)

     66       (87     175.9  
  

 

 

   

 

 

   

 

 

 

Net voyage revenues

     278,445       269,495       3.3  

Vessel operating expenses

     45,816       47,773       (4.1

Depreciation and amortization

     69,064       62,889       9.8  

General and administrative (1)

     17,532       13,385       31.0  
  

 

 

   

 

 

   

 

 

 

Income from vessel operations

     146,033       145,448       0.4  
  

 

 

   

 

 

   

 

 

 

Operating Data:

      

Revenue Days (A)

     5,833       5,061       15.3  

Calendar-Ship-Days (B)

     5,856       5,126       14.2  

Utilization (A)/(B)

     99.6     98.7  

 

(1)

Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to each segment based on estimated use of resources).

Our liquefied gas segment’s total calendar-ship-days increased by 14% to 5,856 days in 2012 from 5,126 days in 2011, as a result of the delivery of two multigas carriers, the Norgas Unikum and Norgas Vision, on June 15, 2011 and October 17, 2011, respectively, and the delivery of an LPG carrier, the Norgas Camilla, on September 15, 2011.

During 2012, the Hispania Spirit was off-hire for approximately 21 days relating to a scheduled dry docking, compared to two LNG carriers off-hire for 61 days relating to scheduled dry dockings in 2011.

Net Voyage Revenues. Net voyage revenues increased during 2012 compared to 2011, primarily as a result of:

 

   

an increase of $9.8 million due to the deliveries of the Norgas Unikum, Norgas Camilla and Norgas Vision in 2011;

 

   

an increase of $3.2 million due to the Arctic Spirit and Polar Spirit being off-hire for 11 days and 50 days, respectively, in 2011 for scheduled dry dockings;

 

   

an increase of $1.6 million due to operating expense recovery adjustments under charter provisions and increases in the charter-hire rates for the Tangguh Hiri and Tangguh Sago at the beginning of 2012; and

 

   

an increase of $0.8 million due to one additional calendar day during 2012;

partially offset by

 

   

a decrease of $4.2 million due to the effect on our Euro-denominated revenues from the weakening of the Euro against the U.S. Dollar in 2012 compared to 2011;

 

   

a decrease of $1.4 million due to the Hispania Spirit being off-hire for 21 days in the second quarter of 2012 for a scheduled dry docking;

 

   

a decrease of $0.8 million due to a decrease in the hire rates for the Arctic Spirit and Polar Spirit as a result of crewing rate adjustments; and

 

   

a net decrease of $0.5 million relating to payments in 2012 and 2011 for delaying the scheduled dry docking of the Galicia Spirit in 2012 and the Catalunya Spirit in 2011.

Vessel Operating Expenses. Vessel operating expenses decreased during 2012 compared to 2011, primarily as a result of:

 

   

a decrease of $1.5 million primarily due to the effect on our Euro-denominated crew manning expenses from the weakening of the Euro against the U.S. Dollar during 2012 compared to 2011 (a portion of our vessel operating expenses are denominated in Euros, which is primarily due to the nationality of our crew); and

 

   

a decrease of $0.9 million due to the cancellation of loss of hire insurance on the Tangguh Hiri and Tangguh Sago in the third quarter of 2011 and lower insurance premiums on certain LNG carriers.

 

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Depreciation and Amortization. Depreciation and amortization increased during 2012 compared to 2011, primarily as a result of:

 

   

an increase of $3.3 million as a result of amortization of dry-dock expenditures incurred in 2011 and the first and second quarters of 2012; and

 

   

an increase $2.9 million due to the deliveries of the Norgas Unikum, Norgas Camilla and Norgas Vision in 2011.

Conventional Tanker Segment

As at December 31, 2012, our fleet included ten Suezmax-class double-hulled conventional crude oil tankers and one Handymax product tanker. All of our conventional tankers operate under long-term, fixed-rate time-charters. The Bermuda Spirit’s and Hamilton Spirit’s time-charter contracts were amended in the fourth quarter of 2012 to reduce the daily hire rate on each vessel by $12,000 for a duration of 24 months, commencing October 1, 2012. Consequently, our future revenue, earnings and cash flow will be negatively impacted. However, during this renegotiated period, if Suezmax tanker spot rates exceed the renegotiated charter rate, the charterer will pay us the excess amount up to a maximum of the original charter rate.

In addition, the time-charter contracts for three of the five Suezmax tankers on charter to CEPSA have cancellation options first exercisable in August 2013, November 2013 and April 2014, respectively. While we have not received official notification of termination, we expect the charterer to exercise these options and the vessels to be sold to a third party. Excluding the impact of the impairment loss on these vessels, the impact on our net income will not be materially affected if this termination occurs. During the fourth quarter of 2012, we determined that these vessels were impaired and consequently we recognized an impairment loss in the amount of $29.4 million. Please read Item 18 – Financial Statements: Note 20 – Write Down of Vessels.

The following table compares our conventional tanker segment’s operating results for the years ended December 31, 2012 and 2011, and compares its net voyage revenues (which is a non-GAAP financial measure) for the years ended December 31, 2012 and 2011 to voyage revenues, the most directly comparable GAAP financial measure. The following table also provides a summary of the changes in calendar-ship-days and revenue days for our conventional tanker segment:

 

(in thousands of U.S. Dollars, except revenue days, calendar-ship-days and percentages)    Year Ended December 31,        
   2012     2011     % Change  

Voyage revenues

     113,740       110,567       2.9  

Voyage expenses

     1,706       1,474       15.7  
  

 

 

   

 

 

   

 

 

 

Net voyage revenues

     112,034       109,093       2.7  

Vessel operating expenses

     40,531       41,273       (1.8

Depreciation and amortization

     30,761       29,030       6.0  

General and administrative (1)

     9,617       10,735       (10.4

Write down of vessels

     29,367       —         100.0  
  

 

 

   

 

 

   

 

 

 

Income from vessel operations

     1,758       28,055       (93.7
  

 

 

   

 

 

   

 

 

 

Operating Data:

      

Revenue Days (A)

     4,026       3,941       2.2  

Calendar-Ship-Days (B)

     4,026       4,015       0.3  

Utilization (A)/(B)

     100.0     98.2  

 

(1)

Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to each segment based on estimated use of corporate resources).

Net Voyage Revenues. Net voyage revenues increased during 2012 compared to 2011, primarily as a result of:

 

   

an increase of $2.4 million due to adjustments to the daily charter rates based on inflation and an increase in interest rates in accordance with the time-charter contracts for five Suezmax tankers (however, under the terms of the related capital leases, we had corresponding increases in our lease payments, which are reflected as increases to interest expense; therefore, these and future similar interest rate adjustments do not affect our cash flow or net income);

 

   

an increase of $1.7 million due to the Huelva Spirit being off-hire for 72 days in 2011 for a scheduled dry dock; and

 

   

an increase of $0.5 million relating to the Alexander Spirit for crew manning adjustments in the charter-hire rates; the crew manning adjustments increased due to higher crewing costs and the strengthening of the Australian Dollar against the U.S. Dollar compared to 2011;

 

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partially offset by

 

   

a decrease of $1.0 million relating to lower revenues earned by the Toledo Spirit relating to the agreement between us and CEPSA for the Toledo Spirit time-charter contract (however, we had a corresponding increase in our realized gain on a related derivative with Teekay Corporation; therefore this decrease and future decreases or increases related to this agreement did not and will not affect our cash flow or net income); and

 

   

a decrease of $0.7 million relating to the reduced charter rates on the Bermuda Spirit and Hamilton Spirit, commencing in the fourth quarter of 2012.

Vessel Operating Expenses. Vessel operating expenses decreased during 2012 compared to 2011, primarily as a result of a decrease of $1.0 million due to the effect on our Euro-denominated crew manning expenses from the weakening of the Euro against the U.S. Dollar during 2012 compared to 2011 (a portion of our vessel operating expenses are denominated in Euros, which is primarily due to the nationality of our crew).

Depreciation and Amortization. Depreciation and amortization increased during 2012 compared to 2011, as a result of:

 

   

an increase of $1.2 million due to the accelerated amortization of the intangible assets relating to the charter contracts of five Suezmax tankers as we expect the life of these intangible assets will be shorter than originally assumed; and

 

   

an increase of $0.5 million due to a full year of amortization of dry-dock expenditures incurred in 2011.

Write down of Vessels. Write down of vessels was $29.4 million for the year ended December 31, 2012, resulting from impairment of three Suezmax tankers on charter to CEPSA.

Other Operating Results

General and Administrative Expenses. General and administrative expenses increased 13% to $27.1 million for 2012, from $24.1 million for 2011, primarily as a result of:

 

   

an increase $3.0 million primarily as a result of an agreement executed with Teekay Corporation for business development services as of January 2012; and

 

   

an increase of $0.7 million as a result of a one-time procurement fee received in 2009 being fully amortized by the end of the first quarter of 2012;

partially offset by

 

   

a decrease of $0.9 million relating to the one-time management fee charged to us by Teekay Corporation in the first quarter of 2011, associated with the portion of stock-based compensation grants to Teekay Corporation’s former Chief Executive Officer that had not yet vested prior to the date of his retirement.

The general and administrative expenses for our Liquefied Gas segment increased whereas general and administrative expenses decreased for our Conventional Tanker segment in 2012 as compared to 2011 as a result of our growth in the liquefied gas market, including our equity accounted joint ventures, over 2012, which requires a higher level of administrative support.

