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 March 31, 2006
Commission file number
1- 32479
TEEKAY LNG PARTNERS
L.P.
(Exact name of
Registrant as specified in its charter)
Bayside House
Bayside Executive Park
West Bay Street &
Blake Road
P.O. Box AP-59212, Nassau, Bahamas
(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
Indicate by check mark whether the registrant
by furnishing the information contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes
No X
If "Yes" is marked, indicate below the file
number assigned to the registrant in connection with Rule 12g3-2(b):82-
TEEKAY LNG PARTNERS
L.P. AND SUBISDIARIES
REPORT ON FORM 6-K FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2006
INDEX
PART I: FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Report of Independent Registered Public Accounting Firm.......................... 3
Unaudited Consolidated Statements of Income
for the three months ended March 31, 2006 and 2005........................... 4
Unaudited Consolidated Balance Sheets
as at March 31, 2006 and December 31, 2005................................... 5
Unaudited Consolidated Statements of Cash Flows
for the three months ended March 31, 2006 and 2005............................ 6
Unaudited Consolidated Statement of Partners' Equity/Stockholder Deficit
for the three months ended March 31, 2006.................................... 7
Notes to the Unaudited Consolidated Financial Statements......................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....20
Item 3. Quantitative and Qualitative Disclosures about Market Risk...............................36
PART II: OTHER INFORMATION.......................................................................39
SIGNATURES.......................................................................................40
ITEM 1 - FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Unitholders of
Teekay LNG Partners L.P.
We have reviewed the consolidated balance sheet of Teekay LNG Partners L.P. (successor to Teekay Luxembourg S.a.r.l) and subsidiaries
(or the Partnership) as of March 31, 2006 and the related consolidated statements of income, partners' equity/stockholder deficit and
cash flows for the three months ended March 31, 2006 and 2005. These financial statements are the responsibility of the Partnership's
management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review
of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of
the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to
above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of the Partnership as of December 31, 2005, the related consolidated statements of income, partners'
equity/stockholder deficit and cash flows for the year then ended and in our report dated February 21, 2006, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2005, is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
Vancouver, Canada
May 1, 2006 |
/s/ ERNST & YOUNG LLP
Chartered Accountants |
TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES (Note 1)
(Successor to Teekay Luxembourg S.a.r.l.)
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in thousands of U.S. dollars, except unit and per unit data)
Three Months Ended March 31,
2006 2005
$ $
--------------- ---------------
VOYAGE REVENUES 44,141 34,764
----------------------------------------------------- --------------- ---------------
OPERATING EXPENSES
Voyage expenses 277 192
Vessel operating expenses (note 10c) 8,961 7,994
Depreciation and amortization 12,659 10,211
General and administrative (notes 10b and 10d) 3,095 1,510
----------------------------------------------------- --------------- ---------------
Total operating expenses 24,992 19,907
----------------------------------------------------- --------------- ---------------
Income from vessel operations 19,149 14,857
----------------------------------------------------- --------------- ---------------
OTHER ITEMS
Interest expense (notes 4 and 7) (18,601) (25,612)
Interest income 7,437 6,269
Foreign currency exchange (loss) gain (note 7) (7,825) 45,000
Other income (note 8) 608 1,393
----------------------------------------------------- --------------- ---------------
Total other items (18,381) 27,050
----------------------------------------------------- --------------- ---------------
Net income 768 41,907
===================================================== =============== ===============
General partner's interest in net income 15 -
Limited partners' interest:
Net income 753 41,907
Net income per: (note 13)
- Common unit (basic and diluted) 0.04 1.79
- Subordinated unit (basic and diluted) 0.00 1.79
- Total unit (basic and diluted) 0.02 1.79
----------------------------------------------------- --------------- ---------------
Weighted-average number of units outstanding:
- Common units (basic and diluted) 20,238,072 8,734,572
- Subordinated units (basic and diluted) 14,734,572 14,734,572
- Total units (basic and diluted) 34,972,644 23,469,144
----------------------------------------------------- --------------- ---------------
The
accompanying notes are an integral part of the unaudited interim consolidated financial
statements.
TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES (Note 1)
(Successor to Teekay Luxembourg S.a.r.l.)
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars)
As at As at
March 31, December 31,
2006 2005
$ $
--------------- ---------------
ASSETS
Current
Cash and cash equivalents 27,401 34,469
Restricted cash - current (note 4) 137,220 139,525
Accounts receivable 4,676 2,977
Prepaid expenses and other assets 5,620 3,972
------------------------------------------------------------------ --------------- ---------------
Total current assets 174,917 180,943
------------------------------------------------------------------ --------------- ---------------
Restricted cash - long-term (notes 4 and 12) 567,517 158,798
Vessels and equipment (note 7)
At cost, less accumulated depreciation of $21,139
(December 31, 2005 - $16,235) 503,489 507,825
Vessels under capital leases, at cost, less accumulated
depreciation of $37,218 (December 31, 2005 - $32,266) (note 4) 673,168 677,686
Advances on newbuilding contracts (note 12) - 316,875
------------------------------------------------------------------ --------------- ---------------
Total vessels and equipment 1,176,657 1,502,386
------------------------------------------------------------------ --------------- ---------------
Other assets (note 11) 65,703 20,215
Intangible assets - net (note 5) 166,911 169,194
Goodwill (note 5) 39,279 39,279
------------------------------------------------------------------ --------------- ---------------
Total assets 2,190,984 2,070,815
================================================================== =============== ===============
LIABILITIES AND PARTNERS' EQUITY
Current
Accounts payable 5,953 5,885
Accrued liabilities 14,576 13,952
Current portion of long-term debt (note 7) 8,434 8,103
Current obligation under capital leases (note 4) 144,867 137,646
Current portion of long-term debt related to
newbuilding vessels to be leased (note 12) 2,076 -
Advances from affiliate (notes 10e and 10f) 4,097 2,222
----------------------------------------------------------------- --------------- ---------------
Total current liabilities 180,003 167,808
----------------------------------------------------------------- --------------- ---------------
Long-term debt (note 7) 398,467 398,249
Long-term obligation under capital leases (note 4) 383,793 382,343
Long-term debt related to newbuilding vessels
to be leased (note 12) 403,407 319,573
Other long-term liabilities (note 11) 50,255 33,703
----------------------------------------------------------------- --------------- ---------------
Total liabilities 1,415,925 1,301,676
----------------------------------------------------------------- --------------- ---------------
Commitments and contingencies (note 12)
Partners' equity
Partners' equity 827,520 841,642
Accumulated other comprehensive loss (note 9) (52,461) (72,503)
----------------------------------------------------------------- --------------- ---------------
Total partners' equity 775,059 769,139
----------------------------------------------------------------- --------------- ---------------
Total liabilities and partners' equity 2,190,984 2,070,815
================================================================= =============== ===============
The
accompanying notes are an integral part of the unaudited interim consolidated financial
statements.
TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES (Note 1)
(Successor to Teekay Luxembourg S.a.r.l.)
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars)
Three Months Ended March 31,
2006 2005
$ $
-------------- --------------
Cash and cash equivalents provided by (used for)
OPERATING ACTIVITIES
Net income 768 41,907
Non-cash items:
Depreciation and amortization 12,659 10,211
Deferred income tax recovery (300) (1,199)
Foreign currency exchange loss (gain) 8,611 (47,679)
Accrued interest and other - net (407) 5,501
Change in non-cash working capital items
related to operating activities (3,334) 8,537
Expenditures for drydocking (1,609) -
----------------------------------------------------------------- --------------- ---------------
Net operating cash flow 16,388 17,278
----------------------------------------------------------------- --------------- ---------------
FINANCING ACTIVITIES
Proceeds from long-term debt 91,627 5,817
Capitalized loan costs (2,512) -
Scheduled repayments of long-term debt (2,009) (3,282)
Scheduled repayments of capital lease obligations (2,134) (1,668)
Prepayments of long-term debt (29,000) (2,587)
Advances from affiliate 16,523 51
(Increase) decrease in restricted cash (note 4) (392,506) 2,422
Cash distributions paid (14,721) -
Other (154) -
----------------------------------------------------------------- --------------- ---------------
Net financing cash flow (334,886) 753
----------------------------------------------------------------- --------------- ---------------
INVESTING ACTIVITIES
Expenditures for vessels and equipment (1,542) (43,962)
Proceeds from sale of vessels and equipment (note 4) 312,972 63,026
----------------------------------------------------------------- --------------- ---------------
Net investing cash flow 311,430 19,064
----------------------------------------------------------------- --------------- ---------------
(Decrease) increase in cash and cash equivalents (7,068) 37,095
Cash and cash equivalents, beginning of the period 34,469 156,410
----------------------------------------------------------------- --------------- ---------------
Cash and cash equivalents, end of the period 27,401 193,505
================================================================= =============== ===============
Please see Note 6 for supplemental
cash flow disclosure.
The accompanying notes are an
integral part of the unaudited interim consolidated financial statements.
TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES (Note 1)
(Successor to Teekay Luxembourg S.a.r.l.)
UNAUDITED CONSOLIDATED STATEMENT OF PARTNERS' EQUITY/STOCKHOLDER DEFICIT
(in thousands of U.S. dollars and units)
PARTNERS' EQUITY
-------------------------------------------------
Limited Partners
---------------------------------------
Accumulated
Stockholder Other
Deficit General Comprehensive
(Predecessor) Common Subordinated Partner Loss Total
$ Units $ Units $ $ $ $
-------------------------------- ---------- --------- --------- --------- --------- --------- --------- ---------
Balance as at December 31, 2004 (123,002) - 1 - - - - (123,001)
Net income (January 1 -
May 9, 2005) 29,215 - - - - - - 29,215
Unrealized loss on derivative
instruments (note 11) (22,874) - - - - - - (22,874)
Reclassification adjustment
for loss on derivative
instruments included in
net income (note 11) 14,359 - - - - - - 14,359
Sale of the Santiago Spirit
(note 10g) (3,115) - - - - - - (3,115)
-------------------------------- ---------- --------- --------- --------- --------- --------- --------- ---------
Balance as at May 9, 2005 (105,417) - 1 - - - - (105,416)
Equity contribution by
Teekay Shipping
Corporation (note 1) 105,417 8,734 211,788 14,735 357,318 11,614 (52,194) 633,943
Proceeds from initial public
offering of limited
partnership interests,
net of offering costs
of $16,089 (note 2) - 6,900 135,711 - - - - 135,711
Proceeds from follow-on
public offering of limited
partnership interests,
net of offering costs
of $5,832 (note 2) - 4,600 120,208 - - 2,572 - 122,780
Issuance of units to
non-employee directors
(note 2) - 4 - - - - - -
Net income (May 10 -
December 31, 2005) - - 23,716 - 16,951 9,665 - 50,332
Cash distributions - - (10,137) - (9,551) (402) - (20,090)
Unrealized loss on derivative
instruments (note 11) - - - - - - (26,622) (26,622)
Reclassification adjustment for
loss on derivative
instruments included
in net income (note 11) - - - - - - 6,313 6,313
Purchase of three Suezmax
tankers from Teekay
Shipping Corporation - - (15,773) - (11,483) (556) - (27,812)
-------------------------------- ---------- --------- --------- --------- --------- --------- --------- ---------
Balance as at December 31, 2005 - 20,238 465,514 14,735 353,235 22,893 (72,503) 769,139
Net income (January 1 -
March 31, 2006) - - 753 - - 15 - 768
Cash distributions - - (8,348) - (6,078) (295) - (14,721)
Unrealized gain on
derivative instruments
(notes 9 and 11) - - - - - - 17,812 17,812
Reclassification adjustment
for loss on derivative
instruments included
in net income (notes 9
and 11) - - - - - - 2,230 2,230
Offering costs from
follow-on public
offering of limited
partnership
interests (note 2) - - (169) - - - - (169)
-------------------------------- ---------- --------- --------- --------- --------- --------- --------- ---------
Balance as at March 31, 2006 - 20,238 457,750 14,735 347,157 22,613 (52,461) 775,059
================================ ========== ========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral
part of the unaudited interim consolidated financial statements.
TEEKAY LNG PARTNERS
L.P. AND SUBSIDIARIES
(Successor to Teekay
Luxembourg S.a.r.l.)
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, except
unit and per unit data)
| |
On April 30, 2004, Teekay Shipping Corporation through its subsidiary, Teekay Luxembourg
S.a.r.l (or Luxco), acquired all of the outstanding shares of Naviera F. Tapias S.A. and
its subsidiaries (or Tapias) and renamed it Teekay Shipping Spain S.L. (or
Teekay Spain). Teekay Shipping Corporation acquired Teekay Spain for
$298.2 million in cash, plus the assumption of debt and remaining newbuilding
commitments. |
| |
On
November 3, 2004, Teekay Shipping Corporation formed Teekay LNG Partners L.P., a
Marshall Islands limited partnership (or the Partnership), to own and operate the
liquefied natural gas (or LNG) and Suezmax crude oil marine transportation
businesses conducted by Luxco and its subsidiaries (collectively, the Predecessor).
On May 6, 2005, Teekay Shipping Corporation contributed all of the outstanding shares of
Luxco, all but $54.9 million of the notes receivable from Luxco, and all of the equity
interests of Granada Spirit L.L.C., which owned the Suezmax tanker, the Granada
Spirit, to the Partnership in connection with the Partnership’s initial public
offering on May 10, 2005 of 6.9 million common units, which represent limited partner
interests in the Partnership. The Partnership subsequently repaid the $54.9 million note
receivable. |
| |
In
exchange for these shares, equity interests and assets, Teekay Shipping Corporation
received 8,734,572 common units and 14,734,572 subordinated units, which represented a
75.7% limited partner interest in the Partnership. The Partnership’s general partner,
Teekay GP L.L.C. (or the General Partner) received a 2% general partner interest
and all of the incentive distribution rights in the Partnership. Teekay GP L.L.C. is a
wholly-owned subsidiary of Teekay Shipping Corporation. During November 2005, the
Partnership issued in a public offering an additional 4.6 million common units,
effectively reducing Teekay Shipping Corporation’s limited partnership interest to
65.8% (please see Note 2). |
| |
The
accompanying unaudited consolidated interim financial statements include the accounts of
Luxco and its subsidiaries, which include Teekay Spain, for periods subsequent to April
30, 2004 and prior to May 10, 2005. The results for the periods subsequent to April 30,
2004 reflect the comprehensive revaluation of all assets (including intangible assets and
goodwill) and liabilities of Teekay Spain at their fair values on the date of acquisition.
