Teekay LNG Partners L.P. (Form: 6-K, Received: 08/24/2012 15:05:52)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2012

Commission file number 1- 32479

TEEKAY LNG PARTNERS L.P.

(Exact name of Registrant as specified in its charter)

4 ^th Floor, Belvedere Building

69 Pitts Bay Road

Hamilton, HM 08 Bermuda

(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F x Form 40- F ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1).

Yes ¨ No x

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7).

Yes ¨ No x

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

REPORT ON FORM 6-K FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012

INDEX


	PAGE

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Unaudited Consolidated Statements of Income (Loss) for the three and six months ended June 30, 2012 and 2011		3

Unaudited Consolidated Balance Sheets as at June 30, 2012 and December 31, 2011		4

Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011		5

Unaudited Consolidated Statement of Changes in Total Equity for the six months ended June 30, 2012		6

Notes to the Unaudited Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

Item 3. Quantitative and Qualitative Disclosures about Market Risk		27

Item 4. Changes in Internal Control over Financial Reporting		28

PART II: OTHER INFORMATION		29

SIGNATURES		30

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES (Note 1)

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(in thousands of U.S. Dollars, except unit and per unit data)


	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
	$			$			$			$
VOYAGE REVENUES (note 9a)		96,354			92,247			195,570			185,466

OPERATING EXPENSES
Voyage expenses		242			685			585			1,055
Vessel operating expenses (note 9a)		20,104			23,388			40,635			44,195
Depreciation and amortization		24,673			22,171			49,306			44,520
General and administrative (note 9a)		6,506			6,535			13,622			12,861

Total operating expenses		51,525			52,779			104,148			102,631

Income from vessel operations		44,829			39,468			91,422			82,835

OTHER ITEMS
Interest expense (note 7)		(13,734	)		(12,136	)		(26,532	)		(23,890	)
Interest income		949			1,698			1,881			3,276
Realized and unrealized loss on derivative instruments (note 10)		(18,145	)		(27,329	)		(34,048	)		(16,560	)
Foreign currency exchange gain (loss) (notes 7 and 10)		13,927			(8,859	)		4,259			(29,892	)
Equity income		11,086			3,447			28,134			11,504
Other income (expense)		480			141			694			(270	)

		(5,437	)		(43,038	)		(25,612	)		(55,832	)

Net income (loss) before income tax (expense) recovery		39,392			(3,570	)		65,810			27,003
Income tax (expense) recovery (note 8)		(132	)		(119	)		129			(955	)

Net income (loss)		39,260			(3,689	)		65,939			26,048

Non-controlling interest in net income (loss)		1,572			(561	)		3,520			4,196
General Partner’s interest in net income (loss)		5,293			2,303			10,325			5,167
Limited partners’ interest in net income (loss)		32,395			(5,431	)		52,094			16,685
Limited partners’ interest in net income (loss) per unit
• Common and total unit (basic and diluted)		0.50			(0.09	)		0.80			0.29
Weighted-average number of common and total units outstanding (basic and diluted)		64,857,900			59,152,816			64,857,900			57,140,637

Cash distributions declared per unit		0.6750			0.6300			1.3050			1.2600

Related party transactions (note 9)

The accompanying notes are an integral part of the unaudited consolidated financial statements.

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES (Note 1)

UNAUDITED CONSOLIDATED BALANCE SHEETS

(in thousands of U.S. Dollars)


	As at		As at
	June 30,		December 31,
	2012		2011
	$		$
ASSETS
Current
Cash and cash equivalents		114,916		93,627
Accounts receivable, including non-trade of $10,091 (2011—$10,011) (note 10)		10,216		13,921
Prepaid expenses		5,567		4,916
Current portion of derivative assets (note 10)		16,401		15,608
Current portion of net investments in direct financing leases (note 5)		6,377		6,074
Advances to affiliates (note 9b)		24,362		11,922

Total current assets		177,839		146,068

Restricted cash – long-term (note 5)		526,705		495,634

Vessels and equipment
At cost, less accumulated depreciation of $321,417 (2011—$291,689)		1,311,719		1,339,571
Vessels under capital leases, at cost, less accumulated depreciation of $178,934 (2011—$163,926)		668,651		681,554

Total vessels and equipment		1,980,370		2,021,125

Investment in and advances to equity accounted joint ventures (notes 9d, 9e and 13)		374,320		191,448
Net investments in direct financing leases (note 5)		400,172		403,467
Advances to joint venture partner (note 6)		13,931		10,200
Other assets		25,456		24,560
Derivative assets (note 10)		146,071		139,651
Intangible assets – net		109,851		114,416
Goodwill—liquefied gas segment		35,631		35,631

Total assets		3,790,346		3,582,200

LIABILITIES AND EQUITY
Current
Accounts payable (includes nil and $556 for 2012 and 2011, respectively, owing to related parties) (note 9b)		1,853		3,302
Accrued liabilities (includes nil and $3,550 for 2012 and 2011, respectively, owing to related parties) (notes 9b and 10)		36,172		46,740
Unearned revenue		15,106		9,988
Current portion of long-term debt (note 7)		85,138		84,722
Current obligations under capital lease (note 5)		170,610		47,203
Current portion of derivative liabilities (note 10)		46,659		43,973
Advances from affiliates (note 9b)		27,288		17,400

Total current liabilities		382,826		253,328

Long-term debt (note 7)		1,448,514		1,230,509
Long-term obligations under capital lease (note 5)		471,736		599,844
Long-term unearned revenue		38,908		40,003
Other long-term liabilities (notes 5 and 13)		67,323		69,562
Derivative liabilities (note 10)		279,688		249,245

Total liabilities		2,688,995		2,442,491

Commitments and contingencies (notes 5, 7, 10, 11 and 13)

Equity
Non-controlling interest		29,712		26,242
Partners’ equity		1,071,639		1,113,467

Total equity		1,101,351		1,139,709

Total liabilities and total equity		3,790,346		3,582,200

Consolidation of variable interest entities (note 11)

The accompanying notes are an integral part of the unaudited consolidated financial statements.

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES (Note 1)

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands of U.S. Dollars)


	Six Months Ended June 30, 2012 $			Six Months Ended June 30, 2011 $
Cash and cash equivalents provided by (used for)

OPERATING ACTIVITIES

Net income		65,939			26,048
Non-cash items:
Unrealized loss (gain) on derivative instruments (note 10)		15,647			(3,776	)
Depreciation and amortization		49,306			44,520
Unrealized foreign currency exchange loss		(4,670	)		29,730
Equity based compensation		22			165
Equity income		(28,134	)		(11,504	)
Amortization of deferred debt issuance costs and other		243			1,512
Change in operating assets and liabilities		(6,733	)		17,023
Accrued interest		124			186
Expenditures for dry docking		(2,972	)		(7,185	)

Net operating cash flow		88,772			96,719


FINANCING ACTIVITIES
Proceeds from issuance of long-term debt		395,352			100,640
Debt issuance costs		(1,808	)		—
Scheduled repayments of long-term debt		(42,200	)		(38,129	)
Prepayments of long-term debt		(119,274	)		(173,000	)
Scheduled repayments of capital lease obligations and other long-term liabilities		(5,040	)		(4,983	)
Proceeds from follow-on offering net of offering costs		—			161,682
Advances to and from affiliates		(3,600	)		1,443
Increase in restricted cash		(30,511	)		(3,227	)
Cash distributions paid		(93,636	)		(78,238	)
Purchase of Skaugen Multigas Subsidiary		—			(55,313	)
Repayment of joint venture partners’ advances		—			(59	)
Other		(50	)		(128	)

Net financing cash flow		99,233			(89,312	)


INVESTING ACTIVITIES

Purchase of equity investment in MALT LNG Carriers (note 13)		(150,999	)		—
Purchase of equity investment in the fourth Angola LNG Carrier (note 9d)		(19,068	)		—
Receipts from direct financing leases		2,992			2,867
Expenditures for vessels and equipment		(1,010	)		(16,821	)
Repayments from joint venture		830			—
Other		539			—

Net investing cash flow		(166,716	)		(13,954	)

Increase (decrease) in cash and cash equivalents		21,289			(6,547	)
Cash and cash equivalents, beginning of the period		93,627			81,055

Cash and cash equivalents, end of the period		114,916			74,508

The accompanying notes are an integral part of the consolidated financial statements.

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES (Note 1)

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY

(in thousands of U.S. Dollars and units)


	Partners’ Equity								Non-
	Common					General Partner			controlling Interest			Total
	Units		$			$			$			$
Balance as at December 31, 2011		64,858		1,070,066			43,401			26,242			1,139,709
Net income and comprehensive income		—		52,094			10,325			3,520			65,939
Cash distributions		—		(84,641	)		(8,995	)		(50	)		(93,686	)
Re-investment tax credit (note 8)		—		5,200			105			—			5,305
Equity based compensation		—		21			1			—			22
Acquisition of investment in the fourth Angola LNG Carrier (note 9d)		—		(15,143	)		(795	)		—			(15,938	)

Balance as at June 30, 2012		64,858		1,027,597			44,042			29,712			1,101,351

The accompanying notes are an integral part of the unaudited consolidated financial statements.

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. Dollars, except unit and per unit data or unless otherwise indicated)

1.	Basis of Presentation

The unaudited interim consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (or GAAP ). These financial statements include the accounts of Teekay LNG Partners L.P., which is a limited partnership organized under the laws of the Republic of The Marshall Islands, its wholly owned or controlled subsidiaries and variable interest entities for which Teekay LNG Partners L.P. or its subsidiaries are the primary beneficiaries (see Note 11) (collectively, the Partnership ). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Certain information and footnote disclosures required by GAAP for complete annual financial statements have been omitted and therefore, these interim financial statements should be read in conjunction with the Partnership’s audited consolidated financial statements for the year ended December 31, 2011, which are included in the Partnership’s Annual Report on Form 20-F. In the opinion of management of Teekay GP L.L.C., the general partner of Teekay LNG Partners L.P. (or the General Partner ), these interim unaudited consolidated financial statements reflect all adjustments consisting solely of a normal recurring nature, necessary to present fairly, in all material respects, the Partnership’s consolidated financial position, results of operations, changes in total equity and cash flows for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of those for a full fiscal year. Significant intercompany balances and transactions have been eliminated upon consolidation.

2.	Adoption of New Accounting Pronouncements

In January 2012, the Partnership adopted an amendment to Financial Accounting Standards Board (or FASB ) Accounting Standards Codification (or ASC ) 820, Fair Value Measurement , which clarifies or changes the application of existing fair value measurements, including: that the highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets; that a reporting entity should measure the fair value of its own equity instrument from the perspective of a market participant that holds that instrument as an asset; to permit an entity to measure the fair value of certain financial instruments on a net basis rather than based on its gross exposure when the reporting entity manages its financial instruments on the basis of such net exposure; that in the absence of a Level 1 input, a reporting entity should apply premiums and discounts when market participants would do so when pricing the asset or liability consistent with the unit of account; and that premiums and discounts related to size as a characteristic of the reporting entity’s holding are not permitted in a fair value measurement. The adoption of this amendment did not have an impact on the Partnership’s consolidated financial statements other than the disclosures as presented in Note 3 – Financial Instruments.

3.	Financial Instruments

Fair Value Measurements

For a description of how the Partnership estimates fair value and for a description of the fair value hierarchy levels, see Note 4 in the Partnership’s audited consolidated financial statements filed with its Annual Report on Form 20-F for the year ended December 31, 2011. The following table includes the estimated fair value and carrying value of those assets and liabilities that are measured at fair value on a recurring and non-recurring basis as well as the estimated fair value of the Partnership’s financial instruments that are not accounted for at a fair value on a recurring basis.


				June 30, 2012						December 31, 2011
	Fair Value Hierarchy Level			Carrying Amount Asset (Liability) $			Fair Value Asset (Liability) $			Carrying Amount Asset (Liability) $			Fair Value Asset (Liability) $

Recurring:
Cash and cash equivalents and restricted cash		Level 1			641,621			641,621			589,261			589,261
Derivative instruments (note 10)
Interest rate swap agreements – assets		Level 2			166,527			166,527			159,603			159,603
Interest rate swap agreements – liabilities		Level 2			(326,229	)		(326,229	)		(304,066	)		(304,066	)
Cross currency swap agreement		Level 2			(10,220	)		(10,220	)		—			—
Other derivative		Level 3			(300	)		(300	)		(600	)		(600	)
Other:
Advances to joint venture partner (note 6)		⁽¹	⁾		13,931			⁽¹	⁾		10,200			⁽¹	⁾
Long-term debt (note 7)		Level 2			(1,533,652	)		(1,397,849	)		(1,315,231	)		(1,191,117	)

(1)	The fair value of the Partnership’s advances to its joint venture partner as at June 30, 2012 and December 31, 2011 was not determinable given the repayment terms described in Note 6 – Advances to Joint Venture Partner.

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. Dollars, except unit and per unit data or unless otherwise indicated)

Changes in fair value during the six months ended June 30, 2012 and 2011 for the Partnership’s other derivative liability, the Toledo Spirit time-charter derivative, that is measured at fair value on a recurring basis using significant unobservable inputs (Level 3), are as follows:


	Six Months Ended June 30,
	2012			2011
	$			$
Fair value at beginning of period		(600	)		(10,000	)
Realized and unrealized gains included in earnings		262			347
Settlements		38			53

Fair value at end of period		(300	)		(9,600	)

The estimated fair value of the Partnership’s other derivative is based in part upon the Partnership’s projection of future spot market tanker rates, which has been derived from current spot market tanker rates and long-term historical average rates as well as an estimated discount rate. The estimated fair value of the Partnership’s other derivative as of June 30, 2012 is based upon an average daily tanker rate of $29,564 (December 31, 2011 – $29,498) over the remaining duration of the contract and a discount rate of 8.91% (December 31, 2011 – 8.68%). In developing and evaluating this estimate, the Partnership considers the current tanker market fundamentals as well as the short and long-term outlook. A higher or lower average daily tanker rate would result in a higher or lower fair value liability or a lower or higher fair value asset. A higher or lower discount rate would result in a lower or higher fair value asset or liability.

Financing Receivables

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

Credit Quality

June 30,
2012

December 31,
2011

Class of Financing Receivable

Indicator

Grade

Direct financing leases

Payment activity

Performing

406,549

409,541

Other receivables

Long-term receivable included in other assets

Payment activity

Performing

973

786

Advances to joint venture included in investment in and advances to joint ventures

Payment activity

Performing

—

830

Advances to joint venture partner (note 6)

Other internal metrics

Performing

13,931

10,200

421,453

421,357

4.	Segment Reporting

The following table includes results for the Partnership’s segments for the periods presented in these financial statements.


	Three Months Ended June 30,
	2012						2011
	Liquefied Gas Segment $		Conventional Tanker Segment $		Total $		Liquefied Gas Segment $		Conventional Tanker Segment $		Total $

Voyage revenues		67,602		28,752		96,354		65,885		26,362		92,247
Voyage expenses		30		212		242		61		624		685
Vessel operating expenses		10,717		9,387		20,104		13,145		10,243		23,388
Depreciation and amortization		17,309		7,364		24,673		15,081		7,090		22,171
General and administrative ⁽¹⁾		4,099		2,407		6,506		3,941		2,594		6,535

Income from vessel operations		35,447		9,382		44,829		33,657		5,811		39,468

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. Dollars, except unit and per unit data or unless otherwise indicated)


	Six Months Ended June 30,
	2012						2011
			Conventional						Conventional
	Liquefied Gas		Tanker				Liquefied Gas		Tanker
	Segment		Segment		Total		Segment		Segment		Total
	$		$		$		$		$		$

Voyage revenues		138,336		57,234		195,570		131,678		53,788		185,466
Voyage expenses		66		519		585		70		985		1,055
Vessel operating expenses		21,529		19,106		40,635		24,222		19,973		44,195
Depreciation and amortization		34,547		14,759		49,306		30,205		14,315		44,520
General and administrative ⁽¹⁾		8,626		4,996		13,622		7,265		5,596		12,861

Income from vessel operations		73,568		17,854		91,422		69,916		12,919		82,835

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

A reconciliation of total segment assets to total assets presented in the consolidated balance sheets is as follows:


	June 30,		December 31,
	2012		2011
	$		$
Total assets of the liquefied gas segment		3,103,704		2,911,659
Total assets of the conventional tanker segment		531,581		546,155
Unallocated:
Cash and cash equivalents		114,916		93,627
Accounts receivable and prepaid expenses		15,783		18,837
Advances to affiliates		24,362		11,922

Consolidated total assets		3,790,346		3,582,200

5.	Vessel Charters

The minimum estimated charter hire payments for the remainder of the year and the next four fiscal years, as at June 30, 2012, for the Partnership’s vessels chartered-in and vessels chartered-out are as follows:


	Remainder
	of 2012		2013		2014		2015		2016
Vessel Charters ⁽¹⁾	$		$		$		$		$
Charters-in – capital leases ^(2)(3)(4)(5)		59,409		100,443		55,728		27,593		27,551


Charters-out – operating leases ⁽⁶⁾		175,639		348,415		348,415		345,272		321,195
Charters-out – direct financing leases ⁽³⁾		19,265		38,530		38,530		38,530		38,530

		194,904		386,945		386,945		383,802		359,725

(1)

The Partnership owns a 99% interest in Teekay Tangguh Borrower LLC (or Teekay Tangguh ), which owns a 70% interest in Teekay BLT Corporation (or the Teekay Tangguh Joint Venture ), giving the Partnership a 69% interest in the Teekay Tangguh Joint Venture. The joint venture is a party to operating leases whereby it is leasing the Tangguh Hiri and the Tangguh Sago LNG carriers (or the Tangguh LNG Carriers ) to a third party, which is in turn leasing the vessels back to the joint venture. The table does not include the Partnership’s minimum charter hire payments to be paid and received under these leases, which are described in more detail in Note 6 to the Partnership’s audited consolidated financial statements filed with its Annual Report on Form 20-F for the year ended December 31, 2011.

(2)

As at June 30, 2012 and December 31, 2011, the Partnership had $475.8 million and $476.1 million, respectively, of cash which, including any interest earned on such amounts, are restricted to being used for charter hire payments of certain vessels chartered-in under capital leases. The Partnership also maintains restricted cash deposits relating to certain term loans and to amounts received from the charterer to be used only for dry-docking expenditures and emergency repairs, which cash totaled $50.9 million and $19.5 million as at June 30, 2012 and December 31, 2011, respectively.

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. Dollars, except unit and per unit data or unless otherwise indicated)

(3)

As described in Note 6 in the Partnership’s audited consolidated financial statements filed with its Annual Report on Form 20-F for the year ended December 31, 2011, the Partnership has leasing arrangements relating to five of its LNG carriers (three through Teekay Nakilat Corporation (or the RasGas II LNG Carriers ) and two through the Teekay Tangguh Joint Venture, in which the Partnership owns 70% and 69% ownership interests, respectively). Under these arrangements, the Partnership is the lessee and the lessors claim tax depreciation on the capital expenditures they incurred to acquire these vessels. As is typical in these leasing arrangements, tax and change of law risks are assumed by the lessee. Lease payments under the lease arrangements are based on certain tax and financial assumptions at the commencement of the leases. If an assumption proves to be incorrect, the lessor is entitled to increase the lease payments to maintain its agreed after-tax margin.