Equity Income. Equity income was $78.9 million for 2012, compared to $20.6 million for 2011, primarily as a result of:

 

   

an increase of $40.2 million due to the acquisition of a 52% ownership interest in the six MALT LNG Carriers in February 2012;

 

   

an increase of $11.4 million due to an unrealized gain on derivative instruments in 2012 compared to an unrealized loss on derivatives in 2011 in our 40% investment in Teekay Nakilat (III) Corporation and our 33% investment in the Angola LNG Project; and

 

   

an increase of $8.7 million due to our 33% investment in the Angola LNG Project that we acquired upon delivery of the four Angola LNG Carriers in the third and fourth quarters of 2011 and the first quarter of 2012;

partially offset by

 

   

a decrease of $2.2 million mainly due to a provision for our customer’s claim relating to the Excalibur and Excelsior LNG carriers in 2012.

Interest Expense. Interest expense increased to $54.2 million for 2012, from $49.9 million for 2011. Interest expense primarily reflects interest incurred on our capital lease obligations and long-term debt. This increase was primarily the result of:

 

   

an increase of $6.0 million as a result of the NOK bond issuance in May 2012;

 

   

an increase of $3.1 million as a result of refinancing one of our debt facilities with a higher margin than the previous debt facility;

 

   

an increase of $2.3 million due to an increase in our borrowings upon our acquisitions of three LPG/Multigas vessels during the second, third and fourth quarters of 2011;

 

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an increase of $1.2 million due to increased LIBOR and a higher principal debt balance due to draws on an existing debt facility during 2012; and

 

   

an increase of $0.6 million due to an interest rate adjustment on our five Suezmax tanker capital lease obligations (however, as described above, under the terms of the time-charter contracts for these vessels, we have a corresponding increase in charter receipts, which are reflected as an increase to voyage revenues);

partially offset by

 

   

a decrease of $5.1 million due to the maturity of the Madrid Spirit capital lease in the fourth quarter of 2011 (the Madrid Spirit was financed pursuant to a Spanish tax lease arrangement, under which we borrowed under a term loan and deposited the proceeds into a restricted cash account and entered into a capital lease for the vessel; as a result, this decrease in interest expense from the capital lease is offset by a corresponding decrease in the interest income from restricted cash); and

 

   

a decrease of $4.0 million due to lower EURIBOR relating to Euro-denominated debt.

Interest Income. Interest income decreased to $3.5 million in 2012, from $6.7 million for 2011. These changes were primarily the result of:

 

   

a decrease of $4.4 million due to the repayment of the capital lease on one of our LNG carriers, the Madrid Spirit, during the fourth quarter of 2011, which was funded from restricted cash;

partially offset by

 

   

an increase of $1.2 million due to increased LIBOR and restricted cash deposits during 2012 primarily relating to a $30.0 million security deposit associated with the debt facility for the MALT LNG Carriers.

Realized and Unrealized Loss on Derivative Instruments. Net realized and unrealized losses on derivative instruments decreased to a loss of ($29.6) million for 2012, from a loss of ($63.0) million for 2011 as set forth in the table below.

 

     Year Ended     Year Ended  
     December 31, 2012     December 31, 2011  
     Realized
gains
(losses)
    Unrealized
gains
(losses)
     Total     Realized
gains
(losses)
    Unrealized
gains
(losses)
    Total  
               
(in thousands of U.S. Dollars)              

Interest rate swap agreements

     (37,427     5,200        (32,227     (62,660     (9,677     (72,337

Toledo Spirit time-charter derivative

     907       1,700        2,607       (93     9,400       9,307  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     (36,520     6,900        (29,620     (62,753     (277     (63,030
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

As at December 31, 2012 and 2011, we had interest rate swap agreements with an aggregate average net outstanding notional amount of approximately $902.9 million and $948.6 million, respectively, with average fixed rates of 4.6% and 4.8%, respectively. The decreases in realized losses from 2011 to 2012 relating to our interest rate swaps were primarily due to the settlement of our interest rate swaps relating to the debt on the Madrid Spirit for $22.6 million in 2011 and higher short-term variable benchmark interest rates in 2012 compared to 2011.

During 2012, we recognized an unrealized gain on our interest rate swaps associated with our U.S. Dollar-denominated long-term debt and capital leases. The net unrealized gain resulted from the transfer of $49.2 million of previously recognized unrealized losses to realized losses related to actual cash settlements, offset by an incremental $34.4 million of unrealized losses relating to further declines in long-term LIBOR benchmark interest rates relative to the prior year. Long-term LIBOR benchmark interest rates declined during 2011; which resulted in us incurring an unrealized loss of $154.1 million from our U.S. Dollar-denominated long-term debt and capital leases. The net unrealized loss was partially offset by a $51.8 million unrealized gain resulting from interest rate swaps settlements made during the year.

Long-term EURIBOR benchmark interest rates declined during 2012 and 2011, which resulted in us incurring unrealized losses of $15.5 million and $0.4 million, respectively, from our interest rates swaps associated with our Euro-denominated long-term debt.

Long-term LIBOR benchmark interest rates declined during 2012 and 2011, which resulted in us recognizing unrealized gains of $5.9 million and $93.0 million from our interest rate swaps associated with our restricted cash deposits, respectively.

The projected average tanker rates in the tanker market in 2012 decreased compared to 2011, which resulted in a $1.7 million unrealized gain on our Toledo Spirit time-charter derivative. The Toledo Spirit time-charter derivative is the agreement with Teekay Corporation under which Teekay Corporation pays us any amounts payable to the charterer of the Toledo Spirit as a result of spot rates being below the fixed rate, and we pay Teekay Corporation any amounts payable to us by the charterer of the Toledo Spirit as a result of spot rates being in excess of the fixed rate (see Item 18 - Financial Statements: Note 13 - Derivative Instruments).

Foreign Currency Exchange (Losses) Gains. Foreign currency exchange (losses) gains were ($8.2) million and $10.3 million for 2012 and 2011, respectively. These foreign currency exchange (losses) gains, substantially all of which were unrealized, are due primarily to the relevant period-end revaluation of our NOK-denominated debt and our Euro-denominated term loans, capital leases and restricted cash for financial reporting purposes and the realized and unrealized (losses) gains on our cross currency swap. Losses on NOK-denominated and Euro-denominated monetary liabilities reflect a weaker U.S. Dollar against the NOK and Euro on the date of revaluation or settlement compared to the rate in effect at the beginning of the period. Gains on NOK-denominated and Euro-denominated monetary liabilities reflect a stronger U.S. Dollar against the NOK and Euro on the date of revaluation or settlement compared to the rate in effect at the beginning of the period.

 

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For 2012, foreign currency exchange losses include realized gains of $0.3 million and unrealized losses of $2.7 million on our cross currency swap and unrealized losses of $0.8 million on the revaluation of our NOK-denominated debt. For 2012, foreign currency exchange (losses) gains also include the revaluation of our Euro-denominated restricted cash, debt and capital leases resulting in an unrealized loss of ($4.7) million as compared to an unrealized gain of $10.5 million for 2011.

Other Income (Expense). Other income (expense) increased to $1.7 million for 2012 from ($0.1) million in 2011, primarily as a result of:

 

   

an increase of $0.8 million due to the amortization of a guarantee liability related to the acquisition of the six MALT LNG Carriers in February 2012; and

 

   

an increase of $0.5 million due to an insurance settlement relating to a 2011 claim on the LNG carrier Algeciras Spirit.

Year Ended December 31, 2011 versus Year Ended December 31, 2010

Liquefied Gas Segment

As at December 31, 2011, our fleet (in which our interests ranged from 33% to 100%) included 20 LNG carriers and five LPG/Multigas carriers. Our partial interests in LNG carriers included our 33% interest in three of the Angola LNG Carriers, our 40% interest in Teekay Nakilat (III) Corporation, which owns the four RasGas 3 LNG Carriers, our 50% interest in the Excalibur and Excelsior Joint Ventures, which own the two Excalibur and Excelsior LNG Carriers, our 69% interest in Teekay Tangguh Joint Venture, which owns the two Tangguh LNG Carriers, our 70% interest in Teekay Nakilat, which is the lessee under 30-year capital lease arrangements relating to the three RasGas II LNG Carriers, our 99% interest in the two Kenai LNG Carriers and our 99% interest in five LPG/Multigas carriers.

The following table compares our liquefied gas segment’s operating results for 2011 and 2010, and compares its net voyage revenues (which is a non-GAAP financial measure) for 2011 and 2010, to voyage revenues, the most directly comparable GAAP financial measure. The following table also provides a summary of the changes in calendar-ship-days and revenue days for our liquefied gas segment:

 

(in thousands of U.S. Dollars, except revenue days,    Year Ended December 31,     % Change  
calendar-ship-days and percentages)    2011     2010    

Voyage revenues

     269,408       264,816       1.7  

Voyage (recoveries) expenses

     (87     29       (400.0
  

 

 

   

 

 

   

 

 

 

Net voyage revenues

     269,495       264,787       1.8  

Vessel operating expenses

     47,773       46,496       2.7  

Depreciation and amortization

     62,889       60,954       3.2  

General and administrative (1)

     13,385       12,239       9.4  

Gain on sale of vessel

     —         (4,340     100.0  
  

 

 

   

 

 

   

 

 

 

Income from vessel operations

     145,448       149,438       (2.7
  

 

 

   

 

 

   

 

 

 

Operating Data:

      

Revenue Days (A)

     5,061       5,005       1.1  

Calendar-Ship-Days (B)

     5,126       5,051       1.5  

Utilization (A)/(B)

     98.7     99.1  

 

(1)

Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to each segment based on estimated use of resources).