For periods subsequent to May 10, 2005, the consolidated financial statements include the
accounts of Teekay LNG Partners L.P., its subsidiaries (which include, among others, Luxco
and Teekay Spain), and Teekay Nakilat Corporation (or Teekay Nakilat), a variable
interest entity for which the Partnership is the primary beneficiary (please see Note 12).
The transfer to the Partnership of the shares of and notes receivable from Luxco and
equity interests of Granada Spirit L.L.C. represented a reorganization of entities under
common control and, consequently, was recorded at historical cost. The book value of these
assets on their transfer was $633.9 million. |
| |
The
accompanying unaudited consolidated interim financial statements have been prepared in
accordance with accounting principles generally accepted in the United States. Certain
information and footnote disclosures required by generally accepted accounting principles
in the United States 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, 2005. In the opinion of the General Partner’s management, these interim
statements reflect all adjustments (consisting only of normal recurring accruals)
necessary to present fairly, in all material respects, the Partnership’s
consolidated financial position, results of operations, changes in partners’ equity
and cash flows for the interim periods presented. The results of operations for the
interim periods presented are not necessarily indicative of those for a full fiscal year.
Significant intercompany balances and transactions have been eliminated upon
consolidation. |
TEEKAY LNG PARTNERS
L.P. AND SUBSIDIARIES
(Successor to Teekay
Luxembourg S.a.r.l.)
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(all
tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)
| |
On
May 10, 2005, the Partnership completed its initial public offering (or the IPO) of
6.9 million common units at a price of $22.00 per unit. During November 2005, the
Partnership issued in a follow-on public offering an additional 4.6 million common units
at a price of $27.40 per unit (or the Follow-On Offering). Concurrent with the
Follow-On Offering, the General Partner contributed $2.6 million to the Partnership to
maintain its 2% general partner interest. |
| |
The
proceeds received by the Partnership from the public offerings and the use of those
proceeds are summarized as follows: |
Follow-On
IPO Offering Total
$ $ $
Proceeds received: -------------- -------------- --------------
Sale of 6,900,000 common units at $22.00 per unit........ 151,800 - 151,800
Sale of 4,600,000 common units at $27.40 per unit........ - 126,040 126,040
General Partner contribution............................. - 2,572 2,572
-------------- -------------- --------------
151,800 128,612 280,412
-------------- -------------- --------------
Use of proceeds from sale of common units:
Underwriting and structuring fees........................ 10,473 5,042 15,515
Professional fees and other offering expenses to
third parties.......................................... 5,616 959 6,575
Repayment of advances from Teekay Shipping
Corporation............................................ 129,400 - 129,400
Purchase of three Suezmax tankers from Teekay - 122,611 122,611
Shipping Corporation...................................
Working capital.......................................... 6,311 - 6,311
-------------- -------------- --------------
151,800 128,612 280,412
-------------- -------------- --------------
| |
Concurrently
with the IPO, the Partnership awarded 700 common units as compensation to each of the
Partnership’s five non-employee directors. These common units reverse vest equally
over a three-year period. |
| |
The
Partnership has two reportable segments: its LNG carrier segment and its Suezmax tanker
segment. The Partnership’s LNG carrier segment consists of LNG carriers subject to
fixed-rate time charters. The Partnership’s Suezmax tanker segment consists of
conventional crude oil tankers operating on fixed-rate time-charter contracts. Segment
results are evaluated based on income from vessel operations. The accounting policies
applied to the reportable segments are the same as those used in the preparation of the
Partnership’s audited consolidated financial statements for the year ended December
31, 2005. |
TEEKAY LNG PARTNERS
L.P. AND SUBSIDIARIES
(Successor to Teekay
Luxembourg S.a.r.l.)
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(all
tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)
| |
The
following tables include results for these segments for the interim periods presented in
these financial statements. |
----------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
------------------------------------------------------------------------
2006 2005
--------------------------------- ----------------------------------- ------------------------------------
LNG Suezmax LNG Suezmax
Carrier Tanker Carrier Tanker
Segment Segment Total Segment Segment Total
$ $ $ $ $ $
--------------------------------- ----------- ----------- ----------- ----------- ------------ -----------
Voyage revenues.................. 23,700 20,441 44,141 24,264 10,500 34,764
Voyage expenses.................. - 277 277 48 144 192
Vessel operating expenses........ 3,802 5,159 8,961 4,343 3,651 7,994
Depreciation and amortization.... 7,678 4,981 12,659 7,522 2,689 10,211
General and administrative (1) .. 1,403 1,692 3,095 755 755 1,510
----------- ----------- ----------- ----------- ------------ -----------
Income from vessel operations.... 10,817 8,332 19,149 11,596 3,261 14,857
=========== =========== =========== =========== ============ ===========
Expenditures for vessels and
equipment...................... 1,542 - 1,542 - 43,962 43,962
--------------------------------- ----------- ----------- ----------- ----------- ------------ -----------
| |
(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 unaudited
consolidated interim balance sheet is as follows: |
As at As at
March 31, December 31,
2006 2005
$ $
--------------- ----------------
Total assets of the LNG carrier segment.................... 1,704,489 1,576,990
Total assets of the Suezmax tanker segment................. 445,204 448,525
Cash and cash equivalents.................................. 27,401 34,469
Accounts receivable and other
assets................................................... 13,890 10,831
--------------- ----------------
Consolidated total assets ................................ 2,190,984 2,070,815
=============== ================
| |
4. |
Capital Lease
Obligations and Restricted Cash |
| |
LNG
Carriers. As at March 31, 2006, the Partnership was a party to capital leases on two
LNG carriers, which are structured as “Spanish tax leases”. Under the terms of
the Spanish tax leases, the Partnership will purchase these vessels at the end of their
respective lease terms in 2006 and 2011, both of which purchase obligations have been
fully funded with restricted cash deposits described below. As at March 31, 2006 and
December 31, 2005, the weighted-average interest rate implicit in the Spanish tax leases
was 5.7%. As at March 31, 2006, the commitments under these capital leases, including the
purchase obligations, approximated 288.2 million Euros ($349.3 million),
including imputed interest of 40.7 million Euros ($49.3 million), repayable as
follows: |
Year Commitment
2006.................................. 123.2 million Euros ($149.3 million)
2007................................... 23.3 million Euros ($28.2 million)
2008................................... 24.4 million Euros ($29.6 million)
2009................................... 25.6 million Euros ($31.1 million)
2010................................... 26.9 million Euros ($32.6 million)
Thereafter............................. 64.8 million Euros ($78.5 million)
TEEKAY LNG PARTNERS
L.P. AND SUBSIDIARIES
(Successor to Teekay
Luxembourg S.a.r.l.)
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(all
tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)
| |
During
January 2006, three subsidiaries of Teekay Nakilat, each of which has contracted to have
built one LNG carrier, sold their shipbuilding contracts to SeaSpirit Leasing Limited (or
SeaSpirit) for proceeds of $313.0 million. Concurrent with the sale, Teekay Nakilat
entered into 30-year leases, commencing upon the completion of vessel construction,
for these three LNG carriers (please see Note 12). |
| |
Suezmax
Tankers. As at March 31, 2006, the Partnership was a party to capital leases on five
Suezmax tankers. Under the terms of the lease arrangements, which include the
Partnership’s contractual right to full operation of the vessels pursuant to bareboat
charters, the Partnership is required to purchase these vessels for a fixed price after
the end of their respective lease terms, which will occur at various times from 2007 to
2010. The weighted-average interest rate implicit in these capital leases at the inception
of the leases was 7.4%. These capital leases are variable-rate capital leases; however,
any change in our lease payments resulting from changes in interest rates is offset by a
corresponding change in the charter hire payments received by the Partnership. As at March
31, 2006, the remaining commitments under these capital leases, including the purchase
obligations, approximated $269.4 million, including imputed interest of
$40.7 million, repayable as follows: |
Year Commitment
2006......................................... $ 19.1 million
2007......................................... 145.1 million
2008......................................... 8.6 million
2009......................................... 8.5 million
2010......................................... 88.1 million
| |
Under
the terms of the Spanish tax leases for the two LNG carriers, the Partnership is required
to have on deposit with financial institutions an amount of cash that, together with
interest earned on the deposit, will equal the remaining amounts owing under the leases,
including the obligations to purchase the LNG carriers at the end of the lease periods.
This amount was 252.3 million Euros ($305.7 million) and 249.0 million Euros
($295.0 million) as at March 31, 2006 and December 31, 2005, respectively. These cash
deposits are restricted to being used for capital lease payments and have been fully
funded with term loans (please see Note 7) and a Spanish government grant. The
interest rates earned on the deposits approximate the interest rates implicit in the
Spanish tax leases. As at March 31, 2006 and December 31, 2005, the weighted-average
interest rate earned on the deposits was 5.2%. |
| |
Under
the terms of the leases for the three LNG carriers, Teekay Nakilat is required to
have on deposit an amount of cash that, together with interest earned on the deposit, will
equal the remaining amounts owing under the leases. This amount was $395.3 million as
at March 31, 2006. These cash deposits are restricted to being used for capital lease
payments and have been fully funded with term loans and loans from the joint venture
partners (please see Note 12). As at March 31, 2006, the weighted-average interest rate
earned on the deposits was 4.7%. |
| |
The
Partnership also maintains restricted cash deposits relating to certain term loans, which
cash totaled $3.7 million and $3.3 million as at March 31, 2006 and December 31, 2005,
respectively. |
TEEKAY LNG PARTNERS
L.P. AND SUBSIDIARIES
(Successor to Teekay
Luxembourg S.a.r.l.)
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(all
tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)
| |
5. |
Intangible Assets and
Goodwill |
| |
As
at March 31, 2006 and December 31, 2005, intangible assets consisted of time-charter
contracts with a weighted-average amortization period of 19.2 years. |
| |
The
carrying amount of intangible assets as at March 31, 2006 and December 31, 2005 is as
follows: |
March 31, December 31,
2006 2005
$ $
--------------- --------------
Gross carrying amount................................... 182,552 182,552
Accumulated amortization................................ (15,641) (13,358)
--------------- --------------
Net carrying amount..................................... 166,911 169,194
=============== ==============
| |
All
intangible assets were recognized on April 30, 2004, when the Predecessor acquired Teekay
Spain. Amortization expense of intangible assets for each of the three month-periods ended
March 31, 2006 and 2005 was $2.3 million. |
| |
The
carrying amount of goodwill as at March 31, 2006 and December 31, 2005 for the
Partnership’s reporting segments is as follows: |
Suezmax LNG
Tanker Carrier
Segment Segment Total
$ $ $
----------- ----------- -----------
Balance as at March 31, 2006 and December 31, 2005..... 3,648 35,631 39,279
=========== =========== ===========
| |
Cash
interest paid by the Partnership during the three months ended March 31, 2006 and 2005
totaled $11.6 million and $16.3 million, respectively. |
March 31, December 31,
2006 2005
$ $
------------ -----------
U.S. Dollar-denominated Revolving Credit Facility due through 2015...... 23,000 29,000
Euro-denominated Term Loans due through 2023............................ 383,901 377,352
------------ -----------
406,901 406,352
Less current portion.................................................... 8,434 8,103
------------ -----------
Total................................................................... 398,467 398,249
============ ===========
| |
In
connection with the IPO, one of the Partnership’s LNG carrier-owning subsidiaries
amended its term loan agreement to provide for a $100.0 million senior secured
revolving credit facility, of which $100.0 million was undrawn at March
31, 2006. Interest payments are based on LIBOR plus a margin and may be used by the
Partnership for general partnership purposes and to fund cash distributions. The
Partnership is required to reduce all borrowings used to fund cash distributions to zero
for a period of at least 15 consecutive days during any 12-month period. The
Partnership’s obligations under this facility are secured by a first-priority
mortgage on one of its LNG carriers, the Hispania Spirit, and a pledge of certain
shares of the subsidiary operating the carrier. This facility is available to the
Partnership until September 2009. |
TEEKAY LNG PARTNERS
L.P. AND SUBSIDIARIES
(Successor to Teekay
Luxembourg S.a.r.l.)
