UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2011

Commission file number 1- 32479

TEEKAY LNG PARTNERS L.P.

(Exact name of Registrant as specified in its charter)

4^th Floor, Belvedere Building
69 Pitts Bay Road
Hamilton, HM 08 Bermuda
(Address of principal executive office)

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

Form 20-F þ      Form 40-F o

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 o No þ

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 o No þ

 

 

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

REPORT ON FORM 6-K FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011

INDEX

		PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Unaudited Consolidated Statements of (Loss) Income for the three and six months ended June 30, 2011 and 2010			3
Unaudited Consolidated Balance Sheets as at June 30, 2011 and December 31, 2010			4
Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010			5
Unaudited Consolidated Statement of Changes in Total Equity for the six months ended June 30, 2011			6
Notes to the Unaudited Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Disclosures about Market Risk			27
PART II: OTHER INFORMATION			29
SIGNATURES			30
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
		$				$				$				$
VOYAGE REVENUES (note 10b)			92,247				91,846				185,466				184,338
OPERATING EXPENSES
Voyage expenses			685				493				1,055				634
Vessel operating expenses (note 10b)			23,388				22,041				44,195				43,069
Depreciation and amortization			22,171				22,407				44,520				44,563
General and administrative (notes 10a and 10b)			6,535				5,037				12,861				10,429
Restructuring charge			—				126				—				175
Total operating expenses			52,779				50,104				102,631				98,870
Income from vessel operations			39,468				41,742				82,835				85,468
OTHER ITEMS
Interest expense (notes 8 and 10a)			(12,136	)			(11,320	)			(23,890	)			(24,094	)
Interest income			1,698				1,429				3,276				3,302
Realized and unrealized loss on derivative instruments (note 11)			(27,329	)			(45,549	)			(16,560	)			(72,361	)
Foreign currency exchange (loss) gain (note 8)			(8,859	)			36,635				(29,892	)			59,856
Equity income (loss)			3,447				(2,930	)			11,504				(1,613	)
Other income (expense)			141				106				(270	)			390
Total other items			(43,038	)			(21,629	)			(55,832	)			(34,520	)
Net (loss) income before income tax (expense) recovery			(3,570	)			20,113				27,003				50,948
Income tax expense (note 9)			(119	)			(222	)			(955	)			(36	)
Net (loss) income			(3,689	)			19,891				26,048				50,912
Non-controlling interest in net (loss) income			(561	)			(2,875	)			4,196				(2,574	)
Dropdown Predecessor’s interest in net (loss) income (note 2)			—				—				—				2,258
General Partner’s interest in net (loss) income (note 13)			2,303				2,110				5,167				4,283
Limited partners’ interest in net (loss) income (note 13)			(5,431	)			20,656				16,685				46,945
Limited partners’ interest in net (loss) income per unit (note 13)
• Common unit (basic and diluted)			(0.09	)			0.39				0.29				0.89
• Subordinated unit (basic and diluted)			—				—				—				1.01
• Total unit (basic and diluted)			(0.09	)			0.39				0.29				0.90
Weighted-average number of units outstanding:
• Common units (basic and diluted)			59,152,816				52,339,849				57,140,637				48,676,558
• Subordinated units (basic and diluted)			—				—				—				3,663,291
• Total units (basic and diluted)			59,152,816				52,339,849				57,140,637				52,339,849
Cash distributions declared per unit			0.63				0.60				1.26				1.17
Related party transactions (note 10)

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

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

		As at				As at
		June 30,				December 31,
		2011				2010
		$				$
ASSETS
Current
Cash and cash equivalents			74,508				81,055
Restricted cash — current (note 6)			91,723				82,576
Accounts receivable, including non-trade of $9,802 (2010 — $12,832) (note 11)			11,423				19,362
Prepaid expenses			5,532				5,911
Current portion of derivative assets (note 11)			16,967				16,758
Current portion of net investments in direct financing leases (note 6)			5,857				5,635
Advances to affiliates (note 10c)			3,157				6,133
Total current assets			209,167				217,430
Restricted cash — long-term (note 6)			493,820				489,562
Vessels and equipment (note 8)
At cost, less accumulated depreciation of $223,643 (2010 — $200,708)			1,093,251				1,059,465
Vessels under capital leases, at cost, less accumulated depreciation of $189,134 (2010 — $172,113)			869,543				880,576
Advances on newbuilding contracts (note 12)			40,835				79,535
Total vessels and equipment			2,003,629				2,019,576
Investments in joint ventures			184,229				172,898
Net investments in direct financing leases (note 6)			406,971				410,060
Advances to joint venture partner (note 7)			10,200				10,200
Other assets			21,778				22,967
Derivative assets (note 11)			50,562				45,525
Intangible assets — net			118,981				123,546
Goodwill — liquefied gas segment			35,631				35,631
Total assets			3,534,968				3,547,395
LIABILITIES AND EQUITY
Current
Accounts payable (includes $275 and $567 for 2011 and 2010, respectively, owing to related parties) (note 10c)			5,720				4,355
Accrued liabilities (includes $3,316 and $3,020 for 2011 and 2010, respectively, owing to related parties) (notes 10c and 11)			40,716				38,672
Unearned revenue			13,411				13,944
Current portion of long-term debt (note 8)			289,651				76,408
Current obligations under capital lease			271,940				267,382
Current portion of derivative liabilities (note 11)			47,041				50,603
Advances from joint venture partner			—				59
Advances from affiliates (note 10c)			83,721				133,351
Total current liabilities			752,200				584,774
Long-term debt (note 8)			1,030,026				1,322,707
Long-term obligations under capital lease			471,072				470,752
Long-term unearned revenue			40,636				41,700
Other long-term liabilities (note 6)			66,944				64,777
Derivative liabilities (note 11)			154,394				149,362
Total liabilities			2,515,272				2,634,072
Commitments and contingencies (notes 6, 8, 11 and 12)
Equity
Non-controlling interest			21,191				17,123
Partners’ equity			998,505				896,200
Total equity			1,019,696				913,323
Total liabilities and total equity			3,534,968				3,547,395
Consolidation of variable interest entities (note 12)