Our liquefied gas segment’s operating results for 2011 included 11 LNG and five LPG carriers (but exclude the three Angola LNG Carriers, the four RasGas 3 LNG Carriers and the Excalibur and Excelsior LNG Carriers that are accounted for under the equity method). Our total calendar-ship-days increased by 1% to 5,126 days in 2011 from 5,051 days in 2010, as a result of the delivery of two Skaugen Multigas Carriers, the Norgas Unikum and Norgas Vision, on June 15, 2011 and October 17, 2011, respectively, and the delivery of an LPG carrier, the Norgas Camilla, on September 15, 2011, partially offset by the sale of an LPG carrier, the Dania Spirit, on November 5, 2010.

During 2011, two of our LNG carriers, the Arctic Spirit and Polar Spirit, were off-hire for approximately 11 days and 50 days, respectively, relating to scheduled dry dockings, compared to 22 off-hire days in 2010.

Net Voyage Revenues. Net voyage revenues increased during 2011 compared to 2010, primarily as a result of:

 

 

an increase of $5.3 million due to the deliveries of the Norgas Unikum, Norgas Camilla and Norgas Vision on June 15, 2011, September 15, 2011 and October 17, 2011, respectively;

 

 

an increase of $4.1 million due to the effect on our Euro-denominated revenues from the strengthening of the Euro against the U.S. Dollar compared to the prior year;

 

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an increase of $1.1 million due to the Arctic Spirit being off-hire for 22 days in the first quarter of 2010 for a scheduled dry dock;

 

 

an increase of $0.9 million, due to operating expense recovery adjustments during 2011 in the charter-hire rates for the Tangguh LNG Carriers; and

 

 

an increase of $0.6 million due to an increase in the hire rates for the Arctic Spirit and Polar Spirit during 2011 as compared to prior year as a result of crewing rate adjustments;

partially offset by

 

 

a decrease of $4.0 million due to the sale of the Dania Spirit on November 5, 2010; and

 

 

a decrease of $3.2 million due to the Arctic Spirit and Polar Spirit being off-hire for 11 days and 50 days, respectively, for scheduled dry dockings during 2011.

Vessel Operating Expenses. Vessel operating expenses increased during 2011 compared to 2010, primarily as a result of:

 

 

an increase of $2.9 million due to the scope and extent of service and maintenance activities performed and an increase in manning costs for certain of our LNG carriers;

 

 

an increase of $0.8 million due to the charterer, Teekay Corporation, not being able to find employment for the Arctic Spirit for most of 2010 and, as a result, we were able to operate the vessel throughout 2010 with a reduced average number of crew on board and reduction in the amount of repair and maintenance activities performed; and

 

 

an increase of $0.7 million due to the effect on our Euro-denominated crew manning expenses from the strengthening of the Euro against the U.S. Dollar during 2011 compared to 2010 (a portion of our vessel operating expenses are denominated in Euros, which is primarily due to the nationality of our crew);

partially offset by

 

 

a decrease of $2.3 million due to the sale of the Dania Spirit on November 5, 2010; and

 

 

a decrease of $1.0 million due to lower insurance rates upon renewal in 2011.

Depreciation and Amortization. Depreciation and amortization increased during 2011 compared to 2010, primarily as a result of:

 

 

an increase of $1.5 million due to the deliveries of the Norgas Unikum, Norgas Camilla and Norgas Vision on June 15, 2011, September 15, 2011 and October 17, 2011; and

 

 

an increase of $1.2 million as a result of amortization of dry-dock expenditures incurred during 2011;

partially offset by

 

 

a decrease of $0.9 million due to the sale of the Dania Spirit on November 5, 2010.

Gain on sale of vessel. The $4.3 million gain on sale of vessel in 2010 relates to the sale of the Dania Spirit on November 5, 2010 for proceeds of $21.5 million.

Conventional Tanker Segment

As at December 31, 2011, our fleet included ten Suezmax-class double-hulled conventional crude oil tankers and one Handymax product tanker. All of our conventional tankers operate under long-term, fixed-rate time-charters.

 

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The following table compares our conventional tanker segment’s operating results for the years ended December 31, 2011 and 2010, and compares its net voyage revenues (which is a non-GAAP financial measure) for the years ended December 31, 2011 and 2010 to voyage revenues, the most directly comparable GAAP financial measure. The following table also provides a summary of the changes in calendar-ship-days and revenue days for our conventional tanker segment:

 

(in thousands of U.S. Dollars, except revenue days,    Year Ended
December 31,
    % Change  
calendar-ship-days and percentages)    2011     2010    

Voyage revenues

     110,567       109,192       1.3  

Voyage expenses

     1,474       2,013       (26.8
  

 

 

   

 

 

   

 

 

 

Net voyage revenues

     109,093       107,179       1.8  

Vessel operating expenses

     41,273       38,081       8.4  

Depreciation and amortization

     29,030       28,393       2.2  

General and administrative (1)

     10,735       11,008       (2.5

Restructuring charge

     —         175       (100.0
  

 

 

   

 

 

   

 

 

 

Income from vessel operations

     28,055       29,522       (4.9
  

 

 

   

 

 

   

 

 

 

Operating Data:

      

Revenue Days (A)

     3,941       3,864       2.0  

Calendar-Ship-Days (B)

     4,015       4,015       —    

Utilization (A)/(B)

     98.2     96.2  

 

(1)

Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to each segment based on estimated use of corporate resources).

Net Voyage Revenues. Net voyage revenues increased during 2011 compared to 2010, primarily as a result of:

 

   

an increase of $3.8 million due to the Tenerife Spirit, Algeciras Spirit and Toledo Spirit being off-hire for 73, 63 and 15 days, respectively, during 2010 for scheduled dry dockings;

 

   

an increase of $2.2 million due to adjustments to the daily charter rates based on inflation and an increase in interest rates in accordance with the time-charter contracts for five Suezmax tankers (however, under the terms of these capital leases, we had corresponding increases in our lease payments, which are reflected as increases to interest expense; therefore, these and future similar interest rate adjustments did not and will not affect our cash flow or net income); and

 

   

increases of $1.0 million relating to crew manning adjustments in the charter-hire rates in order to recognize the foreign exchange impact on Australian-denominated crew manning expenses which flow through to the charterer; the crew manning adjustments increased due to the strengthening of the Australian Dollar against the U.S Dollar during 2011 compared to the prior year;

partially offset by

 

   

a decrease of $1.8 million as only a nominal amount of additional revenue was earned by the Toledo Spirit in 2011 compared to 2010, relating to the agreement between us and Teekay Corporation for the Toledo Spirit time-charter contract (however, we had a corresponding decrease in our realized loss on derivatives; therefore this increase and future increases or decreases related to this agreement did not and will not affect our cash flow or net income);

 

   

a decrease of $1.7 million due to the Huelva Spirit being off-hire for 72 days in the second quarter of 2011 for a scheduled dry dock; and

 

   

a decrease of $1.6 million as only a nominal amount of additional revenue was earned on the four Suezmax tankers, the Teide Spirit, Algeciras Spirit, Huelva Spirit and Tenerife Spirit in 2011 as market rates did not exceed the specified amounts under our time charter, as they did in 2010 (the time charter for the four Suezmax vessels contain a component providing for additional revenues to us beyond the fixed hire rate when spot market rates exceed threshold amounts).

Vessel Operating Expenses. Vessel operating expenses increased during 2011 compared to 2010, primarily as a result of:

 

   

an increase of $1.9 million due to the scope and extent of service and maintenance activities performed and an increase in manning costs for certain of our conventional tankers;

 

   

an increase of $1.0 million due to the effect on our Australian-denominated crew manning expenses from the strengthening of the Australian Dollar against the U.S Dollar during 2011 compared to the prior year (however, we had a corresponding increase in our net revenue as the foreign exchange impact on crew manning expenses flow through to the charterer); and

 

   

an increase of $0.8 million due to the effect on our Euro-denominated crew manning expenses from the strengthening of the Euro against the U.S. Dollar during 2011 compared to the prior year (a portion of our vessel operating expenses are denominated in Euros, which is primarily due to the nationality of our crew);

partially offset by

 

   

a decrease of $0.4 million due to lower insurance rates upon renewal in 2011.

 

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Depreciation and Amortization. Depreciation and amortization increased during 2011 compared to 2010, as a result of a full year of amortization of dry-dock expenditures incurred in the fourth quarter of 2010 and a partial year of amortization of dry-dock expenditures incurred in the second quarter of 2011.