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(all
tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)
| |
During
December 2005, the Partnership entered into a $137.5 million nine-year revolving credit
facility, of which $114.5 million was undrawn at March 31, 2006. This facility bears
interest at a rate of LIBOR plus a margin and may be used by the Partnership for general
partnership purposes. The Partnership’s obligations under this facility are secured
by a first-priority mortgage on three of its Suezmax tankers and a pledge of certain
shares of the subsidiaries operating the Suezmax tankers. This facility contains covenants
that require the maintenance of a minimum free liquidity and minimum tangible net worth
and provide a maximum leverage ratio. |
| |
The
Partnership has term loans outstanding, which, as at March 31, 2006, totaled 316.8 million
Euros ($383.9 million) of Euro-denominated loans. These loans were used to make restricted
cash deposits that fully fund payments under capital leases (please see Note 4). Interest
payments on the Euro-denominated term loans are based on EURIBOR plus a margin. The term
loans reduce in monthly payments with varying maturities through 2023. All term loans of
the Partnership are collateralized by first-preferred mortgages on the vessels to which
the loans relate, together with certain other collateral and guarantees from Teekay Spain. |
| |
At
March 31, 2006 and December 31, 2005, the margins on our term loans and revolving credit
facilities ranged from 0.5% and 1.3%. |
| |
The
weighted-average effective interest rate for U.S. Dollar-denominated debt outstanding at
March 31, 2006 and December 31, 2005 was 5.5% and 5.6%, respectively. The weighted-average
effective interest rate for Euro-denominated debt outstanding at March 31, 2006 and
December 31, 2005 was 3.8% and 3.6%, respectively. These rates do not reflect the effect
of related interest rate swaps that the Partnership has used to hedge certain of its
floating-rate debt (please see Note 11). |
| |
All
Euro-denominated term loans and Euro-denominated advances from affiliates (prior to the
IPO) are revalued at the end of each period using the then prevailing Euro/U.S. Dollar
exchange rate. Due substantially to this revaluation, the Partnership recognized foreign
exchange losses of $7.8 million during the three months ended March 31, 2006 and foreign
exchange gains of $45.0 million during the three months ended March 31, 2005. |
| |
The
aggregate annual long-term debt principal repayments required for periods subsequent to
March 31, 2006 are $6.3 million (2006), $8.9 million (2007), $9.5 million
(2008), $10.2 million (2009), $11.0 million (2010), and $361.0 million
(thereafter). |
| |
All
of the Partnership’s existing vessel financing is arranged on a vessel-by-vessel
basis, and each financing is secured by first-preferred mortgages on the applicable
vessel. The Partnership’s ship-owning subsidiaries may not, among other things, pay
dividends or distributions if the Partnership is in default under the term loans and
revolving credit facilities. In addition, the Partnership’s term loan for one of its
LNG carriers, the Catalunya Spirit, contains covenants that require the maintenance
of a minimum liquidity of 5.0 million Euros and annual restricted cash deposits of 1.2
million Euros. The Partnership’s capital leases do not contain financial or
restrictive covenants other than those relating to operation and maintenance of the
vessels. |
Three Months Ended March 31,
2006 2005
$ $
----------- -----------
Income tax recovery.......................................... 300 1,356
Miscellaneous................................................ 308 37
----------- -----------
Other income................................................. 608 1,393
=========== ===========
TEEKAY LNG PARTNERS
L.P. AND SUBSIDIARIES
(Successor to Teekay
Luxembourg S.a.r.l.)
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(all
tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)
Three Months Ended March 31,
2006 2005
$ $
------------ ------------
Net income................................................... 768 41,907
Other comprehensive income:
Unrealized gain on derivative instruments.................. 17,812 2,008
Reclassification adjustment for loss on derivative
instruments included in net income........................ 2,230 5,113
------------ ------------
Comprehensive income......................................... 20,810 49,028
============ ============
| |
10. |
Related Party Transactions |
| |
a) |
The Partnership has entered into an omnibus agreement with Teekay Shipping Corporation, the General
Partner and others governing, among other things, when the Partnership and Teekay Shipping
Corporation may compete with each other and certain rights of first offer on LNG carriers and Suezmax
tankers.
|
| |
b) |
The Partnership and certain of its operating subsidiaries have entered into
services agreements with certain subsidiaries of Teekay Shipping Corporation
pursuant to which the Teekay Shipping Corporation subsidiaries provide the
Partnership with administrative, advisory, technical and strategic consulting
services. During the three months ended March 31, 2006, the Partnership incurred
$0.9 million of these costs. |
| |
c) |
The Partnership has entered into an insurance agreement with Teekay Shipping
Corporation pursuant to which Teekay Shipping Corporation provides the
Partnership with off-hire insurance for its LNG carriers commencing January 1,
2006. During the three months ended March 31, 2006, the Partnership incurred
$0.1 million of this cost. |
| |
d) |
The Partnership reimburses the General Partner for all expenses necessary or
appropriate for the conduct of the Partnership’s business. During the three
months ended March 31, 2006, the Partnership incurred $0.1 million of these
costs. |
| |
e) |
The Partnership’s Suezmax tanker, the Toledo Spirit, which delivered
in July 2005, operates pursuant to a time-charter contract that increases or
decreases the fixed 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 Partnership has entered into an agreement with
Teekay Shipping Corporation under which Teekay Shipping Corporation pays the
Partnership any amounts payable to the charter party as a result of spot rates
being below the fixed rate, and the Partnership pays Teekay Shipping Corporation
any amounts payable to the Partnership as a result of spot rates being in excess
of the fixed rate. During the three months ended March 31, 2006, $1.8 million
was paid or payable by the Partnership to Teekay Shipping Corporation as a
result of this agreement. |
| |
f) |
At March 31, 2006 and December 31, 2005, advances from affiliates totaled $4.1
million and $2.2 million, respectively. Advances from affiliates are
non-interest bearing and unsecured. |
| |
g) |
In early 2005, the Partnership completed the sale of the Santiago Spirit
(a newly constructed, double-hulled Suezmax tanker delivered in March 2005) to a
subsidiary of Teekay Shipping Corporation for $70.0 million. The resulting
$3.1 million loss on sale, net of income taxes, has been accounted for as an
equity distribution. |
TEEKAY LNG PARTNERS
L.P. AND SUBSIDIARIES
(Successor to Teekay
Luxembourg S.a.r.l.)
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(all
tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)
| |
11. |
Derivative
Instruments and Hedging Activities |
| |
The
Partnership, including Teekay Nakilat, uses derivatives only for hedging purposes. |
| |
As
at March 31, 2006, the Partnership was committed to the following interest rate swap
agreements related to its LIBOR-based debt, restricted cash deposits and EURIBOR-based
debt whereby certain of the Partnership’s floating-rate debt and restricted cash
deposits were swapped with fixed-rate obligations and fixed-rate deposits: |
Fair Value
/Carrying Weighted-
Amount of Average Fixed
Interest Principal Asset Remaining Interest
Rate Amount (Liability) Term Rate
Index $ $ (years) (%)(1)
------------- ------------- ------------- ------------- -------------
LIBOR-Based Debt:
U.S. Dollar-denominated
interest rate swaps (2)............ LIBOR 387,519 29,198 30.8 4.9
U.S. Dollar-denominated interest
rate swaps (2)(3).................. LIBOR 234,000 (15,205) 12.0 6.2
LIBOR-Based Restricted
Cash Deposit:
U.S. Dollar-denominated interest
rate swaps (2)..................... LIBOR 392,137 (35,050) 30.8 4.8
EURIBOR-Based Debt:
Euro-denominated interest rate
swaps(4)........................... EURIBOR 383,901 7,867 18.2 3.8
============= ============= ============= ============= =============
| (1) |
Excludes the margin the Partnership pays on its floating-rate debt. (Please see
Note 7). |
| (2) |
U.S. Dollar-denominated interest rate swaps are held in Teekay Nakilat. |
| (3) |
Inception dates of swaps are December 2006 ($78.0 million) and March and June
of 2007 ($156.0 million). |
| (4) |
Principal amount reduces monthly to 70.1 million Euros ($84.9 million) by the
maturity dates of the swap agreements. |
| |
During
April 2005, the Predecessor repaid term loans of $337.3 million on two LNG carriers and
settled related interest rate swaps. The Predecessor recognized a loss of $7.8 million as
a result of these interest rate swap settlements. During April 2005, the Predecessor also
settled interest rate swaps associated with 322.8 million Euros ($390.5 million) of term
loans and entered into new swaps of the same amount with a lower fixed interest rate. A
loss of 39.2 million Euros ($50.4 million) relating to these interest rate swap
settlements has been deferred in accumulated other comprehensive income and is being
recognized over the remaining terms of the term loans. The cost to settle all of these
interest rate swaps was $143.3 million. |
| |
Changes
in the fair value of the designated interest rate swaps (cash flow hedges) have been
recognized in other comprehensive income until the hedged item is recognized in income.
The ineffective portion of a derivative’s change in fair value is immediately
recognized into income and is presented as interest expense. During the three months ended
March 31, 2006, the ineffective portion of the Partnership’s interest rate swaps was
nominal. |
| |
The
Partnership is exposed to credit loss in the event of non-performance by the counter
parties to the interest rate swap agreements; however, counterparties to these agreements
are major financial institutions and the Partnership considers the risk of loss due to
non-performance to be minimal. The Partnership requires no collateral from these
institutions. |
TEEKAY LNG PARTNERS
L.P. AND SUBSIDIARIES
(Successor to Teekay
Luxembourg S.a.r.l.)
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(all
tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)
| |
12. |
Commitments and
Contingencies |
| |
The
Partnership has entered into an agreement with Teekay Shipping Corporation to purchase its
70% interest in Teekay Nakilat and the related 20-year time charters. Teekay Nakilat has a
30-year lease arrangement for three LNG carriers currently under construction. The
purchase will occur upon the delivery of the first newbuilding under capital lease, which
is scheduled during the fourth quarter of 2006. The estimated purchase price for the 70%
interest in Teekay Nakilat is approximately $93.0 million, before the expected benefits from the lease
arrangements, which are described in further detail below. |
| |
In
January 2003, the Financial Accounting Standards Board (or FASB) issued FASB
Interpretation 46, Consolidation of Variable Interest Entities, an Interpretation of
ARB No. 51 (or FIN 46). In general, a variable interest entity (or VIE)
is a corporation, partnership, limited-liability corporation, 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.
If a party with an ownership, contractual or other financial interest in the VIE (a
variable interest holder) is obligated to absorb a majority of the risk of loss from the
VIE’s activities, is entitled to receive a majority of the VIE’s residual
returns (if no party absorbs a majority of the VIE’s losses), or both, then FIN 46
requires that this party consolidate the VIE. The Partnership has consolidated Teekay
Nakilat in its consolidated financial statements, as Teekay Nakilat is a VIE and the
Partnership is its primary beneficiary. The assets and liabilities of Teekay Nakilat in
the Partnership’s financial statements are recorded at historical cost as the
Partnership and Teekay Nakilat are under common control. |
| |
During January 2006, three subsidiaries of Teekay Nakilat, each of which has contracted to have built one
LNG carrier sold their shipbuilding contracts to SeaSpirit for proceeds of $313.0 million, which
approximated the accumulated construction costs incurred to that date. Concurrent with the sale, Teekay
Nakilat entered into 30-year leases, commencing upon the completion of vessel construction, for these
three LNG carriers. The proceeds from the sale were used to partially fund restricted cash deposits,
which totaled $395.3 million as at March 31, 2006. During vessel construction, the amount of restricted
cash approximates the accumulated vessel construction costs and is expected to increase by approximately
$137.2 million during the remaining construction period. Teekay Nakilat has long-term financing
arrangements in place to fund its remaining funding commitments of these restricted cash deposits. Under
the terms of the leases and upon vessel delivery, the Partnership is required to have on deposit an
amount of cash that, together with interest earned on the deposit, will equal the remaining amounts owing
under the leases. The benefits of these lease arrangements will be received subsequent to the
Partnership’s purchase of Teekay Shipping Corporation’s 70% interest in Teekay Nakilat. Consequently, the
Partnership’s 70% share of these benefits, which is expected to be $40 million, will be obtained by a
reduction in lease payments for the three LNG carriers instead of a reduction in the purchase price of the 70%
interest in Teekay Nakilat.
|
| |
The
following table summarizes the balance sheet of Teekay Nakilat at March 31, 2006 and
December 31, 2005. |
March 31, December 31,
2006 2005
$ $
------------- -------------
ASSETS
Prepaid expenses and other current assets.................................. 1,107 -
Restricted cash - long-term................................................ 395,320 -
Advances on newbuilding contracts.......................................... - 316,875
Other assets............................................................... 40,565 4,175
------------- -------------
Total assets............................................................... 436,992 321,050
============= =============
TEEKAY LNG PARTNERS
L.P. AND SUBSIDIARIES
(Successor to Teekay
Luxembourg S.a.r.l.)
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(all
tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)
March 31, December 31,
2006 2005
$ $
-------------- --------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Accrued liabilities....................................................... 3,338 1,477
Debt related to newbuilding vessels to be leased (please see table
below)................................................................... 405,483 319,573
Other long-term liabilities............................................... 50,255 23,565
-------------- --------------
Total liabilities......................................................... 459,076 344,615
-------------- --------------
Total shareholders' deficit............................................... (22,084) (23,565)
-------------- --------------
Total liabilities and shareholders' deficit............................... 436,992 321,050
============== ==============
Teekay Nakilat's assets have been financed with the following debt financing:
March 31, December 31,
2006 2005
$ $
-------------- --------------
U.S. Dollar-denominated Term Loans due through 2019....................... 274,510 205,882
Interest-bearing Shareholder Loans of Teekay Nakilat...................... 113,017 111,666
Non-interest bearing Shareholder Loans of Teekay Nakilat.................. 17,956 2,025
-------------- --------------
405,483 319,573
Less current portion...................................................... 2,076 -
-------------- --------------
Total..................................................................... 403,407 319,573
============== ==============
| |
Teekay
Nakilat has U.S. Dollar-denominated term loans outstanding, which, as at March 31, 2006,
totaled $274.5 million. Interest payments on these term loans are based on LIBOR plus
margins. At March 31, 2006 and December 31, 2005, these margins ranged between 0.9% and
1.05%. The term loans reduce in quarterly payments commencing three months after delivery
of each LNG newbuilding. Once fully drawn, the loans will have approximately $56.0 million
per vessel in bullet repayments, due at maturity. Upon delivery of the first LNG carrier
under capital lease, a portion of the term loans will be drawn to repay the non-interest
bearing shareholder loans of Teekay Nakilat. All term loans are collateralized by
first-preferred mortgages on the vessels to which the loans relate, together with certain
other collateral and guarantees from Teekay Shipping Corporation. The creditors of Teekay
Nakilat do not have recourse to the Partnership. |
| |
During December 2005, $111.7 million of Teekay Nakilat’s equity owned by Teekay Shipping Corporation
($78.2 million) and Qatar Gas Transport Company Ltd. (Nakilat) ($33.5 million) was converted to
interest-bearing shareholder loans. Interest payments on these loans are based on a fixed interest rate
of 4.84% and are payable commencing one year after the delivery of the third LNG carrier. These loans are
unsecured and are repayable on demand.
|
| |
The
aggregate annual long-term debt principal repayments of Teekay Nakilat required for
periods subsequent to March 31, 2006 are $0.0 (2006), $11.4 million (2007),
$14.6 million (2008), $14.6 million (2009), $14.6 million (2010), and
$219.3 million (thereafter). |
| |
The
Partnership’s maximum exposure to loss at March 31, 2006, as a result of its
commitment to purchase Teekay Shipping Corporation’s interest in Teekay Nakilat, is
limited to the purchase price of its 70% interest in Teekay Nakilat. |
TEEKAY LNG PARTNERS
L.P. AND SUBSIDIARIES
(Successor to Teekay
Luxembourg S.a.r.l.)