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

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

		Six Months				Six Months
		Ended				Ended
		June 30,				June 30,
		2011				2010
		$				$
Cash and cash equivalents provided by (used for)
OPERATING ACTIVITIES
Net income			26,048				50,912
Non-cash items:
Unrealized (gain) loss on derivative instruments (note 11)			(3,776	)			50,566
Depreciation and amortization			44,520				44,563
Unrealized foreign currency exchange loss (gain)			29,730				(58,640	)
Equity based compensation			165				56
Equity (income) loss			(11,504	)			1,613
Amortization of deferred debt issuance costs and other			1,512				1,840
Change in operating assets and liabilities			17,023				9,197
Accrued interest			186				(2,233	)
Expenditures for drydocking			(7,185	)			(6,016	)
Net operating cash flow			96,719				91,858
FINANCING ACTIVITIES
Distribution to Teekay Corporation for the acquisition of Alexander Spirit LLC, Bermuda Spirit LLC and Hamilton Spirit LLC (note 2)			—				(33,997	)
Proceeds from issuance of long-term debt			100,640				35,049
Scheduled repayments of long-term debt			(38,129	)			(40,427	)
Prepayments of long-term debt			(173,000	)			(9,000	)
Scheduled repayments of capital lease obligations and other long-term liabilities			(4,983	)			(1,854	)
Proceeds from follow-on offering net of offering costs (note 13)			161,682				—
Advances to and from affiliates			1,443				(4,223	)
(Increase) decrease in restricted cash			(3,227	)			495
Equity contribution from Teekay Corporation to Dropdown Predecessor			—				466
Cash distributions paid			(78,238	)			(65,269	)
Purchase of Skaugen Multigas Subsidiary (note 10e)			(55,313	)			—
Repayment of joint venture partners’ advances			(59	)			(1,264	)
Other			(128	)			(131	)
Net financing cash flow			(89,312	)			(120,155	)
INVESTING ACTIVITIES
Advances to joint venture partner and to joint venture			—				(6,900	)
Receipts from direct financing leases			2,867				2,666
Expenditures for vessels and equipment			(16,821	)			(4,820	)
Net investing cash flow			(13,954	)			(9,054	)
Decrease in cash and cash equivalents			(6,547	)			(37,351	)
Cash and cash equivalents, beginning of the period			81,055				108,350
Cash and cash equivalents, end of the period			74,508				70,999
Supplemental cash flow information (note 14)

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

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

		Partners’ Equity												Non-
										General				controlling
		Common								Partner				Interest				Total
		Units				$				$				$				$
Balance as at December 31, 2010			55,106				856,421				39,779				17,123				913,323
Net income and comprehensive income			—				16,685				5,167				4,196				26,048
Cash distributions			—				(72,112	)			(6,126	)			(128	)			(78,366	)
Equity based compensation			—				161				4				—				165
Proceeds from follow-on public offering of units, net of offering costs of $7.0 million (note 13)			4,252				158,309				3,373				—				161,682
Acquisition of Skaugen Multigas Subsidiary (note 10e)			—				(3,011	)			(145	)			—				(3,156	)
Balance as at June 30, 2011			59,358				956,453				42,052				21,191				1,019,696

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

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

1.