Other Operating Results

General and Administrative Expenses. General and administrative expenses increased 4% to $24.1 million for 2011, from $23.2 million for 2010, primarily as a result of:

 

   

an increase of $0.9 million relating to the one-time management fee charged to us by Teekay Corporation associated with the portion of stock-based compensation grants to Teekay Corporation’s former Chief Executive Officer that had not yet vested prior to the date of his retirement on March 31, 2011;

 

   

an increase of $0.8 million related to a greater amount of corporate services provided to us by Teekay Corporation to support our growth;

 

   

an increase of $0.7 million related to a charge for depreciation of office wide systems allocated by Teekay Corporation, commencing in 2011; and

 

   

an increase of $0.6 due to more consulting fees incurred by us related to higher levels of business development activity in 2011;

partially offset by

 

   

a decrease of $2.0 million relating to a 2010 payment to Teekay Corporation for its support in successfully acquiring interests in the Excalibur and Excelsior Joint Ventures.

Interest Expense. Interest expense increased to $49.9 million for 2011, from $49.0 million for 2010. Interest expense primarily reflects interest incurred on our capital lease obligations and long-term debt. This increase was primarily the result of:

 

   

an increase of $2.8 million due to increased EURIBOR rates relating to Euro-denominated debt;

 

   

an increase of $1.2 million due to an interest rate adjustment on our five Suezmax tanker capital lease obligations (however, as described above, under the terms of the time-charter contracts for these vessels, we have a corresponding increase in charter receipts, which are reflected as an increase to voyage revenues); and

 

   

an increase of $0.8 million due to a draw on our Skaugen debt facilities upon delivery of vessels during the third and fourth quarters of 2011;

partially offset by

 

   

a decrease of $2.1 million due to principal debt repayments made during 2011 and decreases of the LIBOR rates relating to our variable-rate debt; and

 

   

a decrease of $1.8 million from the scheduled capital lease repayments on the LNG carrier Madrid Spirit (the Madrid Spirit was financed pursuant to a Spanish tax lease arrangement, under which we borrowed under a term loan and deposited the proceeds into a restricted cash account and entered into a capital lease for the vessel; as a result, this decrease in interest expense from the capital lease is offset by a corresponding decrease in the interest income from restricted cash). During the fourth quarter of 2011, the Madrid Spirit lease expired and the purchase obligation was fully funded with restricted cash deposits.

Interest Income. Interest income decreased to $6.7 million in 2011, from $7.2 million for 2010. Interest income primarily reflects interest earned on restricted cash deposits that approximate the present value of the remaining amounts we owe under lease arrangements on four of our LNG carriers. This decrease was primarily the result of scheduled capital lease repayments on one of our LNG carriers, the Madrid Spirit, which was funded from restricted cash.

Realized and Unrealized Loss on Derivative Instruments. Net realized and unrealized losses on derivative instruments decreased to a loss of ($63.0) million for 2011, from a loss of ($78.7) million for 2010 as set forth in the table below.

 

     Year Ended     Year Ended  
     December 31, 2011     December 31, 2010  
     Realized
gains
(losses)
    Unrealized
gains
(losses)
    Total     Realized
gains
(losses)
    Unrealized
gains
(losses)
    Total  
              
(in thousands of U.S. Dollars)             

Interest rate swap agreements

     (62,660     (9,677     (72,337     (42,495     (34,906     (77,401

Toledo Spirit time-charter derivative

     (93     9,400       9,307       (1,919     600       (1,319
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (62,753     (277     (63,030     (44,414     (34,306     (78,720
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During 2011 and 2010, we had interest rate swap agreements with an aggregate average net outstanding notional amount of approximately $948.6 million and $997.5 million, respectively, with average fixed rates of 4.8% and 4.9%, respectively. The increase in realized losses from 2010 to 2011 relating to our interest rate swaps was primarily due to the settlement of our interest rate swaps relating to the debt on the Madrid Spirit for $22.6 million, partially offset by higher short-term variable benchmark interest rates in 2011 compared to 2010.

 

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Long-term benchmark interest rates declined in 2011 and 2010, causing us to incur unrealized losses of $9.7 million and $34.9 million, respectively, for our interest rate swap agreements. Please see Item 5 - Operating and Financial Review and Prospects: Valuation of Derivative Instruments, which explains how our derivative instruments are valued, including the significant factors and uncertainties in determining the estimated fair value and why changes in these factors result in material variances in realized and unrealized (losses) gains on derivative instruments.

Spot rates in the tanker market declined in 2011 which resulted in an increase in an unrealized gain of $8.8 million relating to our Toledo Spirit time charter derivative. The Toledo Spirit time charter derivative is the agreement with Teekay Corporation under which Teekay Corporation pays us any amounts payable to the charterer of the Toledo Spirit as a result of spot rates being below the fixed rate, and we pay Teekay Corporation any amounts payable to us by the charterer of the Toledo Spirit as a result of spot rates being in excess of the fixed rate (see Item 18 - Financial Statements: Note 13 - Derivative Instruments).

Foreign Currency Exchange Gains. Foreign currency exchange gains were $10.3 million and $27.5 million for 2011 and 2010, respectively. These foreign currency exchange gains, substantially all of which were unrealized, are due primarily to the relevant period-end revaluation of our Euro-denominated term loans, capital leases and restricted cash for financial reporting purposes. Gains reflect a strengthening U.S. Dollar against the Euro on the date of revaluation. Losses reflect a weaker U.S. Dollar against the Euro on the date of revaluation.

Equity Income. Equity income was $20.6 million for 2011, compared to $8.0 million for 2010, primarily as a result of:

 

   

an increase of $9.3 million relating to a full year of equity income from our 50% investments in the Excalibur and Excelsior Joint Ventures that we acquired in November 2010;

 

   

an increase of $2.9 million due to a decrease in unrealized losses on derivative instruments for 2011 compared to the prior year in our 40% investment in Teekay Nakilat (III) Corporation;

 

   

an increase of $2.3 million relating to equity income from our 33% investment in the Angola LNG Project that we acquired upon delivery of three of the four Angola LNG Carriers in August, September and October 2011; and

 

   

an increase of $1.3 million relating to our 40% investment in Teekay Nakilat (III) Corporation primarily due to increased charter-hire rates on the four RasGas 3 LNG Carriers, lower interest expense as a result of debt repayments made during 2011 and lower LIBOR rates during 2011;

partially offset by

 

   

a decrease of $2.3 million relating to unrealized losses on derivatives within our 33% investment in the Angola LNG Project that we acquired upon delivery of three of the four Angola LNG Carriers in August, September and October 2011; and

 

   

a decrease of $0.9 million due to expenses incurred during 2011 relating to acquisition costs of our 52% investment in the Teekay LNG-Marubeni Joint Venture.

Liquidity and Cash Needs

Our business model is to employ our vessels on fixed-rate contracts with major oil companies, with original terms typically between 10 to 25 years. The operating cash flow our vessels generate each quarter, excluding a reserve for maintenance capital expenditures and debt repayments, are generally paid out to our unitholders within approximately 45 days after the end of each quarter. Our primary short-term liquidity needs are to pay these quarterly distributions on our outstanding units, payment of operating expenses, dry-docking expenditures, debt service costs and to fund general working capital requirements. We anticipate that our primary sources of funds for our short-term liquidity needs will be cash flows from operations.

Our long-term liquidity needs primarily relate to expansion and maintenance capital expenditures and debt repayment. Expansion capital expenditures primarily represent the purchase or construction of vessels to the extent the expenditures increase the operating capacity or revenue generated by our fleet, while maintenance capital expenditures primarily consist of dry-docking expenditures and expenditures to replace vessels in order to maintain the operating capacity or revenue generated by our fleet. Our primary sources of funds for our long-term liquidity needs are from cash from operations, long-term bank borrowings and other debt or equity financings, or a combination thereof. Consequently, our ability to continue to expand the size of our fleet is dependent upon our ability to obtain long-term bank borrowings and other debt, as well as raising equity.

Our revolving credit facilities and term loans are described in Item 18 – Financial Statements: Note 10 – Long-Term Debt. They contain covenants and other restrictions typical of debt financing secured by vessels, that restrict the ship-owning subsidiaries from: incurring or guaranteeing indebtedness; changing ownership or structure, including mergers, consolidations, liquidations and dissolutions; making dividends or distributions if we are in default; making capital expenditures in excess of specified levels; making certain negative pledges and granting certain liens; selling, transferring, assigning or conveying assets; making certain loans and investments; and entering into a new line of business. Certain of our revolving credit facilities and term loans require us to maintain financial covenants. If we do not meet these financial covenants, the lender may accelerate the repayment of the revolving credit facilities and term loans, thus having a significant impact our short-term liquidity requirements. As at December 31, 2012, we and our affiliates were in compliance with all covenants relating to our credit facilities and term loans.

As at December 31, 2012, our cash and cash equivalents were $113.6 million, compared to $93.6 million at December 31, 2011. Our total liquidity, which consists of cash, cash equivalents and undrawn medium-term credit facilities, was $495.0 million as at December 31, 2012, compared to $538.7 million as at December 31, 2011. The decrease in liquidity is primarily due to borrowings to fund the acquisition of the Teekay LNG-Marubeni Joint Venture in February 2012, the acquisition of our 33% interest in the fourth Angola LNG carrier, the first installment payment for two LNG newbuildings and an increase in restricted cash deposits; partially offset by $182.3 million resulting from an equity offering in September 2012 and an increase of $125.0 million resulting from our NOK 700 million Norwegian bond offering in May 2012.