The tax indemnification is for the duration of the lease contracts with the third parties plus the years it would take for the lease payments to be statute barred, and ends in 2033 for two vessels and 2041 for three vessels. Although there is no maximum potential amount of future payments, Teekay Nakilat Corporation and the Teekay Tangguh Joint Venture may terminate the lease arrangements on a voluntary basis at any time. If the lease arrangements terminate, Teekay Nakilat Corporation and the Teekay Tangguh Joint Venture will be required to pay termination sums to the lessor sufficient to repay the lessor’s investment in the vessels and to compensate it for the tax effect of the terminations, including recapture of any tax depreciation. The Partnership’s carrying amount of the tax indemnification guarantees as at June 30, 2012 was $25.4 million (December 31, 2011 – $26.0 million) and is included as part of other long-term liabilities in the Partnership’s consolidated balance sheets.

(4)	Excludes estimated charter hire payments of $908.0 million for the period from 2017 to 2037.

(5)

As at June 30, 2012, the Partnership was a party to capital leases on five Suezmax tankers. Under the terms of the lease arrangements the Partnership is required to purchase these vessels after the end of their respective lease terms in 2012 to 2017 for a fixed price and the lessor has the option to sell these vessels to the Partnership any time after 2012 during the remaining lease terms. The table above is based on the remaining terms of the leases assuming the lessor does not exercise its option to sell the vessels to the Partnership. However, the present value of these leases are classified as current liabilities in the Partnership’s consolidated balance sheets.

(6)

Minimum scheduled future operating lease revenues do not include revenue generated from new contracts entered into after June 30, 2012, revenue from unexercised option periods of contracts that existed on June 30, 2012, or variable or contingent revenues. Therefore, the minimum scheduled future operating lease revenues should not be construed to reflect total charter hire revenues that may be recognized for any of the years.

6.	Advances to Joint Venture Partner

The Partnership owns a 69% interest in the Teekay Tangguh Joint Venture and, as of June 30, 2012 and December 31, 2011 the Teekay Tangguh Joint Venture has advances of $13.9 million and $10.2 million, respectively, to the Partnership’s joint venture partner, BLT LNG Tangguh Corporation, and its parent company, PT Berlian Laju Tanker. The advances are comprised of a $3.6 million promissory note due on demand and bearing interest at a fixed-rate of 8.0%. The remaining amount of the advance is non-interest bearing.

In March 2012, PT Berlian Laju Tanker filed for bankruptcy protection in order to restructure its debts. The Partnership believes the advances to the joint venture partner and its parent are still collectible given that the expected cash flows anticipated to be generated by the Teekay Tangguh Joint Venture can be used to repay the advances.

7.	Long-Term Debt


	June 30,		December 31,
	2012		2011
	$		$
U.S. Dollar-denominated Revolving Credit Facilities due through 2018		190,000		49,274
U.S. Dollar-denominated Term Loan due through 2018		116,594		120,796
U.S. Dollar-denominated Term Loan due through 2019		334,310		346,768
U.S. Dollar-denominated Term Loan due through 2021		315,802		321,337
U.S. Dollar-denominated Term Loan due through 2021		111,877		114,868
U.S. Dollar-denominated Unsecured Demand Loan		13,282		13,282
Norwegian Kroner-denominated Bond due in 2017		117,475		—
Euro-denominated Term Loans due through 2023		334,312		348,906

Total		1,533,652		1,315,231
Less current portion		85,138		84,722

Total		1,448,514		1,230,509

As at June 30, 2012, the Partnership had three long-term revolving credit facilities available, which, as at such date, provided for aggregate borrowings of up to $478.0 million, of which $288.0 million was undrawn. Interest payments are based on LIBOR plus margins. The amount available under the revolving credit facilities reduces by $16.5 million (remainder of 2012), $33.7 million (2013), $34.5 million (2014), $84.1 million (2015), $27.3 million (2016) and $281.9 million (thereafter). All the revolving credit facilities may be used by the Partnership to fund general corporate purposes and cash distributions. The Partnership is required to repay all borrowings used to fund cash distributions within 12 months of their being drawn, from a source other than further borrowings. The revolving credit facilities are collateralized by first-priority mortgages granted on seven of the Partnership’s vessels, together with other related security, and include a guarantee from the Partnership or its subsidiaries of all outstanding amounts.

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. Dollars, except unit and per unit data or unless otherwise indicated)

At June 30, 2012, the Partnership had a U.S Dollar-denominated term loan outstanding in the amount of $116.6 million. Interest payments on this loan are based on LIBOR plus 2.75% and require quarterly payments and a bullet repayment of approximately $50.7 million due at maturity in 2018. This loan facility is collateralized by first-priority mortgages on the five vessels to which the loan relates, together with certain other related security and is guaranteed by the Partnership.

The Partnership owns a 70% interest in Teekay Nakilat Corporation (or the Teekay Nakilat Joint Venture ), a consolidated entity of the Partnership. The Teekay Nakilat Joint Venture has a U.S. Dollar-denominated term loan outstanding, which, as at June 30, 2012, totaled $334.3 million, of which $166.1 million bears interest at a fixed-rate of 5.39% and requires quarterly payments. The remaining $168.2 million bears interest based on LIBOR plus 0.68% and will require bullet repayments of approximately $56.0 million per each of three vessels due at maturity in 2018 and 2019. The term loan is collateralized by first-priority mortgages on the three vessels, together with certain other related security and certain guarantees from the Partnership.

The Partnership owns a 69% interest in the Teekay Tangguh Joint Venture, a consolidated entity of the Partnership. The Teekay Tangguh Joint Venture has a U.S. Dollar-denominated term loan outstanding, which, as at June 30, 2012, totaled $315.8 million. Interest payments on the loan are based on LIBOR plus margins. Interest payments on one tranche under the loan facility are based on LIBOR plus 0.30%, while interest payments on the second tranche are based on LIBOR plus 0.63%. One tranche reduces in quarterly payments while the other tranche correspondingly is drawn up with a final $95.0 million bullet payment per each of two vessels due in 2021. This loan facility is collateralized by first-priority mortgages on the two vessels to which the loan relates, together with certain other security and is guaranteed by the Partnership.

At June 30, 2012, the Partnership had a U.S. Dollar-denominated term loan outstanding in the amount of $111.9 million. Interest payments on one tranche under the loan facility are based on LIBOR plus 0.30%, while interest payments on the second tranche are based on LIBOR plus 0.70%. One tranche reduces in semi-annual payments while the other tranche correspondingly is drawn up every six months with a final $20 million bullet payment per each of two vessels due 12 years and six months from each vessel delivery date. This loan facility is collateralized by first-priority mortgages on the two vessels to which the loan relates, together with certain other related security and is guaranteed by Teekay Corporation.

The Teekay Nakilat Joint Venture has a U.S. Dollar-denominated demand loan outstanding owing to Qatar Gas Transport Company Ltd. (Nakilat), which, as at June 30, 2012, totaled $13.3 million. Interest payments on this loan, which are based on a fixed interest rate of 4.84%, commenced in February 2008. The loan is repayable on demand no earlier than February 27, 2027.

On May 3, 2012, the Partnership issued Norwegian Kroner (or NOK ) 700 million of senior unsecured bonds that mature in May 2017 in the Norwegian bond market. As at June 30, 2012, the carrying amount of the bonds was $117.5 million. The Partnership is applying to list the bonds on the Oslo Stock Exchange. The interest payments on the bonds are based on NIBOR plus a margin of 5.25%. The Partnership entered into a cross currency swap, to swap all interest and principal payments into U.S. Dollars, with the interest payments fixed at a rate of 6.88% (see Note 10), and the transfer of principal fixed at $125.0 million upon maturity in exchange for NOK 700 million.

The Partnership has two Euro-denominated term loans outstanding, which as at June 30, 2012 totaled 264.1 million Euros ($334.3 million). Interest payments are based on EURIBOR plus a margin, which margins ranged from 0.60% to 2.25% as of June 30, 2012. The term loans have varying maturities through 2023. The term loans are collateralized by first-priority mortgages on two vessels to which the loans relate, together with certain other related security and are guaranteed by the Partnership and one of its subsidiaries.

The weighted-average effective interest rate for the Partnership’s long-term debt outstanding at June 30, 2012 and December 31, 2011 was 2.38% and 2.30%, respectively. This rate does not reflect the effect of related interest rate swaps that the Partnership has used to economically hedge certain of its floating-rate debt (see Note 10). At June 30, 2012, the margins on the Partnership’s outstanding revolving credit facilities and term loans ranged from 0.30% to 2.75%.

All Euro-denominated term loans and Norwegian Kroner-denominated bonds are revalued at the end of each period using the then-prevailing U.S. Dollar exchange rate. Due primarily to the revaluation of the Partnership’s Norwegian Kroner-denominated bonds, the Partnership’s Euro-denominated term loans, capital leases and restricted cash, and the change in the valuation of the Partnership’s cross currency swap, the Partnership incurred foreign exchange gains (losses) of $13.9 million and ($8.9) million, and $4.3 million and ($29.9) million, of which these amounts were primarily unrealized, for the three months ended June 30, 2012 and 2011 and the six months ended June 30, 2012 and 2011, respectively.

The aggregate annual long-term debt principal repayments required subsequent to June 30, 2012 are $42.4 million (remainder of 2012), $85.9 million (2013), $87.5 million (2014), $144.2 million (2015), $91.0 million (2016) and $1,082.7 million (thereafter).

Certain loan agreements require that (a) the Partnership maintains minimum levels of tangible net worth and aggregate liquidity, (b) the Partnership maintains certain ratios of vessel values as it relates to the relevant outstanding loan principal balance, (c) the Partnership not exceed a maximum level of leverage, and (d) one of the Partnership’s subsidiaries maintains restricted cash deposits. The Partnership’s ship-owning subsidiaries may not, among other things, pay dividends or distributions if the Partnership is in default under its term loans or revolving credit facilities. One of the Partnership’s term loans is guaranteed by Teekay Corporation and contains covenants that require Teekay Corporation to maintain the greater of a minimum liquidity (cash and cash equivalents) of at least $50.0 million and 5.0% of Teekay Corporation’s total consolidated debt which has recourse to Teekay Corporation. As at June 30, 2012, the Partnership and its affiliates were in compliance with all covenants relating to the Partnership’s credit facilities and term loans.

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. Dollars, except unit and per unit data or unless otherwise indicated)

8.	Income Tax

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
	$			$			$			$
Current		(330	)		(210	)		(619	)		(619	)
Deferred		198			91			748			(336	)

Income tax (expense) recovery		(132	)		(119	)		129			(955	)

As of December 31, 2011, the Partnership had unrecognized tax benefits of 4.2 million Euros (approximately $5.5 million) relating to a re-investment tax credit in connection to a 2005 annual tax filing. The Partnership received this tax credit refund in 2008; however, the relevant tax authorities had challenged the eligibility of the re-investment tax credit and, as a result, the Partnership believed the more-likely-than-not threshold was not met and recognized a liability of 3.4 million Euros (approximately $4.7 million) in 2009. During 2012, the Central Administrative Court accepted the Partnership’s claim on its re-investment tax credit and as a result, the Partnership has recognized this tax benefit in equity as the original vessel sale transaction was a related party transaction reflected in equity.

9.	Related Party Transactions

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


	Three Months Ended				Six Months Ended
	June 30, 2012 $		June 30, 2011 $		June 30, 2012 $		June 30, 2011 $
Revenues ⁽¹⁾		9,592		8,441		19,183		17,786
Vessel operating expenses ⁽²⁾		8,029		8,506		17,011		16,079
General and administrative ^{(3) (4) (5)}		4,737		4,492		9,793		8,754

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

(2)	Teekay Corporation’s crew salaries and training.

(3)	Teekay Corporation’s administrative, advisory, business development, technical and strategic management fees.

(4)	Includes $0.2 million and $0.4 million, and $0.7 million and $0.6 million of costs incurred by the General Partner during the three months ended June 30, 2012 and 2011 and the six months ended June 30, 2012 and 2011, respectively.

(5)

Amounts are net of nil and $0.3 million, and $0.2 million and $0.5 million for the three months ended June 30, 2012 and 2011, and the six months ended June 30, 2012 and 2011, respectively, which consist of the amortization of $3.0 million paid to the Partnership by Teekay Corporation in March 2009 for the right to provide ship management services to certain of the Partnership’s vessels.

b) At December 31, 2011, crewing and manning costs of $4.1 million were payable to affiliates and were included as part of accounts payable and accrued liabilities in the Partnership’s consolidated balance sheets. In addition, as at June 30, 2012 and December 31, 2011, non-interest bearing advances to affiliates totaled $24.4 million and $11.9 million, respectively, and non-interest bearing advances from affiliates totaled $27.3 million and $17.4 million, respectively. These advances are unsecured and have no fixed repayment terms.

c) The Partnership’s Suezmax tanker the Toledo Spirit operates pursuant to a time-charter contract that increases or decreases the otherwise fixed-hire rate established in the charter depending on the spot charter rates that the Partnership would have earned had it traded the vessel in the spot tanker market. The remaining term of the time-charter contract is 13 years, although the charterer has the right to terminate the time-charter in July 2018. The Partnership has entered into an agreement with Teekay Corporation under which Teekay Corporation pays the Partnership any amounts payable to the charterer as a result of spot rates being below the fixed rate, and the Partnership pays Teekay Corporation any amounts payable to the Partnership as a result of spot rates being in excess of the fixed rate. The amounts payable to or receivable from Teekay Corporation are recognized at the end of each year (see Note 10).

d) In December 2007, a consortium in which Teekay Corporation had a 33% ownership interest agreed to charter four newbuilding 160,400-cubic meter LNG carriers (or the Angola LNG Carriers ) for a period of 20 years to Angola LNG Supply Services LLC. The consortium entered into agreements to construct the four LNG carriers at a total cost of $906.2 million (of which Teekay Corporation’s 33% portion was $299.0 million), excluding capitalized interest. The vessels are chartered at fixed rates, with inflation adjustments, which began upon delivery of the vessels. In March 2011, the Partnership agreed to acquire Teekay Corporation’s 33% ownership interest in these vessels and related charter contracts upon delivery of each vessel.

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. Dollars, except unit and per unit data or unless otherwise indicated)

Three of the four Angola LNG Carriers delivered during August to October 2011 and commenced their 20-year, fixed-rate charters to Angola LNG Supply Services. Concurrently, the Partnership acquired Teekay Corporation’s 33% ownership interest in these three vessels and related charter contracts for a total equity purchase price of $57.3 million (net of assumed debt of $193.8 million). In January 2012, the remaining Angola LNG Carrier delivered and commenced its 20-year, fixed-rate charter. Concurrently, the Partnership acquired Teekay Corporation’s 33% ownership interest in this vessel and related charter contract for a total equity purchase price of $19.1 million (net of assumed debt of $64.8 million). The excess of the purchase price over the book value of the assets of $15.9 million was accounted for as an equity distribution to Teekay Corporation. The Partnership’s investments in the Angola LNG Carriers are accounted for using the equity method.

e) In February 2012, the Partnership incurred a $7.0 million charge relating to a one-time fee to Teekay Corporation for its support in the Partnership’s successful acquisition of its 52% interest in six LNG carriers (see Note 13). This acquisition fee is reflected as part of investments in and advances to equity accounted joint ventures in the Partnership’s consolidated balance sheets.

10.

Derivative Instruments

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

Foreign Exchange Risk

In May 2012 the Partnership entered into a cross currency swap and pursuant to this swap the Partnership receives the principal amount in NOK on the maturity date of the swap, in exchange for payment of a fixed U.S. Dollar amount. In addition, the cross currency swap exchanges a receipt of floating interest in NOK based on NIBOR plus a margin for a payment of U.S. Dollar fixed interest. The purpose of the cross currency swap is to economically hedge the foreign currency exposure on the payment of interest and principal of the Partnership’s Norwegian Kroner-denominated bond due in 2017 and to economically hedge the interest rate exposure. The Partnership has not designated, for accounting purposes, this cross currency swap as a cash flow hedge of its Norwegian Kroner-denominated bond due in 2017. As at June 30, 2012, the Partnership was committed to the following cross currency swap:

Fair Value /

Carrying

Weighted-

Principal

Floating Rate Receivable

Amount of

Average

Amount

Reference

Fixed Rate

Liability

Remaining

NOK

Rate

Margin

Payable

Term (Years)

700,000

125,000

NIBOR

5.25

6.88

(10,220

)

4.8

Interest Rate Risk

The Partnership enters into interest rate swaps which either exchange a receipt of floating interest for a payment of fixed interest or a payment of floating interest for a receipt of fixed interest to reduce the Partnership’s exposure to interest rate variability on its outstanding floating-rate debt and floating-rate restricted cash deposits. As at June 30, 2012, the Partnership was committed to the following interest rate swap agreements:


				Fair Value /
				Carrying			Weighted-
				Amount of			Average		Fixed
	Interest	Principal		Assets			Remaining		Interest
	Rate	Amount		(Liability)			Term		Rate
	Index	$		$			(years)		(%) ⁽¹⁾
LIBOR-Based Debt:
U.S. Dollar-denominated interest rate swaps ⁽²⁾	LIBOR		417,666		(130,811	)		24.6		4.9
U.S. Dollar-denominated interest rate swaps ⁽²⁾	LIBOR		206,696		(60,618	)		6.7		6.2
U.S. Dollar-denominated interest rate swaps	LIBOR		90,000		(19,111	)		6.2		4.9
U.S. Dollar-denominated interest rate swaps	LIBOR		100,000		(21,414	)		4.5		5.3
U.S. Dollar-denominated interest rate swaps ⁽³⁾	LIBOR		212,500		(59,119	)		16.5		5.2
LIBOR-Based Restricted Cash Deposit:
U.S. Dollar-denominated interest rate swaps ⁽²⁾	LIBOR		469,666		166,527			24.6		4.8
EURIBOR-Based Debt:
Euro-denominated interest rate swaps ⁽⁴⁾	EURIBOR		334,312		(35,156	)		12.0		3.1

					(159,702	)

(1)	Excludes the margins the Partnership pays on its floating-rate term loans, which, at June 30, 2012, ranged from 0.30% to 2.75% (see Note 7).

(2)	Principal amount reduces quarterly.

(3)	Principal amount reduces semi-annually.

(4)	Principal amount reduces monthly to 70.1 million Euros ($88.8 million) by the maturity dates of the swap agreements.