Basis of Presentation

The unaudited interim consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (or GAAP). These financial statements include the accounts of Teekay LNG Partners L.P., which is a limited partnership organized under the laws of the Republic of The Marshall Islands, its wholly owned or controlled subsidiaries, the Dropdown Predecessor, as described in Note 2 below, and variable interest entities for which Teekay LNG Partners L.P. or its subsidiaries are the primary beneficiaries (see Note 12) (collectively, the Partnership). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Certain information and footnote disclosures required by GAAP for complete annual financial statements have been omitted; therefore, these interim financial statements should be read in conjunction with the Partnership’s audited consolidated financial statements for the year ended December 31, 2010. In the opinion of management of Teekay GP L.L.C., the general partner of Teekay LNG Partners L.P. (or the General Partner), these interim consolidated financial statements reflect all adjustments consisting solely of a normal recurring nature, necessary to present fairly, in all material respects, the Partnership’s consolidated financial position, results of operations, and changes in total equity and cash flows for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of those for a full fiscal year. Significant intercompany balances and transactions have been eliminated upon consolidation.

2.

Dropdowns

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

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

3.

Adoption of New Accounting Pronouncements

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

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

4.

Financial Instruments

a) Fair Value Measurements

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

				June 30, 2011								December 31, 2010
				Carrying				Fair				Carrying				Fair
				Amount				Value				Amount				Value
		Fair Value		Asset				Asset				Asset				Asset
		Hierarchy		(Liability)				(Liability)				(Liability)				(Liability)
		Level(1)		$				$				$				$
Cash and cash equivalents and restricted cash					660,051				660,051				653,193				653,193
Advances to and from affiliates					(80,564	)			(80,564	)			(127,218	)			(127,218	)
Long-term debt (note 8)					(1,319,677	)			(1,222,154	)			(1,399,115	)			(1,292,026	)
Advances to and from joint venture partners (note 7)					10,200					(2)			10,141					(2)
Derivative instruments (note 11)
Interest rate swap agreements — assets		Level 2			72,059				72,059				66,870				66,870
Interest rate swap agreements — liabilities		Level 2			(203,202	)			(203,202	)			(201,463	)			(201,463	)
Other derivative		Level 3			(9,600	)			(9,600	)			(10,000	)			(10,000	)

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

		Asset/(Liability)
		$
Fair value at December 31, 2010			(10,000	)
Total unrealized gains			400
Fair value at June 30, 2011			(9,600	)

b) Financing Receivables

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

						June 30,				December 31,
		Credit Quality				2011				2010
Class of Financing Receivable		Indicator		Grade		$				$
Direct financing leases		Payment activity		Performing			412,828				415,695
Other receivables
Long-term receivable included in other assets		Payment activity		Performing			596				410
Advances to joint venture partner		Other internal metrics		Performing			10,200				10,200
							423,624				426,305

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

5.

Segment Reporting

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

		Three Months Ended June 30,
		2011												2010
						Conventional												Conventional
		Liquefied Gas				Tanker								Liquefied Gas				Tanker
		Segment				Segment				Total				Segment				Segment				Total
		$				$				$				$				$				$
Voyage revenues			65,885				26,362				92,247				65,822				26,024				91,846
Voyage expenses			61				624				685				122				371				493
Vessel operating expenses			13,145				10,243				23,388				12,744				9,297				22,041
Depreciation and amortization			15,081				7,090				22,171				15,394				7,013				22,407
General and administrative (1)			3,941				2,594				6,535				2,626				2,411				5,037
Restructuring charge			—				—				—				—				126				126
Income from vessel operations			33,657				5,811				39,468				34,936				6,806				41,742

		Six Months Ended June 30,
		2011												2010
						Conventional												Conventional
		Liquefied Gas				Tanker								Liquefied Gas				Tanker
		Segment				Segment				Total				Segment				Segment				Total
		$				$				$				$				$				$
Voyage revenues			131,678				53,788				185,466				131,608				52,730				184,338
Voyage expenses			70				985				1,055				95				539				634
Vessel operating expenses			24,222				19,973				44,195				24,160				18,909				43,069
Depreciation and amortization			30,205				14,315				44,520				30,632				13,931				44,563
General and administrative (1)			7,265				5,596				12,861				5,370				5,059				10,429
Restructuring charge			—				—				—				—				175				175
Income from vessel operations			69,916				12,919				82,835				71,351				14,117				85,468

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

		June 30,				December 31,
		2011				2010
		$				$
Total assets of the liquefied gas segment			2,880,137				2,866,541
Total assets of the conventional tanker segment			560,211				568,393
Cash and cash equivalents			74,508				81,055
Accounts receivable and prepaid expenses			16,955				25,273
Advances to affiliates			3,157				6,133
Consolidated total assets			3,534,968				3,547,395

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

6.

Vessel Charters

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

		Remainder
		of 2011				2012				2013				2014				2015
Vessel Charters(1)		$				$				$				$				$
Charters-in — capital leases(2)(3)(4)			154,448				79,175				96,766				52,093				24,000
Charters-out — operating leases(5)			170,998				339,646				338,718				338,718				335,564
Charters-out — direct financing leases			19,265				38,530				38,530				38,530				38,530
			190,263				378,176				377,248				377,248				374,094

7.

Advances to Joint Venture Partner

Advances to joint venture partner of $10.2 million as at June 30, 2011 and December 31, 2010 are non-interest bearing and unsecured. The Partnership did not recognize any interest income from the advances during the three and six months ended June 30, 2011 and 2010.