 

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As of December 31, 2012, we had a working capital deficit of $71.9 million. The working capital includes a $70.3 million current lease obligation for five Suezmax tankers, under which the owner has the option to require us to purchase the vessels and under the charter contracts, the owner also has cancellation rights. For three of the five Suezmax tankers, the cancellation options are first exercisable in August 2013, November 2013 and April 2014, respectively. While we have not received notification of termination, we expect the charterer to exercise their cancellation rights and the vessels to be sold by the owner to a third party. Upon sale of the vessels, we will not be required to repay the capital lease obligations as the vessels under capital leases will be returned to the owner and the capital lease obligations will be concurrently extinguished.

We expect to manage the remaining working capital deficit primarily with net operating cash flow generated in 2013 and, to a lesser extent, existing undrawn revolving credit facilities. Please read Item 18 – Financial Statements: Note 14 – Commitments and Contingencies.

As described under “Item 4 — Information on the Company: C. Regulations — Other Environmental Initiatives,” passage of any climate control legislation or other regulatory initiatives that restrict emissions of greenhouse gases could have a significant financial and operational impact on our business, which we cannot predict with certainty at this time. Such regulatory measures could increase our costs related to operating and maintaining our vessels and require us to install new emission controls, acquire allowances or pay taxes related to our greenhouse gas emissions, or administer and manage a greenhouse gas emissions program. In addition, increased regulation of greenhouse gases may, in the long term, lead to reduced demand for oil and gas and reduced demand for our services.

Cash Flows. The following table summarizes our cash flow for the periods presented:

 

     Year Ended December 31,  
(in thousands of U.S. Dollars)    2012     2011     2010  

Net cash flow from operating activities

     192,013       122,046       174,970  

Net cash flow from (used for) financing activities

     30,374       7,174       (167,746

Net cash flow used for investing activities

     (202,437     (116,648     (34,519

Operating Cash Flows. Net cash flow from operating activities increased to $192.0 million in 2012 from $122.0 million in 2011, primarily due to fewer off-hire days relating to scheduled dry dockings in 2012 compared to 2011, a corresponding decrease in dry-docking expenditures in 2012 and lower net cash flows in 2011 due to the settlement of our interest rate swaps relating to the debt on the Madrid Spirit upon refinancing this debt. Net cash flow from operating activities decreased to $122.0 million in 2011 from $175.0 million in 2010, primarily due to the settlement of our interest rate swaps relating to the debt on the Madrid Spirit upon the refinancing of this debt, increased dry-docking expenditures related to scheduled dry dockings in 2011 and repayment of amounts owing to affiliates relating to operating activities, partially offset by higher operating cash flows related to the deliveries of the Norgas Unikum, Norgas Camilla and Norgas Vision in June, September and October 2011, respectively, and dividends we received during 2011 from our equity accounted investments. Net cash flow from operating activities depends upon the timing and amount of dry-docking expenditures, repairs and maintenance activity, vessel additions and dispositions on operating cash flows, foreign currency rates, changes in interest rates, timing of dividends from equity accounted investments, fluctuations in working capital balances and spot market hire rates (to the extent we have vessels operating in the spot tanker market or our hire rates are partially affected by spot market rates). The number of vessel dry dockings tends to vary each period.

Financing Cash Flows. Our investments in vessels and equipment are financed primarily with term loans, capital lease arrangements and proceeds from issuance of securities. Proceeds from long-term debt were $500.3 million, $600.9 million and $100.9 million, respectively, for 2012, 2011 and 2010. The proceeds from long-term debt for 2012 includes proceeds received from the issuance of our NOK 700 million senior unsecured bonds in May 2012. From time to time we refinance our loans and revolving credit facilities. During 2012, we primarily used the proceeds from long-term debt to fund the acquisition of our 52% interest in the six MALT LNG Carriers, to fund the first installment payment for two LNG newbuildings, to fund the acquisition of our 33% interest in the fourth Angola LNG Carrier, to prepay and repay outstanding debt under our revolving credit facilities and for general corporate purposes. During 2011, we refinanced the debt relating to the Madrid Spirit upon acquisition of the vessel when its capital lease ended. We also used the proceeds from long-term debt primarily to fund the acquisition of the first three Angola LNG Carriers, the acquisition of the two Skaugen Multigas Carriers and the last Skaugen LPG carrier. During 2010, we used proceeds from long-term debt primarily to fund a portion of the acquisition of the Centrofin Suezmaxes, the Alexander Spirit, and the Excelsior and Excalibur Joint Ventures.

On September 10, 2012, we completed a public offering of approximately 4.8 million common units at a price of $38.43 per unit, for net proceeds of $182.3 million. On November 2, 2011, we completed a public equity offering of approximately 5.5 million common units at a price of $33.40 per unit, for net proceeds of $179.5 million. On April 8, 2011, we completed a public equity offering of approximately 4.3 million common units at a price of $38.88 per unit, for net proceeds of $161.7 million. On July 15, 2010, we completed a direct equity placement of approximately 1.7 million common units at a price of $29.18 per unit, for net proceeds of approximately $50.9 million. All such amounts of proceeds include our general partners’ 2% contribution. Please read item 18 – Financial Statements: Note 16 – Total Capital and Net Income Per Unit.

Cash distributions paid during 2012 increased to $195.9 million from $159.4 million for the prior year. This increase was the result of:

 

   

an increase in the number of units eligible to receive the cash distribution as a result of the public equity offerings during 2012 and 2011; and

 

   

an increase in our quarterly distribution to $0.675 per unit from $0.63 per unit starting with the second quarter distribution in 2012.

 

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Cash distributions paid during 2011 increased to $159.4 million from $135.5 million for the prior year. This increase was the result of:

 

   

an increase in the number of units eligible to receive the cash distribution as a result of the public equity offerings during 2011 and 2010; and

 

   

an increase in our quarterly distribution to $0.63 per unit from $0.60 per unit starting with the first quarter distribution in 2011.

Subsequent to December 31, 2012, a cash distribution totaling $53.0 million was declared with respect to the fourth quarter of 2012, which was paid in February 2013.

Investing Cash Flows Net cash flow used in investing activities increased to $202.4 million in 2012 from $116.6 million in 2011, primarily due to $151.0 million (including working capital contribution and acquisition costs) to fund the acquisition of our 52% interest in the six MALT LNG Carriers, $38.6 million to fund the first installment payment for two LNG newbuildings and $19.1 million for our acquisition of a 33% interest in the fourth and last Angola LNG Carrier. During 2011, we incurred $64.7 million of capital expenditures for vessels and equipment. These expenditures represent construction payments for the two Skaugen Multigas Carrier newbuildings, the acquisition of the Norgas Camilla in September 2011 and capital modifications for certain of our vessels. In addition, during 2011 we used $57.3 million for the purchase of Teekay Corporation’s 33% ownership interest in three of the Angola LNG Carriers. During 2010, we incurred $26.7 million in expenditures for vessels and equipment. These expenditures represent construction payments for the two Skaugen Multigas Carrier newbuildings and capital modifications for certain of our vessels. Also during 2010, we received proceeds of $21.6 million from the sale of the Dania Spirit and used $35.2 million for the purchase of the Excelsior and Excalibur Joint Ventures.

Credit Facilities

Our revolving credit facilities and term loans are described in Item 18 – Financial Statements: Note 10 – Long-Term Debt. Our term loans and revolving credit facilities contain covenants and other restrictions typical of debt financing secured by vessels, including, among others, one or more of the following that restrict the ship-owning subsidiaries from:

 

   

incurring or guaranteeing indebtedness;

 

   

changing ownership or structure, including mergers, consolidations, liquidations and dissolutions;

 

   

making dividends or distributions if we are in default;

 

   

making capital expenditures in excess of specified levels;

 

   

making certain negative pledges and granting certain liens;

 

   

selling, transferring, assigning or conveying assets;

 

   

making certain loans and investments; and

 

   

entering into a new line of business.

Certain loan agreements require a) that minimum levels of tangible net worth and aggregate liquidity be maintained, b) that we maintain certain ratios of vessel values as it relates to the relevant outstanding loan principal balance, c) that we provide for a maximum level of leverage and d) one of our subsidiaries to maintain restricted cash deposits. Our ship-owning subsidiaries may not, among other things, pay dividends or distributions if we are in default under its term loans or revolving credit facilities. One of our 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 December 31, 2012, we and our affiliates were in compliance with all covenants relating to our credit facilities and capital leases.

We have two facilities that require us to maintain vessel value to outstanding loan principal balance ratios of 110% and 115%, respectively. As at December 31, 2012, we had vessel value to outstanding loan principal balance ratios of 164% and 157%, respectively. The vessel values are determined using reference to second-hand market comparables or using a depreciated replacement cost approach. Since vessel values can be volatile, our estimates of market value may not be indicative of either the current or future prices that could be obtained if the Partnership sold any of the vessels.