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. Dollars, except unit and per unit data or unless otherwise indicated)

Credit Risk

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

Other Derivative

In order to reduce the variability of its revenue, the Partnership has entered into an agreement with Teekay Corporation under which Teekay Corporation pays the Partnership any amounts payable to the charterer of the Toledo Spirit as a result of spot rates being below the fixed rate, and the Partnership pays Teekay Corporation any amounts payable to the Partnership by the charterer of the Toledo Spirit as a result of spot rates being in excess of the fixed rate. The fair value of the derivative at June 30, 2012 was a liability of $0.3 million (December 31, 2011 – liability of $0.6 million).

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


			Current							Current
			portion of							portion of
	Accounts		derivative		Derivative		Accrued			derivative			Derivative
	receivable		assets		assets		liabilities			liabilities			liabilities
As at June 30, 2012
Interest rate swap agreements		4,276		16,180		146,071		(10,672	)		(46,659	)		(268,898	)
Cross currency swap agreement		49		221		—		—			—			(10,490	)
Toledo Spirit time-charter derivative		—		—		—		—			—			(300	)

		4,325		16,401		146,071		(10,672	)		(46,659	)		(279,688	)

As at December 31, 2011
Interest rate swap agreements		4,344		15,608		139,651		(11,448	)		(43,973	)		(248,645	)
Toledo Spirit time-charter derivative		—		—		—		—			—			(600	)

		4,344		15,608		139,651		(11,448	)		(43,973	)		(249,245	)

Realized and unrealized (losses) gains relating to interest rate swap agreements and Toledo Spirit time-charter derivative are recognized in earnings and reported in realized and unrealized loss on derivative instruments in the Partnership’s consolidated statements of income (loss). The effect of the gain (loss) on these derivatives on the Partnership’s consolidated statements of income (loss) is as follows:


	Three Months Ended June 30,
	2012									2011
	Realized			Unrealized						Realized			Unrealized
	gains			gains						gains			gains
	(losses)			(losses)			Total			(losses)			(losses)			Total
Interest rate swap agreements		(9,284	)		(8,855	)		(18,139	)		(10,046	)		(16,430	)		(26,476	)
Toledo Spirit time-charter derivative		(6	)		—			(6	)		(53	)		(800	)		(853	)

		(9,290	)		(8,855	)		(18,145	)		(10,099	)		(17,230	)		(27,329	)


	Six Months Ended June 30,
	2012									2011
	Realized			Unrealized						Realized			Unrealized
	gains			gains						gains			gains
	(losses)			(losses)			Total			(losses)			(losses)		Total
Interest rate swap agreements		(18,363	)		(15,947	)		(34,310	)		(20,283	)		3,376		(16,907	)
Toledo Spirit time-charter derivative		(38	)		300			262			(53	)		400		347

		(18,401	)		(15,647	)		(34,048	)		(20,336	)		3,776		(16,560	)

Realized and unrealized gains (losses) of the cross currency swap are recognized in earnings and reported in foreign currency exchange gain (loss) in the Partnership’s consolidated statements of income (loss). For the three and six months ended June 30, 2012, unrealized losses of ($10.3) million and realized gains of $48,000 were recognized in earnings.

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. Dollars, except unit and per unit data or unless otherwise indicated)

11.

Commitments and Contingencies

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

In July 2008, subsidiaries of Teekay Corporation (or the Skaugen Multigas Subsidiaries ) signed contracts for the purchase of two multigas carriers from I.M. Skaugen ASA (or Skaugen ). The Partnership agreed to acquire the Skaugen Multigas Subsidiaries from Teekay Corporation upon delivery of the vessels. Each vessel commenced service under 15-year, fixed-rate charters to Skaugen upon delivery. Subsequent to July 2008 and prior to the delivery of the vessels in June and October 2011, the Partnership consolidated the Skaugen Multigas Subsidiaries as they were VIEs and the Partnership was the primary beneficiary during this period. The Partnership acquired 100% of the shares of the two Skaugen Multigas Subsidiaries on June 15, 2011 and October 17, 2011, respectively, for a purchase price of $55.3 million and $59.2 million, respectively.

b) As described in Note 5, 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 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. 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 $46 million.

12.

Total Capital and Net Income (Loss) Per Unit

At June 30, 2012, 61.1% of the Partnership’s common units outstanding were held by the public. The remaining common units, as well as the 2% general partner interest, were held by a subsidiary of Teekay Corporation.

Net Income (Loss) Per Unit

Net income (loss) per unit is determined by dividing net income (loss), after deducting the non-controlling interest and the General Partner’s interest, by the weighted-average number of units outstanding during the period.

The General Partner’s and common unitholders’ interests in net income (loss) are calculated as if all net income (loss) was distributed according to the terms of the Partnership’s partnership agreement, regardless of whether those earnings would or could be distributed. The partnership agreement does not provide for the distribution of net income (loss); rather, it provides for the distribution of available cash, which is a contractually defined term that generally means all cash on hand at the end of each quarter after establishment of cash reserves determined by the Partnership’s board of directors to provide for the proper conduct of the Partnership’s business, including reserves for maintenance and replacement capital expenditures and anticipated credit needs. In addition, the General Partner is entitled to incentive distributions if the amount the Partnership distributes to unitholders with respect to any quarter exceeds specified target levels. Unlike available cash, net income (loss) is affected by non-cash items, such as depreciation and amortization, unrealized gains or losses on non-designated derivative instruments and foreign currency translation gains (losses).

During the three and six months ended June 30, 2012 and 2011, cash distributions exceeded $0.4625 per unit and, consequently, the assumed distribution of net income (loss) resulted in the use of the increasing percentages to calculate the General Partner’s interest in net income (loss) for the purposes of the net income (loss) per unit calculation. For more information on the increasing percentages to calculate the General Partner’s interest in net income (loss), please refer to the Partnership’s Annual Report on Form 20-F.

Pursuant to the partnership agreement, allocations to partners are made on a quarterly basis.

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts stated in thousands of U.S. Dollars, except unit and per unit data or unless otherwise indicated)

13.

Equity Method Investments

On February 28, 2012, a joint venture between the Partnership and Marubeni Corporation (or Teekay LNG-Marubeni Joint Venture ) acquired a 100% interest in six LNG carriers (or the MALT LNG Carriers ) from Denmark-based A.P. Moller-Maersk A/S for approximately $1.3 billion. The Teekay LNG-Marubeni Joint Venture financed this acquisition with $1.06 billion from secured loan facilities and $266 million from equity contributions from the Partnership and Marubeni Corporation. The Partnership has agreed to guarantee its 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 for the debt within the Teekay LNG-Marubeni Joint Venture and recorded a guarantee liability of $1.4 million. The carrying value of the guarantee liability as at June 30, 2012, was $1.1 million and is included as part of other long-term liabilities in the Partnership’s consolidated balance sheets. The recognition of the guarantee liability in 2012 was treated as a non-cash transaction in the Partnership’s consolidated statements of cash flows. The Partnership has a 52% economic interest in the Teekay LNG-Marubeni Joint Venture and consequently its share of the equity contribution was $138.2 million. The Partnership also contributed an additional $5.8 million for its share of legal and financing costs and recorded the $7.0 million acquisition fee paid to Teekay Corporation as part of the investment (see Note 9e). The Partnership financed this equity contribution by borrowing under its existing credit facilities.

This jointly-controlled entity is accounted for using the equity method. The excess of the Partnership’s investment in the Teekay LNG-Marubeni Joint Venture over the book value of net assets acquired, which amounted to approximately $303 million, has been accounted for as an increase to the carrying value of the vessels and out-of-the-money charters of the Teekay LNG-Marubeni Joint Venture, in accordance with the preliminary purchase price allocation.

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

JUNE 30, 2012

PART I – FINANCIAL INFORMATION

Item 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

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. Our current fleet of 27 LNG carriers (including one regasification unit), five LPG/Multigas carriers and 11 conventional tankers operates under long-term, fixed-rate charters primarily with major energy and utility companies and Teekay Corporation. Our interests in these vessels range from 33% to 100%.

SIGNIFICANT DEVELOPMENTS IN 2012

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 (or the Maersk LNG Acquisition ). We and Marubeni have 52% and 48% economic interests, respectively, but share control in 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 from 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. Teekay Corporation has substantially taken over the technical management of the acquired vessels.

Angola LNG Project

In December 2007, a consortium in which Teekay Corporation had a 33% ownership interest agreed to charter four newbuilding 160,400-cubic meter LNG carriers (or the Angola LNG Carriers ) to the Angola LNG Project. The Angola LNG Project involves the collection and transportation of gas from offshore production facilities to an onshore LNG processing plant at Soyo, located in northwest Angola. The project is being developed by subsidiaries of Chevron Corporation, Sociedade Nacional de Combustiveis de Angola EP, BP Plc, Total S.A. and Eni SpA. Mitsui & Co., Ltd. and NYK Bulkship (Europe) have 34% and 33% ownership interests in the consortium, respectively. In 2011, Teekay Corporation offered to us, and we agreed to purchase, its 33% ownership interest in these vessels and related charter contracts at a total equity purchase price of approximately $76 million (net of assumed debt of approximately $259 million). We acquired the ownership interests and paid a proportionate share of the purchase price as each vessel delivered. Three of the Angola LNG Carriers delivered in 2011 and the remaining Angola LNG Carrier delivered on January 12, 2012.

The Angola LNG Carriers are chartered at fixed rates, subject to inflation adjustments, to the Angola LNG Project for a period of 20 years from the date of delivery from the shipyard, with two extension periods for five years each. The charterer has the option to terminate the charter upon 120 days notice and payment of an early termination fee, which would equal approximately 50% of the fully built-up cost of the applicable vessel. The charterer may also terminate the charter under other circumstances typical in our long-term charters, such as excessive off-hire during which we do not provide a replacement vessel, or certain force majeure events.

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 U.S. $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. We are applying to list the bonds on the Oslo Stock Exchange.

RESULTS OF OPERATIONS

There are a number of factors that should be considered when evaluating our historical financial performance and assessing our future prospects and we use a variety of financial and operational terms and concepts when analyzing our results of operations. These factors, terms and concepts are described in Item 5. “Operating and Financial Review and Prospects” of our Annual Report on Form 20-F for the year ended December 31, 2011, filed with the SEC on April 11, 2012.

We manage our business and analyze and report our results of operations on the basis of two business segments: the liquefied gas segment and the conventional tanker segment, each of which are discussed below.

Liquefied Gas Segment

As at June 30, 2012, our liquefied gas segment fleet (in which our interests ranged from 33% to 100%) included 27 LNG carriers and five LPG/Multigas carriers, however, the table below only includes 11 LNG carriers (excluding the six MALT LNG Carriers, the four Angola LNG Carriers, the four RasGas 3 LNG Carriers and the Excalibur and Excelsior Carriers, which are all accounted for under the equity method) and five LPG carriers.

The following table compares our liquefied gas segment’s operating results for the three and six months ended June 30, 2012 and 2011, and compares its net voyage revenues (which is a non-GAAP financial measure) for the three and six months ended June 30, 2012 and 2011 to voyage revenues, the most directly comparable GAAP financial measure. We principally use net voyage revenues because it provides more meaningful information to us than voyage revenues and net voyage revenues is also widely used by investors and analysts in the shipping industry for comparing financial performance between companies and to industry averages. The following tables also provide a summary of the changes in calendar-ship-days and revenue days for our liquefied gas segments:


(in thousands of U.S. Dollars, except revenue days,	Three Months Ended June 30,
calendar-ship-days and percentages)	2012			2011			% Change
Voyage revenues		67,602			65,885			2.6
Voyage expenses		30			61			(50.8	)

Net voyage revenues		67,572			65,824			2.7
Vessel operating expenses		10,717			13,145			(18.5	)
Depreciation and amortization		17,309			15,081			14.8
General and administrative ⁽¹⁾		4,099			3,941			4.0

Income from vessel operations		35,447			33,657			5.3

Operating Data:
Revenue Days (A)		1,435			1,174			22.2
Calendar-Ship-Days (B)		1,456			1,198			21.5
Utilization (A)/(B)		98.6	%		98.0	%


(in thousands of U.S. Dollars, except revenue days,	Six Months Ended June 30,
calendar-ship-days and percentages)	2012			2011			% Change
Voyage revenues		138,336			131,678			5.1
Voyage expenses		66			70			(5.7	)

Net voyage revenues		138,270			131,608			5.1
Vessel operating expenses		21,529			24,222			(11.1	)
Depreciation and amortization		34,547			30,205			14.4
General and administrative ⁽¹⁾		8,626			7,265			18.7

Income from vessel operations		73,568			69,916			5.2

Operating Data:
Revenue Days (A)		2,891			2,344			23.3
Calendar-Ship-Days (B)		2,912			2,368			23.0
Utilization (A)/(B)		99.3	%		99.0	%

⁽¹⁾	Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to each segment based on estimated use of resources).

During the six months ended June 30, 2012, our liquefied gas segment’s total calendar-ship-days increased by 23% for the six months ended June 30, 2012 from the six months ended June 30, 2011, primarily as a result of the delivery of two Multigas carriers, the Norgas Unikum , on June 15, 2011 and the Norgas Vision , on October 17, 2011 and the delivery of an LPG carrier, the Norgas Camilla , on September 15, 2011.

Net Voyage Revenues . Net voyage revenues increased for the three and six months ended June 30, 2011 from the same periods last year, primarily as a result of:

•

increases of $3.5 million and $7.3 million for the three and six months ended June 30, 2012, respectively, due to the deliveries of the Norgas Unikum , Norgas Camilla and Norgas Vision ;

•

an increase of $1.0 million for the three and six months ended June 30, 2012 due to the Arctic Spirit and Polar Spirit being off-hire for 11 days and 9 days, respectively, in the second quarter of 2011 for scheduled dry dockings;

•

an increase of $0.7 million for the six months ended June 30, 2012 due to one additional calendar day during 2012; and

•

increases of $0.1 million and $0.7 million for the three and six months ended June 30, 2012, respectively, due to operating expense recovery adjustments and increase in the charter-hire rates for the Tangguh Hiri and Tangguh Sago ;

partially offset by

•

decreases of $1.6 million and $2.1 million for the three and six months ended June 30, 2012, respectively, due to the effect on our Euro-denominated revenues from the weakening of the Euro against the U.S. Dollar compared to the same periods last year;

•

a decrease of $1.4 million for the three and six months ended June 30, 2012 due to the Hispania Spirit being off-hire for 21 days in the second quarter of 2012 for scheduled dry docking; and

•

a decrease of $0.9 million for the three and six months ended June 30, 2012 due to a one-time payment made to the charterer of the Galicia Spirit for delaying the scheduled dry docking.

Vessel Operating Expenses . Vessel operating expenses decreased for the three and six months ended June 30, 2012 from the same periods last year, primarily as a result of:

•

a decrease of $1.2 million for the three and six months ended June 30, 2012 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 lower manning levels due to timing of scheduled crew changes;

•

decreases of $0.6 million and $0.8 million for the three and six months ended June 30, 2012, respectively, due to the cancellation of loss of hire insurance on Tangguh Hiri and Tangguh Sago in the third quarter of 2011 and lower insurance premiums on certain LNG carriers; and

•

decreases of $0.6 million and $0.8 million for the three and six months ended June 30, 2012, respectively, due to maintenance on the Tangguh Hiri during the second quarter of 2011 relating to a scheduled dry docking.

Depreciation and Amortization . Depreciation and amortization increased for the three and six months ended June 30, 2012, from the same periods last year, primarily as a result of:

•

increases of $1.1 million and $2.2 million for the three and six months ended June 30, 2012, respectively, 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; and

•

increases of $1.1 million and $2.1 million for the three and six months ended June 30, 2012, respectively, as a result of amortization of dry-dock expenditures incurred in 2011 and the first and second quarters of 2012. The dry docking of the Al Daayan in the first quarter of 2012 did not result in any off-hire days based on the time-charter contract and therefore, did not result in a corresponding decrease in revenue during the dry-docking period.

Conventional Tanker Segment

Our fleet includes 10 Suezmax-class double-hulled conventional crude oil tankers and one Handymax Product tanker, each of which we own 100%. All of our conventional tankers operate under long-term, fixed-rate charters.

The following table compares our conventional tanker segment’s operating results for the three and six months ended June 30, 2012 and 2011, and compares its net voyage revenues (which is a non-GAAP financial measure) for the three and six months ended June 30, 2012 and 2011 to voyage revenues, the most directly comparable GAAP financial measure. We principally use net voyage revenues because it provides more meaningful information to us than voyage revenues and net voyage revenues is also widely used by investors and analysts in the shipping industry for comparing financial performance between companies and to industry averages. The following tables also provide 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,	Three Months Ended June 30,
calendar-ship-days and percentages)	2012			2011			% Change
Voyage revenues		28,752			26,362			9.1
Voyage expenses		212			624			(66.0	)

Net voyage revenues		28,540			25,738			10.9
Vessel operating expenses		9,387			10,243			(8.4	)
Depreciation and amortization		7,364			7,090			3.9
General and administrative ⁽¹⁾		2,407			2,594			(7.2	)

Income from vessel operations		9,382			5,811			61.5

Operating Data:
Revenue Days (A)		1,001			929			7.8
Calendar-Ship-Days (B)		1,001			1,001			—
Utilization (A)/(B)		100.0	%		92.8	%


(in thousands of U.S. Dollars, except revenue days,	Six Months Ended June 30,
calendar-ship-days and percentages)	2012			2011			% Change
Voyage revenues		57,234			53,788			6.4
Voyage expenses		519			985			(47.3	)

Net voyage revenues		56,715			52,803			7.4
Vessel operating expenses		19,106			19,973			(4.3	)
Depreciation and amortization		14,759			14,315			3.1
General and administrative ⁽¹⁾		4,996			5,596			(10.7	)

Income from vessel operations		17,854			12,919			38.2

Operating Data:
Revenue Days (A)		2,002			1,919			4.3
Calendar-Ship-Days (B)		2,002			1,991			0.6
Utilization (A)/(B)		100.0	%		96.4	%

⁽¹⁾	Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to each segment based on estimated use of corporate resources).

During the six months ended June 30, 2012, none of our vessels were off-hire as compared to 72 off-hire days for the Huelva Spirit relating to a scheduled dry docking in the same period last year. As a result, our utilization increased to 100.0% from 92.8% for the three months ended June 30, 2012 compared to the same period in 2011, and to 100.0% from 96.4% for the six months ended June 30, 2012 compared to the same period in 2011.

Net Voyage Revenues . Net voyage revenues increased for the three and six months ended June 30, 2012, from the same periods last year, primarily as a result of:

•

an increase of $1.7 million for the three and six months ended June 30, 2012 due to the Huelva Spirit being off-hire for 72 days in the second quarter of 2011 for a scheduled dry dock;

•

increases of $0.4 million and $1.1 million for the three and six months ended June 30, 2012, respectively, due to lower voyage expenses in 2012 compared to 2011 primarily as a result of the scheduled dry dock of the Huelva Spirit in 2011;

•

increases of $0.3 million and $0.5 million for the three and six months ended June 30, 2012, respectively, 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 the same periods last year; and

•

increases of $0.1 million and $0.5 million for the three and six months ended June 30, 2012, respectively, 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 do not affect our cash flow or net income (loss)).