8.

Long-Term Debt

		June 30,				December 31,
		2011				2010
		$				$
U.S. Dollar-denominated Revolving Credit Facilities due through 2018			105,000				188,000
U.S. Dollar-denominated Term Loans due through 2019			359,226				371,685
U.S. Dollar-denominated Term Loans due through 2021			326,835				332,248
U.S. Dollar-denominated Term Loans due through 2021			117,774				120,599
U.S. Dollar-denominated Unsecured Demand Loan			13,282				13,282
Euro-denominated Term Loans due through 2023			397,560				373,301
Total			1,319,677				1,399,115
Less current portion			289,651				76,408
Total			1,030,026				1,322,707

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

As at June 30, 2011, the Partnership had three long-term revolving credit facilities available, which, as at such date, provided for borrowings of up to $510.6 million, of which $405.6 million was undrawn. Interest payments are based on LIBOR plus margins. The amount available under the revolving credit facilities reduces by $16.2 million (remainder of 2011), $32.9 million (2012), $33.7 million (2013), $34.5 million (2014), $84.1 million (2015) and $309.2 million (thereafter). All the revolving credit facilities may be used by the Partnership to fund general partnership purposes and to fund cash distributions. The Partnership is required to repay all borrowings used to fund cash distributions within 12 months of their being drawn, from a source other than further borrowings. The revolving credit facilities are collateralized by first-priority mortgages granted on seven of the Partnership’s vessels, together with other related security, and include a guarantee from the Partnership or its subsidiaries of all outstanding amounts.

The Partnership has a U.S. Dollar-denominated term loan outstanding, which, as at June 30, 2011, totaled $359.2 million, of which $191.0 million bears interest at a fixed-rate of 5.39% and requires quarterly payments. The remaining $168.2 million bears interest based on LIBOR plus a margin and will require bullet repayments of approximately $56.0 million per vessel due at maturity in 2018 and 2019. The term loan is collateralized by first-priority mortgages on three vessels, together with certain other related security and certain guarantees from the Partnership.

The Partnership owns a 69% interest in the Teekay Tangguh Joint Venture. The Teekay Tangguh Joint Venture has a U.S. Dollar-denominated term loan outstanding, which, as at June 30, 2011, totaled $326.8 million. Interest payments on the loan are based on LIBOR plus margins. Interest payments on one tranche under the loan facility are based on LIBOR plus 0.30%, while interest payments on the second tranche are based on LIBOR plus 0.625%. One tranche (total value of up to $324.5 million) reduces in quarterly payments while the other tranche (total value of up to $190.0 million) correspondingly is drawn up with a final $95.0 million bullet payment per vessel due in 2021. This loan facility is collateralized by first-priority mortgages on the two vessels to which the loan relates, together with certain other security and is guaranteed by the Partnership.

At June 30, 2011, the Partnership had a U.S. Dollar-denominated term loan outstanding in the amount of $117.8 million. Interest payments on one tranche under the loan facility are based on LIBOR plus 0.3%, while interest payments on the second tranche are based on LIBOR plus 0.7%. One tranche reduces in semi-annual payments of $5.4 million while the other tranche correspondingly is drawn up every six months with a final $20 million bullet payment per vessel due 12 years and six months from each vessel delivery date. This loan facility is collateralized by first-priority mortgages on the two vessels to which the loan relates, together with certain other related security and is guaranteed by Teekay Corporation.

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

The Partnership has two Euro-denominated term loans outstanding, which as at June 30, 2011 totaled 274.1 million Euros ($397.6 million). Interest payments are based on EURIBOR plus a margin, which margins ranged from 0.60% to 0.66% as of June 30, 2011. The term loans have varying maturities through 2023. The term loans are collateralized by first-priority mortgages on two vessels to which the loans relate, together with certain other related security and guarantees from one of the Partnership’s subsidiaries. One of the term loans outstanding in the amount of 151.6 million Euros ($219.9 million) matures in January 2012. The Partnership expects to refinance this loan in 2011.

Also at June 30, 2011, the Partnership has an undrawn credit facility equal to the lower of $122.0 million and 60% of the aggregate purchase price of three liquefied petroleum gas (or LPG) carriers (or the Skaugen LPG Carriers), and two multigas carriers (or the Skaugen Multigas Carriers). The facility will mature, with respect to each vessel, seven years after each vessel’s first drawdown date. The facility will be collateralized by the vessels to which the loan relates. The Partnership expects to draw on this facility in 2011 to repay a portion of the amount it borrowed under its existing revolving credit facilities to purchase two Skaugen LPG Carriers in April 2009 and November 2009 and one Skaugen Multigas Carrier in June 2011. As at June 30, 2011, the Partnership had access to draw $71 million on this facility. The Partnership intends to use the remaining available funds from the facility to assist in purchasing the remaining Skaugen LPG Carrier and Skaugen Multigas Carrier.