 

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Contractual Obligations and Contingencies

The following table summarizes our contractual obligations as at December 31, 2012:

 

     Total      2013      2014
and
2015
     2016
and
2017
     Beyond
2017
 
     (in millions of U.S. Dollars)  

U.S. Dollar-Denominated Obligations:

  

Long-term debt (1)

     946.2        71.7        180.2        147.6        546.7  

Commitments under capital leases (2)

     190.5        80.8        43.8        38.6        27.3  

Commitments under capital leases (3)

     977.1        24.0        48.0        48.0        857.1  

Commitments under operating leases (4)

     402.8        24.8        49.6        49.5        278.9  

Newbuilding installments (5)

     347.4        —          77.2        270.2        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. Dollar-denominated obligations

     2,864.0        201.3        398.8        553.9        1,710.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Euro-Denominated Obligations: (6)

              

Long-term debt (7)

     341.4        14.8        32.8        37.8        256.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Euro-denominated obligations

     341.4        14.8        32.8        37.8        256.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Norwegian Kroner-Denominated Obligations:

              

Long-term debt(6)

     125.8        —          —          125.8        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Norwegian Kroner-Denominated obligations (8)

     125.8        —          —          125.8        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

     3,331.2        216.1        431.6        717.5        1,966.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Excludes expected interest payments of $17.1 million (2013), $28.9 million (2014 and 2015), $21.4 million (2016 and 2017) and $19.1 million (beyond 2017). Expected interest payments are based on the existing interest rates (fixed-rate loans) and LIBOR at December 31, 2012, plus margins on debt that has been drawn that ranged up to 2.75% (variable-rate loans). The expected interest payments do not reflect the effect of related interest rate swaps that we have used as an economic hedge of certain of our variable-rate debt.

(2)

Includes, in addition to lease payments, amounts we may be required to pay to purchase five leased vessels from 2014 to the end of the period when cancellation options are first exercisable. The purchase price will be based on the unamortized portion of the vessel construction financing costs for the vessels, which are included in the table above. We expect to satisfy the purchase price by assuming the existing vessel financing, although we may be required to obtain separate debt or equity financing to complete the purchases if the lenders do not consent to our assuming the financing obligations. Please read Item 18 – Financial Statements: Note 6 – Leases and Restricted Cash.

(3)

Existing restricted cash deposits of $475.5 million, together with the interest earned on these deposits, are expected to be sufficient to repay the remaining amounts we currently owe under the lease arrangements.

(4)

We have corresponding leases whereby we are the lessor and expect to receive approximately $361.4 million for these leases from 2013 to 2029. Please read Item 18 – Financial Statements: Note 6 – Leases and Restricted Cash.

(5)

In December 2012, we entered into an agreement for the construction of two LNG newbuildings. The remaining ship yard installments for these two newbuildings total $347.4 million. Please read Item 18 – Financial Statements: Note 14(b) – Commitments and Contingencies. In February 2013, we acquired a 50% ownership in Exmar LPG BVBA for approximately $134 million, which is not included in the above table. Please read Item 18 – Financial Statements: Note 21 – Subsequent Events.

(6) 

Euro-denominated and NOK-denominated obligations are presented in U.S. Dollars and have been converted using the prevailing exchange rate as of December 31, 2012.

(7) 

Excludes expected interest payments of $5.5 million (2013), $10.2 million (2014 and 2015), $9.1 million (2016 and 2017) and $4.9 million (beyond 2017). Expected interest payments are based on EURIBOR at December 31, 2012, plus margins that ranged up to 2.25%, as well as the prevailing U.S. Dollar/Euro exchange rate as of December 31, 2012. The expected interest payments do not reflect the effect of related interest rate swaps that we have used as an economic hedge of certain of our variable-rate debt.

(8) 

Excludes expected interest payments of $8.9 million (2013), $17.9 million (2014 and 2015) and $11.9 million (2016 and 2017). Expected interest payments are based on NIBOR at December 31, 2012, plus a margin of 5.25%, as well as the prevailing U.S. Dollar/NOK exchange rate as of December 31, 2012. The expected interest payments do not reflect the effect of the related cross currency swap that we have used as an economic hedge of our foreign exchange and interest rate exposure associated with our NOK-denominated long-term debt.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements. The details of our equity accounted investments are shown in Item 18 – Financial Statements: Note 19 – Equity Method Investments.

 

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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 discussed in this section are those that we consider to be the most critical to an understanding of our financial statements, because they inherently involve significant judgments and uncertainties. For a further description of our material accounting policies, please read Item 18 – Financial Statements: Note 1 – Basis of Presentation and Significant Accounting Policies.

Vessel Lives and Impairment

Description. The carrying value of each of our vessels represents its original cost at the time of delivery or purchase less depreciation and impairment charges. We depreciate the original cost, less an estimated residual value, of our vessels on a straight-line basis over each vessel’s estimated useful life. The carrying values of our vessels may not represent their market value at any point in time because the market prices of second-hand vessels tend to fluctuate with changes in charter rates and the cost of newbuildings. Both charter rates and newbuilding costs tend to be cyclical in nature.

We review vessels and equipment for impairment whenever events or circumstances indicate the carrying value of an asset, including the carrying value of the charter contract, if any, under which the vessel is employed, may not be recoverable. This occurs when the asset’s carrying value is greater than the future undiscounted cash flows the asset is expected to generate over its remaining useful life. For a vessel under charter, the discounted cash flows from that vessel may exceed its market value, as market values may assume the vessel is not employed on an existing charter. If the estimated future undiscounted cash flows of an asset exceeds the asset’s carrying value, no impairment is recognized even though the fair value of the asset may be lower than its carrying value. If the estimated future undiscounted cash flows of an asset is less than the asset’s carrying value and the fair value of the asset is less than its carrying value, the asset is written down to its fair value. Fair value is calculated as the net present value of estimated future cash flows, which, in certain circumstances, will approximate the estimated market value of the vessel.

Our business model is to employ our vessels on fixed-rate contracts with major oil companies. These contracts generally have original terms between 10 to 25 years in length. Consequently, while the market value of a vessel may decline below its carrying value, the carrying value of a vessel may still be recoverable based on the future undiscounted cash flows the vessel is expected to obtain from servicing its existing contract and future contracts.

The following table presents by segment the aggregate market values and carrying values of certain of our vessels that we have determined have a market value that is less than their carrying value as of December 31, 2012. Specifically, the following table reflects all such vessels, except those operating on contracts where the remaining term is significant and the estimated future undiscounted cash flows relating to such contracts are sufficiently greater than the carrying value of the vessels such that we consider it unlikely an impairment would be recognized in the following year. Consequently, the vessels included in the following table generally include those vessels near the end of existing charters or other operational contracts. While the market values of these vessels are below their carrying values, no impairment has been recognized on any of these vessels as the estimated future undiscounted cash flows relating to such vessels are greater than their carrying values.

We would consider the vessels reflected in the following table to be at a higher risk of future impairment. The estimated future undiscounted cash flows of the vessels reflected in the following table are significantly greater than their respective carrying values. Consequently, in these cases the following table would not necessarily represent vessels that would likely be impaired in the next 12 months, and the recognition of an impairment in the future for those vessels may primarily depend upon our deciding to dispose of the vessel instead of continuing to operate it. In deciding whether to dispose of a vessel, we determine whether it is economically preferable to sell the vessel or continue to operate it. This assessment includes an estimate of the net proceeds expected to be received if the vessel is sold in its existing condition compared to the present value of the vessel’s estimated future revenue, net of operating costs. Such estimates are based on the terms of the existing charter, charter market outlook and estimated operating costs, given a vessel’s type, condition and age. In addition, we typically do not dispose of a vessel that is servicing an existing customer contract.

 

(in thousands of U.S. Dollars, except number of vessels)

Reportable Segment

   Number of Vessels      Market  Values(1)
$
     Carrying  Values
$
 
        

Conventional Tanker Segment

     3        88,500        114,394  

 

(1) Market values are determined using reference to second-hand market comparable values. Since vessel values can be volatile, our estimates of market value may not be indicative of either the current or future prices we could obtain if we sold any of the vessels.

Judgments and Uncertainties. Depreciation is calculated using an estimated useful life of 25 years for conventional tankers, 30 years for LPG Carriers and 35 years for LNG carriers, commencing at the date the vessel was originally delivered from the shipyard. However, the actual life of a vessel may be different than the estimated useful life, with a shorter actual useful life resulting in an increase in the quarterly depreciation and potentially resulting in an impairment loss. The estimated useful life of our vessels takes into account design life, commercial considerations and regulatory restrictions. Our estimates of future cash flows involve assumptions about future charter rates, vessel utilization, operating expenses, dry-docking expenditures, vessel residual values and the remaining estimated life of our vessels. Our estimated charter rates are based on rates under existing vessel contracts and market rates at which we expect we can re-charter our vessels. Our estimates of vessel utilization, including estimated off-hire time, are based on historical experience. Our estimates of operating expenses and dry-docking expenditures are based on historical operating and dry-docking costs and our expectations of future inflation and operating requirements. Vessel residual values are a product of a vessel’s lightweight tonnage and an estimated scrap rate. The remaining estimated lives of our vessels used in our estimates of future cash flows are consistent with those used in the calculation of depreciation.

 

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Certain assumptions relating to our estimates of future cash flows are more predictable by their nature in our historical experience, including estimated revenue under existing contract terms, on-going operating costs and remaining vessel life. Certain assumptions relating to our estimates of future cash flows require more discretion and are inherently less predictable, such as future charter rates beyond the firm period of existing contracts and vessel residual values, due to factors such as the volatility in vessel charter rates and vessel values. We believe that the assumptions used to estimate future cash flows of our vessels are reasonable at the time they are made. We can make no assurances, however, as to whether our estimates of future cash flows, particularly future vessel charter rates or vessel values, will be accurate.