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(all
tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)
| |
Net
income per unit is determined by dividing net income, after deducting the
amount of net income allocated to the General Partner’s interest from the issuance
date of the units of May 10, 2005, as described below, by the weighted-average number of
units outstanding during the period. For periods prior to May 10, 2005, such units are
deemed equal to the common and subordinated units received by Teekay Shipping Corporation
in exchange for net assets contributed to the Partnership in connection with the IPO, or
23,469,144 units. |
| |
As
required by Emerging Issues Task Force Issue No. 03-6, Participating Securities and
Two-Class Method under FASB Statement No. 128, Earnings Per Share, the general
partner’s, common unit holders’ and subordinated unitholders’ interests in
net income are calculated as if all net income for periods subsequent to May 10, 2005 were
distributed according to the terms of the Partnership Agreement, regardless of whether
those earnings would or could be distributed. The Partnership Agreement does not provide
for the distribution of net income; rather, it provides for the distribution of available
cash, which is a contractually defined term that generally means all cash on hand at the
end of each quarter after establishment of cash reserves. Unlike available cash, net
income is affected by non-cash items. Net income for the three months ended March 31, 2006
was $0.1 million, which included a $7.8 million foreign currency translation loss relating
primarily to long-term debt denominated in Euros. The limited partners’ interest in
net income for this period was $0.1 million. Subsequent to March 31, 2006, cash distributions
declared and paid to the limited partners for the three months ended
March 31, 2006 totaled $16.2 million. |
| |
Under
the Partnership Agreement, the holder of the incentive distribution rights in the
Partnership, which is currently the General Partner, has the right to receive an
increasing percentage of cash distributions after the minimum quarterly distribution.
Assuming there are no cumulative arrearages on common unit distributions, the target
distribution levels entitle the General Partner to receive 2% of quarterly cash
distributions up to $0.4625 per unit, 15% of quarterly cash distributions between $0.4625
and $0.5375 per unit, 25% of quarterly cash distributions between $0.5375 and $0.65 per
unit, and 50% of quarterly cash distributions in excess of $0.65 per unit. During the
three months ended March 31, 2006, net income did not exceed $0.4625 per unit and,
consequently, the assumed distributions of net income did not result in the use of the
increasing percentages to calculate the General Partner’s interest in net income. |
| |
Under
the Partnership Agreement, during the subordination period the common units will have the
right to receive distributions of available cash from operating surplus in an amount equal
to the minimum quarterly distribution of $0.4125 per quarter, plus any arrearages in the
payment of the minimum quarterly distribution on the common units from prior quarters,
before any distributions of available cash from operating surplus may be made on the
subordinated units. During the three months ended March 31, 2006, net income did not
exceed the minimum quarterly distribution of $0.4125 per unit and, consequently, the
assumed distributions of net income resulted in unequal distributions of net income
between the subordinated unit holders and common unit holders. |
| |
a) |
In July 2005, Teekay Shipping Corporation announced that it had been awarded
long-term, fixed-rate contracts to charter two LNG carriers to the Tangguh LNG
project in Indonesia. The carriers will be chartered for a period of
20 years to The Tangguh Production Sharing Contractors, a consortium led by
BP Berau Ltd., a subsidiary of BP plc. In connection with this award, Teekay
Shipping Corporation has exercised shipbuilding options with Hyundai Heavy
Industries Co. Ltd. to construct two 155,000 cubic meter LNG carriers at a total
delivered cost of approximately $450 million. The charters will commence
upon vessel deliveries, which are scheduled for late 2008 and early 2009. Teekay
Shipping Corporation is entering into these transactions with an Indonesian
partner that has taken a 30% interest in the vessels and related contracts. In
accordance with an existing agreement, Teekay Shipping Corporation is required
to offer to the Partnership its 70% ownership interest in these vessels and
related charter contracts. |
TEEKAY LNG PARTNERS
L.P. AND SUBSIDIARIES
(Successor to Teekay
Luxembourg S.a.r.l.)
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(all
tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)
| |
b) |
In August 2005, Teekay Shipping Corporation announced that it had been awarded
long-term, fixed-rate contracts to charter four LNG carriers to Ras Laffan
Liquefied Natural Gas Co. Limited (3) (or RasGas 3), a joint venture
company between a subsidiary of ExxonMobil Corporation and Qatar Petroleum. The
vessels will be chartered to RasGas 3 at fixed rates, with inflation
adjustments, for a period of 25 years (with options exercisable by the
customer to extend up to an additional 10 years). In connection with this
award, Teekay Shipping Corporation has entered into agreements with Samsung
Heavy Industries Co. Ltd. to construct four 217,000 cubic meter LNG carriers at
a total delivered cost of approximately $1.1 billion. The charters will
commence upon vessel deliveries, which are scheduled for the first half of 2008.
Teekay Shipping Corporation is entering into these transactions with Qatar Gas
Transport Company Ltd. (Nakilat), which has taken a 60% interest in the vessels
and related contracts. In accordance with an existing agreement, Teekay Shipping
Corporation is required to offer to the Partnership its 40% ownership interest
in these vessels and related charter contracts. |
TEEKAY LNG PARTNERS
L.P. AND SUBSIDIARIES
MARCH 31, 2006
PART I –
FINANCIAL INFORMATION
ITEM 2 —
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Teekay LNG Partners L.P. is an international
provider of liquefied natural gas (or LNG) and crude oil marine transportation
services. Our growth strategy focuses on expanding our fleet of LNG carriers under
long-term, fixed-rate time charters. We intend to continue our practice of acquiring LNG
carriers as needed for approved projects only after the long-term charters for the
projects have been awarded to us, rather than ordering vessels on a speculative basis. We
seek to capitalize on opportunities emerging from the global expansion of the LNG sector
by selectively targeting long-term, fixed-rate time charters. We may enter into joint
ventures and partnerships with companies that may provide increased access to these
opportunities or may engage in vessel or business acquisitions. We plan to leverage the
expertise, relationships and reputation of Teekay Shipping Corporation and its affiliates
to pursue these growth opportunities in the LNG sector and may consider other
opportunities to which our competitive strengths are well suited. We view our Suezmax
tanker fleet primarily as a source of stable cash flow as we expand our LNG operations.
We manage our business and analyze
and report our results of operations on the basis of the following two business segments:
LNG
Carrier Segment. We have four LNG carriers, all of which operate under
long-term, fixed-rate charters.
| |
In
addition, we have entered into an agreement with Teekay Shipping Corporation to purchase
its 70% interest in Teekay Nakilat Corporation (or Teekay Nakilat) and the related
20-year time charters. Teekay Nakilat has a 30-year lease arrangement on three LNG
carriers currently under construction. The purchase will occur upon the delivery of the
first newbuilding under capital lease, which is scheduled during the fourth quarter of
2006. The remaining two newbuildings under capital lease are scheduled for delivery in the
first half of 2007. Upon their deliveries, these vessels will commence service under
existing charters with Ras Laffan Liquefied Natural Gas Co. Limited (II) (or RasGas
II), a joint venture between Qatar Petroleum and ExxonMobil RasGas Inc., a subsidiary
of ExxonMobil Corporation, established for the purpose of expanding LNG production in
Qatar. Please read Item 1 – Financial Statements: Note 12 – Commitments and
Contingencies. |
| |
During
the three months ended March 31, 2006 and 2005, our LNG carrier segment generated 54.0%
and 70.0%, respectively, of our total net voyage revenues. |
| |
Suezmax
Tanker Segment. We have eight Suezmax class crude oil tankers, including a
new tanker, the Toledo Spirit, that delivered in July 2005 and three
double-hulled Suezmax tankers we acquired from Teekay Shipping Corporation in November
2005. In May 2005, we sold our only single-hulled Suezmax tanker, the Granada
Spirit. During the three months ended March 31, 2005, we had four Suezmax tankers.
Please read “ — Follow-On Offering and Acquisition of Three Suezmax
Tankers” below. We describe our Suezmax tanker dispositions and deliveries in more
detail under “ — Results of Operations” below. All of our Suezmax tankers
operate under long-term, fixed-rate time charters. |
During
the three months ended March 31, 2006 and 2005, our Suezmax tanker segment generated 46.0%
and 30.0%, respectively, of our total net voyage revenue.
Our original fleet was established by
Naviera F. Tapias S.A. (or Tapias), a Spanish company founded in 1991. Teekay
Shipping Corporation, through its subsidiary Teekay Luxembourg S.a.r.l. (or Luxco),
acquired Tapias on April 30, 2004 and changed its name to Teekay Shipping Spain S.L. (or
Teekay Spain).
Our Initial Public
Offering
On November 3, 2004, Teekay Shipping
Corporation formed us to own and operate the LNG
and Suezmax crude oil marine transportation businesses conducted by Luxco and its
subsidiaries. On May 6, 2005, Teekay Shipping Corporation contributed to us all of the
outstanding shares of Luxco, all but $54.9 million of notes receivable from Luxco, and all
of the equity interests of Granada Spirit L.L.C., which owned the Suezmax tanker, the
Granada Spirit, in connection with our initial public offering on May 10, 2005. We
subsequently repaid the $54.9 million note receivable.
In exchange for these shares, equity
interests and assets, Teekay Shipping Corporation received 8,734,572 common units and
14,734,572 subordinated units, which represented a 75.7% limited partner interest in us.
Our general partner, Teekay GP L.L.C., received a 2% general partner interest and all of
the incentive distribution rights in us. Teekay GP L.L.C. is a wholly-owned subsidiary of
Teekay Shipping Corporation. We sold 6.9 million of our common units, which represent
limited partner interests, in our initial public offering at a price of $22.00 per unit,
for net proceeds of $135.7 million, net of $16.1 million of underwriting costs and
offering expenses. Please read Item 1- Financial Statements: Note 2 – Public
Offerings.
New Long-Term,
Fixed-Rate LNG Contracts Awarded
In July and August 2005, Teekay Shipping
Corporation announced that it has been awarded new long-term, fixed-rate time charter
contracts to transport LNG and has entered into agreements to construct a total of six LNG
carriers in connection with these awards. Two of the LNG carriers will be chartered for a
period of 20 years to The Tangguh Production Sharing Contractors, and four will be
chartered for a period of 25 years (with options to extend up to an additional 10 years)
to Ras Laffan Liquefied Natural Gas Co. Limited (3). Partners in each of these projects
will participate in the ownership of the time charters and related vessels, and Teekay
Shipping Corporation will offer to us its interest in these charters and vessels. Please
read Item 1 – Financial Statements: Note 14 – Other Information.
Follow-On Offering and
Acquisition of Three Suezmax Tankers
In November 2005, we completed our
follow-on public offering of 4.6 million common units at a price of $27.40 per unit. Net
proceeds from the offering were $120.0 million, net of $6.0 million of underwriting costs
and offering expenses. In addition, our general partner contributed $2.6 million to us to
maintain its 2% general partner interest. Please read Item 1 – Financial Statements:
Note 2 – Public Offerings.
Concurrently with the closing of the
offering, we acquired from Teekay Shipping Corporation three double-hulled Suezmax oil
tankers and related long-term, fixed-rate time charters for an aggregate price of $180.0
million. These vessels, the African Spirit, the Asian Spirit and the
European Spirit (collectively, the ConocoPhillips Tankers), are similar in
size to our other five crude oil tankers. The ConocoPhillips Tankers have an average age
of two years and are chartered to a subsidiary of ConocoPhillips, an international,
integrated energy company. Each time charter has a remaining scheduled term of
approximately 10 years, subject to termination and vessel sale and purchase rights. In
addition, ConocoPhillips has the option to extend the charters for up to an additional six
years.
Our Charters
We generate revenues by charging
customers for the transportation of their LNG and crude oil using our vessels.
Historically, we generally have provided these services under the following basic types of
contractual relationships:
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Time charters, where vessels are chartered to customers for a fixed period of time at
rates that are generally fixed but may contain a variable component, based on inflation,
interest rates or current market rates; and |
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Voyage charters, which are charters for shorter intervals, usually a single round trip,
that are priced on a current, or “spot,” market rate. |
During the three months ended March
31, 2006 and 2005, we derived 100.0% of our revenues from time charters. We do not
anticipate earning revenues from voyage charters in the foreseeable future.
“Hire” rate refers to the
basic payment from the customer for the use of a vessel. Hire is payable monthly, in
advance, in U.S. Dollars or Euros, as specified in the charter. The hire rate generally
includes two components – a capital cost component and an operating expense
component. The capital component typically approximates the amount we are required to pay
under vessel financing obligations and, for our existing Suezmax tankers (other than for
the ConocoPhillips Tankers), adjusts for changes in the floating interest rates relating
to the underlying vessel financing. The operating component, which adjusts annually for
inflation, is intended to compensate us for vessel operating expenses and provide us a
profit.
The time charters for the
ConocoPhillips Tankers include a fixed monthly rate for their initial 12-year term, which
increases to another fixed amount for any extensions of the initial term. These time
charters do not include capital or operating components or adjust for inflation.
For our charters, other than the
charters for the RasGas II vessels and the ConocoPhillips Tankers, we earn a profit from a
margin built into the operating component. Under the RasGas II charters, this margin is
built into the capital component.