The weighted-average effective interest rate for the Partnership’s long-term debt outstanding at June 30, 2011 and December 31, 2010 was 1.8%. This rate does not reflect the effect of related interest rate swaps that the Partnership has used to economically hedge certain of its floating-rate debt (see Note 11). At June 30, 2011, the margins on the Partnership’s long-term debt that has been drawn on ranged from 0.3% to 0.7%.

All Euro-denominated term loans are revalued at the end of each period using the then-prevailing Euro/U.S. Dollar exchange rate. Due primarily to the revaluation of the Partnership’s Euro-denominated term loans, capital leases and restricted cash, the Partnership recognized foreign exchange (losses) gains, substantially all of which were unrealized, of ($8.9) million and $36.6 million, and ($29.9) million and $59.9 million for the three months ended June 30, 2011 and 2010 and the six months ended June 30, 2011 and 2010, respectively.

The aggregate annual long-term debt principal repayments required for periods subsequent to June 30, 2011 are $38.5 million (remainder of 2011), $286.2 million (2012), $70.6 million (2013), $73.5 million (2014), $129.5 million (2015) and $721.4 million (thereafter).

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

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

9.

Income Tax

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

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
		$				$				$				$
Current			(210	)			(2	)			(619	)			(2	)
Deferred			91				(220	)			(336	)			(34	)
Income tax expense			(119	)			(222	)			(955	)			(36	)

10.

Related Party Transactions

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

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

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

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

		Three Months Ended								Six Months Ended
		June 30,				June 30,				June 30,				June 30,
		2011				2010				2011				2010
		$				$				$				$
Revenues(1)			8,441				9,526				17,786				17,795
Vessel operating expenses(2)			8,506				7,620				16,079				14,595
General and administrative(3) (4) (5)			4,492				2,650				8,754				5,405

c) As at June 30, 2011 and December 31, 2010, crewing and manning costs of $3.6 million were payable to affiliates and were included as part of accounts payable and accrued liabilities in the Partnership’s consolidated balance sheets. In addition, as at June 30, 2011 and December 31, 2010, non-interest bearing advances to affiliates totaled $3.2 million and $6.1 million, respectively, and non-interest bearing advances from affiliates totaled $83.7 million and $133.4 million, respectively. These advances are unsecured and have no fixed repayment terms.

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

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

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

On June 15, 2011, the first Skaugen Multigas Carrier, the Norgas Unikum, was delivered and commenced service under a 15-year, fixed-rate charter to Skaugen. On delivery, the Partnership concurrently acquired Teekay Corporation’s 100% ownership interest in the first Skaugen Multigas Subsidiary for a purchase price of $55.3 million. This transaction was concluded between two entities under common control and, thus, the assets acquired were recorded at historical book value. The excess of the purchase price over the book value of the assets of $3.2 million was accounted for as an equity distribution to Teekay Corporation. The second Skaugen Multigas Carrier is expected to be delivered in late 2011 for a cost of approximately $55 million and is scheduled to commence service under a 15-year, fixed-rate charter to Skaugen (see Note 12).

11.

Derivative Instruments

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

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

								Fair Value /
								Carrying				Weighted-
								Amount of				Average				Fixed
		Interest		Principal				Assets				Remaining				Interest
		Rate		Amount				(Liability)				Term				Rate
		Index		$				$				(years)				(%) (1)
LIBOR-Based Debt:
U.S. Dollar-denominated interest rate swaps (2)		LIBOR			429,638				(63,073	)			25.6				4.9	%
U.S. Dollar-denominated interest rate swaps (2)		LIBOR			212,806				(48,748	)			7.7				6.2	%
U.S. Dollar-denominated interest rate swaps		LIBOR			90,000				(13,255	)			7.2				4.9	%
U.S. Dollar-denominated interest rate swaps		LIBOR			100,000				(18,260	)			5.5				5.3	%
U.S. Dollar-denominated interest rate swaps (3)		LIBOR			225,000				(39,059	)			17.5				5.2	%
LIBOR-Based Restricted Cash Deposit:
U.S. Dollar-denominated interest rate swaps (2)		LIBOR			470,673				72,059				25.6				4.8	%
EURIBOR-Based Debt:
Euro-denominated interest rate swaps (4)		EURIBOR			397,560				(20,807	)			13.0				3.8	%
									(131,143	)

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

In order to reduce the variability of its revenue, the Partnership has entered into an agreement with Teekay Corporation under which Teekay Corporation pays the Partnership any amounts payable to the charterer of the Toledo Spirit as a result of spot rates being below the fixed rate, and the Partnership pays Teekay Corporation any amounts payable to the Partnership by the charterer of the Toledo Spirit as a result of spot rates being in excess of the fixed rate. The fair value of the derivative at June 30, 2011 was a liability of $9.6 million (December 31, 2010 — liability of $10.0 million).