Vessel Operating Expenses . Vessel operating expenses decreased for the three and six months ended June 30, 2012 from the same periods last year, 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 lower manning levels due to timing of scheduled crew changes.

Depreciation and Amortization . Depreciation and amortization increased slightly for the three and six months ended June 30, 2012, from the same periods last year, primarily as a result of amortization of dry-dock expenditures incurred in 2011.

Other Operating Results

General and Administrative Expenses . General and administrative expenses increased to $13.6 million for the six months ended June 30, 2012 from $12.9 million for the same period last year and remained consistent for the three months ended June 30, 2012 compared to the same period last year, primarily as a result of:

•

increases of $0.8 million and $2.0 million for the three and six months ended June 30, 2012, respectively, as a result of an agreement executed with Teekay Corporation for business development services as of January 2012;

partially offset by:

•

a decrease of $0.9 million for the six months ended June 30, 2012 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; and

•

a decrease of $0.5 million for the three months ended June 30, 2012 due to a reduction of fees charged by Teekay Corporation.

Interest Expense . Interest expense increased to $13.7 million and $26.5 million for the three and six months ended June 30, 2012, respectively, from $12.1 million and $23.9 million for the same periods last year. Interest expense primarily reflects interest incurred on our capital lease obligations and long-term debt. These changes were primarily the result of:

•

an increase of $1.5 million for the three and six months ended June 30, 2012 as a result of the NOK bond issuance on May 3, 2012;

•

increases of $0.8 million and $1.6 million for the three and six months ended June 30, 2012, respectively, due to an increase in our borrowings upon our acquisitions of three LPG/Multigas vessels during the second, third and fourth quarters of 2011;

•

increases of $0.6 million and $1.1 million for the three and six months ended June 30, 2012, respectively, due to increased LIBOR and a higher principal debt balance due to draws on an existing debt facility during the first and second quarters of 2012; and

•

increases of $0.8 million and $1.6 million for the three and six months ended June 30, 2012, respectively, as a result of refinancing one of our debt facilities with a higher margin than the previous debt facility;

partially offset by

•

decreases of $1.3 million and $2.6 million for the three and six months ended June 30, 2012, respectively, 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 $1.0 million for the three and six months ended June 30, 2012 due to lower EURIBOR relating to Euro-denominated debt.

Interest Income . Interest income decreased to $0.9 million and $1.9 million for the three and six months ended June 30, 2012, from $1.7 million and $3.3 million for the same periods last year. 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 three of our LNG carriers. These changes were primarily the result of:

•

decreases of $1.1 million and $2.2 million for the three and six months ended June 30, 2012, respectively, due to the termination 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

•

increases of $0.4 million and $0.8 million for the three and six months ended June 30, 2012, respectively, due to higher interest earned on other restricted cash deposits in the first and second quarters of 2012, compared to the same periods last year.

Realized and Unrealized Loss on Derivative Instruments . Net realized and unrealized losses on derivative instruments decreased to a loss of ($18.1) million for the three months ended June 30, 2012 from a loss of ($27.3) million in the same period last year, and increased to a loss of ($34.0) million for the six months ended June 30, 2012 from a loss of ($16.6) million for the same period last year, as set forth in the tables below.


	Three Months Ended June 30,
	2012									2011
	Realized			Unrealized						Realized			Unrealized
	gains			gains						gains			gains
	(losses)			(losses)			Total			(losses)			(losses)			Total
Interest rate swap agreements		(9,284	)		(8,855	)		(18,139	)		(10,046	)		(16,430	)		(26,476	)
Toledo Spirit time-charter derivative		(6	)		—			(6	)		(53	)		(800	)		(853	)

		(9,290	)		(8,855	)		(18,145	)		(10,099	)		(17,230	)		(27,329	)


	Six Months Ended June 30,
	2012									2011
	Realized			Unrealized						Realized			Unrealized
	gains			gains						gains			gains
	(losses)			(losses)			Total			(losses)			(losses)		Total
Interest rate swap agreements		(18,363	)		(15,947	)		(34,310	)		(20,283	)		3,376		(16,907	)
Toledo Spirit time-charter derivative		(38	)		300			262			(53	)		400		347

		(18,401	)		(15,647	)		(34,048	)		(20,336	)		3,776		(16,560	)

As at June 30, 2012 and 2011, we had interest rate swap agreements with an aggregate average net outstanding notional amount of approximately $0.9 billion and $1 billion, respectively, with average fixed rates of 4.6% and 4.9%, respectively. The decreases in realized losses from 2011 to 2012 relating to our interest rate swaps were primarily due to higher short-term variable benchmark interest rates in 2012 compared to 2011.

Long-term LIBOR and EURIBOR benchmark interest rates decreased during the three and six months ended June 30, 2012. The decrease in rates during the three and six months ended June 30, 2012 resulted in ($42.0) million and ($23.0) million of unrealized losses, respectively, from our interest rates swaps associated with our U.S. Dollar-denominated long-term debt and capital lease obligations and from our interest rates swaps associated with our Euro-denominated long-term debt, which were partially offset by $33.1 million and $7.0 million of unrealized gains, respectively, from our interest rate swaps associated with our restricted cash deposits.

Long-term benchmark interest rates decreased during the three months ended June 30, 2011 resulting in ($33.2) million of unrealized losses from our interest rate swaps associated with our U.S. Dollar-denominated long-term debt and capital lease obligations and from our interest rate swaps associated with our Euro-denominated debt, which were partially offset by $16.8 million of unrealized gains from our interest rate swaps associated with our restricted cash deposits.

Long-term LIBOR benchmark interest rates decreased during the six months ended June 30, 2011 whereas long-term EURIBOR benchmark interest rates increased during the six months ended June 30, 2011. The decrease in LIBOR during the six months ended June 30, 2011 resulted in ($6.5) million of unrealized losses from our interest rate swaps associated with our U.S. Dollar-denominated long-term debt and capital lease obligations, which were more than offset by $5.3 million of unrealized gains from our interest rate swaps associated with our restricted cash deposits and $4.6 million of unrealized gains from our interest rate swaps associated with our Euro-denominated long-term debt.

The projected average tanker rates in the tanker market in the second quarter of 2012 remained consistent with the first quarter of 2012; therefore there was no change in the fair value of the Toledo Spirit time-charter derivative during the three months ended June 30, 2012. The projected average tanker rates in the tanker market in the second quarter of 2011 decreased compared to the first quarter of 2011, which resulted in an $0.8 million unrealized loss 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.

Foreign Currency Exchange Gains and Losses . Foreign currency exchange gains were $13.9 million and $4.3 million for the three and six months ended June 30, 2012, respectively, compared to losses of ($8.9) million and ($29.9) million for the same periods last year. Our foreign currency exchange gains (losses), substantially all of which are unrealized, are due primarily to the relevant period-end revaluation of our Norwegian Kroner-denominated debt and our Euro-denominated term loans, capital leases and restricted cash for financial reporting purposes and the realized and unrealized gains (losses) on our cross currency swap. Gains on Norwegian Kroner-denominated and Euro-denominated monetary liabilities reflect a stronger U.S. Dollar against the Norwegian Kroner and Euro on the date of revaluation or settlement compared to the rate in effect at the beginning of the period. Losses on Norwegian Kroner-denominated and Euro-denominated monetary liabilities reflect a weaker U.S. Dollar against the Norwegian Kroner and Euro on the date of revaluation or settlement compared to the rate in effect at the beginning of the period. For the three and six months ended June 30, 2012, foreign currency exchange gains (losses) include realized gains of a nominal amount and unrealized losses of ($10.3) million on our cross currency swap and unrealized gains of $7.6 million on the revaluation of our Norwegian Kroner-denominated debt. For the three and six months ended June 30, 2012, foreign currency exchange gains (losses) include the revaluation of our Euro-denominated restricted cash, debt and capital leases of $17.4 million and $7.6 million, respectively, as compared to ($9.2) million and ($29.9) million, for the same periods last year.

Equity Income. Equity income increased to $11.1 million and $28.1 million for the three and six months ended June 30, 2012, respectively, from $3.4 million and $11.5 million for the same periods last year, primarily as a result of:

•

increases of $10.4 million and $13.2 million for the three and six months ended June 30, 2012, respectively, due to the acquisition of a 52% ownership interest in the six MALT LNG Carriers on February 28, 2012;

•

increases of $2.8 million and $5.4 million for the three and six months ended June 30, 2012, respectively, 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; and

•

increases of $3.2 million and $1.8 million for the three and six months ended June 30, 2012, respectively, due to the change in unrealized gains (losses) on derivative instruments for the three and six months ended June 30, 2012, as compared to the same periods last year in our 40% investment in Teekay Nakilat (III) Corporation;

partially offset by

•

decreases of $8.0 million and $4.3 million for the three and six months ended June 30, 2012, respectively, due to the change in unrealized losses on derivatives for the three and six months ended June 30, 2012, as we acquired our 33% investment in the Angola LNG Project upon delivery of the four Angola LNG carriers in the third and fourth quarters of 2011 and the first quarter of 2012.

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 1 – Financial Statements: Note 7 – 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 through 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 on our short-term liquidity requirements. As at June 30, 2012, we and our affiliates were in compliance with all covenants relating to our credit facilities and term loans.

As at June 30, 2012, our cash and cash equivalents were $114.9 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 $402.9 million as at June 30, 2012, compared to $538.7 million as at December 31, 2011. The decrease in total liquidity is primarily due to borrowings to fund the acquisition of the Teekay LNG-Marubeni Joint Venture on February 28, 2012, the acquisition of our 33% interest in the fourth Angola LNG carrier, an increase in restricted cash and repayments of long-term debt; partially offset by an increase of $125.0 million resulting from our NOK 700 million Norwegian bond offering in May 2012.

As of June 30, 2012, we had a working capital deficit of $205.0 million. The working capital deficit includes a $170.6 million lease obligation for five Suezmax tankers. We are obligated to purchase one of the tankers after the end of its respective lease term which ends during 2012 and we may be obligated to purchase the other four tankers as the lessor has the option to sell these vessels to us any time after 2012. While we believe this is unlikely to occur in the next twelve months, as we do not expect the lessor to exercise its right to terminate the leases, such exercise would require us to satisfy the purchase price either by assuming the existing vessel financing, if the lender consents, or by financing the purchase using existing liquidity or by obtaining new debt or equity financing. We expect to manage the remaining working capital deficit primarily with net operating cash flow generated in 2012 and, to a lesser extent, existing undrawn revolving credit facilities. Please read Item 1 – Financial Statements: Note 11 – Commitments and Contingencies.

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


	Six Months Ended June 30,
(in thousands of U.S. Dollars)	2012			2011
Net cash flow from operating activities		88,772			96,719
Net cash flow from (used for) financing activities		99,233			(89,312	)
Net cash flow used for investing activities		(166,716	)		(13,954	)

Operating Cash Flows. Net cash flow from operating activities decreased to $88.8 million for the six months ended June 30, 2012, from $96.7 million for the same period last year, primarily due to changes in working capital due to the timing of our cash receipts and payments; partially offset by an increase for the delivery of two Multigas carriers in June and October 2011 and an LPG carrier in September 2011. Net cash flow from operating activities depends upon the timing and amount of dry-docking expenditures, repairs and maintenance activity, the impact of vessel additions and dispositions on operating cash flows, foreign currency rates, changes in interest rates, timing of dividends from equity accounted investments and fluctuations in working capital balances. 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 and capital lease arrangements. Proceeds from long-term debt were $395.4 million and $100.6 million for the six months ended June 30, 2012 and 2011, respectively. 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 the six months ended June 30, 2012, we primarily used the proceeds from long-term debt to fund the acquisition of our 52% interest in the six MALT LNG Carriers for $151.0 million (including working capital contribution and acquisition costs), to fund the acquisition of our 33% interest in the fourth Angola LNG Carrier for $19.1 million, to prepay and repay outstanding debt under our revolving credit facilities and for general corporate purposes.

Cash distributions paid during the six months ended June 30, 2012 increased to $93.6 million from $78.2 million for the same period last 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 two public equity offerings during 2011 and a 7.1% increase in the quarterly dividend per unit commencing in the first quarter of 2012. In addition, restricted cash during the six months ended June 30, 2012 increased by $30 million for collateral on the 18-month bridge loan used to finance a portion of our 52% interest in the six MALT LNG Carriers.

Investing Cash Flows. Net cash flow used in investing activities increased to $166.7 million for the six months ended June 30, 2012, from $14.0 million for the same period last year. During the six months ended June 30, 2012, we used cash of $151.0 million to fund the acquisition of our 52% interest in the six MALT LNG Carriers and $19.1 million for our acquisition of a 33% interest in the fourth and last Angola LNG Carrier.

Contractual Obligations and Contingencies

The following table summarizes our contractual obligations as at June 30, 2012:


	Total		Remainder of 2012		2013 and 2014		2015 and 2016		Beyond 2016
	(in millions of U.S. Dollars)
U.S. Dollar-Denominated Obligations:
Long-term debt ⁽¹⁾		1,081.9		35.7		144.0		201.4		700.8
Commitments under capital leases ⁽²⁾		189.6		47.4		108.2		7.1		26.9
Commitments under capital leases ⁽³⁾		989.1		12.0		48.0		48.0		881.1
Commitments under operating leases ⁽⁴⁾		418.9		12.5		50.0		50.0		306.4

Total U.S. Dollar-Denominated obligations		2,679.5		107.6		350.2		306.5		1,915.2

Euro-Denominated Obligations: ⁽⁵⁾
Long-term debt ⁽⁶⁾		334.3		6.7		29.4		33.8		264.4

Total Euro-Denominated obligations		334.3		6.7		29.4		33.8		264.4

Norwegian Kroner-Denominated Obligations: ⁽⁵⁾
Long-term debt ⁽⁷⁾		117.5		—		—		—		117.5

Total Norwegian Kroner-Denominated obligations		117.5		—		—		—		117.5

Totals		3,131.3		114.3		379.6		340.3		2,297.1

⁽¹ ⁾

Excludes expected interest payments of $10.3 million (remainder of 2012), $36.7 million (2013 and 2014), $28.8 million (2015 and 2016) and $32.9 million (beyond 2016). Expected interest payments are based on the existing interest rates (fixed-rate loans) and LIBOR at June 30, 2012, plus margins on debt that has been drawn that ranges 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 are required to pay to purchase certain leased vessels at the end of the lease terms. The lessor has the option to sell these vessels to us at any time during the remaining lease term; however, in this table we have assumed the lessor will not exercise its right to sell the vessels to us until after the lease terms expire, which is during the years 2012 to 2017. 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.

⁽³⁾	Existing restricted cash deposits of $475.8 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 $375.8 million for these leases from 2012 to 2029.

⁽⁵⁾	Euro-denominated and Norwegian Kroner-denominated obligations are presented in U.S. Dollars and have been converted using the prevailing exchange rate as of June 30, 2012.

⁽⁶⁾

Excludes expected interest payments of $3.1 million (remainder of 2012), $11.9 million (2013 and 2014), $10.8 million (2015 and 2016) and $10.9 million (beyond 2016). Expected interest payments are based on EURIBOR at June 30, 2012, plus margins that range up to 2.25%, as well as the prevailing U.S. Dollar/Euro exchange rate as of June 30, 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.

⁽⁷⁾

Excludes expected interest payments of $4.4 million (remainder of 2012), $17.8 million (2013 and 2014), $17.8 million (2015 and 2016) and $4.4 million (beyond 2016). Expected interest payments are based on NIBOR at June 30, 2012, plus a margin of 5.25%, as well as the prevailing U.S. Dollar/Norwegian Kroner exchange rate as of June 30, 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 Norwegian Kroner-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 of our Annual Report on Form 20-F for the year ended December 31, 2011. In addition, please read Item 1 – Financial Statements: Note 9(d) – Related Party Transactions and Note 13 – Equity Method of Investments as a result of the acquisition of our 33% interest in the fourth Angola LNG Carrier and the acquisition of our 52% interest in the six MALT LNG Carriers in the first quarter of 2012.

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 materially differ from our assumptions and estimates. Accounting estimates and assumptions discussed in Item 5—Operating and Financial Review and Prospects – Critical Accounting Estimates of our Annual Report on Form 20-F for the year ended December 31, 2011 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 5—Operating and Financial Review and Prospects in our Annual Report on Form 20-F for the year ended December 31, 2011. There were no significant changes in accounting estimates and assumptions from those discussed in the Form 20-F.

At June 30, 2012, we had one reporting unit with goodwill attributable to it. Based on conditions that existed at June 30, 2012, we do not believe that there is a reasonable possibility that the goodwill attributable to this reporting unit might be impaired for the remainder of the year. However, certain factors that impact this assessment are inherently difficult to forecast and, as such, we cannot provide any assurance 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 “Forward-Looking Statements”.

FORWARD-LOOKING STATEMENTS

This Report on Form 6-K for the three and six months ended June 30, 2012 contains certain forward-looking statements (as such term is defined in Section 27A of the Securities Exchange Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934, as amended) concerning future events and our operations, performance and financial condition, including, in particular, statements regarding:

•

our future financial condition;

•

results of operations and revenues and expenses, including performance of our liquefied gas segment and the performance and expected cash flows of our various joint ventures;

•

the collectability of advances to our joint venture partner, BLT LNG Tangguh Corporation, and its parent company, PT Berlian Laju Tanker;

•

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

•

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

•

future capital expenditures and availability of capital resources to fund capital expenditures;

•

the exercise of any counterparty’s rights to terminate a lease, or failure to exercise such rights;

•

our liquidity needs;

•

the outcome of ongoing tax proceedings;

•

the duration of dry dockings;

•

fluctuations in our reported voyage revenues, vessel operating expenses, general and administrative expenses, interest expense, interest income, realized and unrealized loss on derivative instruments and foreign currency exchange gain (loss);

•

the future valuation of goodwill; and

•

the expected timing, amount and method of financing for the purchase of joint venture interests and vessels, including our five Suezmax tankers operated pursuant to capital leases.

Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “believe”, “anticipate”, “expect”, “estimate”, “project”, “will be”, “will continue”, “will likely result”, “plan”, “intend” or words or phrases of similar meanings. These statements involve known and unknown risks and are based upon a number of assumptions and estimates that are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from those expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially include, but are not limited to: changes in production of LNG, LPG or oil; greater or less than anticipated levels of vessel newbuilding orders or greater or less than anticipated rates of vessel scrapping; changes in trading patterns; changes in our expenses; changes in applicable industry laws and regulations and the timing of implementation of new laws and regulations; LNG or LPG infrastructure constraints and community and environmental group resistance to new LNG or LPG infrastructure; potential development of active short-term or spot LNG or LPG shipping markets; potential inability to implement our growth strategy; competitive factors in the markets in which we operate; potential for early termination of long-term contracts and our and joint ventures’ potential inability to renew or replace long-term contracts; loss of any customer, time-charter or vessel; shipyard production or vessel delivery delays; changes in tax regulations; our potential inability to raise financing to purchase additional vessels; our exposure to currency exchange rate fluctuations; conditions in the public equity markets; LNG or LPG project delays or abandonment; and other factors detailed from time to time in our periodic reports filed with the SEC, including our Annual Report on Form 20-F for the year ended December 31, 2011. We do not intend to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with respect thereto or any change in events, conditions or circumstances on which any such statement is based.