In addition, we may receive
additional revenues beyond the fixed hire rate when current market rates exceed specified
amounts under our time charter for one Suezmax tanker, the Teide Spirit.
Hire payments may be reduced or,
under some charters, we must pay liquidated damages, if the vessel does not perform to
certain of its specifications, such as if the average vessel speed falls below a
guaranteed speed or the amount of fuel consumed to power the vessel under normal
circumstances exceeds a guaranteed amount. Historically, we have had few instances of hire
rate reductions and none that have had a material impact on our operating results.
When a vessel is “off-hire”—or not available
for service—generally the customer is not required to pay the hire
rate and we are responsible for all costs. Commencing January 1, 2006, Teekay Shipping Corporation began providing
off-hire insurance for our LNG carriers. Prolonged off-hire may lead to vessel substitution or termination of the
time charter. A vessel will be deemed to be off-hire if it is in drydock. We must periodically drydock each of our
vessels for inspection, repairs and maintenance and any modifications to comply with industry certification or
governmental requirements. In addition, a vessel generally will be deemed off-hire if there is a loss of time due
to, among other things: operational deficiencies; equipment breakdowns; delays due to accidents, crewing strikes,
certain vessel detentions or similar problems; or our failure to maintain the vessel in compliance with its
specifications and contractual standards or to provide the required crew.
The average remaining term of our
existing long-term, fixed-rate time charters is approximately 19 years for our LNG
carriers and 14 years for our Suezmax tankers, subject, in certain circumstances, to
termination or purchase rights. The initial term of each of our three LNG newbuilding
charters is 20 years, in each case from delivery of the vessel.
Our customers include major energy
companies and their affiliates. We derive a substantial majority of our revenues from a
limited number of customers. During the three months ended March 31, 2006 and 2005, we
derived 84% and 100%, respectively, of our revenues from four customers – Compania
Espanola de Petroleos, S.A. (30% and 30%), Repsol YPF, S.A. (27% and 33%), Gas Natural
SDG, S.A. (14% and 20%) and Unión Fenosa Gas, S.A (13% and 17%). In addition,
during the three months ended March 31, 2006, we derived 16% of our revenues from a
subsidiary of ConocoPhillips. After delivery of the three RasGas II LNG newbuildings under
capital leases and commencement of the related charters, we expect to derive a significant
amount of revenues from RasGas II. The loss of any customer or time charter, or a
significant decline in payments under any of our time charters, could materially and
adversely affect our revenues, cash flows and operating results.
Important Financial and
Operational Terms and Concepts
We use a variety of financial and
operational terms and concepts when analyzing our performance. These include the
following:
Voyage Revenues.
Voyage revenues currently include revenues only from time charters. Voyage revenues are
affected by hire rates and the number of calendar-ship-days a vessel operates. Voyage
revenues are also affected by the mix of business between time and voyage charters. Hire
rates for voyage charters are more volatile, as they are typically tied to prevailing
market rates at the time of a voyage.
Voyage Expenses.
Voyage expenses are all expenses unique to a particular voyage, including any bunker fuel
expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and
commissions. Voyage expenses are typically paid by the customer under time charters and by
us under voyage charters. When we pay voyage expenses, we typically add them to our hire
rates at an approximate cost.
Net Voyage
Revenues. Net voyage revenues represent voyage revenues less voyage
expenses. Because the amount of voyage expenses we incur for a particular charter depends
upon the form of the charter, we use net voyage revenues to improve the comparability
between periods of reported revenues that are generated by the different forms of
charters. We principally use net voyage revenues, a non-GAAP financial measure, because it
provides more meaningful information to us about the deployment of our vessels and their
performance than voyage revenues, the most directly comparable financial measure under
accounting principles generally accepted in the United States (or GAAP).
Vessel Operating
Expenses. We are responsible for vessel operating expenses, which include
crewing, repairs and maintenance, insurance, stores, lube oils and communication expenses.
The two largest components of vessel operating expenses are crews and repairs and
maintenance.
Income from Vessel
Operations. To assist us in evaluating our operations by segment, we
sometimes analyze the income we receive from each segment after deducting operating
expenses, but prior to the deduction of interest expense, taxes, foreign currency and
interest rate swap gains or losses and other income and losses. For more information,
please read Item 1 – Financial Statements: Note 3 – Segment Reporting.
Drydocking.
We must periodically drydock each of our vessels for inspection, repairs and
maintenance and any modifications to comply with industry certification or
governmental requirements. Generally, we drydock each of our vessels every five
years. In addition, a shipping society classification intermediate survey is
performed on our LNG carriers between the second and third year of a five-year
drydocking period. We capitalize a substantial portion of the costs incurred
during drydocking and for the survey and amortize those costs on a straight-line
basis from the completion of a drydocking or intermediate survey to the
estimated completion of the next drydocking. We expense costs related to routine
repairs and maintenance incurred during drydocking or intermediate survey that
do not improve or extend the useful lives of the assets. The number of
drydockings undertaken in a given period, and the nature of the work performed
determine the level of drydocking expenditures.
Depreciation and
Amortization. Our depreciation and amortization expense typically consists
of the following three components:
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charges related to the depreciation of the historical cost of our fleet (less an estimated
residual value) over the estimated useful lives of our vessels; |
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charges related to the amortization of drydocking expenditures over the estimated number
of years to the next scheduled drydocking; and |
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charges related to the amortization of the fair value of the time charters acquired in the
Teekay Spain acquisition (over the remaining terms of the charters), which was initially
determined at approximately $183 million in April 2004 when Teekay Shipping Corporation
acquired Teekay Spain. |
Revenue Days.
Revenue days are the total number of calendar days our vessels were in our possession
during a period less the total number of off-hire days during the period associated with
major repairs, drydockings or special or intermediate surveys. Consequently, revenue days
represents the total number of days available for the vessel to earn revenue. Idle days,
which are days when the vessel is available to earn revenue, yet is not employed, are
included in revenue days. We use revenue days to explain changes in our net voyage
revenues between periods.
Calendar-Ship-Days.
Calendar-ship-days are equal to the total number of calendar days that our
vessels were in our possession during a period. As a result, we use
calendar-ship-days primarily in explaining changes in vessel operating expenses
and depreciation and amortization.
Utilization.
An indicator of the use of our fleet during a given period, which is determined
by dividing our revenue days by our calendar-ship-days for the period.
Restricted Cash
Deposits. Under capital lease arrangements for two of our LNG carriers, we
(a) borrowed under term loans and deposited the proceeds into restricted cash accounts and
(b) entered into capital leases, also referred to as “bareboat charters,” for
the vessels. The restricted cash deposits, together with interest earned on the deposits,
will equal the remaining amounts we owe under the lease arrangements, including our
obligation to purchase the vessels at the end of the lease terms. During vessel
construction, we borrowed under the term loans and made restricted cash deposits equal to
construction installment payments. We also maintain restricted cash deposits relating to
certain term loans and other obligations, such as the lease agreements for the three
RasGas II LNG newbuilding carriers. For more information, please read Item 1 –
Financial Statements: Note 4 – Capital Lease Obligations and Restricted Cash.
Foreign Currency
Fluctuations. Our results of operations are affected by fluctuations in
currency exchange rates. The volatility in our financial results due to currency exchange
rate fluctuations are attributed primarily to the following factors:
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Unrealized end-of-period revaluations. Under U.S. accounting guidelines, all
foreign currency-denominated monetary assets and liabilities, such as cash and cash
equivalents, restricted cash, long-term debt and capital lease obligations, are revalued
and reported based on the prevailing exchange rate at the end of the period. A substantial
majority of our foreign currency gains and losses are attributable to this revaluation in
respect of our Euro-denominated term loans. Substantially all of these gains and losses
are unrealized. |
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Foreign currency revenues and expenses. A portion of our voyage revenues are
denominated in Euros. A substantial majority 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 also have Euro-denominated interest
expense and interest income related to our Euro-denominated loans and Euro-denominated
restricted cash deposits, respectively. As a result, fluctuations in the Euro 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 and interest income. |
Our Euro-denominated revenues
currently generally approximate our Euro-denominated expenses and Euro-denominated loan
and interest payments. For this reason, we have not entered into any forward contracts or
similar arrangements to protect against the risk of foreign currency-denominated revenues,
expenses or monetary assets or liabilities. If our foreign currency-denominated revenues
and expenses become sufficiently disproportionate in the future, we may engage in hedging
activities. For more information, please read Item 3 - Quantitative and Qualitative
Disclosures About Market Risk.
Items You Should
Consider When Evaluating Our Results of Operations
Some factors that have affected our
historical financial performance or will affect our future performance are listed below:
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Our financial results reflect changes in our capital structure. Prior to the
closing of our initial public offering on May 10, 2005, we repaid $337.3 million of term
loans on two LNG carriers and settled related interest rate swaps. We also settled other
interest rate swaps associated with 322.8 million Euros ($390.5 million) of other term
loans and entered into new swaps of the same amount with a lower fixed interest rate. In
addition, on May 6, 2005, Teekay Shipping Corporation contributed to us all but $54.9
million of its notes receivable from Luxco, among other assets. We subsequently repaid the
$54.9 million note receivable. These reductions in our debt and effective interest rates
have decreased the amount of our interest expense. |
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Our historical operating results include the historical results of Luxco for the three
months ended March 31, 2005. Teekay Shipping Corporation formed Luxco in April
2004 to acquire and hold Teekay Spain. During the three months ended March 31, 2005, Luxco
had no revenues, expenses or income, other than: |
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net interest expense of $1.0 million related to $448.0 million of advances from Teekay
Shipping Corporation that Luxco used to purchase Teekay Spain and to prepay certain debt
of Teekay Spain; and |
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an unrealized foreign exchange loss of $7.7 million for the three months ended March
31, 2005 related to the advances, which were Euro-denominated. |
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Luxco’s
results relate solely to the financing of the acquisition of Teekay Spain and repayment of
Teekay Spain debt by Teekay Shipping Corporation and do not relate to the historical
results of Teekay Spain. In addition, because the capital stock of Luxco and the advances
from Teekay Shipping Corporation were contributed to us in connection with our initial
public offering, these advances and their related effects were eliminated on consolidation
in the periods subsequent to May 9, 2005. Consequently, certain of our financial and
operating data for the three months ended March 31, 2006 may not be comparable to the same
period last year. |
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Our financial results reflect the consolidation of Teekay Nakilat, a variable interest
entity for which we are the primary beneficiary. In May 2005, we entered into
an agreement with Teekay Shipping Corporation to purchase its 70% interest in Teekay
Nakilat and the related 20-year time charters. Teekay Nakilat has a 30-year lease
arrangement on three LNG carriers currently under construction. The purchase will occur
upon the delivery of the first newbuilding under capital lease, which is scheduled during
the fourth quarter of 2006. As discussed below, we are required to consolidate Teekay
Nakilat for financial statement purposes. |
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In
January 2003, the Financial Accounting Standards Board (or FASB) issued FASB
Interpretation 46, Consolidation of Variable Interest Entities, an Interpretation of
ARB No. 51 (or FIN 46). In general, a variable interest entity (or VIE)
is a corporation, partnership, limited-liability corporation, 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.
If a party with an ownership, contractual or other financial interest in the VIE (a
variable interest holder) is obligated to absorb a majority of the risk of loss from the
VIE’s activities, is entitled to receive a majority of the VIE’s residual
returns (if no party absorbs a majority of the VIE’s losses), or both, then FIN 46
requires that this party consolidate the VIE. We have consolidated Teekay Nakilat in our
consolidated financial statements, as Teekay Nakilat is a VIE and we are its primary
beneficiary. Please read Item 1 — Financial Statements: Note 1 – Basis of
Presentation and Note 12 – Commitments and Contingencies. |
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Our financial results reflect the sale and leaseback of the three RasGas II LNG
newbuildings of Teekay Nakilat. During January 2006, three subsidiaries of
Teekay Nakilat, each of which has contracted to have built one LNG carrier, sold their
shipbuilding contracts to SeaSpirit Leasing Limited (or SeaSpirit) and entered into
30-year leases, commencing upon the completion of vessel construction, for these
three LNG carriers. Under the terms of the leases and upon vessel delivery, the
Partnership is required to have on deposit an amount of cash that, together with interest
earned on the deposit, will equal the remaining amounts owing under the leases. |
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As
a result of this transaction, Teekay Nakilat received $313.0 million from the sale of the
shipbuilding contracts, which approximated the accumulated construction costs incurred as
of the sale date. The proceeds from the sale were used to fund restricted cash deposits.
During the three months ended March 31, 2006, we placed an additional $82.3 million in
restricted cash deposits, which was funded with $68.6 million of term loans and $13.7
million of loans from Teekay Shipping Corporation. During the three months ended March 31,
2006, Teekay Nakilat earned $3.3 million of interest income on its restricted cash
deposits and $4.1 million of interest expense on its long-term debt. |
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The size of our Suezmax tanker fleet has changed. Our historical results of
operations reflect changes in the size and composition of our fleet due to certain vessel
deliveries and vessel dispositions. During the three months ended March 31, 2005, we had
four Suezmax tankers, while during the three months ended March 31, 2006, we had eight
Suezmax tankers. Please read “– Results of Operations – Suezmax Tanker
Segment” below for further details about our vessel dispositions and deliveries. |
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One of our Suezmax tankers earns revenues based partly on the current spot market
rates. The time charter for our Suezmax tanker, the Teide Spirit, contains a
component providing for additional revenues to us beyond the fixed hire rate when current
market rates exceed certain threshold amounts. Accordingly, even though declining spot
market rates will not result in our receiving less than the fixed hire rate, our results
may continue to be influenced, in part, by the variable component of the Teide
Spirit charter. During the three months ended March 31, 2006 and 2005, we earned
$1.4 million and $1.8 million, respectively, in additional revenue from this
variable component. |
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We are incurring additional general and administrative expenses following our initial
public offering. In connection with the closing of our initial public offering and
also with our acquisition of the ConocoPhillips Tankers, we and certain of our
subsidiaries entered into services agreements with certain subsidiaries of Teekay Shipping
Corporation pursuant to which those subsidiaries provide us and our subsidiaries certain
services, including strategic consulting, advisory, ship management, technical and
administrative services. Our cost for these services depends on the amount and type of
services provided during each period. The services are valued at a reasonable,
arm’s-length rate that includes reimbursement of reasonable direct or indirect
expenses incurred to provide the services. We also reimburse our general partner for all
expenses it incurs on our behalf. We may also pay “incentive fees” to Teekay
Shipping Corporation to reward and motivate it for pursuing LNG projects that we may elect
to undertake, and we may grant equity compensation that would result in an expense to us.