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

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

						Current												Current
						portion of												portion of
		Accounts				derivative				Derivative				Accrued				derivative				Derivative
		receivable				assets				assets				liabilities				liabilities				liabilities
As at June 30, 2011
Interest rate swap agreements			4,530				16,967				50,562				(11,367	)			(47,041	)			(144,794	)
Toledo Spirit time-charter derivative			—				—				—				—				—				(9,600	)
			4,530				16,967				50,562				(11,367	)			(47,041	)			(154,394	)
As at December 31, 2010
Interest rate swap agreements			4,587				16,758				45,525				(11,498	)			(50,603	)			(139,362	)
Toledo Spirit time-charter derivative			—				—				—				—				—				(10,000	)
			4,587				16,758				45,525				(11,498	)			(50,603	)			(149,362	)

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

		Three Months Ended June 30,
		2011												2010
		Realized				Unrealized								Realized				Unrealized
		gains				gains								gains				gains
		(losses)				(losses)				Total				(losses)				(losses)				Total
Interest rate swap agreements			(10,046	)			(16,430	)			(26,476	)			(10,581	)			(32,868	)			(43,449	)
Toledo Spirit time-charter derivative			(53	)			(800	)			(853	)			—				(2,100	)			(2,100	)
			(10,099	)			(17,230	)			(27,329	)			(10,581	)			(34,968	)			(45,549	)

		Six Months Ended June 30,
		2011												2010
		Realized				Unrealized								Realized				Unrealized
		gains				gains								gains				gains
		(losses)				(losses)				Total				(losses)				(losses)				Total
Interest rate swap agreements			(20,283	)			3,376				(16,907	)			(21,795	)			(48,266	)			(70,061	)
Toledo Spirit time-charter derivative			(53	)			400				347				—				(2,300	)			(2,300	)
			(20,336	)			3,776				(16,560	)			(21,795	)			(50,566	)			(72,361	)

12.

Commitments and Contingencies

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

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

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

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

		June 30,				December 31,
		2011				2010
		$				$
ASSETS
Vessels and equipment
Advances on newbuilding contracts			40,835				79,535
Other assets			326				651
Total assets			41,161				80,186
LIABILITIES AND DEFICIT
Accrued liabilities and other			56				587
Advances from affiliates			41,110				79,612
Total liabilities			41,166				80,199
Total deficit			(5	)			(13	)
Total liabilities and total deficit			41,161				80,186

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

b) The Partnership has an agreement to acquire an LPG carrier from Skaugen upon delivery for approximately $33.0 million. This vessel is expected to be delivered in late 2011 and upon delivery, the vessel will be chartered to Skaugen at fixed rates for a period of 15 years.

c) In December 2007, a consortium in which Teekay Corporation has a 33% ownership interest agreed to charter four newbuilding 160,400-cubic meter LNG carriers for a period of 20 years to the Angola LNG Project. The consortium entered into agreements to construct the four LNG carriers at a total cost of approximately $906.0 million (of which Teekay Corporation’s 33% portion is $299.0 million), excluding capitalized interest. As at June 30, 2011, payments made towards these commitments by the joint venture companies totaled $339.7 million (of which Teekay Corporation’s 33% contribution was $112.1 million), excluding capitalized interest and other miscellaneous construction costs. As at June 30, 2011, the remaining payments required to be made under these contracts were $430.4 million (remainder of 2011) and $135.9 million (2012), of which the Teekay Corporation’s share is 33% of these amounts. The vessels will be chartered at fixed rates, with inflation adjustments, commencing in late August 2011 and first quarter of 2012 upon deliveries of the vessels. In March 2011, the Partnership agreed to acquire Teekay Corporation’s 33% ownership interest in these vessels and related charter contracts for a total equity purchase price of approximately $73 million (net of assumed debt in the amount of approximately $258 million) subject to adjustment based on actual costs incurred at the time of delivery. It was determined that these vessel companies are VIEs; however, the Partnership is not the primary beneficiary.

13.

Total Capital and Net (Loss) Income Per Unit

On April 8, 2011, the Partnership completed a public offering of 4.3 million common units (including 551,800 common units issued upon exercise of the underwriters’ over-allotment option) at a price of $38.88 per unit, for gross proceeds of approximately $168.7 million (including the Partnership’s General Partner’s 2% proportionate capital contribution). The Partnership used the net proceeds from the offering of approximately $161.7 million to repay a portion of its outstanding debt under one of its revolving credit facilities.

At June 30, 2011, of the Partnership’s total number of units outstanding, 56.4% were held by the public and the remaining units were held by a subsidiary of Teekay Corporation (including the Partnership’s General Partner’s 2% interest).

Net (Loss) Income Per Unit

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

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

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES

During the three and six months ended June 30, 2011 and 2010, cash distributions exceeded $0.4625 per unit and, consequently, the assumed distribution of net (loss) income resulted in the use of the increasing percentages to calculate the General Partner’s interest in net (loss) income for the purposes of the net (loss) income per unit calculation.

14.