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

JUNE 30, 2012

PART I – FINANCIAL INFORMATION

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We are exposed to the impact of interest rate changes primarily through our borrowings that require us to make interest payments based on LIBOR, EURIBOR or NIBOR. Significant increases in interest rates could adversely affect our operating margins, results of operations and our ability to service our debt. We use interest rate swaps to reduce our exposure to market risk from changes in interest rates. The principal objective of these contracts is to minimize the risks and costs associated with our floating-rate debt.

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

The table below provides information about our financial instruments at June 30, 2012, that are sensitive to changes in interest rates. For long-term debt and capital lease obligations, the table presents principal payments and related weighted-average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted-average interest rates by expected contractual maturity dates.


	Expected Maturity Date
	Remainder of 2012			2013			2014			2015			2016			There- after			Total			Fair Value Liability			Rate ⁽¹⁾⁽⁵⁾
	(in millions of U.S. Dollars, except percentages)
Long-Term Debt:
Variable Rate ($U.S.) ⁽²⁾		23.2			46.8			47.4			103.0			48.6			633.5			902.5			(797.3	)		1.3	%
Variable Rate (Euro) ^{(3) (4)}		6.7			14.2			15.2			16.3			17.5			264.4			334.3			(300.4	)		1.9	%
Variable Rate (NOK) ^{(4) (5)}		—			—			—			—			—			117.5			117.5			(117.5	)		7.6	%

Fixed-Rate Debt ($U.S.)		12.5			24.9			24.9			24.9			24.9			67.3			179.4			(182.6	)		5.4	%
Average Interest Rate		5.4	%		5.4	%		5.4	%		5.4	%		5.4	%		5.3	%		5.4	%

Capital Lease Obligations: ⁽⁶⁾
Fixed-Rate ($U.S.) ⁽⁷⁾		42.2			68.2			29.6			2.3			2.3			26.0			170.6			(170.6	)		7.4	%
Average Interest Rate ⁽⁸⁾		6.6	%		9.1	%		7.8	%		4.4	%		4.4	%		4.4	%		7.4	%

Interest Rate Swaps:
Contract Amount ($U.S.) ^{(6) (9)}		9.5			19.4			19.9			20.6			21.2			518.6			609.2			(160.3	)		5.5	%
Average Fixed Pay Rate ⁽²⁾		5.6	%		5.6	%		5.6	%		5.6	%		5.6	%		5.5	%		5.5	%
Contract Amount (Euro) ^{(4) (10)}		6.7			14.2			15.2			16.3			17.5			264.4			334.3			(35.2	)		3.1	%
Average Fixed Pay Rate ⁽³⁾		3.1	%		3.1	%		3.1	%		3.1	%		3.1	%		3.1	%		3.1	%

(1)

Rate refers to the weighted-average effective interest rate for our long-term debt and capital lease obligations, including the margin we pay on our floating-rate debt and the average fixed pay rate for our interest rate swap agreements. The average interest rate for our capital lease obligations is the weighted-average interest rate implicit in our lease obligations at the inception of the leases. The average fixed pay rate for our interest rate swaps excludes the margin we pay on our floating-rate term loans, which as of June 30, 2012 ranged from 0.30% to 2.75%. Please read Item 1 – Financial Statements: Note 7 – Long-Term Debt.

(2)	Interest payments on U.S. Dollar-denominated debt and interest rate swaps are based on LIBOR.

(3)	Interest payments on Euro-denominated debt and interest rate swaps are based on EURIBOR.

(4)	Euro-denominated and Norwegian Kroner-denominated amounts have been converted to U.S. Dollars using the prevailing exchange rate as of June 30, 2012.

(5)

Interest payments on our NOK-denominated debt and on our cross currency swap are based on NIBOR. Our NOK-denominated debt has been economically hedged with a cross currency swap, to swap all interest and principal payments into U.S. Dollars, with the interest payments fixed at a rate of 6.88%, and the transfer of principal locked in at $125.0 million upon maturity in exchange for NOK 700 million.

(6)

Under the terms of the capital leases for the RasGas II LNG Carriers (see Item 1 – Financial Statements: Note 5 – Vessel Charters), we are required to have on deposit, subject to a variable rate of interest, an amount of cash that, together with interest earned on the deposit, will equal the remaining amounts owing under the variable-rate leases. The deposits, which as at June 30, 2012 totaled $475.8 million, and the lease obligations, which as at June 30, 2012 totaled $471.7 million, have been swapped for fixed-rate deposits and fixed-rate obligations. Consequently, Teekay Nakilat Corporation is not subject to interest rate risk from these obligations and deposits and, therefore, the lease obligations, cash deposits and related interest rate swaps have been excluded from the table above. As at June 30, 2012, the contract amount, fair value and fixed interest rates of these interest rate swaps related to Teekay Nakilat Corporation’s capital lease obligations and restricted cash deposits were $417.7 million and $469.7 million, ($130.8) million and $166.5 million, and 4.9% and 4.8%, respectively.

(7)	The amount of capital lease obligations represents the present value of minimum lease payments together with our purchase obligation, as applicable.

(8)

The average interest rate is the weighted-average interest rate implicit in the capital lease obligations at the inception of the leases. Interest rate adjustments on these leases have corresponding adjustments in charter receipts under the terms of the charter contracts to which these leases relate to.

(9)	The average variable receive rate for our U.S. Dollar-denominated interest rate swaps is set at 3-month or 6-month LIBOR.

(10)	The average variable receive rate for our Euro-denominated interest rate swaps is set at 1-month EURIBOR.

Spot Market Rate Risk

One of our Suezmax tankers, the Toledo Spirit , operates pursuant to a time-charter contract that increases or decreases the otherwise fixed-rate established in the charter depending on the spot charter rates that we would have earned had we traded the vessel in the spot tanker market. The remaining term of the time-charter contract is 13 years, although the charterer has the right to terminate the time-charter in July 2018. We have entered into an agreement with Teekay Corporation 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 from the charterer as a result of spot rates being in excess of the fixed rate. The amounts payable to or receivable from Teekay Corporation are settled at the end of each year. At June 30, 2012, the fair value of this derivative liability was $0.3 million and the change from December 31, 2011 to the reporting period has been reported in realized and unrealized loss on derivative instruments.

Foreign Currency Fluctuation Risk

Our functional currency is U.S. Dollars. Our results of operations are affected by fluctuations in currency exchange rates. The volatility in our financial results due to currency exchange rate fluctuations is attributed primarily to foreign currency revenues and expenses, our Euro-denominated loans and restricted cash deposits and our Norwegian Kroner-denominated bonds. A portion of our voyage revenues are denominated in Euros. A portion of our vessel operating expenses and general and administrative expenses are denominated in Euros, which is primarily a function of the nationality of our crew and administrative staff. We have Euro-denominated interest expense and Euro-denominated interest income related to our Euro-denominated loans and Euro-denominated restricted cash deposits, respectively. We also incur Norwegian Kroner-denominated interest expense on our Norwegian Kroner-denominated bonds however, we entered into a cross currency swap to economically hedge the foreign exchange risk on the principal and interest, please read Item 1 – Financial Statements: Note 10 – Derivative Instruments. As a result, fluctuations in the Euro and Norwegian Kroner relative to the U.S. Dollar have caused, and are likely to continue to cause, fluctuations in our reported voyage revenues, vessel operating expenses, general and administrative expenses, interest expense, interest income and realized and unrealized loss on derivative instruments.

ITEM 4 – CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

During the quarter ended June 30, 2012, we implemented a new accounting system designed to improve the effectiveness and efficiency of our accounting and financial reporting processes. Although this implementation changed certain specific activities within the accounting function, it did not significantly affect the overall controls and procedures followed by the Partnership in establishing internal controls over financial reporting. Other than this accounting system implementation, there have been no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during our first two quarters that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

JUNE 30, 2012

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

None

Item 1A – Risk Factors

In addition to the other information set forth in this Report on Form 6-K, you should carefully consider the risk factors discussed in Part I, “Item 3. Key Information-Risk Factors” in our Annual Report on Form 20-F for the year ended December 31, 2011, which could materially affect our business, financial condition or results of operations.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3 – Defaults Upon Senior Securities

None

Item 4 – Mine Safety Disclosures

None

Item 5 – Other Information

None

Item 6 – Exhibits

2.1

Agreement, dated April 30, 2012, for NOK 700,000,000, Senior Unsecured Bonds due May 2017, among, Teekay LNG Partners L.P. and Norsk Tillitsmann ASA.

THIS REPORT ON FORM 6-K IS HEREBY INCORPORATED BY REFERENCE INTO THE FOLLOWING REGISTRATION STATEMENTS OF THE PARTNERSHIP:

•

REGISTRATION STATEMENT ON FORM S-8 (NO.333-124647) FILED WITH THE SEC ON MAY 5, 2005

•

REGISTRATION STATEMENT ON FORM F-3 (NO.333-170838) FILED WITH THE SEC ON NOVEMBER 24, 2010

•

REGISTRATION STATEMENT ON FORM F-3ASR (NO.333-174220) FILED WITH THE SEC ON MAY 13, 2011

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	TEEKAY LNG PARTNERS L.P.

	By: Teekay GP L.L.C., its General Partner

Date: August 24, 2012	By:	/s/ Peter Evensen
	Peter Evensen
	Chief Executive Officer and Chief Financial Officer
	(Principal Financial and Accounting Officer)

Exhibit 2.1

ISIN NO 001 064325.7

BOND AGREEMENT

between

Teekay LNG Partners L.P.

(Issuer)

and

Norsk Tillitsmann ASA

(Bond Trustee)

on behalf of

the Bondholders

in the bond issue

FRN Teekay LNG Partners L.P.

Senior Unsecured Bond Issue 2012/2017

Norsk Tillitsmann ASA

TABLE OF CONTENTS


1 Interpretation			3
2 The Bonds			9
3 Listing			10
4 Registration in a Securities Register			10
5 Purchase and transfer of Bonds			11
6 Conditions precedent			11
7 Representations and Warranties			13
8 Status of the Bonds and security			16
9 Interest			16
10 Maturity of the Bonds and Change of Control			17
11 Payments			17
12 Issuer’s acquisition of Bonds			19
13 Covenants			19
14 Fees and expenses			23
15 Events of Default			23
16 Bondholders’ meeting			26
17 The Bond Trustee			28
18 Miscellaneous			30

Norsk Tillitsmann ASA

This bond agreement has been entered into on 30 April 2012 between

(1)

Teekay LNG Partners L.P. (a limited partnership organized in the Marshall Islands with Company No. 950008), as issuer (the “Issuer” ), and

(2)

Norsk Tillitsmann ASA (a company incorporated in Norway with Company No. 963 342 624), as bond trustee (the “Bond Trustee” ).

1	Interpretation

1.1

Definitions

In this Bond Agreement the following terms shall have the following meanings (certain terms relevant for Clause 18.2 and other Clauses may be defined in the relevant Clause):

“Account Manager” means a Bondholder’s account manager in the Securities Register.

“Attachment” means any attachments to this Bond Agreement.

“Bond Agreement” means this bond agreement, including any Attachments to which it refers, and any subsequent amendments and additions agreed between the Parties.

“Bond Issue” means the bond issue constituted by the Bonds.

“Bond Reference Rate” means 3 months NIBOR.

“Bondholder” means a holder of Bond(s), as registered in the Securities Register, from time to time.

“Bondholders’ Meeting” means a meeting of Bondholders, as set forth in Clause 16.

“Bonds” means the securities issued by the Issuer pursuant to this Bond Agreement, representing the Bondholders’ underlying claim on the Issuer.

“Business Day” means any day on which Norwegian commercial banks are open for general business, and when Norwegian banks can settle foreign currency transactions, being any day on which the Norwegian Central Bank’s Settlement System is open.

“Business Day Convention” means that if the relevant Interest Payment Date falls on a day that is not a Business Day, that date will be the first following day that is a Business Day unless that day falls in the next calendar month, in which case that date will be the first preceding day that is a Business Day (Modified Following Business Day Convention).

Norsk Tillitsmann ASA

“Change of Control Event” means an event where Teekay Corporation (a company incorporated in the Marshall Islands with Company No. 3521) ceases to hold, directly or indirectly, a minimum of 51% of the ownership and voting rights of the General Partner.

“Default” means an Event of Default or any event or circumstance specified in Clause 15.1 (Events of Default) which would (with the giving of notice, lapse of time, determination of materiality or the fulfillment of any other applicable condition or any combination of the foregoing) be an Event of Default under any Finance Document.

“Encumbrance” means any encumbrance, mortgage, pledge, lien, charge (whether fixed or floating), assignment by way of security, finance lease, sale and repurchase or sale and leaseback arrangement, sale of receivables on a recourse basis or security interest or any other agreement or arrangement having the effect of conferring security.

“Equity” means the aggregate of the amount paid up on the issued share capital of the Issuer and the amount standing to the credit of its capital and revenue reserves (including any share premium account or capital redemption reserve but excluding any revaluation reserve), plus or minus the amount standing to the credit or debit (as the case may be) of its profit and loss account.

“Event of Default” means the occurrence of an event or circumstance specified in Clause 15.1.

“Exchange” means securities exchange or other reputable marketplace for securities, on which the Bonds are listed, or where the Issuer has applied for listing of the Bonds.

“Finance Documents” means (i) this Bond Agreement, (ii) the agreement between the Bond Trustee and the Issuer referred to in Clause 14.2, and (iii) any other document (whether creating a security interest or not) which is executed at any time by the Issuer in relation to any amount payable under this Bond Agreement.

“Financial Indebtedness” means, without double counting, any indebtedness incurred in respect of:

(a)

moneys borrowed, including acceptance credit;

(b)

any bond, note, debenture, loan stock or other similar instrument;

(c)

the amount of any liability in respect of any lease, hire purchase contract which would, in accordance with GAAP, be treated as a finance or capital lease (excluding any amounts applicable to leases to the extent that such lease obligations are fully secured by a security deposit which is held on the balance sheet under “restricted cash”);

(d)

receivables sold or discounted (other than any receivables sold on a non-recourse basis);

(e)

any sale and lease-back transaction, or similar transaction which is treated as indebtedness under GAAP;

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(f)

the acquisition cost of any asset to the extent payable after its acquisition or possession by the party liable where the deferred payment is arranged primarily as a method of raising finance or financing the acquisition of that asset;

(g)

any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price, including without limitation currency or interest rate swaps, caps or collar transactions (and, when calculating the value of the transaction, only the mark-to-market value of the applicable derivative shall be taken into account);

(h)

any amounts raised under any other transactions having the commercial effect of a borrowing or raising of money, whether recorded in the balance sheet or not (including any forward sale of purchase agreement);

(i)

any counter-indemnity obligation in respect of a guarantee, indemnity, bond, standby or documentary letter of credit or any other instrument issued by a bank or financial institutions; and

(j)

any guarantee, indemnity or similar assurance against financial loss of any person in respect of any of the items referred to in( a) through (i) above.

“Financial Statements” means the audited consolidated and unconsolidated annual accounts and financial statements of the Issuer for any financial year, prepared in accordance with GAAP, such accounts to include a profit and loss account, balance sheet and cash flow statement.

“Free and Available Cash” means, at any time, cash, cash equivalents and marketable securities (with investment grade rating from S&P and/or Moody’s Investors Service) of maturities less than one (1) year, to which the Group shall have free, immediate and direct access each as reflected in the Issuer’s most recent quarterly or annual consolidated financial statements. For the avoidance of doubt, Free and Available Cash shall not be subject to any Encumbrance.

“Free Liquidity” means the sum of Free and Available Cash plus Undrawn Revolving Credit Lines.

“GAAP” means the generally accepted accounting principles in the United States of America, in force from time to time.

“General Partner” or “GP” means Teekay GP L.L.C., a Marshall Islands limited liability company with Company No. 960578, which is the general partner of the Issuer, which is a limited partnership formed under the Marshall Islands Limited Partnership Act and governed by a limited partnership agreement. Under such Act and partnership agreement, the General Partner manages the operations and activities of the Issuer. For the avoidance of doubt, the General Partner shall at all times during the tenor of the Bonds maintain its interests as general partner of the Issuer.

“Group” means the Issuer and its Subsidiaries from time to time, and a “Group Company” means the Issuer or any of its Subsidiaries.

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“Interest Payment Date” means 3 February, 3 May, 3 August and 3 November each year and the Maturity Date. Any adjustment will be made according to the Business Day Convention.

“ISIN” means International Securities Identification Numbering system—the identification number of the Bonds.

“Issue Date” means 3 May 2012.

“Issuer’s Bonds” means Bonds owned by the Issuer, any party or parties who has decisive influence over the Issuer, or any party or parties over whom the Issuer has decisive influence.

“Manager” means the manager for the Bond Issue.

“Margin” means 5.25 percentage points per annum.

“Material Adverse Effect” means a material adverse effect on: (a) the business, financial condition or operations of the Issuer and/or the Group taken as a whole, (b) the Issuer’s ability to perform and comply with its obligations under the Bond Agreement; or (c) the validity or enforceability of the Bond Agreement.

“Material Subsidiary” means:

(i)

any Subsidiary whose total consolidated assets represent at least 10 % of the total consolidated assets of the Group, or

(ii)

any Subsidiary whose total consolidated revenues represent at least 10 % of the total consolidated net sales of the Group.

“Maturity Date” means 3 May 2017 or an earlier maturity date as provided for in this Bond Agreement. Any further adjustment may be made according to the Business Day Convention.

“Net Debt” means Total Debt less Free and Available Cash.

“Net Debt Ratio” means a fraction where the numerator is an amount equal to Net Debt and the denominator is an amount equal to the sum of Net Debt plus Equity.

“NIBOR” means that the rate for an interest period will be the rate for deposits in Norwegian Kroner for a period as defined under Bond Reference Rate which appears on the Reuters Screen NIBR Page as of 12.00 noon, Oslo time, on the day that is two Business Days preceding that Interest Payment Date. If such rate does not appear on the Reuters Screen NIBR Page, the rate for that Interest Payment Date will be determined as if the Bond Reference Rate is 3 months NIBOR Reference Rate as the applicable floating rate option.

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“NIBOR Reference Rate” means that the rate for an interest period will be determined on the basis of the rates at which deposits in Norwegian Kroner are offered by four large authorised exchange banks in the Oslo market (the “Reference Banks”) at approximately 12.00 noon, Oslo time, on the day that is two Business Days preceding that Interest Payment Date to prime banks in the Oslo interbank market for a period as defined under Bond Reference Rate commencing on that Interest Payment Date and in a representative amount. The Bond Trustee will request the principal Oslo office of each Reference Bank to provide a quotation of its rate. If at least two such quotations are provided, the rate for that Interest Payment Date shall be the arithmetic mean of the quotations. If fewer than two quotations are provided as requested, the rate for that Interest Payment Date will be the arithmetic mean of the rates quoted by major banks in Oslo, selected by the Bond Trustee, at approximately 12.00 noon, Oslo time, on that Interest Payment Date for loans in Norwegian Kroner to leading European banks for a period as defined under Bond Reference Rate commencing on that Interest Payment Date and in a representative amount.