In addition, since our initial public offering on May 10, 2005, we have incurred
expenses as a result of being a publicly-traded limited partnership, including costs
associated with annual reports to unitholders and SEC filings, investor relations,
incremental director and officer liability insurance costs and director compensation. |
Results of Operations
The following tables present our
operating results by reportable segment for the three months ended March 31, 2006 and
2005, and compare our net voyage revenues, a non-GAAP financial measure, for those periods
to the most directly comparable GAAP financial measure.
---------------------------------- -------------------------------------- ---------------------------------------
Three Months Ended Three Months Ended
March 31, 2006 March 31, 2005
-------------------------------------- ---------------------------------------
(in thousands of U.S. dollars, LNG Suezmax LNG Suezmax
except Operating Data) Carrier Tanker Carrier Tanker
Segment Segment Total Segment Segment Total
------------ ------------ ------------ ------------ ------------ ------------
Voyage revenues.................. 23,700 20,441 44,141 24,264 10,500 34,764
Voyage expenses.................. - 277 277 48 144 192
------------ ------------ ------------ ------------ ------------ ------------
Net voyage revenues.............. 23,700 20,164 43,864 24,216 10,356 34,572
Vessel operating expenses........ 3,802 5,159 8,961 4,343 3,651 7,994
Depreciation and amortization.... 7,678 4,981 12,659 7,522 2,689 10,211
General and administrative (1)... 1,403 1,692 3,095 755 755 1,510
------------ ------------ ------------ ------------ ------------ ------------
Income from vessel operations.... 10,817 8,332 19,149 11,596 3,261 14,857
============ ============ ============ ============ ============ ============
Operating Data:
Revenue Days (A)............... 360 704 1,064 345 354 699
Calendar-Ship-Days (B)......... 360 720 1,080 360 360 720
Utilization (A)/(B)............ 100.0% 97.8% 98.5% 95.8% 98.3% 97.1%
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
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(1) |
Includes direct general and administrative expenses and indirect general and administrative
expenses (allocated to each segment based on estimated use of resources). |
Three Months Ended March
31, 2006 Versus Three Months Ended March 31, 2005
LNG Carrier Segment
We operated four LNG carriers during
the three months ended March 31, 2006 and 2005 and, therefore, our total
calendar-ship-days remained the same for both periods.
Net Voyage Revenues. Net
voyage revenues decreased 2.1% to $23.7 million for the three months ended March 31, 2006,
from $24.2 million for the same period last year. This decrease was the result of:
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a decrease of $1.3 million due to the effect on our Euro-denominated revenue from the
weakening of the Euro against the U.S. Dollar during the three months ended March 31,
2006, compared to the same period last year; |
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an increase of $0.8 million from
15.2 days of off-hire for one of our LNG carriers during February 2005. |
Vessel Operating Expenses.
Vessel operating expenses decreased 11.6% to $3.8 million for the three months ended March
31, 2006, from $4.3 million for the same period last year. This decrease was the result
of:
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a decrease of $0.7 million primarily relating to repair and maintenance work completed on
one of our LNG carriers during February 2005; and |
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a decrease of $0.2 million due to the effect on our Euro-denominated vessel operating
expenses from the weakening of the Euro against the U.S. Dollar during the three months
ended March 31, 2006, compared to the same period last year (a majority of our vessel
operating expenses are denominated in Euros, which is primarily a function of the
nationality of our crew); |
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a number of smaller factors that increased vessel operating expenses by $0.4 million. |
Depreciation and Amortization.
Depreciation and amortization increased 2.7% to $7.7 million for the three months ended
March 31, 2006, from $7.5 million for the same period last year. This increase reflects
the amortization of drydock expenditures incurred during 2005.
Suezmax Tanker Segment
During the three months ended March
31, 2006 and 2005, we operated eight and four Suezmax tankers, respectively. The results
of our Suezmax tanker segment reflect the following fleet changes during 2005:
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the delivery and concurrent sale of a Suezmax tanker newbuilding (the Santiago
Spirit) to Teekay Shipping Corporation in March 2005; |
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the delivery of a Suezmax tanker newbuildings (the Toledo Spirit) in July 2005 (or the Suezmax Delivery); |
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the sale of the Granada Spirit to Teekay Shipping Corporation in December 2004, in
connection with a significant drydocking and re-flagging of the vessel, the contribution
of this vessel to us on May 6, 2005, and the subsequent sale back to Teekay Shipping
Corporation on May 26, 2005; and |
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the acquisition of the ConocoPhillips Tankers from Teekay Shipping Corporation in November 2005. |
As a result, our total
calendar-ship-days increased by 100% to 720 for the three months ended March 31, 2006,
from 360 calendar-ship-days for the same period last year.
Net Voyage Revenues. Net
voyage revenues increased 94.2% to $20.2 million for the three months ended March 31,
2006, from $10.4 million for the same period last year. This increase was the result of:
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an increase of $7.0 million relating the acquisition of the ConocoPhillips Tankers; |
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an increase of $2.4 million relating to the Suezmax Delivery; and |
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an increase of $1.2 million due to adjustments to the daily charter rate based on
inflation and increases from rising interest rates in accordance with the time charter
contracts for all Suezmax tankers other than the ConocoPhillips Tankers. (However, under
the terms of our capital leases for our tankers subject to these charter rate
fluctuations, we had a corresponding increase in our lease payments, which is reflected as
an increase to interest expense; therefore, these interest rate adjustments, which will
continue, did not affect our cash flow or net income); |
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a decrease of $0.4 million from an additional 13 days of off-hire for one of our Suezmax
tankers during February 2006 relating to a scheduled drydocking; and |
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a decrease of $0.4 million in revenues earned by the Teide Spirit during the three
months ended March 31, 2006 compared to the same period last year. The time charter for
the Teide Spirit contains a component providing for additional revenues to us
beyond the fixed hire rate when current market rates exceed threshold amounts. |
Vessel Operating Expenses.
Vessel operating expenses increased 40.5% to $5.2 million for the three months ended March
31, 2006, from $3.7 million for the same period last year. This increase was the result
of:
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an increase of $1.5 million relating to the acquisition of the ConocoPhillips Tankers; and |
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an increase of $0.5 million relating to the Suezmax Delivery; |
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a decrease of $0.3 million due to the effect on our Euro-denominated vessel operating
expenses from the weakening of the Euro against the U.S. Dollar during the three months
ended March 31, 2006, compared to the same period last year (a majority of our vessel
operating expenses are denominated in Euros, which is primarily a function of the
nationality of our crew); and |
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a decrease of $0.2 million due to a number of smaller factors. |
Depreciation and Amortization.
Depreciation and amortization increased 85.2% to $5.0 million for the three months ended
March 31, 2006, from $2.7 million for the same period last year. This increase was the
result of:
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an increase of $1.6 million relating to the acquisition of the ConocoPhillips Tankers; and |
| |
• |
an increase of $0.7 million relating to the Suezmax Delivery. |
Other Operating Results
General and Administrative
Expenses. General and administrative expenses increased 106.7% to $3.1 million for the
three months ended March 31, 2006, from $1.5 million for the same period last year. This
increase was the result of:
| |
• |
an increase of $1.2 million associated with (a) services agreements we and certain of our
subsidiaries entered into with subsidiaries of Teekay Shipping Corporation in connection
with our initial public offering and with our acquisition of the ConocoPhillips Tankers,
(b) fees and cost reimbursements of our general partner and (c) additional expenses as a
result of being a publicly traded limited partnership; and |
| |
• |
a number of smaller factors which increased general and administrative expenses by $0.4 million. |
Interest Expense. Interest
expense decreased 27.3% to $18.6 million for the three months ended March 31, 2006, from
$25.6 million for the same period last year. This decrease was the result of:
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• |
a decrease of $6.4 million resulting from the repayment of $337.3 million of term loans
and the settlement of related interest rate swaps prior to our initial public offering; |
| |
• |
a decrease of $4.8 million resulting from Teekay Shipping Corporation’s contribution
to us of the interest-bearing loans in connection with our initial public offering; |
| |
• |
a decrease of $1.2 million resulting from scheduled debt repayments and capital lease
payments on our LNG vessels from restricted cash deposits (these LNG vessels have been
financed pursuant to Spanish tax lease arrangements, under which we borrow under term
loans and deposit the proceeds into restricted cash accounts and enter into capital leases
for the vessels; as a result, this decrease in interest expense is offset by a
corresponding decrease in the interest income from restricted cash); and |
| |
• |
a decrease of $0.9 million due to the effect on our Euro-denominated debt from the
weakening of the Euro against the U.S. Dollar during the three months ended March 31,
2006, compared to the same period last year; |
| |
• |
an increase of $4.1 million relating to the interest-bearing debt of Teekay Nakilat, of
which such interest was capitalized prior to the January 2006 sale and leaseback
transaction relating to the three LNG newbuilding carriers; |
| |
• |
an increase of $1.3 million relating to an increase in debt used to finance the Suezmax
Delivery and the acquisition of the ConocoPhillips Tankers; and |
| |
• |
an increase of $0.9 million from rising interest rates on our five Suezmax tanker lease
obligations. (However, under the terms of our time charter contracts for these vessels, we
had corresponding increases in our charter payments, which are reflected as an increase to
voyage revenues.) |
Interest Income. Interest
income increased 17.4% to $7.4 million for the three months ended March 31, 2006, from
$6.3 million for the same period 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 two of our LNG carriers and on restricted cash
deposits held for the three LNG carriers to be leased by Teekay Nakilat upon their
deliveries during the fourth quarter of 2006 and the first half of 2007. This increase was
the result of:
| |
• |
an increase of $3.3 million relating to additional restricted cash deposits which were
primarily funded with the proceeds from the sale and leaseback of the three LNG
newbuildings of Teekay Nakilat; and |
| |
• |
an increase of $0.1 million from interest earned on overnight deposits in our bank accounts; |
| |
• |
a decrease of $1.1 million resulting from scheduled capital lease repayments on two of our
LNG vessels which were funded from restricted cash deposits; |
| |
• |
a decrease of $0.8 million primarily from temporary investments held during 2005; and |
| |
• |
a decrease of $0.4 million due to the effect on our Euro-denominated deposits from the
weakening of the Euro against the U.S. Dollar during the three months ended March 31,
2006, compared to the same period last year. |
Foreign Currency Exchange Gains
(Losses). Foreign currency exchange loss was $7.8 million for the three months ended
March 31, 2006, compared to a foreign currency exchange gain of $45.0 million for the
three months ended March 31, 2005. Our foreign currency exchange gains and losses,
substantially all of which have been unrealized, are due substantially to the relevant
period-end revaluation of Euro-denominated term loans for financial reporting purposes.
Gains reflect a stronger U.S. Dollar against the Euro on the date of revaluation. Losses
reflect a weaker U.S. Dollar against the Euro on the date of revaluation.
Other Income. Other income of
$0.6 million for the three months ended March 31, 2006 is comprised of $0.3 million of
income tax recoveries and $0.3 million of miscellaneous income.
Other income of $1.4 million for the
three months ended March 31, 2005 resulted primarily from income tax recoveries.
Net Income. As a result of the
foregoing factors, net income was $0.8 million and $41.9 million for the three months
ended March 31, 2006 and 2005, respectively.
Liquidity and Capital
Resources
Liquidity and Cash Needs
As at March 31, 2006, our total cash
and cash equivalents totaled $27.4 million, compared to
$34.5 million at December 31, 2005. Our total liquidity including cash, cash equivalents
and undrawn long-term borrowings, was $241.9 million as at March 31, 2006, compared to
$105.5 million as at December 31, 2005. This increase was primarily the result of our
additional $137.5 million revolving credit facility we entered into during December 2005,
which became available to us in January 2006.
Our primary short-term liquidity
needs are to pay quarterly distributions on our outstanding units and to fund general
working capital requirements and drydocking expenditures, while 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
drydocking expenditures and expenditures to replace vessels in order to maintain the
operating capacity or revenue generated by our fleet. We anticipate that our primary
sources of funds for our short-term liquidity needs will be cash flows from operations
while our long-term sources of funds will be from cash from operations, term loans and
other debt or equity financings.
We believe that cash flows from
operations will be sufficient to meet our short-term liquidity needs for at least the next
12 months. We may need to raise additional capital to finance the purchase of our five
Suezmax tankers that we are required to purchase at the end of their capital lease terms,
which will be at various times from 2007 to 2010. We anticipate that we will be able to
purchase these five tankers by assuming the outstanding financing obligations that relate
to them; however, 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. We may be unable to raise additional funds on favorable terms, if at all.
Cash Flows. The following table summarizes
our sources and uses of cash for the periods presented:
Three Months Ended March 31,
2006 2005
($000's) ($000's)
Sources of Cash:
Operating activities: ........................................ 16,388 17,278
Financing activities:
Advances from affiliate..................................... 16,523 51
Proceeds from long-term debt................................ 91,627 5,817
Decrease in restricted cash................................. - 2,422
Investing activities:
Proceeds from sale of vessels and equipment................. 312,972 63,026
---------------- ----------------
437,510 88,594
---------------- ----------------
Uses of Cash:
Financing activities:
Repayments of debt and capital lease obligations............. 33,143 7,537
Increase in restricted cash.................................. 392,506 -
Cash distributions paid...................................... 14,721 -
Other........................................................ 2,666 -
Investing activities:
Expenditures for vessels and equipment....................... 1,542 43,962
---------------- ----------------
444,578 51,499
---------------- ----------------
Net (Decrease) Increase in Cash and Cash Equivalents........... (7,068) 37,095
================ ================
Operating Cash Flows.