Supplemental Cash Flow Information

The Partnership’s consolidated statement of cash flows for the six months ended June 30, 2010 reflects the Dropdown Predecessor as if the Partnership had acquired the Dropdown Predecessor when the vessels began operations under the ownership of Teekay Corporation.

15.

Accounting Pronouncements Not Yet Adopted

In May 2011, the FASB issued amendments to FASB ASC 820, Fair Value Measurement, which clarify or change the application of existing fair value measurements, including: that the highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets; that a reporting entity should measure the fair value of its own equity instrument from the perspective of a market participant that holds that instrument as an asset; to permit an entity to measure the fair value of certain financial instruments on a net basis rather than based on its gross exposure when the reporting entity manages its financial instruments on the basis of such net exposure; that in the absence of a Level 1 input, a reporting entity should apply premiums and discounts when market participants would do so when pricing the asset or liability consistent with the unit of account; and that premiums and discounts related to size as a characteristic of the reporting entity’s holding are not permitted in a fair value measurement. These amendments are effective for the Partnership on January 1, 2012. The Partnership is currently assessing the potential impacts, if any, of these amendments on its consolidated financial statements.

16.

Subsequent Events

On August 30, 2011, the first of four LNG carriers servicing the Angola LNG Project was delivered and commenced its 20 year fixed-rate charter. Concurrently, the Partnership acquired Teekay Corporation’s 33% ownership interest in this vessel and related charter contract for a total equity purchase price of approximately $19 million (net of assumed debt of $65 million).

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES
JUNE 30, 2011
PART I — FINANCIAL INFORMATION

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

OVERVIEW

Teekay LNG Partners L.P. is an international provider of marine transportation services for liquefied natural gas (or LNG), liquefied petroleum gas (or LPG) and crude oil. Our current fleet of 17 LNG carriers, three LPG/Multigas carriers and 11 conventional tankers operates under long-term, fixed-rate charters primarily with major energy and utility companies and Teekay Corporation.

SIGNIFICANT DEVELOPMENTS IN 2011

Equity Offering

On April 8, 2011, we completed a public offering of 4.3 million common units (including 551,800 common units issued upon exercise of the underwriters’ over-allotment option) at a price of $38.88 per unit, for gross proceeds of approximately $168.7 million (including our general partner’s 2% proportionate capital contribution). We used the net proceeds from the offering of approximately $161.7 million to repay a portion of our outstanding debt under one of our revolving credit facilities. We intend to draw on our credit facilities to fund the equity purchase price of our acquisition of Teekay Corporation’s 33% interest in four LNG newbuilding vessels to service the Angola LNG Project, as such payments come due.

SIGNIFICANT PROJECTS

Skaugen LPG Project

In December 2006, we agreed to acquire upon delivery three LPG carriers from subsidiaries of I.M. Skaugen ASA (or Skaugen), each of which has a purchase price of approximately $33 million. The first two vessels delivered in April and November 2009 and the remaining vessel is scheduled to be delivered in late 2011. At delivery, each vessel is chartered at fixed rates for 15 years to Skaugen.

Skaugen Multigas Carriers

In July 2008, subsidiaries of Teekay Corporation (or the Skaugen Multigas Subsidiaries) signed contracts for the purchase from Skaugen of two technically advanced 12,000-cubic meter newbuilding Multigas vessels (or the Skaugen Multigas Carriers) capable of carrying LNG, LPG or ethylene. We, in turn, agreed to acquire the Skaugen Multigas Subsidiaries from Teekay Corporation upon delivery of the vessels. On June 15, 2011, the first Skaugen Multigas Carrier, the Norgas Unikum, was delivered and we in turn acquired Teekay Corporation’s 100% ownership interest in the first Skaugen Multigas Subsidiary for a purchase price of $55.3 million. The second Skaugen Multigas Carrier is expected to be delivered in late 2011 for a cost of approximately $55 million. Upon delivery, each vessel commences service under 15-year, fixed-rate charters to Skaugen.

Angola LNG Project

In December 2007, a consortium in which Teekay Corporation has a 33% ownership interest agreed to charter four newbuilding 160,400-cubic meter LNG carriers to the Angola LNG Project. The Angola LNG Project involves the collection and transportation of gas from offshore production facilities to an onshore LNG processing plant at Soyo, located in northwest Angola. The Project is being developed by subsidiaries of Chevron Corporation, Sociedade Nacional de Combustiveis de Angola EP, BP Plc, Total S.A., and Eni SpA. Mitsui & Co., Ltd. and NYK Bulkship (Europe) have 34% and 33% ownership interests in the consortium, respectively.

Teekay Corporation has offered to us, and we have agreed to purchase, its 33% ownership interest in these vessels and related charter contracts at a total equity purchase price of approximately $73 million (net of assumed debt in the amount of approximately $258 million) subject to adjustment based on actual costs incurred at the time of delivery. We will acquire the ownership interests and pay a proportionate share of the purchase price as each vessel is delivered. The vessels are scheduled for delivery between late August 2011 and the first quarter of 2012.