“NOK” means Norwegian kroner, being the lawful currency of Norway.

“Outstanding Bonds” means the aggregate principal amount of the total number of Bonds not redeemed or otherwise discharged.

“Party” means a party to this Bond Agreement (including its successors and permitted transferees).

“Paying Agent” means any legal entity as appointed by the Issuer and approved by the Bond Trustee who acts as paying agent on behalf of the Issuer with respect to the Bonds.

“Payment Date” means a date for payment of principal or interest on the Bonds.

“Quarter Date” means each 31 March, 30 June, 30 September and 31 December.

“Quarterly Financial Reports” means the unaudited consolidated and unconsolidated financial statements of the Issuer as of each Quarter Date, prepared in accordance with GAAP, such accounts to include a profit and loss account, balance sheet and cash flow statement.

“QIB” means a “qualified institutional buyer” as defined in Rule 144A under the US Securities Act.

“Securities Register” means the securities register in which the Bond Issue is registered.

“Securities Register Act” means the Norwegian Act relating to Registration of Financial Instruments of 5 July 2002 No. 64.

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“Subsidiary” means an entity over which another entity or person has a determining influence due to (i) direct and indirect ownership of shares or other ownership interests, (ii) control of the general partner of any such other entity that is a limited partnership and/or (iii) agreement, understanding or other arrangement. An entity shall always be considered to be the subsidiary of another entity or person if such entity or person has such number of shares or ownership interests so as to represent the majority of the votes in the entity, or has the right to elect or dismiss a majority of the directors in the entity.

“Taxes” means all present and future taxes, levies, imposts, duties, charges, fees, deductions and withholdings, and any restrictions and or conditions resulting in a charge together with interest thereon and penalties in respect thereof and “Tax” and “Taxation” shall be construed accordingly.

“Tangible Net Worth” means A plus B less C,

where:

“A” means the issued and paid up share capital of the Issuer (including share premium or items of a similar nature (but excluding shares which are expressed to be redeemable)), loans from shareholders (where subordinated to the satisfaction of the Trustee), and amounts standing to the credit of the capital reserves of the Issuer; and

“B” means any credit balance carried forward on the Issuer’s consolidated profit and loss account; and

“C” means the aggregate of:

(i)

any debit balance carried forward on the Issuer’s consolidated profit and loss account;

(ii)

any amount shown for goodwill, including on consolidation, or any other intangible property on the Issuer’s consolidated balance sheet(other than intangible property relating to contracts as shown in the balance sheet of the Issuer); and

(iii)

any amount attributable to minority interests in Subsidiaries on the Issuer’s consolidated balance sheet.

“Total Debt” means, at any time, on a consolidated basis of the Group, the aggregate of:

(i)

the amount calculated in accordance with GAAP shown as each of “long term debt”, “short term debt” and “current portion of long term debt” on the latest consolidated balance sheet of the Issuer; and

(ii)

the amount of any liability in respect of any lease or hire purchase contract entered into by the Issuer or any of its Subsidiaries which would, in accordance with GAAP, be treated as a finance or capital lease (excluding any amounts applicable to leases to the extent that the lease obligations are secured by a security deposit which is held on the balance sheet under “restricted cash”).

“Undrawn Revolving Credit Lines” means undrawn committed revolving credit lines freely available to the Issuer and/or its Subsidiaries (excluding undrawn committed revolving credit lines with less than 6 months to maturity) as verified by the Chief Financial Officer of the Issuer in connection with delivery of a compliance certificate in accordance with Clause 13.2.3.

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“ US Person” has the meaning ascribed to such term in Regulation S under the US Securities Act.

“US Securities Act” means the U.S. Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

“USD” means US Dollars, being the legal currency of the United States of America.

“Voting Bonds” means the Outstanding Bonds less the Issuer’s Bonds.

1.2	Construction

In this Bond Agreement, unless the context otherwise requires:

(a)

headings are for ease of reference only;

(b)

words denoting the singular number shall include the plural and vice versa;

(c)

references to Clauses are references to the Clauses of this Bond Agreement;

(d)

references to a time is a reference to Oslo time unless otherwise stated herein;

(e)

references to a provision of law is a reference to that provision as it may be amended or re-enacted, and to any regulations made by the appropriate authority pursuant to such law, including any determinations, rulings, judgments and other binding decisions relating to such provision or regulation;

(f)

references to “control” means the power to appoint a majority of the board of directors of the entity or to direct the management and policies of an entity, whether through the ownership of voting capital, by contract or otherwise; and

(h)

references to a “person” shall include any individual, firm, partnership, joint venture, company, corporation, trust, fund, body corporate, unincorporated body of persons, or any state or any agency of a state or association (whether or not having separate legal personality).

2	The Bonds

2.1

Binding nature of the Bond Agreement

2.1.1

The Bondholders are, through their subscription, purchase or other transfer of Bonds bound by the terms of the Bond Agreement and other Finance Documents, and grant authority to the Bond Trustee to finalize and execute the Bond Agreement on the Bondholders behalf as set out in the subscription documents, term sheet, sales documents or in any other way, and all Bond transfers are subject to the terms of this Bond Agreement and all Bond transferees are, in taking transfer of Bonds, deemed to have accepted the terms of the Bond Agreement and the other Finance Documents and will automatically become parties to the Bond Agreement upon the completed transfer having been registered, without any further action required to be taken or formalities to be complied with, see also Clause 18.1.

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2.1.2

The Bond Agreement is available to anyone and may be obtained from the Bond Trustee or the Issuer. The Issuer shall ensure that the Bond Agreement is available to the general public throughout the entire term of the Bonds.

2.2	The Bonds

2.2.1

The Issuer has resolved to issue a series of Bonds in the maximum amount of NOK 700,000,000 (Norwegian kroner seven hundred million).

The Bonds will be in denominations of NOK 500,000 each and rank pari passu between themselves.

The Bond Issue will be described as “FRN Teekay LNG Partners L.P. Senior Unsecured Bond Issue 2012/2017”.

The International Securities Identification Number (ISIN) of the Bond Issue will be NO 001 0643257.

The tenor of the Bonds is from and including the Issue Date to the Maturity Date.

2.3	Purpose and utilization

2.3.1

The net proceeds of the Bonds shall be employed for general partnership purposes.

3	Listing

3.1	The Issuer shall apply for listing of the Bonds on Oslo Børs.

3.2	If the Bonds are listed, the Issuer shall ensure that the Bonds remain listed until they have been discharged in full.

4	Registration in a Securities Register

4.1	The Bond Issue and the Bonds shall prior to disbursement be registered in the Securities Register according to the Securities Register Act and the conditions of the Securities Register.

4.2	The Issuer shall promptly arrange for notification to the Securities Register of any changes in the terms and conditions of this Bond Agreement. The Bond Trustee shall receive a copy of the notification.

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4.3	The Issuer is responsible for the implementation of correct registration in the Securities Register. The registration may be executed by an agent for the Issuer provided that the agent is qualified according to relevant regulations.

4.4	The Bonds have not been registered under the US Securities Act, and the Issuer is under no obligation to arrange for registration of the Bonds under the US Securities Act.

5	Purchase and transfer of Bonds

5.1	Subject to the restrictions set forth in this Clause 5, the Bonds are freely transferable and may be pledged.

5.2

Bondholders may be subject to purchase or transfer restrictions with regard to the Bonds, as applicable from time to time under local laws to which a Bondholder may be subject (due e.g. to its nationality, its residency, its registered address, its place(s) for doing business). Each bondholder must ensure compliance with local laws and regulations applicable at own cost and expense. Without limiting the generality of the foregoing:

Bondholders that are US Persons or located in the United States will not be permitted to transfer the Bonds except (a) subject to an effective registration statement under the US Securities Act, (b) to a person that the Bondholder reasonably believes is a QIB within the meaning of Rule 144A under the US Securities Act that is purchasing for its own account, or the account of another QIB, to whom notice is given that the resale, pledge or other transfer may be made in reliance on Rule 144A, (c) outside the United States in accordance with Regulation S under the US Securities Act in a transaction on the Oslo Børs, and (d) pursuant to an exemption from registration under the US Securities Act provided by Rule 144 thereunder (if available). The Bonds may not be purchased by, or for the benefit of, persons resident in Canada.

5.3	Notwithstanding the above, a Bondholder which has purchased the Bonds in contradiction to mandatory restrictions applicable may nevertheless utilize its voting rights under this Bond Agreement.

6	Conditions Precedent

6.1	Disbursement of the net proceeds of the Bonds to the Issuer will be subject to the Bond Trustee having received the following documents, in form and substance satisfactory to it, at least two Business Days prior to the Issue Date:

(a)

this Bond Agreement duly executed by all parties thereto;

(b)

certified copies of all necessary corporate resolutions of the Issuer to issue the Bonds and execute the Finance Documents to which it is a party;

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(c)

a power of attorney from the Issuer to relevant individuals for its execution of the relevant Finance Documents, or extracts from the relevant register or similar documentation evidencing the individuals authorized to sign on behalf of the Issuer;

(d)

certified copies of the Certificate of Limited Partnership for the Issuer, evidencing that it is validly existing, and the partnership agreement for the Issuer;

(e)

the latest Financial Statements for the Issuer, and the Issuer’s latest Quarterly Financial Report;

(f)

confirmation that the requirements set forth in Chapter 7 of the Norwegian Securities Trading Act (implementing the EU prospectus directive (2003/71 EC) concerning prospectuses have been fulfilled or do not apply to the Bond Issue;

(g)

to the extent necessary, any public authorisations required for the Bond Issue;

(h)

confirmation from the Paying Agent that the Bonds have been registered in the Securities Register;

(i)

written confirmation in accordance with Clause 7.3 (if required);

(j)

the agreement set forth in Clause 14.2, duly executed;

(k)

documentation on the granting of authority to the Bond Trustee as set out in Clause 2.1 and copies of any written documentation made public by the Issuer or the Manager in connection with the Bond Issue; and

(l)

legal opinions in a form and content acceptable to the Bond Trustee from local counsel acceptable to the Bond Trustee, confirming inter alia (i) that the Issuer is legally organised and validly existing under its jurisdiction of organisation, (ii) the valid execution by the Issuer of the Finance Documents and the enforceability of the Finance Documents, (iii) that the Issuer has full partnership power and capacity to enter into and perform the duties under the Finance Documents, and (iv) that there are no other consents, approvals, authorisations or orders required by the Issuer from any governmental or other regulatory agencies in the jurisdictions of organisation of the Issuer in connection with the issue and offering of the Bonds and the performance by Issuer of its obligations under the Finance Documents.

6.2	The Bond Trustee may, in its reasonable opinion, waive the deadline or requirements for documentation as set forth in Clause 6.1.

6.3	Disbursement of the net proceeds from the Bonds is subject to the Bond Trustee’s written notice to the Issuer, the Manager and the Paying Agent that the documents have been received and that the required conditions precedent are fulfilled or have been waived.

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6.4	On the Issue Date, subject to receipt of confirmation from the Bond Trustee pursuant to Clause 6.3, the Manager shall make the net proceeds from the Bond Issue available to the Issuer.

7	Representations and Warranties

7.1	The Issuer represents and warrants to the Bond Trustee (on behalf of the Bondholders) that:

(a) Status

It is a limited partnership, duly organized and validly existing under the law of the jurisdiction in which it is organized, and has the power to own its assets and carry on its business as it is being conducted.

(b) Power and authority

It has the power to enter into and perform, and has taken all necessary partnership action to authorise its entry into, performance and delivery of this Bond Agreement and any other Finance Document to which it is a party and the transactions contemplated by those Finance Documents.

(c) Valid, binding and enforceable obligations

This Bond Agreement and any other Finance Document to which it is a party constitute (or will constitute, when executed by the respective parties thereto) legal, valid and binding obligations of the Issuer, enforceable in accordance with their terms, and (save as provided for therein) no further registration, filing, payment of Tax or fees or other formalities are necessary to render the said documents enforceable against the Issuer.

(d) Non-conflict with other obligations

The entry into and performance by the Issuer of the Bond Agreement and any other Finance Document to which it is a party and the transactions contemplated thereby do not and will not conflict with (i) any present law or regulation or present judicial or official order; (ii) its Certificate of Limited Partnership or partnership agreement; or (iii) any document or agreement which is binding on the Issuer or any of its assets.

(e) No Event of Default

No Default exists, and no other circumstances exist which constitute or (with the giving of notice, lapse of time, determination of materiality or the fulfillment of any other applicable condition, or any combination of the foregoing) would constitute a default under any document which is binding on the Issuer or any of its assets, and which would reasonably be expected to have a Material Adverse Effect.

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(f) Authorizations and consents

All authorisations, consents, licenses or approvals of any governmental authorities required for the Issuer in connection with the execution, performance, validity or enforceability of this Bond Agreement or any other Finance Document, and the transactions contemplated thereby, have been obtained and are valid and in full force and effect. All material authorisations, consents, licenses or approvals of any governmental authorities required for the Issuer to carry on its business as presently conducted and as contemplated by this Bond Agreement, have been obtained and are in full force and effect.

(g) Litigation

No litigation, arbitration or administrative proceeding of or before any court, arbitral body or agency is pending or, to the best of the Issuer’s knowledge, threatened which, if adversely determined, would reasonably be expected to have a Material Adverse Effect.

(h) Financial Statements

The most recently audited Financial Statements and the most recent unaudited Quarterly Financial Reports for the Issuer fairly and accurately represent in all material respects the assets and liabilities and financial condition as at their respective dates, and have been prepared in accordance with GAAP, consistently applied from one year to another.

(i) No undisclosed liabilities

As of the date of the most recent balance sheet included in the Financial Statements and Quarterly Financial Report, the Issuer had no material liabilities, direct or indirect, actual or contingent, that are required by GAAP to be included in such balance sheet and that are not disclosed by or reserved against in the Financial Statements or in the notes thereto.

(j) No Material Adverse Effect

Since the date of the most recent Financial Statements and Quarterly Financial Report, there has been no change in the business, assets or financial condition of the Issuer that would reasonably be expected to have a Material Adverse Effect.

(k) No misleading information

All documents and information which have been provided by the Issuer or with the agreement of the Issuer to the subscribers or the Bond Trustee in connection with this Bond Issue represent the latest publicly available financial information concerning the Group, and there has been no change in the Group’s financial position since the date of the latest Quarterly Financial Report of the Issuer which could reasonably be expected to have a Material Adverse Effect.

(l) Environmental compliance

The Issuer and each Group Company is in compliance with any relevant applicable environmental law or regulation and no circumstances have occurred which would prevent such compliance in a manner which, in each case, has had or would reasonably be expected to have a Material Adverse Effect.

(m) Intellectual property

The Group has valid and good title to (a) its material patents, trade marks, service marks, designs, business names, copyrights, design rights, inventions, confidential information and other intellectual property rights and interests (whether registered or unregistered), and (b) the benefit of all applications and rights to use such assets.

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(n) No withholdings

The Issuer is not required to make any deduction or withholding for or on account of any Taxes levied by the United States, Canada or the Republic of the Marshall Islands, or any political subdivision thereof or Taxing or other authority therein, or any political subdivision or Taxing or other authority in any jurisdiction from or through which the Issuer effects any payments hereunder, from any payment which it may become obliged to make to the Bond Trustee (on behalf of the Bondholders) or the Bondholders under this Bond Agreement; provided, however, that, notwithstanding the foregoing or any other provision in this Agreement to the contrary, the Issuer shall not be liable under this Agreement or have any obligation to indemnify any Bondholder for or with respect to any Taxes that are imposed due to any of the following:

(i)

the Bondholder has some connection with the Taxing jurisdiction other than merely holding the Bonds or receiving principal or interest payments on the Bonds (such as citizenship, nationality, residence, domicile, or existence of a business, a permanent establishment, a dependent agent, a place of business or a place of management present or deemed present within the Taxing jurisdiction);

(ii)

any Tax imposed on, or measured by, net income.

(o) Pari passu ranking

The Issuer’s payment obligations under this Bond Agreement or any other Finance Document to which it is a party rank at least pari passu with the claims of its other unsecured and unsubordinated creditors, except for claims which are preferred by bankruptcy, insolvency, liquidation or other similar laws of general application and for other obligations that are mandatorily preferred by law applying to companies generally.

7.2	The representations and warranties set out in Clause 7.1 shall apply for the Issuer and are made on the execution date of this Bond Agreement, and shall be deemed to be repeated on the Issue Date.

7.3	The Bond Trustee may prior to disbursement require a written statement from the Issuer confirming compliance with Clause 7.1.

7.4	In the event of misrepresentation, the Issuer shall indemnify the Bond Trustee for any economic losses suffered, both prior to the disbursement of the Bonds, and during the term of the Bonds, as a result of its reliance on the representations and warranties provided by the Issuer herein.

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8	Status of the Bonds and security

8.1

The Bonds shall be senior unsecured debt of the Issuer. The Bonds shall rank at least pari passu with all other senior unsecured obligations of the Issuer (save for such claims which are preferred by bankruptcy, insolvency, liquidation or other similar laws of general application and for other obligations that are mandatorily preferred by law) and shall rank ahead of subordinated debt.

8.2	The Bonds are unsecured.

9	Interest

9.1	The Issuer shall pay interest on the aggregate outstanding principal amount of the Bonds from, and including, the Issue Date at the Bond Reference Rate plus the Margin (together the “Floating Rate”).

9.2	Interest payments shall be made in arrears on the Interest Payment Dates each year; the first Interest Payment Date falls in August 2012.

9.3	The relevant interest payable amount shall be calculated based on a period from, and including, one Interest Payment Date to, but excluding, the next following applicable Interest Payment Date.

9.4	The day count fraction in respect of the calculation of the payable interest amount shall be “Actual/360”, which refers to the actual number of days in the calculation period for which interest is payable divided by 360.

9.5	The applicable Floating Rate on the Bonds is set/reset on each Interest Payment Date by the Bond Trustee commencing on the Interest Payment Date at the beginning of the relevant calculation period.

When the interest rate is set for the first time and on subsequent interest rate resets, the next Interest Payment Date, the interest rate applicable up to the next Interest Payment Date and the actual number of calendar days up to that date shall be determined by the Bond Trustee and promptly notified to the Bondholders, the Issuer, the Paying Agent, and if the Bonds are listed, the Exchange.

9.6	The payable interest amount per Bond for a relevant calculation period shall be calculated as follows:

Interest

Face

Floating

Floating Rate

Amount

Value

Rate

Day Count Fraction

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10	Maturity of the Bonds and Change of Control

10.1

Maturity

The Bonds shall mature in full on the Maturity Date, and shall be repaid at par (100%) by the Issuer.