Net cash flow from operating activities decreased to $16.4 million for the
three months ended March 31, 2006, from $17.3 million for the same period in 2005,
primarily reflecting the timing of our cash receipts and payments and a $1.6 million
increase in drydock expenditures, partially offset by the increase in operating cash flows
from the Suezmax Delivery and the acquisition of the ConocoPhillips Tankers. Net cash flow
from operating activities depends upon the timing and amount of drydocking expenditures,
repairs and maintenance activity, vessel additions and dispositions, foreign currency
rates, changes in interest rates, fluctuations in working capital balances and spot market
hire rates (to the extent we have vessels operating in the spot tanker market or our hire
rates are partially affected by spot market rates). The number of vessel drydockings tends
to be uneven between years.
Financing Cash Flows.
Our investments in vessels and equipment have been financed primarily with
term loans and capital lease arrangements. Net proceeds from long-term debt were
$91.6 million and $5.8 million, respectively, for the three months ended March
31, 2006 and 2005. During the three months ended March 31, 2006, Teekay Nakilat used $68.6
million of these funds, along with $13.7 million of advances from Teekay Shipping
Corporation, to partially fund its restricted cash deposits for the three LNG carriers
that are subject to capital leases and will be delivered during the fourth quarter of 2006
and the first half of 2007.
Cash distributions paid during the
three months ended March 31, 2006 was $14.7 million.
Debt repayments were $33.1 million during
the three months ended March 31, 2006, compared to $7.5 million during the same period
last year. The increase in debt repayments is primarily due to a $29.0 million debt
prepayment made during the three months ended March 31, 2006, compared to $2.6 million in
debt prepayments made during the three months ended March 31, 2005. Please read Item 1
– Financial Statements: Note 7 – Long-Term Debt.
As at March 31, 2006, our total debt
was $406.9 million, essentially unchanged from $406.4 million as at December 31, 2005. As
at March 31, 2006, our revolving credit facilities provided for borrowings of up to $237.5
million, of which $214.5 million was undrawn. As at March 31, 2006, we had term loans
outstanding that totaled 316.8 million Euros ($383.9 million) of Euro-denominated loans,
compared to 318.5 million Euros ($377.4 million) of Euro-denominated loans as at December
31, 2005. Our Euro-denominated term loans reduce in monthly payments with varying
maturities through 2023. Please read Item 1 – Financial Statements: Note 7 –
Long-Term Debt. We have used Euro-denominated loans to make restricted cash deposits that
fully fund payments under capital leases. Please read Item 1 – Financial Statements:
Note 4 – Capital Lease Obligations and Restricted Cash.
We entered into the $100 million
revolving credit facility in connection with our initial public offering, which was
undrawn at March 31, 2006. We may use this facility for general partnership purposes and
to fund cash distributions. Under the credit facility, we are required to reduce all
borrowings used to fund cash distributions to zero for a period of at least 15 consecutive
days during any 12-month period. Interest payments are based on LIBOR plus a margin. The
credit facility is available to us until September 2009. Our obligations under this
facility are secured by a first-priority mortgage on one of our LNG carriers, the
Hispania Spirit, and a pledge of certain shares of the subsidiary operating the
carrier.
During
December 2005, we entered into a $137.5 million nine-year revolving credit facility, which
became available to us in 2006, of which $114.5 million was undrawn at March 31, 2006.
This facility may be used by us for general partnership purposes. Our obligations under
this facility are secured by a first-priority mortgage on three of our Suezmax tankers and
a pledge of certain shares of the subsidiaries operating the Suezmax tankers. The credit
facility bears interest at a rate of LIBOR plus a margin. This facility contains covenants
that require us to maintain a minimum free liquidity, minimum tangible net worth and a
maximum leverage ratio.
As at March 31, 2006, our total debt
related to newbuilding vessels to be leased was $405.5 million, which consisted of $274.5
million of U.S. Dollar-denominated term loans of Teekay Nakilat, $113.0 million of
interest-bearing loans to Teekay Nakilat from Teekay Shipping Corporation and Qatar Gas
Transport Company Ltd. (Nakilat), and $18.0 million of non-interest bearing loans from
Teekay Shipping Corporation to Teekay Nakilat. As at December 31, 2005, Teekay
Nakilat’s total debt related to newbuilding vessels to be leased was $319.6 million,
which consisted of $205.9 million of U.S. Dollar-denominated term loans of Teekay Nakilat,
$111.7 million of interest-bearing loans from Teekay Shipping Corporation and Qatar Gas
Transport Company Ltd. (Nakilat), and $2.0 million of non-interest bearing loans from
Teekay Shipping Corporation. Please read Item 1 – Financial Statements: Note 12
– Commitments and Contingencies.
Interest payments on the term loans
in Teekay Nakilat are based on LIBOR plus a margin. The term loans reduce in quarterly
payments commencing three months after delivery of each LNG newbuilding. Once fully drawn,
the loans will have approximately $56.0 million per vessel in bullet repayments, due at
maturity. Interest payments on the loans from Teekay Shipping Corporation and Qatar Gas
Transport Company Ltd. (Nakilat) are based on a fixed interest rate of 4.84% and will be
payable commencing one year after the delivery of the third LNG carrier. These loans are
unsecured and are repayable on demand.
As at March 31, 2006 and December 31,
2005, the margins on our term loans and revolving credit facilities ranged from 0.5% to
1.3%.
All of our existing vessel financing is arranged on a vessel-by-vessel
basis, and each financing is secured by
first-preferred mortgages on the applicable vessel, together with other related collateral. Our capital leases do
not contain financial or restrictive covenants other than those relating to operation and maintenance of the
vessels. In addition, our ship-owning subsidiaries may not pay dividends or distributions if we are in default
under our loan agreements and revolving credit facilities.
The term loan agreements for our LNG carriers, including the
RasGas II financing arrangements we expect to assume,
are with separate shipowning subsidiaries, although Teekay Spain guarantees the payments under the term loan
agreements for all of our existing LNG carriers (or Teekay Shipping Corporation in the case of the RasGas II loan
agreements). These agreements and the agreements that govern our revolving credit facilities contain covenants
and other restrictions typical of debt financing secured by vessels, including, but not limited to, one or more of
the following that restrict the shipowning subsidiaries from:
| |
• |
incurring or guaranteeing indebtedness;
|
| |
• |
changing ownership or structure, including mergers, consolidations, liquidations and dissolutions;
|
| |
• |
making dividends or distributions if we are in default;
|
| |
• |
making capital expenditures in excess of specified levels;
|
| |
• |
making certain negative pledges and granting certain liens;
|
| |
• |
selling, transferring, assigning or conveying assets;
|
| |
• |
making certain loans and investments; and
|
| |
• |
entering into a new line of business.
|
The term loan for one of our LNG carriers, the Catalunya Spirit,
contains covenants that require the maintenance of a minimum liquidity of 5.0 million Euros and annual restricted cash
deposits of 1.2 million Euros.
Investing Cash Flows.
During the three months ended March 31, 2006, Teekay Nakilat novated its
shipbuilding contracts for the three RasGas II LNG carriers to SeaSpirit and was
reimbursed by SeaSpirit for previously paid shipyard installments and other construction
costs in the amount of $313.0 million. During the three months ended March 31, 2005, we
sold the Santiago Spirit, a Suezmax tanker, to Teekay Shipping Corporation for
proceeds of $63.0 million.
During the three months ended March
31, 2005, we incurred capital expenditures for vessels and equipment of $44.0 million.
These capital expenditures represent construction installment payments for the Suezmax
tankers, the Toledo Spirit, which delivered in July 2005, and the Santiago
Spirit, which we sold upon its delivery in March 2005.
Contractual Obligations
and Contingencies
The following table summarizes our
long-term contractual obligations as at March 31, 2006:
---------------------------------------------------------------------------------------------------------
Balance 2007 2009
of and and Beyond
Total 2006 2008 2010 2010
-------------------------------------------------- ---------- ---------- ---------- ---------- ----------
(in millions of U.S. Dollars)
U.S. Dollar-Denominated Obligations:
Long-term debt (1).............................. 23.0 - - - 23.0
Commitments under capital leases (2) ........... 269.4 19.1 153.7 96.6 -
---------- ---------- ---------- ---------- ----------
Total U.S. Dollar-denominated obligations....... 292.4 19.1 153.7 96.6 23.0
---------- ---------- ---------- ---------- ----------
Euro-Denominated Obligations: (3)
Long-term debt (4).............................. 383.9 6.3 18.4 21.2 338.0
Commitments under capital leases (2)(5)......... 349.3 149.3 57.8 63.7 78.5
---------- ---------- ---------- ---------- ----------
Total Euro-denominated obligations.............. 733.2 155.6 76.2 84.9 416.5
---------- ---------- ---------- ---------- ----------
U.S. Dollar-Denominated Obligations (Nakilat): (6)
Commitments under capital leases............... 1,118.8 - 41.4 48.0 1,029.4
Long-term debt relating to newbuilding vessels
to be leased (including purchase obligation).. 405.5 93.0 26.0 29.2 257.3
---------- ---------- ---------- ---------- ----------
Total U.S. Dollar-denominated obligations....... 1,524.3 93.0 67.4 77.2 1,286.7
---------- ---------- ---------- ---------- ----------
Totals............................................ 2,549.9 267.7 297.3 258.7 1,726.2
========== ========== ========== ========== ==========
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(1) |
Excludes interest payments which are based on LIBOR plus a margin. |
| |
(2) |
Includes amounts we are required to pay to purchase the vessels at the end of
the lease terms. We are obligated to purchase five of our existing Suezmax
tankers upon the termination of the related capital leases, which will occur at
various times from 2007 to 2010. The purchase price will be based on the unamortized
portion of the vessel construction financing costs for the vessels, which we
expect to range from $39.4 million to $41.9 million per vessel. We expect to
satisfy the purchase price by assuming the existing vessel financing. We are
also obligated to purchase two of our existing LNG carriers upon the termination
of the related capital leases in 2006 for the Catalunya Spirit and 2011
for the Madrid Spirit, both of which purchase obligations have been fully
funded with restricted cash deposits. Please read Item 1 – Financial
Statements: Note 4 – Capital Lease Obligations and Restricted Cash. |
| |
(3) |
Euro-denominated obligations are presented in U.S. Dollars and have been converted using the prevailing
exchange rate as of March 31, 2006.
|
| |
(4) |
Excludes interest payments which are based on EURIBOR plus a margin. |
| |
(5) |
Existing restricted cash deposits, together with the interest earned on the deposits, will equal the
remaining amounts we owe under the lease arrangements, including our obligation to purchase the vessels at the
end of the lease terms.
|
| |
(6) |
During May 2005, we entered into an agreement with Teekay Shipping Corporation to purchase its 70%
interest in Teekay Nakilat and the related 20-year time charters. Our estimated purchase commitment is $92.8
million. Teekay Nakilat has a 30-year lease arrangement on three LNG carriers currently under construction.
The purchase will occur upon the delivery of the first newbuilding under capital lease, which is scheduled
during the fourth quarter of 2006. As a result of this agreement, under current U.S. accounting guidelines we
are required to consolidate Teekay Nakilat even though we do not yet have an ownership interest in Teekay
Nakilat. During January 2006, Teekay Shipping Corporation completed a 30-year lease arrangement that was used
to finance the purchase of the three newbuildings owned by Teekay Nakilat. Please read Item 1 – Financial
Statements: Note 12 – Commitments and Contingencies.
|
| |
Under the terms of the leases, we are required to have on deposit an amount of cash that, together with
interest earned on the deposit, will equal the remaining amounts owing under the leases. During vessel
construction, the amount of the deposits approximates the accumulated vessel construction costs and is
expected to increase by approximately $137.2 million during the remaining construction period. Teekay Nakilat
has long-term financing arrangements in place to fund its remaining commitments of these deposits.
|
Critical Accounting
Policies
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.
Following is a discussion of the accounting policies that involve a high degree of
judgment and the methods of their application. For a further description of our material
accounting policies, please read Note 1 to our consolidated financial statements for the
year ended December 31, 2005, included in our Annual Report on Form 20-F filed with the
SEC.
Vessel Lives and
Impairment
The carrying value of each of our
vessels represents its original cost at the time of delivery or purchase less depreciation
or impairment charges. We depreciate our vessels on a straight-line basis over a
vessel’s estimated useful life, less an estimated residual value. Depreciation is
calculated using an estimated useful life of 25 years for Suezmax tankers and 35 years for
LNG carriers, from the date the vessel was originally delivered from the shipyard, or a
shorter period if regulations prevent us from operating the vessels to 25 years or 35
years, respectively. In the shipping industry, the use of a 25-year vessel life for
Suezmax tankers has become the prevailing standard. In addition, the use of a 30 to 40
year vessel life for LNG carriers is typical. However, the actual life of a vessel may be
different, with a shorter life potentially resulting in an impairment loss. We are not
aware of any regulatory changes or environmental liabilities that we anticipate will have
a material impact on our current or future operations.
The carrying values of our vessels
may not represent their fair market value at any point in time since the market prices of
second-hand vessels tend to fluctuate with changes in charter rates and the cost of
newbuildings. Both charter rates and newbuilding costs tend to be cyclical in nature. We
review vessels and equipment for impairment whenever events or changes in circumstances
indicate the carrying amount of an asset may not be recoverable. We measure the
recoverability of an asset by comparing its carrying amount to future undiscounted cash
flows that the asset is expected to generate over its remaining useful life. If we
consider a vessel or equipment to be impaired, we recognize impairment in an amount equal
to the excess of the carrying value of the asset over its fair market value.