Effect if Actual Results Differ from Assumptions. If we conclude that a vessel or equipment is impaired, we recognize a loss in an amount equal to the excess of the carrying value of the asset over its fair value at the date of impairment. The written-down amount becomes the new lower cost basis and will result in a lower annual depreciation expense than for periods before the vessel impairment.

Dry docking Life

Description. We capitalize a portion of the costs we incur during dry docking and for an intermediate survey and amortize those costs on a straight-line basis over the useful life of the dry dock. We expense costs related to routine repairs and maintenance incurred during dry docking that do not improve operating efficiency or extend the useful lives of the assets.

Judgments and Uncertainties. Amortization of capitalized dry-dock expenditures requires us to estimate the period of the next dry docking and useful life of dry-dock expenditures. While we typically dry dock each vessel every five years and have a shipping society classification intermediate survey performed on our LNG and LPG carriers between the second and third year of the five-year dry-docking period, we may dry dock the vessels at an earlier date, with a shorter life resulting in an increase in the amortization.

Effect if Actual Results Differ from Assumptions. If we change our estimate of the next dry-dock date for a vessel, we will adjust our annual amortization of dry-docking expenditures. Amortization expense of capitalized dry-dock expenditures for 2012, 2011 and 2010 were $13.1 million, $9.6 million and $7.3 million. As at December 31, 2012, 2011 and 2010 our capitalized dry-dock expenditures were $7.5 million, $19.6 million and $12.7 million, respectively. A one-year reduction in the estimated useful lives of capitalized dry-dock expenditures would result in an increase in our current annual amortization by approximately $4.2 million.

Goodwill and Intangible Assets

Description. We allocate the cost of acquired companies, including acquisitions of equity accounted investments, to the identifiable tangible and intangible assets and liabilities acquired, with the remaining amount being classified as goodwill. Certain intangible assets, such as time-charter contracts, are being amortized over time. Our future operating performance will be affected by the amortization of intangible assets and potential impairment charges related to goodwill and intangibles. Accordingly, the allocation of purchase price to intangible assets and goodwill may significantly affect our future operating results.

Goodwill is not amortized, but reviewed for impairment at the reporting unit level on annual basis or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value a reporting until below its carrying value. When goodwill is reviewed for impairment, we may elect to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. Alternatively, we may bypass this step and use a fair value approach to identify potential goodwill impairment and, when necessary, measure the amount of impairment. The Partnership uses a discounted cash flow model to determine the fair value of reporting units, unless there is a readily determinable fair market value. Intangible assets are assessed for impairment when and if impairment indicators exist. An impairment loss is recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value.

Judgments and Uncertainties. The allocation of the purchase price of acquired companies to intangible assets and goodwill requires management to make significant estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets and the appropriate discount rate to value these cash flows. In addition, the process of evaluating the potential impairment of goodwill and intangible assets is highly subjective and requires significant judgment at many points during the analysis. The fair value of our reporting units was estimated based on discounted expected future cash flows using a weighted-average cost of capital rate. The estimates and assumptions regarding expected cash flows and the discount rate require considerable judgment and are based upon existing contracts, historical experience, financial forecasts and industry trends and conditions.

At December 31, 2012, we had one reporting unit with goodwill attributable to it. As of the date of this filing, we do not believe that there is a reasonable possibility that the goodwill attributable to this reporting unit might be impaired within the next year. However, certain factors that impact this assessment are inherently difficult to forecast and as such we cannot provide any assurances that an impairment will or will not occur in the future. An assessment for impairment involves a number of assumptions and estimates that are based on factors that are beyond our control. These are discussed in more detail in the following section entitled in Part I - Forward-Looking Statements.

Amortization expense of intangible assets for each of the years 2012, 2011 and 2010 was $11.0 million, $9.6 million and $9.6 million, respectively. If actual results are not consistent with our estimates used to value our intangible assets, we may be exposed to an impairment charge and a decrease in the annual amortization expense of our intangible assets.

Valuation of Derivative Instruments

Description. Our risk management policies permit the use of derivative financial instruments to manage interest rate risk, foreign exchange risk and spot tanker market risk. Changes in fair value of derivative financial instruments that are not designated as cash flow hedges for accounting purposes are recognized in earnings.

Judgments and Uncertainties. A substantial majority of the fair value of our derivative instruments and the change in fair value of our derivative instruments from period to period result from our use of interest rate swap agreements. The fair value of our interest rate swap agreements is the estimated amount that we would receive or pay to terminate the agreements at the reporting date, taking into account current interest rates and the current credit worthiness of both us and the swap counterparties. The estimated amount is the present value of estimated future cash flows, being equal to the difference between the benchmark interest rate and the fixed rate in the interest rate swap agreement, multiplied by the notional principal amount of the interest rate swap agreement at each interest reset date.

 

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The fair value of our interest and currency swap agreements at the end of each period are most significantly affected by the interest rate implied by the benchmark interest yield curve, including its relative steepness, and forward foreign exchange rates. Interest rates and foreign exchange rates have experienced significant volatility in recent years in both the short and long term. While the fair value of our interest and currency swap agreements are typically more sensitive to changes in short-term rates, significant changes in the long-term benchmark interest and foreign exchange rates also materially impact our interest and currency swap agreements.

The fair value of our interest and currency swap agreements are also affected by changes in our specific credit risk included in the discount factor. We discount our interest rate swap agreements with reference to the credit default swap spreads of similarly rated global industrial companies and by considering any underlying collateral. The process of determining credit worthiness requires significant judgment in determining which source of credit risk information most closely matches our risk profile.

The benchmark interest rate yield curve and our specific credit risk are expected to vary over the life of the interest rate swap agreements. The larger the notional amount of the interest rate swap agreements outstanding and the longer the remaining duration of the interest rate swap agreements, the larger the impact of any variability in these factors will be on the fair value of our interest rate swaps. We economically hedge the interest rate exposure on a significant amount of our long-term debt and for long durations. As such, we have historically experienced, and we expect to continue to experience, material variations in the period-to-period fair value of our derivative instruments.

The fair value of our derivative instrument relating to the agreement between us and Teekay Corporation for the Toledo Spirit time-charter contract is the estimated amount that we would receive or pay to terminate the agreement at the reporting date. This amount is estimated using the present value of our projected future spot market tanker rates, which has been derived from current spot market rates and long-term historical average rates.

Effect if Actual Results Differ from Assumptions. Although we measure the fair value of our derivative instruments utilizing the inputs and assumptions described above, if we were to terminate the agreements at the reporting date, the amount we would pay or receive to terminate the derivative instruments may differ from our estimate of fair value. If the estimated fair value differs from the actual termination amount, an adjustment to the carrying amount of the applicable derivative asset or liability would be recognized in earnings for the current period. Such adjustments could be material. See Item 18 – Financial Statements: Note 13 – Derivative Instruments for the effects on the change in fair value of our derivative instruments on our consolidated statements of income.

Taxes

Description. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized.

Judgments and Uncertainties. The future realization of deferred tax assets depends on the existence of sufficient taxable income of the appropriate character in either the carryback or carryforward period. This analysis requires, among other things, the use of estimates and projections in determining future reversals of temporary differences, forecasts of future profitability and evaluating potential tax-planning strategies.

Effect if Actual Results Differ from Assumptions. If we determined that we were able to realize a net deferred tax asset in the future, in excess of the net recorded amount, an adjustment to the deferred tax assets would typically increase our net income (or decrease our loss) in the period such determination was made. Likewise, if we determined that we were not able to realize all or a part of our deferred tax asset in the future, an adjustment to the deferred tax assets would typically decrease our net income (or increase our loss) in the period such determination was made. As at December 31, 2012, we had a valuation allowance of $85.9 million (2011 - $89.2 million).

 

Item 6. Directors, Senior Management and Employees

Management of Teekay LNG Partners L.P.

Teekay GP L.L.C., our General Partner, manages our operations and activities. Unitholders are not entitled to elect the directors of our General Partner or directly or indirectly participate in our management or operation.

Our General Partner owes a fiduciary duty to our unitholders. Our General Partner is liable, as general partner, for all of our debts (to the extent not paid from our assets), except for indebtedness or other obligations that are expressly nonrecourse to it. Whenever possible, our General Partner intends to cause us to incur indebtedness or other obligations that are nonrecourse to it.

The directors of our General Partner oversee our operations. The day-to-day affairs of our business are managed by the officers of our General Partner and key employees of certain of our operating subsidiaries. Employees of certain subsidiaries of Teekay Corporation provide assistance to us and our operating subsidiaries pursuant to services agreements. Please read Item 7 – Major Unitholders and Related Party Transactions.

The Chief Executive Officer and Chief Financial Officer of our General Partner, Peter Evensen, allocates his time between managing our business and affairs and the business and affairs of Teekay Corporation and its subsidiaries Teekay Offshore (NYSE: TOO) and Teekay Tankers Ltd. (NYSE: TNK) (or Teekay Tankers). Mr. Evensen is the President and Chief Executive Officer of Teekay Corporation. He also holds the roles of Chief Executive Officer and Chief Financial Officer of Teekay Offshore’s general partner, Teekay Offshore GP L.L.C. The amount of time Mr. Evensen allocates between our business and the businesses of Teekay Corporation and Teekay Offshore varies from time to time depending on various circumstances and needs of the businesses, such as the relative levels of strategic activities of the businesses. We believe Mr. Evensen devotes sufficient time to our business and affairs as is necessary for their proper conduct.