10.2

Change of control

10.2.1

Upon the occurrence of a Change of Control Event each Bondholder shall have a right of pre-payment (a “Put Option” ) of its Bonds at a price of 100 % of par plus accrued and unpaid interest.

10.2.2

The Put Option must be exercised within 60 days after the Issuer has given notification to the Bond Trustee and the Bondholders of a Change of Control Event. Such notification shall be given as soon as possible after a Change of Control Event has taken place.

The Put Option may be exercised by the Bondholders by giving written, irrevocable notice of the request to its Account Manager. The Account Manager shall notify the Paying Agent of the pre-payment request. The settlement date of the Put Option shall be fifteen—15—Business Days following the date when the Paying Agent received the repayment request.

10.2.3

On the settlement date of the Put Option, the Issuer shall pay to each of the Bondholders holding Bonds to be pre-paid, the principal amount of each such Bond and any unpaid interest accrued up to (but not including) the settlement date.

11	Payments

11.1

Payment mechanics

11.1.1

The Issuer shall pay all amounts due to the Bondholders under the Bonds and this Bond Agreement by crediting the bank account nominated by each Bondholder in connection with its securities account in the Securities Register.

11.1.2

Payment shall be considered to have been made once the amount has been credited to the bank which holds the bank account nominated by the Bondholder in question, but if the paying bank and the receiving bank are the same, payment shall be considered to have been made once the amount has been credited to the bank account nominated by the Bondholder in question, see however Clause 11.2.

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11.2

Currency

11.2.1

If the Bonds are denominated in currencies other than NOK, each Bondholder must provide the Paying Agent (either directly or through its Account Manager) with specific payment instructions, including foreign exchange bank account details. Depending on the currency exchange settlement agreements between the Bondholders’ bank and the Paying Agent, cash settlement may be delayed, in which case no default interest or other penalty shall accrue for the benefit of the Bondholders.

11.2.2

Except as otherwise expressly provided, all amounts payable under this Bond Agreement and any other Finance Document shall be payable in the same currency as the Bonds are denominated in. If, however, the Bondholder has not given instruction as set out in Clause 11.2.1, within 5 Business Days prior to a Payment Date, the cash settlement will be exchanged into NOK and credited to the NOK bank account registered with the Bondholders account in the Securities Register.

11.2.3

Amounts payable in respect of costs, expenses, Taxes and other liabilities shall be payable in the currency in which they are incurred.

11.3

Set-off and counterclaims

11.3.1

The Issuer may apply or perform any counterclaims or set-off against any payment obligations pursuant to this Bond Agreement or any other Finance Document.

11.4

Interest in the event of late payment

11.4.1

In the event that payment of interest or principal is not made on the relevant Payment Date, the unpaid amount shall bear interest from the Payment Date at an interest rate equivalent to the interest rate according to Clause 9 plus 5.00 percentage points.

11.4.2

The interest charged under this Clause 11.4 shall be added to the defaulted amount on each respective Interest Payment Date relating thereto until the defaulted amount has been repaid in full.

11.4.3

The unpaid amounts shall bear interest as stated above until payment is made, whether or not the Bonds are declared to be in default pursuant to Clause 15.1 (a), cf. Clauses 15.2 - 15.4.

11.5

Irregular payments

11.5.1

In case of interest payments made on a date other than the regularly scheduled payment date, the Bond Trustee may instruct the Issuer or Bondholders of other payment mechanisms than described in Clause 11.1 or 11.2 above. The Bond Trustee may also obtain payment information regarding Bondholders’ accounts from the Securities Register or Account Managers.

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12	Issuer’s acquisition of Bonds

12.1	The Issuer has the right to acquire and own Bonds (Issuer’s Bonds). The Issuer’s Bonds may at the Issuer’s discretion be retained by the Issuer, sold or discharged.

13	Covenants

13.1

General

13.1.1

The Issuer has undertaken the covenants in this Clause 13 to the Bond Trustee (on behalf of the Bondholders), as further stated below.

13.1.2

Subject to Section 18.2, the covenants in this Clause 13 shall remain in force from the date of this Bond Agreement and until such time that no amounts are outstanding under this Bond Agreement and any other Finance Document, unless the Bond Trustee (or Bondholders by action at a Bondholders Meeting, as the case may be), has agreed in writing to waive any covenant, and then only to the extent of such waiver, and on the terms and conditions set forth in such waiver.

13.2

Information Covenants

13.2.1

The Issuer shall

(a)

without being requested to do so, immediately inform the Bond Trustee of any Default or Event of Default as well as of any circumstances which the Issuer understands would reasonably be expected to lead to an Event of Default;

(b)

without being requested to do so, inform the Bond Trustee of any other event which could reasonably be expected to have a Material Adverse Effect;

(c)

without being requested to do so, inform the Bond Trustee if the Issuer intends to sell or dispose of all or a substantial part of its assets or operations, or change the nature of its business;

(d)

without being requested to do so, produce Financial Statements annually and Quarterly Financial Reports quarterly and make them available on its website in the English language as soon as they become available, and not later than 120 days after the end of the financial year and 60 days after the end of the relevant quarter, in each case subject to any exemption, waiver or extension granted by the Exchange or as permitted by any amendment to the Exchange listing rules;

(e)

at the request of the Bond Trustee, report the balance of the Issuer’s Bonds;

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(f)

without being requested to do so, send a copy to the Bond Trustee of its notices to the Exchange (if listed) which are of relevance for the Issuer’s liabilities pursuant to this Bond Agreement;

(g)

without being requested to do so, inform the Bond Trustee of changes in the registration of the Bonds in the Securities Register; and

(h)

within a reasonable time, provide such information about the Issuer’s financial condition as the Bond Trustee may reasonably request.

13.2.2

The Issuer shall at the request of the Bond Trustee provide the documents and information necessary to maintain the listing and quotation of the Bonds on the Exchange (if listed) and to otherwise enable the Bond Trustee to carry out its rights and duties pursuant to this Bond Agreement and the other Finance Documents, as well as applicable laws and regulations.

13.2.3

The Issuer shall in connection with the issue of its Financial Statements and Quarterly Reports under Clause 13.2.l (d), confirm to the Bond Trustee in writing the Issuer’s compliance with the covenants in Clause 13. Such confirmation shall be undertaken in a compliance certificate, substantially in the format set out in Attachment 1 hereto, signed by the Chief Executive Officer or Chief Financial Officer of the Issuer. In the event of non-compliance, the compliance certificate shall describe the non-compliance, the reasons therefore as well as the steps which the Issuer has taken and will take in order to rectify the non-compliance.

13.3

General Covenants

(a) Pari passu ranking

The Issuer’s obligations under this Bond Agreement and any other Finance Document shall at all times rank at least pari passu with the claims of all its other unsecured and unsubordinated creditors save for those whose claims that are preferred solely by any bankruptcy, insolvency, liquidation or other similar laws of general application and for other obligations that are mandatorily preferred by law applying to companies generally.

(b) Mergers

The Issuer shall not, and shall ensure that no Group Company shall, carry out any merger or other business combination or corporate reorganization involving consolidating the assets and obligations of any of the Group Companies with any other companies or entities not being a member of the Group if such transaction would have a Material Adverse Effect. The Issuer shall notify the Bond Trustee of any such transaction, providing relevant details thereof, as well as, if applicable, its reasons for believing that the proposed transaction would not have a Material Adverse Effect.

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(c) De-mergers

The Issuer shall not, and shall ensure that no Group Company shall, carry out any de-merger or other corporate reorganization involving splitting any Group Company into two or more separate companies or entities, if such transaction would have a Material Adverse Effect. The Issuer shall notify the Bond Trustee of any such transaction, providing relevant details thereof, as well as, if applicable, its reasons for believing that the proposed transaction would not have a Material Adverse Effect.

(d)

Continuation of business

(i)

The Issuer shall not, and shall ensure that no Group Companies shall cease to carry out the general nature or scope of its business, if such cessation would have a Material Adverse Effect.

(ii)

The Issuer shall procure that no material change is made to the general nature or scope of the business of the Group from that carried on at the date of this Bond Agreement, or as contemplated by this Bond Agreement.

(iii)

The General Partner shall at all times during the tenor of the Bonds maintain its interest as a general partner of the Issuer.

(e)

Disposal of business

The Issuer shall not, and shall ensure that no Group Companies shall, be entitled to sell or otherwise dispose of all or a substantial part of the Group’s aggregate assets or operations if such transaction would have a Material Adverse Effect.

13.4

Corporate and operational matters

(a) Related party transactions

The Issuer shall not engage in, or permit any member of the Group to engage in, directly or indirectly, any transaction with any affiliate of Teekay Corporation that is not a Group Company (without limitation, the purchase, sale or exchange of assets or the rendering of any service), except (i) pursuant to existing agreements and arrangements with such affiliates or (ii) transactions that are (A) approved by a majority of the members of the conflicts committee of the board of directors of the General Partner, (B) on terms no less favorable to the Issuer or such Group member than those generally being provided to or available from unrelated third parties, (C) fair and reasonable to the Issuer or such Group member, taking into account the totality of the relationships between the Group and the other parties involved (including other transactions that may be particularly favorable or advantageous to the Group) or (D) immaterial in amount or significance to the Issuer or the Group.

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(b) Corporate status

The Issuer shall not, and shall ensure that no Group Company changes its type of organization or jurisdiction of organization unless such change in type or jurisdiction of organization would not have a Material Adverse Effect. Notwithstanding the foregoing, no change shall be made to the Issuer’s type of organization or jurisdiction of organization or incorporation without prior delivery to the Bond Trustee of legal opinions in a form and content acceptable to the Bond Trustee from local counsel acceptable to the Bond Trustee, confirming inter alia that (i) the Issuer is legally organized or incorporated (as applicable) and validly existing under their new jurisdictions of organization or incorporation, (ii) the execution by the Issuer of the Finance Documents and the enforceability of the Finance Documents will remain valid and enforceable under the new jurisdiction of organization or incorporation, (iii) the Issuer has full partnership or corporate power and capacity to enter into and perform the duties under the Finance Documents under its new jurisdiction of organization or incorporation, and (iv) there are no other consents, approvals, authorisations or orders that have not been obtained and are required by the Issuer with respect to such change of its type of organization or jurisdiction of organization from any governmental or other regulatory agencies in the jurisdictions of organization or incorporation of the Issuer in connection with the Bonds and the performance by the Issuer of its obligations under the Finance Documents.

(c) Compliance with laws

The Issuer shall (and shall ensure that all Group Companies shall) comply in all material respects with all laws and regulations it or they may be subject to from time to time (including any environmental laws and regulations).

(d) Litigations

The Issuer shall, promptly upon becoming aware of them, send the Bond Trustee such relevant details of any:

(i)

material litigations, arbitrations or administrative proceedings which have been started by or against any Group Company; and

(ii)

other events which have occurred which have had or would reasonably be expected to have a Material Adverse Effect, as the Bond Trustee may reasonably request.

13.5

Financial Covenants and listing

(a) Free Liquidity

The Issuer shall, at any time during the term of the Bonds, ensure that the Group on a consolidated basis maintains Free Liquidity of not less than USD 35,000,000.

(b) Net Debt Ratio

The Issuer shall, at any time during the term of the Bonds, ensure that the Group on a consolidated basis maintains a Net Debt Ratio of no more than 80%.

(c) Tangible Net Worth

The Issuer shall, at any time during the term of the Bonds, ensure that the Group on a consolidated basis maintains a Tangible Net Worth of at least USD 400,000,000.

(d) Listing of Issuer’s common units

The Issuer shall ensure that the Issuer’s common units remain listed on the New York Stock Exchange or another recognized stock exchange.

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14	Fees and expenses

14.1

The Issuer shall cover all its own expenses in connection with this Bond Agreement and fulfillment of its obligations under this Bond Agreement, including preparation of this Bond Agreement, preparation of the Finance Documents and any registration or notifications relating thereto, listing of the Bonds on the Exchange (if applicable), and the registration and administration of the Bonds in the Securities Register.

14.2

The expenses and fees payable to the Bond Trustee shall be paid by the Issuer and are set forth in a separate agreement between the Issuer and the Bond Trustee. Fees and expenses payable to the Bond Trustee which, due to the Issuer’s insolvency or similar, are not reimbursed in any other way may be covered by making an equivalent reduction in the payments to the Bondholders.

14.3

The Issuer shall cover all public fees in connection with the Bonds and the Finance Documents; provided, however, that any public fees levied on the trade of Bonds in the secondary market shall be paid by the Bondholders, unless otherwise provided by law or regulation, and the Issuer is not responsible for reimbursing any such fees.

14.4

In addition to the fee due to the Bond Trustee pursuant to Clause 14.2 and normal expenses pursuant to Clauses 14.1 and 14.3, the Issuer shall, on demand, cover extraordinary expenses incurred by the Bond Trustee in connection with the Bonds, as determined in a separate agreement between the Issuer and the Bond Trustee.

14.5	The Issuer is responsible for withholding any withholding tax imposed by applicable law on any payments to the Bondholders.

15	Events of Default

15.1	Subject to Clause 15.2 or 15.3, the Bonds may be declared by the Bond Trustee to be in default upon occurrence of any of the following events (each of which shall be referred to as an “Event of Default”) if:

(a) Non-payment

The Issuer fails to fulfill any payment obligation under this Bond Agreement or any Finance Document when due, unless, in the opinion of the Bond Trustee, it is obvious that such failure will be remedied, and payment in full of any such late payment is made, within 5—five—Business Days following the original due date.

(b) Breach of other obligations

The Issuer or any other Group Company fails to duly perform any other covenant or obligation pursuant to this Bond Agreement or any of the Finance Documents, and such failure is not remedied within 10—ten—Business Days after notice thereof is given to the Issuer by the Bond Trustee.

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(c) Cross default

The aggregate amount of Financial Indebtedness or committed Financial Indebtedness of the Group or any Group Company falling within paragraphs (i) to (iv) below exceeds a total of USD 50 million, or the equivalent thereof in other currencies;

(i)

any Financial Indebtedness is not paid when due and after giving effect to any applicable grace period,

(ii)

any Financial Indebtedness is declared to be or otherwise becomes due and payable prior to its specified maturity as a result of an event of default (however described),

(iii)

any commitment for any Financial Indebtedness is cancelled or suspended by a creditor as a result of an event of default (however described) and such cancellation and suspension would have a Material Adverse Effect, or

(iv)

any creditor becomes entitled to declare any Financial Indebtedness due and payable prior to its specified maturity as a result of an event of default (however described).

(d)

Misrepresentations

Any representation, warranty or statement (including statements in compliance certificates) made under this Bond Agreement or in connection therewith, taken as a whole with all other such representations, warranties and statements, is or proves to have been incorrect, inaccurate or misleading in any material respect when made or deemed to have been made.

(e) Insolvency

The following occurs in respect of the Issuer or Material Subsidiary:

(i)

general suspension of payments, or a moratorium of any indebtedness, winding-up, dissolution, administration or reorganisation (by way of voluntary arrangement, scheme of arrangement or otherwise) under any law relating to bankruptcy, insolvency or reorganization or relief of debtors,

(ii)

a composition, compromise, assignment or arrangement with any creditor which has a material adverse effect on the Issuer’s ability to perform its payment obligations under this Bond Agreement, or

(iii)

the appointment of a liquidator (other than in respect of a solvent liquidation), receiver, administrative receiver, administrator, compulsory manager or other similar officer of any substantial part of its assets.

(f) Creditors’ process

The Issuer or any Material Subsidiary has a substantial portion of its assets impounded, confiscated, attached or subject to distraint, or is subject to enforcement of any security over any substantial portion of its assets.

(g) Dissolution, appointment of liquidator or analogous proceedings

The Issuer or any Material Subsidiary is resolved to be dissolved or a liquidator, administrator or the like is appointed or requested to be appointed under any law relating to bankruptcy, insolvency or reorganization or relief of debtors.

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(h) Impossibility or illegality

It is or becomes impossible or unlawful for any Group Company or the Issuer to fulfill

or perform any of the material terms of the Finance Documents to which it is a party.

(i) Litigation

Any claim, litigation, arbitration or administrative proceedings against any Group Company or the Issuer is adversely determined against the Group Company or the Issuer and has (or, in the reasonable opinion of the Bond Trustee, after consultations with the Issuer, would reasonably be expected to have) a Material Adverse Effect.

(j) Material adverse effect

Any event or series of events occurs which, in the reasonable opinion of the Bond

Trustee, after consultations with the Issuer, has a Material Adverse Effect.

15.2	In the event that one or more of the circumstances mentioned in Clause 15.1 occurs and is continuing, the Bond Trustee can, in order to protect the interests of the Bondholders, declare the Outstanding Bonds including accrued interest and expenses to be in default and due for immediate payment.

The Bond Trustee may at its discretion, on behalf of the Bondholders, take every measure necessary to recover the amounts due under the Outstanding Bonds, and all other amounts outstanding under the Bond Agreement and any other Finance Document.

15.3	In the event that one or more of the circumstances mentioned in Clause 15.1 occurs and is continuing, the Bond Trustee shall declare the Outstanding Bonds including accrued interest and costs to be in default and due for payment if:

(a)

the Bond Trustee receives a demand in writing with respect to the above from Bondholders representing at least 1/5 of the aggregate principal amount of Voting Bonds, and the Bondholders’ Meeting has not decided on other solutions, or

(b)

the Bondholders pursuant to action at a Bondholders’ Meeting have decided to declare the Outstanding Bonds in default and due for payment.

In either case the Bond Trustee shall on behalf of the Bondholders take every measure necessary to recover the amounts due under the Outstanding Bonds. The Bond Trustee can request satisfactory security for any possible liability and anticipated expenses, from those Bondholders who requested that the declaration of default be made pursuant to sub clause (a) above and/or those who voted in favour of the decision pursuant to sub clause (b) above.

15.4

In the event that the Bond Trustee pursuant to the terms of Clauses 15.2 or 15.3 declares the Outstanding Bonds to be in default and due for payment, the Bond Trustee shall immediately deliver to the Issuer a notice demanding payment of interest and principal due to the Bondholders under the Outstanding Bonds including accrued interest and interest on overdue amounts and expenses.

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16	Bondholders’ meeting

16.1

Authority of the Bondholders’ meeting

16.1.1

The Bondholders’ Meeting represents the supreme authority of the Bondholders community in all matters relating to the Bonds. If a resolution by or an approval of the Bondholders is required, resolution of such shall be passed at a Bondholders’ Meeting. Resolutions passed at Bondholders’ Meetings shall be binding upon and prevail for all the Bonds and Bondholders.

16.2

Procedural rules for Bondholders’ meetings

16.2.1

A Bondholders’ Meeting shall be held at the request of:

(a)

the Issuer,

(b)

Bondholders representing at least 1/10 of the aggregate principal amount of Voting Bonds,

(c)

the Exchange, if the Bonds are listed, or

(d)

the Bond Trustee.

16.2.2

The Bondholders’ Meeting shall be summoned by the Bond Trustee. A request for a Bondholders’ Meeting shall be made in writing to the Bond Trustee, and shall clearly state the matters to be discussed.