Drydocking
Generally, we drydock each LNG
carrier and Suezmax tanker every five years. In addition, a shipping society
classification intermediate survey is performed on our LNG carriers between the second and
third year of the five-year drydocking period. We capitalize a substantial portion of the
costs we incur during drydocking and for the survey and amortize those costs on a
straight-line basis from the completion of a drydocking or intermediate survey to the
estimated completion of the next drydocking. We expense costs related to routine repairs
and maintenance incurred during drydocking that do not improve or extend the useful lives
of the assets. When significant drydocking expenditures occur prior to the expiration of
this period, we expense the remaining unamortized balance of the original drydocking cost
and any unamortized intermediate survey costs in the month of the subsequent drydocking.
Derivative Instruments
We utilize derivative financial
instruments to reduce interest rate risks. We do not hold or issue derivative financial
instruments for trading purposes. Statement of Financial Accounting Standards (or
SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities, which was amended in June 2000 by SFAS No. 138 and in May 2003
by SFAS No. 149, establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial condition and measure those
instruments at fair value. Derivatives that are not hedges or are not designated as hedges
are adjusted to fair value through income. If the derivative is a hedge, depending upon
the nature of the hedge, changes in the fair value of the derivatives are either offset
against the fair value of assets, liabilities or firm commitments through income, or
recognized in other comprehensive income until the hedged item is recognized in income.
The ineffective portion of a derivative’s change in fair value is immediately
recognized into income.
Goodwill and Intangible
Assets
We allocate the cost of acquired
companies to the identifiable tangible and intangible assets and liabilities acquired,
with the remaining amount being classified as goodwill. Certain intangible assets, such as
time charter contracts, are being amortized over time. Our future operating performance
will be affected by the amortization of intangible assets and potential impairment charges
related to goodwill. Accordingly, the allocation of purchase price to intangible assets
and goodwill may significantly affect our future operating results. The allocation of the
purchase price of acquired companies to intangible assets and goodwill requires management
to make significant estimates and assumptions, including estimates of future cash flows
expected to be generated by the acquired assets and the appropriate discount rate to value
these cash flows.
Goodwill and indefinite lived assets
are not amortized, but reviewed for impairment annually, or more frequently if impairment
indicators arise. The process of evaluating the potential impairment of goodwill and
intangible assets is highly subjective and requires significant judgment at many points
during the analysis. The fair value of our reporting units was estimated based on
discounted expected future cash flows using a weighted-average cost of capital rate. The
estimates and assumptions regarding expected cash flows and the discount rate require
considerable judgment and are based upon existing contracts, historical experience,
financial forecasts and industry trends and conditions.
FORWARD-LOOKING
STATEMENTS
This Report on Form 6-K for the three
months ended March 31, 2006 contains certain forward-looking statements (as such term is
defined in 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 and results of operations
and our future revenues and expenses; growth prospects of the LNG shipping sector and
tanker market; LNG and tanker market fundamentals, including the balance of supply and
demand in the LNG and tanker market; future capital expenditures and availability of
capital resources to fund capital expenditures; obtaining LNG projects that we or Teekay
Shipping Corporation bid on or have been awarded; vessel acquisitions; delivery dates of
and financing for newbuildings; the commencement of service of newbuildings under
long-term contracts; our liquidity needs; the expected timing, amount and method of
financing for the purchase of Teekay Nakilat; benefits from lease arrangements; and the timing of the commencement of the
RasGas II, RasGas 3 and Tangguh LNG projects. 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”, 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 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 applicable industry laws and
regulations and the timing of implementation of new laws and regulations; LNG
infrastructure constraints and community and environmental group resistance to new LNG
infrastructure; potential development of an active short-term or spot LNG shipping market;
potential inability to implement our growth strategy; competitive factors in the markets
in which we operate; potential for early termination of long-term contracts and our
potential inability to renew or replace long-term contracts; loss of any customer, time
charter or vessel; shipyard production or vessel delivery delays; 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; and other factors detailed from
time to time in our periodic reports, including our Annual Report on Form 20-F for the
year ended December 31, 2005, filed with the SEC. 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
MARCH 31, 2006
PART I –
FINANCIAL INFORMATION
ITEM 3 —
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are exposed to the impact of
interest rate changes primarily through our unhedged floating-rate borrowings. Significant
increases in interest rates could adversely affect 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. As at
March 31, 2006, our unhedged floating-rate borrowings totaled $23.0 million.
The table below provides information
about our financial instruments at March 31, 2006, that are sensitive to changes in
interest rates. For debt obligations, the table presents principal payments and related
weighted-average interest rates by expected maturity dates. For interest rate swaps, the
table presents notional amounts and weighted-average interest rates by expected
contractual maturity dates.
Expected Maturity Date
2006 2007 2008 2009 2010 Thereafter Rate(1)
--------- --------- --------- --------- --------- --------- ---------
(in millions of U.S. dollars, except percentages)
Long-Term Debt:
Variable Rate ($U.S.) (2)........ - 11.4 14.6 14.6 14.6 242.3 5.6%
Variable Rate (Euro) (3)(4)...... 6.3 8.9 9.5 10.2 11.0 338.0 3.8%
Fixed Rate ($U.S.)............... - - - - - 113.0 4.8%
Capital Lease Obligations (5)(6)..
Fixed-Rate ($U.S.) (7)........... 6.5 130.7 3.7 3.8 84.0 - 7.4%
Average Interest Rate (8)........ 7.5% 8.8% 5.4% 5.4% 5.5% -
Interest Rate Swaps:
Contract Amount ($U.S.) (6)(9).... - 2.2 4.5 4.9 5.3 217.1 6.2%
Average Fixed Pay Rate (2) ...... - 6.2% 6.2% 6.2% 6.2% 6.2%
Contract Amount (Euro) (4)(10).... 6.3 8.9 9.5 10.2 11.0 338.0 3.8%
Average Fixed Pay Rate (3) ...... 3.8% 3.8% 3.8% 3.8% 3.8% 3.8%
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(1) |
Rate refers to the weighted-average effective interest rate for our 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
swaps. 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 debt, which as of March 31, 2006 ranged
from 0.9% to 1.3%.
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(2) |
Interest payments on U.S. Dollar-denominated debt and interest rate swaps are based on LIBOR.
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(3) |
Interest payments on Euro-denominated debt and interest rate swaps are based on EURIBOR.
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(4) |
Euro-denominated amounts have been converted to U.S. Dollars using the prevailing exchange rate as of
March 31, 2006.
|
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(5) |
Excludes capital lease obligations (present value of minimum lease payments) of 247.5 million Euros
($300.0 million) on two of our existing LNG carriers with a weighted-average fixed interest rate of 5.7%.
Under the terms of these fixed-rate lease obligations, we are required to have on deposit, subject to a
weighted-average fixed interest rate of 5.2%, an amount of cash that, together with the interest earned
thereon, will fully fund the amount owing under the capital lease obligations, (including purchase
obligations). As at March 31, 2006 this amount was $252.3 million Euros ($305.7 million). Consequently, we are
not subject to interest rate risk from these obligations or deposits.
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(6) |
During January 2006, three subsidiaries of Teekay Nakilat, each of which has contracted to have built one LNG
carrier sold their shipbuilding contracts and entered into 30-year leases, commencing upon the completion of
vessel construction, for these three LNG carriers. Under the terms of the leases and upon vessel delivery, Teekay
Nakilat is 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. Both
the deposits, which as at March 31, 2006 were $395.3 million, and the lease obligations, which upon delivery are
expected to be approximately $180 million per vessel, have been swapped for fixed-rate deposits and fixed-rate
obligations. Consequently, Teekay Nakilat 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 March 31, 2006, the contract amount, fair value and fixed interest rates of these interest rate
swaps related to its capital lease obligations and restricted cash deposits were $387.5 million and $392.1
million, $29.2 million and ($35.1) million, 4.9% and 4.8%, respectively. |
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(7) |
The amount of capital lease obligations represents the present value of minimum
lease payments together with our purchase obligation. |
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(8) |
The average interest rate is the weighted-average interest rate implicit in the
capital lease obligations at the inception of the leases. |
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(9) |
The average variable receive rate for our U.S. Dollar-denominated interest rate
swaps is set quarterly at 3-month LIBOR. |
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(10) |
The average variable receive rate for our Euro-denominated interest rate swaps is set monthly at 1-month
EURIBOR.
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The following table sets forth
further information about our interest rate swap agreements, long-term debt and capital
lease obligations as at March 31, 2006 and December 31, 2005.
Fair Value /
Carrying
Amount of
Contract Asset
Amount (Liability) Rate (1)
--------- --------- ---------
(in millions of U.S. dollars)
March 31, 2006
Interest Rate Swap Agreements:
U.S. Dollar-denominated (2).......................... 234.0 (15.2) 6.2%
Euro-denominated..................................... 383.9 7.9 3.8%
Long-Term Debt: (3)
U.S. Dollar-denominated.............................. 410.5 (410.5) 5.4%
Euro-denominated..................................... 383.9 (383.9) 3.8%
December 31, 2005
Interest Rate Swap Agreements:
U.S. Dollar-denominated.............................. 234.0 (23.6) 6.2%
Euro-denominated..................................... 377.4 (10.1) 3.8%
Long-Term Debt: (3)
U.S. Dollar-denominated.............................. 346.6 (346.6) 5.1%
Euro-denominated .................................... 377.4 (377.4) 3.6%
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(1) |
Please read Note 1 from the previous table. |
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(2) |
Please read Note 6 from the previous table. |
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(3) |
Includes capital lease obligations except for capital lease obligations on two of our LNG carriers and three of
our LNG carriers currently under construction. Please read Notes 5 and 6 from the previous table. |
Foreign Currency Risk
We are exposed to the impact of
changes in foreign currency exchange rates. Revenues generated from three of our time
charters are either partially or solely denominated in Euros. During the three months
ended March 31, 2006 and 2005, we earned approximately 11.8 million Euros and 11.7 million
Euros ($14.2 million and $15.3 million), respectively, in Euro-denominated revenues from
these three time charters. The Euro-denominated cash received from these charters is used
for payment of Euro-denominated expenditures, including vessel operating expenses for our
Spanish crew, general and administrative expenses for our Madrid office and interest and
principal repayments for our Euro-denominated debt. Our Euro-denominated revenues
currently approximate our Euro-denominated expenses and Euro-denominated loan and interest
payments. For this reason, we have not entered into any forward contracts or similar
arrangements to protect against the currency risk of foreign currency-denominated
revenues, expenses, monetary assets or monetary liabilities. If our foreign
currency-denominated revenues and expenses become sufficiently disproportionate in the
future, we may engage in hedging activities.
TEEKAY LNG PARTNERS
L.P. AND SUBSIDIARIES
MARCH 31, 2006
PART II – OTHER
INFORMATION
Item 1 – Legal
Proceedings
Item 1A – Risk
Factors
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In
addition to the other information set forth in this Quarterly Report on Form 6-K, you
should carefully consider the risk factors discussed in Part I, “Item 3.
Key Information” in our Annual Report on Form 20-F for the year ended
December 31, 2005, which could materially affect our business, financial condition or
results of operations. There have been no material changes in our risk factors from those
disclosed in our 2005 Annual Report on Form 20-F. |
Item 2 –
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 – Defaults
Upon Senior Securities
Item 4 – Submission
of Matters to a Vote of Security Holders
Item 5 – Other
Information
Item 6 – Exhibits
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The following exhibits are filed as part of this Report: |
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3.1 |
Certificate of Limited Partnership of Teekay LNG Partners L.P. (1) |
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3.2 |
Form of First Amended and Restated Agreement of Limited Partnership of Teekay LNG Partners L.P. (2) |
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3.3 |
Certificate of Formation of Teekay G.P. L.L.C. (1) |
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3.4 |
Form of Second Amended and Restated Limited Liability Company Agreement of Teekay GP L.L.C. (3) |
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15.1 |
Acknowledgement of Independent Registered Public Accounting Firm. |
(1)
Previously filed as an exhibit to the Partnership’s Registration Statement
on Form F-1 (File No. 333-120727), filed with the SEC on November 24, 2004, and
hereby incorporated by reference to such Registration Statement.
(2)
Previously
filed as Appendix A to the Partnership’s Rule 424(b)(4) Prospectus filed
with the SEC on May 6, 2005, and hereby incorporated by reference to such
Prospectus.
(3)
Previously filed as an exhibit to the Partnership’s Amendment No. 3 to
Registration Statement on Form F-1 (File No. 333-120727), filed with the SEC on
April 11, 2005, and hereby incorporated by reference to such Registration
Statement.
THIS REPORT ON FORM 6-K IS HEREBY INCORPORATED BY REFERENCE
INTO THE FOLLOWING REGISTRATION STATEMENT OF THE PARTNERSHIP:
• REGISTRATION STATEMENT ON FORM S-8
(NO. 333-124647) FILED WITH THE SEC ON MAY 5, 2005
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.
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Date: May 17, 2006 |
TEEKAY LNG PARTNERS L.P.
By: Teekay GP L.L.C., its general partner
By: /s/ Peter Evensen
Peter Evensen
Chief Executive Officer and Chief Financial Officer
(Principal Financial and Accounting Officer)
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Exhibit 15.1
ACKNOWLEDGEMENT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
May 17, 2006
To the Board of Directors and
Unitholders of Teekay LNG Partners L.P.
We are aware of the incorporation by
reference in the Registration Statement (Form S-8 No. 333-124647) pertaining to the Teekay
LNG Partners L.P. 2005 Long Term Incentive Plan of our report dated May 1, 2006 relating
to the unaudited consolidated interim financial statements of Teekay LNG Partners L.P. and
its subsidiaries that is included in its interim report (Form 6-K) for the three months
ended March 31, 2006.
Pursuant to Rule 436(c) of the
Securities Act of 1933, our report is not a part of the registration statement prepared or
certified by accountants within the meaning of Section 7 or 11 of the Securities Act of
1933.
/s/ Ernst & Young LLP
Chartered Accountants
Vancouver, Canada