Officers of our General Partner and those individuals providing services to us or our subsidiaries may face a conflict regarding the allocation of their time between our business and the other business interests of Teekay Corporation or its affiliates. Our General Partner seeks to cause its officers to devote as much time to the management of our business and affairs as is necessary for the proper conduct of our business and affairs.

 

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Directors, Executive Officers and Key Employees

The following table provides information about the directors and executive officers of our General Partner and a key employee of our operating subsidiary Teekay Shipping Spain SL. Directors are elected for one-year terms. The business address of each of our directors and executive officers listed below is c/o 4th Floor, Belvedere Building, 69 Pitts Bay Road, Hamilton, HM 08, Bermuda. The business address of our key employee of Teekay Shipping Spain SL. is Musgo Street 5—28023, Madrid, Spain. Ages of the individuals are as of December 31, 2012.

 

Name

   Age     

Position

C. Sean Day

     63      

Chairman

Peter Evensen

     54      

Chief Executive Officer, Chief Financial Officer and Director

Robert E. Boyd

     74      

Director (1)(2)

Kenneth Hvid

     44      

Director until September 18, 2012 and rejoined on February 19, 2013(3)

Ida Jane Hinkley

     62      

Director (1)

Joseph E. McKechnie

     54      

Director beginning February 19, 2013(4)

George Watson

     65      

Director (1)(2)

Michael Balaski

     56      

Vice President

Andres Luna

     56      

Managing Director, Teekay Shipping Spain SL

 

(1) Member of Audit Committee and Conflicts Committee.
(2) Member of Corporate Governance Committee.
(3) Mr. Kenneth Hvid resigned from the General Partner’s Board effective September 18, 2012 to allow the Board to maintain a majority of independent directors and rejoined the Board on February 19, 2013.
(4) Mr. Joseph E. McKechnie joined the Board on February 19, 2013, replacing Mr. Ihab J.M. Massoud, who retired from the Board effective September 14, 2012.

Certain biographical information about each of these individuals is set forth below:

C. Sean Day has served as Chairman of Teekay GP L.L.C. since it was formed in November 2004. Mr. Day has also served as Chairman of the Board for Teekay Corporation since September 1999, Teekay Offshore GP L.L.C. since it was formed in August 2006, and Teekay Tankers Ltd. since it was formed in October 2007. From 1989 to 1999, he was President and Chief Executive Officer of Navios Corporation, a large bulk shipping company based in Stamford, Connecticut. Prior to this, Mr. Day held a number of senior management positions in the shipping and finance industry. He is currently serving as a Director of Kirby Corporation and Chairman of Compass Diversified Holdings. Mr. Day is engaged as a consultant to Kattegat Limited, the parent company of Teekay’s largest shareholder, to oversee its investments, including that in the Teekay group of companies.

Peter Evensen has served as Chief Executive Officer and Chief Financial Officer of Teekay GP L.L.C. since it was formed in November 2004 and as a Director since January 2005. He has also served as Chief Executive Officer, Chief Financial Officer, a Director of Teekay Offshore GP L.L.C., formed in August 2006 and as a Director of Teekay Tankers Ltd., formed in October 2007. Effective April 1, 2011, he assumed the position of President and Chief Executive Officer of Teekay Corporation and also became a Director of Teekay Corporation. Mr. Evensen joined Teekay Corporation in May 2003 as Senior Vice President, Treasurer and Chief Financial Officer. He was appointed Executive Vice President and Chief Strategy Officer of Teekay Corporation in 2006. Mr. Evensen has over 25 years’ experience in banking and shipping finance. Prior to joining Teekay Corporation, Mr. Evensen was Managing Director and Head of Global Shipping at J.P. Morgan Securities Inc., and worked in other senior positions for its predecessor firms. His international industry experience includes positions in New York, London and Oslo.

Robert E. Boyd has served as a Director of Teekay GP L.L.C. since January 2005. From May 1999 until his retirement in March 2004, Mr. Boyd was employed as the Senior Vice President and Chief Financial Officer of Teknion Corporation, a company engaged in the design, manufacture and marketing of office systems and office furniture products. From 1991 to 1999, Mr. Boyd was employed by The Oshawa Group Limited, a company engaged in the wholesale and retail distribution of food products and real estate activities, where his positions included Executive Vice President-Financial and Chief Financial Officer. Prior to 1991, Mr. Boyd held senior financial positions with several major companies, including Gulf Oil Corporation.

Kenneth Hvid served as a Director of Teekay GP L.L.C. from April 1, 2011 to September 18, 2012, when he resigned from this position to allow the Board to maintain a majority of independent Directors. Mr. Hvid rejoined the Board as a Director of Teekay GP L.L.C. on February 19, 2013. Since April 2011, he has served as Chief Strategy Officer and Executive Vice President of Teekay Corporation and as a Director of Teekay Offshore GP L.L.C. He joined Teekay Corporation in October 2000 and was responsible for leading its global procurement activities until he was promoted in 2004 to Senior Vice President, Teekay Gas Services. During this time, Mr. Hvid was involved in leading Teekay Corporation through its entry and growth in the LNG business. He held this position until the beginning of 2006, when he was appointed President of the Teekay Shuttle and Offshore division of Teekay Corporation. In this role, he is responsible for Teekay Corporation’s global shuttle tanker business as well as initiatives in the floating storage and offtake business and related offshore activities. Mr. Hvid has 18 years of global shipping experience, 12 of which were spent with A.P. Moller in Copenhagen, San Francisco and Hong Kong.

Ida Jane Hinkley has served as a Director of Teekay GP L.L.C. since January 2005. From 1998 to 2001, she served as Managing Director of Navion Shipping AS, a shipping company at that time affiliated with the Norwegian state-owned oil company Statoil ASA (and subsequently acquired by Teekay Corporation’s in 2003). From 1980 to 1997, Ms. Hinkley was employed by the Gotaas-Larsen Shipping Corporation, an international provider of marine transportation services for crude oil and gas (including LNG), serving as its Chief Financial Officer from 1988 to

 

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1992 and its Managing Director from 1993 to 1997. She currently serves as a non-executive director on the Board of Premier Oil plc, a London Stock Exchange listed oil exploration and production company. From 2007 to 2008 she served as a non-executive director on the Board of Revus Energy ASA, a Norwegian listed oil company. In December, 2012 Ms. Hinkley was appointed non-executive director of Vesuvius plc, a London Stock Exchange listed engineering company.

Joseph E. McKechnie joined the board of Teekay GP L.L.C. on February 19, 2013. Mr. McKechnie is a retired United States Coast Guard Officer, having served for more than 23 years, many of which focused on marine safety and security with an emphasis on LNG. In 2000 he joined Tractebel LNG North America (formerly Cabot LNG) in Boston, Massachusetts as the Vice President of Shipping, where he oversaw the LNG shipping operations for the Port of Boston. From 2006 to 2011, Mr. McKechnie was transferred to London and then Paris to continue his work with SUEZ, (the parent company of Tractebel) and ultimately GDF-SUEZ, as the Senior Vice President of Shipping, and Deputy Head of the Shipping Department. He is a former member of the Board of Directors of Society of International Gas Tankers and Terminal Operators, and Gaz-Ocean, the GDF-SUEZ Owned LNG vessel operating company. In 2011, he left GDF-SUEZ following the successful merger of GDF and SUEZ, and ultimately formed J.E. McKechnie LLC in early 2011.

George Watson has served as a Director of Teekay GP L.L.C. since January 2005. He currently serves as Executive Chairman of Critical Control Solutions Inc. (formerly WNS Emergent), a provider of information control applications for the energy sector. He held the position of CEO of Critical Control from 2002 to 2007. From February 2000 to July 2002, he served as Executive Chairman at VerticalBuilder.com Inc. Mr. Watson served as President and Chief Executive Officer of TransCanada Pipelines Ltd. from 1993 to 1999 and as its Chief Financial Officer from 1990 to 1993.

Michael Balaski has served as Vice President of Teekay Offshore GP L.L.C. since December 6, 2011. He was also appointed Vice President of Teekay GP L.L.C. on December 6, 2011. In 2011, he retired as a partner in the Tax Services Group of PricewaterhouseCoopers LLP (“PwC”) in Vancouver, where he was a member of the International Tax Group specializing in the international shipping sector. Mr. Balaski was a partner of PwC Canada for over ten years. During that time, he worked closely with Teekay Corporation, spending much of his working time at Teekay Corporation’s office.

Andres Luna has served as the Managing Director of Teekay Shipping Spain SL since April 2004. Mr. Luna joined Alta Shipping, S.A., a former affiliate company of Naviera F. Tapias S.A., in September 1992 and served as its General Manager until he was appointed Commercial General Manager of Naviera F. Tapias S.A. in December 1999. He also served as Chief Executive Officer of Naviera F. Tapias S.A. from July 2000 until its acquisition by Teekay Corporation in April 2004, when it was renamed Teekay Shipping Spain. Mr. Luna’s responsibilities with Teekay Spain have included business development, newbuilding contracting, project management, development of its LNG business and the renewal of its tanker fleet. He has been in the shipping business since his graduation as a naval architect from Madrid University in 1981.