Each of the four newbuilding LNG carriers will be chartered at fixed rates, subject to inflation adjustments, to the Angola LNG Project for a period of 20 years upon delivery from the shipyard, with two extension periods for five years each. The charterer has the option to terminate the charter upon 120 days notice and payment of an early termination fee, which would equal approximately 50% of the fully built-up cost of the vessel. The charterer may also terminate the charter under other circumstances typical in our long-term charters, such as excessive off-hire during which we do not provide a replacement vessel, or certain force majeure events. For more information, please read Item 1 — Financial Statements: Note 12(c) — Commitments and Contingencies.

RESULTS OF OPERATIONS

There are a number of factors that should be considered when evaluating our historical financial performance and assessing our future prospects and we use a variety of financial and operational terms and concepts when analyzing our results of operations. These factors, terms and concepts are described in Item 5. “Operating and Financial Review and Prospects” of our Annual Report on Form 20-F for the year ended December 31, 2010, filed with the SEC on April 4, 2011.

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

Liquefied Gas Segment

As at June 30, 2011, our fleet included 17 LNG carriers (in which our interest ranges from 40% to 100%). Our partial interests in LNG carriers include our 40% interest in Teekay Nakilat (III) Corporation, which owns four LNG carriers that are accounted for under the equity method (or the RasGas 3 LNG Carriers), our 50% interest in our joint ventures with Exmar NV (the Excalibur and Excelsior Joint Ventures), which own two LNG carriers (the Excalibur and Excelsior Carriers) that are accounted for under the equity method, our 69% interest in the Tangguh Joint Venture, which owns the Tangguh Hiri and the Tangguh Sago (or the Tangguh LNG Carriers), our 70% interest in Teekay Nakilat Corporation (or Teekay Nakilat), which is the lessee under 30-year capital lease arrangements relating to three LNG carriers (or the RasGas II LNG Carriers), and our 99% interest in the Arctic Spirit and Polar Spirit LNG carriers (or the Kenai LNG Carriers)) and three LPG carriers. All of our LNG and LPG carriers operate under long-term, fixed-rate charters. We expect our liquefied gas segment to increase due to the following:

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We have agreed to acquire an LPG carrier from Skaugen for approximately $33 million upon its delivery scheduled in late 2011. Please read Item 1 — Financial Statements: Note 12(b) — Commitments and Contingencies.

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As discussed above, we have agreed to acquire the second Skaugen Multigas Subsidiary from Teekay Corporation for a total cost of approximately $55 million upon delivery of the related Skaugen Multigas Carrier scheduled in 2011. Please read Item 1 — Financial Statements: Note 12(a) — Commitments and Contingencies.

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As discussed above, we have agreed to acquire Teekay Corporation’s 33% ownership interest in the consortium relating to the Angola LNG Project that has four newbuilding LNG carriers, which are scheduled to deliver during the fall of 2011 and the first quarter of 2012. Please read Item 1 — Financial Statements: Note 12(c) — Commitments and Contingencies.

The following table compares our liquefied gas segment’s operating results for the three and six months ended June 30, 2011 and 2010, and compares its net voyage revenues (which is a non-GAAP financial measure) for the three and six months ended June 30, 2011 and 2010 to voyage revenues, the most directly comparable GAAP financial measure. The following tables also provide a summary of the changes in calendar-ship-days and revenue days for our liquefied gas segment:

(in thousands of U.S. dollars, except revenue days,		Three Months Ended June 30,
calendar-ship-days and percentages)		2011				2010				% Change
Voyage revenues			65,885				65,822				0.1
Voyage expenses			61				122				(50.0	)
Net voyage revenues			65,824				65,700				0.2
Vessel operating expenses			13,145				12,744				3.1
Depreciation and amortization			15,081				15,394				(2.0	)
General and administrative (1)			3,941				2,626				50.1
Income from vessel operations			33,657				34,936				(3.7	)
Operating Data:
Revenue Days (A)			1,174				1,259				(6.8	)
Calendar-Ship-Days (B)			1,198				1,274				(6.0	)
Utilization (A)/(B)			98.0	%			98.8	%
(in thousands of U.S. dollars, except revenue days,		Six Months Ended June 30,
calendar-ship-days and percentages)		2011				2010				% Change
Voyage revenues			131,678				131,608				0.1
Voyage expenses			70				95				(26.3	)
Net voyage revenues			131,608				131,513				0.1
Vessel operating expenses			24,222				24,160				0.3
Depreciation and amortization			30,205				30,632				(1.4	)
General and administrative (1)			7,265				5,370				35.3
Income from vessel operations			69,916				71,351				(2.0	)
Operating Data:
Revenue Days (A)			2,344				2,497				(6.1	)
Calendar-Ship-Days (B)			2,368				2,534				(6.6	)
Utilization (A)/(B)			99	%			98.5	%