16.2.3

If the Bond Trustee has not summoned a Bondholders’ Meeting within 10—ten—Business Days after having received such a request, then the requesting party may summons the Bondholders’ Meeting itself.

16.2.4

Summons to a Bondholders Meeting shall be dispatched no later than 10—ten—Business Days prior to the Bondholders’ Meeting. The summons and a confirmation of each Bondholder’s holdings of Bonds shall be sent to all Bondholders registered in the Securities Register at the time of distribution, with a copy to the Issuer. The summons shall also be sent to the Exchange for publication.

16.2.5

The summons shall specify the agenda of the Bondholders’ Meeting. The Bond Trustee may in the summons also set forth other matters on the agenda than those requested. If amendments to this Bond Agreement have been proposed, the main content of the proposal shall be stated in the summons.

16.2.6

The Bond Trustee may restrict the Issuer from making any changes of Voting Bonds in the period from distribution of the summons until the Bondholders’ Meeting, by serving notice to it to such effect.

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16.2.7

Matters that have not been reported to the Bondholders in accordance with the procedural rules for summoning of a Bondholders’ Meeting may only be adopted with the approval of all Voting Bonds.

16.2.8

The Bondholders’ Meeting shall be held on premises designated by the Bond Trustee. The Bondholders’ Meeting shall be opened and shall, unless otherwise decided by the Bondholders’ Meeting, be chaired by the Bond Trustee. If the Bond Trustee is not present, the Bondholders’ Meeting shall be opened by a Bondholder, and be chaired by a representative elected by the Bondholders’ Meeting.

16.2.9

Minutes of the Bondholders’ Meeting shall be kept. The minutes shall state the numbers of Bondholders represented at the Bondholders’ Meeting, the resolutions passed at the meeting, and the result of the voting. The minutes shall be signed by the chairman and at least one other person elected by the Bondholders’ Meeting. The minutes shall be deposited with the Bond Trustee and shall be available to the Bondholders.

16.2.10

The Bondholders, the Bond Trustee and—provided the Bonds are listed—representatives of the Exchange, have the right to attend the Bondholders’ Meeting. The chairman may grant access to the meeting to other parties, unless the Bondholders’ Meeting decides otherwise. Bondholders may attend by a representative holding proxy. Bondholders have the right to be assisted by an advisor. In case of dispute the chairman shall decide who may attend the Bondholders’ Meeting and vote the Bonds.

16.2.11

Representatives of the Issuer have the right to attend the Bondholders’ Meeting. The Bondholders’ Meeting may resolve that the Issuer’s representatives may not participate in particular matters. The Issuer has the right to be present during the voting.

16.3

Resolutions passed at Bondholders’ meetings

16.3.1

At the Bondholders’ Meeting each Bondholder may cast one vote for each Voting Bond owned at close of business on the day prior to the date of the Bondholders’ Meeting in accordance with the records registered in the Securities Register. Whoever opens the Bondholders’ Meeting shall adjudicate any question concerning which Bonds shall count as the Issuer’s Bonds. The Issuer’s Bonds shall not have any voting rights.

16.3.2

In all matters, the Issuer, the Bond Trustee and any Bondholder have the right to demand vote by ballot. In case of parity of votes, the chairman shall have the deciding vote, regardless of the chairman being a Bondholder or not.

16.3.3

In order to form a quorum, at least half (1/2) of the aggregate principal amount of the Voting Bonds must be represented at the meeting, see however Clause 16.4. Even if less than half (1/2) of the aggregate principal amount of the Voting Bonds are represented, the Bondholders’ Meeting shall be held and voting completed.

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16.3.4

If a quorum exists, resolutions shall be passed by simple majority of the Voting Bonds represented at the Bondholders’ Meeting, unless otherwise set forth in Clause 16.3.5.

16.3.5

In the following matters, approval by the holders of at least 2/3 of the aggregate principal amount of the Voting Bonds represented at the Bondholders’ Meeting is required:

(a)

amendment of the terms of this Bond Agreement regarding the interest rate, the tenor, redemption price and other terms and conditions directly affecting the cash flow of the Bonds;

(b)

transfer of rights and obligations of this Bond Agreement to another issuer (Issuer), or

(c)

change of Bond Trustee.

16.3.6

The Bondholders’ Meeting may not adopt resolutions which may give certain Bondholders or others an unreasonable advantage at the expense of other Bondholders.

16.3.7

The Bond Trustee shall ensure that resolutions passed at the Bondholders’ Meeting are properly implemented.

16.3.8

The Issuer, the Bondholders and the Exchange shall be notified of resolutions passed at the Bondholders’ Meeting.

16.4

Repeated Bondholders’ meeting

16.4.1.

If the Bondholders’ Meeting does not form a quorum pursuant to Clause 16.3.3, a repeated Bondholders’ Meeting may be summoned to vote on the same matters. The attendance and the voting result of the first Bondholders’ Meeting shall be specified in the summons for the repeated Bondholders’ Meeting.

16.4.2

When a matter is tabled for discussion at a repeated Bondholders’ Meeting, a valid resolution may be passed even though less than half (1/2) of the aggregate principal amount of the Voting Bonds are represented.

17	The Bond Trustee

17.1

The role and authority of the Bond Trustee

17.1.1

The Bond Trustee shall monitor the compliance by the Issuer of its obligations under this Bond Agreement and applicable laws and regulations which are relevant to the terms of this Bond Agreement, including supervision of timely and correct payment of principal or interest, inform the Bondholders, the Paying Agent and the Exchange of relevant information which is obtained and received in its capacity as Bond Trustee (however, this shall not restrict the Bond Trustee from discussing matters of confidentiality with the Issuer), arrange Bondholders’ Meetings, and make the decisions and implement the measures resolved pursuant to this Bond Agreement. The Bond Trustee is not obligated to assess the Issuer’s financial situation beyond what is directly set forth in this Bond Agreement.

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17.1.2

The Bond Trustee may take any step necessary to ensure the rights of the Bondholders in all matters pursuant to the terms of this Bond Agreement. The Bond Trustee may postpone taking action until such matter has been put forward to the Bondholders’ Meeting.

17.1.3

Except as provided for in Clause 17.1.5 the Bond Trustee may reach decisions binding for all Bondholders concerning this Bond Agreement, including amendments to the Bond Agreement and waivers or modifications of certain provisions, which in the opinion of the Bond Trustee, do not have a Material Adverse Effect on the rights or interests of the Bondholders pursuant to this Bond Agreement.

17.1.4

Except as provided for in Clause 17.1.5, the Bond Trustee may reach decisions binding for all Bondholders in circumstances other than those mentioned in Clause 17.1.3 provided prior notification has been made to the Bondholders. Such notice shall contain a proposal of the amendment and the Bond Trustee’s evaluation. Further, such notification shall state that the Bond Trustee may not reach a decision binding for all Bondholders in the event that any Bondholder submits a written protest against the proposal within a deadline set by the Bond Trustee. Such deadline may not be less than five (5) Business Days following the dispatch of such notification.

17.1.5

The Bond Trustee may not reach decisions pursuant to Clauses 17.1.3 or 17.1.4 for matters set forth in Clause 16.3.5 except to rectify obvious incorrectness, vagueness or incompleteness.

17.1.6

The Bond Trustee may not adopt resolutions which may give certain Bondholders or others an unreasonable advantage at the expense of other Bondholders.

17.1.7

The Issuer, the Bondholders and the Exchange shall be notified of decisions made by the Bond Trustee pursuant to Clause 17.1 unless such notice obviously is unnecessary.

17.1.8

The Bondholders through action at a Bondholders’ Meeting may replace the Bond Trustee without the Issuer’s approval, as provided for in Clause 16.3.5.

17.2

Liability and indemnity

17.2.1

The Bond Trustee is liable only for direct losses incurred by Bondholders or the Issuer as a result of negligence or willful misconduct by the Bond Trustee in performing its functions and duties as set forth in this Bond Agreement. The Bond Trustee is not liable for the content of information provided to the Bondholders on behalf of the Issuer.

17.2.2

The Issuer is liable for, and shall indemnify the Bond Trustee fully in respect of, all losses, expenses and liabilities incurred by the Bond Trustee as a result of negligence by the Issuer (including its directors, management, officers, employees, agents and representatives) to fulfill its obligations under the terms of this Bond Agreement and any other Finance Documents, including losses incurred by the Bond Trustee as a result of the Bond Trustee’s actions based on misrepresentations made by the Issuer in connection with the establishment and performance of this Bond Agreement and the other Finance Documents.

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17.3

Change of Bond Trustee

17.3.1

Change of Bond Trustee shall be carried out pursuant to the procedures set forth in Clause 16. The Bond Trustee shall continue to carry out its duties as bond trustee until such time that a new Bond Trustee is elected.

17.3.2

The fees and expenses of a new bond trustee shall be covered by the Issuer pursuant to the terms set out in Clause 14, but may be recovered wholly or partially from the Bond Trustee if the change is due to a breach of the Bond Trustee duties pursuant to the terms of this Bond Agreement or other circumstances for which the Bond Trustee is liable.

17.3.3

The Bond Trustee undertakes to co-operate so that the new bond trustee receives without undue delay following the Bondholders’ Meeting the documentation and information necessary to perform the functions as set forth under the terms of this Bond Agreement.

18	Miscellaneous

18.1

The community of Bondholders

18.1	By virtue of holding Bonds, which are governed by this Bond Agreement (which pursuant to Clause 2.1.1 is binding upon all Bondholders), a community exists between the Bondholders, implying, inter alia, that

(a)

the Bondholders are bound by the terms of this Bond Agreement,

(b)

the Bond Trustee has power and authority to act on behalf of the Bondholders,

(c)

the Bond Trustee has, in order to administer the terms of this Bond Agreement, access to the Securities Register to review ownership of Bonds registered in the Securities Register,

(d)

this Bond Agreement establishes a community between Bondholders meaning that;

(i)

the Bonds rank pari passu between each other,

(ii)

the Bondholders may not, based on this Bond Agreement, act directly towards the Issuer and may not themselves institute legal proceedings against the Issuer; provided, however that this provision shall not restrict the Bondholders from exercising any of their individual rights derived from the Bond Agreement.

(iii)

the Issuer may not, based on this Bond Agreement, act directly towards the Bondholders,

(iv)

the Bondholders may not cancel the Bondholders’ community, and

(v)

an individual Bondholder may not resign from the Bondholders’ community.

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18.2

Defeasance

18.2.1

The Issuer may, at its option and at any time, elect to have certain obligations discharged (see Clause 18.2.2) upon complying with the following conditions (“Covenant Defeasance”);

(a)

the Issuer shall have irrevocably pledged to the Bond Trustee for the benefit of the Bondholders cash or government obligations acceptable by the Bond Trustee (the “Defeasance Pledge”) in such amounts as will be sufficient for the payment of principal and interest on the Outstanding Bonds to Maturity Date;

(b)

the Issuer shall, if required by the Bond Trustee, provide a legal opinion reasonable acceptable to the Bond Trustee to the effect that the Bondholders will not recognize income, gain or loss for income tax purposes (under US federal or Norwegian tax law, if applicable) as a result of the Defeasance Pledge and Covenant Defeasance, and will be subject to such income tax on the same amount and in the same manner and at the same times as would have been the case if the Defeasance Pledge had not occurred;

(c)

no Event of Default shall have occurred and be continuing on the date of establishment of the Defeasance Pledge, or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 181 ^st day after the date of establishment of the Defeasance Pledge;

(d)

neither the Defeasance Pledge nor the Covenant Defeasance results in a breach or violation of any material agreement or instrument binding upon the Issuer, or the certificate of association or partnership agreement governing the Issuer;

(e)

the Issuer shall have delivered to the Bond Trustee a certificate signed by the Chief Executive Officer of the GP that the Defeasance Pledge was not made by the Issuer with the intent of preferring the Bondholders over any other creditors of the Issuer or with the intent of defeating, hindering, delaying or defrauding any other creditors of the Issuer or others;

(f)

the Issuer shall have delivered to the Bond Trustee any certificate or legal opinion reasonably required regarding the Covenant Defeasance or Defeasance Pledge (including certificate from the Chief Executive Officer of the GP and a legal opinion from its legal counsel to the effect that all conditions for Covenant Defeasance have been complied with; and that (i) the Defeasance Pledge will not be subject to any rights of creditors of the Issuer, (ii) the Defeasance Pledge will constitute a valid, perfected and enforceable security interest in favour of the Bond Trustee for the benefit of the Bondholders, and (iii) after the 181 ^st day following the establishment of the Defeasance Pledge, the funds and assets so pledged will not be subject to the effects of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors rights generally under the laws of the jurisdiction where the Defeasance Pledge was established and the corporate domicile of the Issuer.

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18.2.2

Upon the exercise by the Issuer of its option under Clause 18.2.1;

(a)

the Issuer shall be released from their obligations under all provisions in Clause 13, except 13.2.1 (a), (g) and (h).

(b)

the Issuer shall not (and shall ensure that all Group Companies shall not) take any actions that may cause the value of the security interest created by this Covenant Defeasance to be reduced, and shall at the request of the Bond Trustee execute, or cause to be executed, such further documentation and perform such other acts as the Bond Trustee may reasonably require in order for the security interest to remain valid, enforceable and perfected by the Bond Trustee for the account of the Bondholders;

(c)

any guarantor(s) of the Issuer’s obligations under the Bonds shall be discharged from their obligations under the related guarantee(s), and the guarantee(s) shall cease to have any legal effect;

(d)

all other provisions of the Bond Agreement (except to the extend indicated in clauses (a)—(c) above) shall remain fully in force without any modifications.

18.2.3

All moneys covered by the Defeasance Pledge shall be applied by the Bond Trustee, in accordance with the provisions of this Bond Agreement, to the payment to the Bondholders of all sums due to them under this Bond Agreement on the due date thereof.

Any excess funds not required for the payment of principal, premium and interest to the Bondholders (including any expenses and fees due to the Bond Trustee hereunder) shall be returned to the Issuer.

18.3

Limitation of claims

18.3.1

All claims under the Bonds and this Bond Agreement for payment, including interest and principal, shall be subject to the time-bar provisions of the Norwegian Limitation Act of May 18, 1979 No. 18.

18.4

Access to information

18.4.1

The Bond Agreement is available to anyone and copies may be obtained from the Bond Trustee or the Issuer. The Issuer shall ensure that the Bond Agreement is available in copy form to the general public until all the Bonds have been fully discharged.

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18.4.2

The Bond Trustee shall, in order to carry out its functions and obligations under the Bond Agreement, have access to the Securities Register for the purposes of reviewing ownership of the Bonds registered in the Securities Register.

18.5

Amendments

18.5.1

All amendments of this Bond Agreement shall be made in writing, and shall unless otherwise provided for by this Bond Agreement, only be made with the approval of all parties hereto.

18.6

Notices, contact information

18.6.1

Written notices, warnings, summons and other communications to the Bondholders made by the Bond Trustee shall be sent via the Securities Register with a copy to the Issuer and the Exchange. Information to the Bondholders may in lieu of such requirement in the immediately preceding sentence be published at the web site www.stamdata.no.

18.6.2

The Issuer’s written notifications to the Bondholders shall be sent via the Bond Trustee, or alternatively through the Securities Register with a copy to the Bond Trustee and the Exchange.

18.6.3

Unless otherwise specifically provided, all notices or other communications under or in connection with this Bond Agreement between the Bond Trustee and the Issuer shall be given or made in writing, by letter, or facsimile. Any such notice or communication shall be deemed to be given or made as follows:

(a)

if by letter, when delivered at the address of the relevant Party;

(b)

if by facsimile, when received.

18.6.4

The Issuer and the Bond Trustee shall ensure that the other party is kept informed of changes in postal address, e-mail address, telephone and fax numbers and contact persons.

18.7

Dispute resolution and legal venue

18.7	This Bond Agreement and all disputes arising out of, or in connection with this Bond Agreement between the Bond Trustee, the Bondholders and the Issuer, shall be governed by Norwegian law.

Norsk Tillitsmann ASA

All disputes arising out of, or in connection with this Bond Agreement between the Bond Trustee, the Bondholders and the Issuer, shall be exclusively resolved by the courts of Norway, with the District Court of Oslo as sole legal venue.

18.8

Service of process

18.8.1

Without prejudice to any other mode of service, the Issuer:

(a)

irrevocably appoints Teekay Shipping Norway AS (a limited liability company incorporated in Norway with Company No. 964 111 723) as its agent for service of process relating to any proceedings before the Norwegian courts in connection with any Finance Document;

(b)

agrees that failure by the process agent to notify it of the process will not invalidate the proceedings concerned; and

(c)

consents to the service of process relating to any such proceedings before the Norwegian courts by prepaid posting of a copy of the process to its address stated in this Bond Agreement.

*****

This Bond Agreement has been executed in two originals, of which the Issuer and the Bond Trustee retain one each.


The Issuer:				The Bond Trustee:
TEEKAY LNG PARTNERS L.P.				NORSK TILLITSMANN ASA

By: Teekay GP L.L.C., its general partner

/s/ Peter Evensen				/s/ Ola Nygard
By: Peter Evensen				By: Ola Nygard

Position: Chief Executive Officer & Chief Financial Officer				Position:

Norsk Tillitsmann ASA

Attachment 1

COMPLIANCE CERTIFICATE

Norsk Tillitsmann ASA

P.O. Box 1470 Vika

N-0116 Oslo

Norway

Fax: + 47 22 87 94 10

E-mail: mail@trustee.no

[date]

Dear Sirs,

TEEKAY LNG PARTNERS L.P. BOND AGREEMENT 2012/2017 - ISIN 001 064325.7

We refer to the Bond Agreement for the above mentioned Bond Issue made between Norsk Tillitsmann ASA as Bond Trustee on behalf of the Bondholders, and the undersigned as Issuer under which a Compliance Certificate shall be issued. This letter constitutes the Compliance Certificate for the period [PERIOD].

Capitalised words and expressions are used herein as defined in the Bond Agreement.

With reference to Clause 13.2.3 we hereby certify that:

1.	All information contained herein is true and accurate and there has been no change which would reasonably be expected to have a material adverse effect on the financial condition of the Issuer since the date of the last accounts or the last Compliance Certificate submitted to you.

2.	The covenants set out in Clause 13 are satisfied in all material respects;

3.	The aggregate amount of Undrawn Revolving Credit Lines of the Group Companies as of [date] was USD [ ];

4.	In accordance with Clause 13.5(a), the Free Liquidity of the Group as of [date] was USD [ ];

5.	In accordance with Clause 13.5(b), the Net Debt Ratio as of [date] was [ ]%; and

6.	In accordance with Clause 13.5(c), the Tangible Net Worth as of [date] was USD [ ].

Copies

of our latest consolidated [annual audited/quarterly unaudited] accounts are enclosed.

Norsk Tillitsmann ASA

Yours faithfully,

Teekay LNG Partners L.P.

By: Teekay GP L.L.C., its general partner

Name of authorized person

Enclosure: [ copy of any written documentation ]

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