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

 

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

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 o          No þ

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 SUBSIDIARIES

		PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Unaudited Consolidated Statements of Income (Loss) for the three and nine months ended September 30, 2008 and 2007			3
Unaudited Consolidated Balance Sheets as at September 30, 2008 and December 31, 2007			4
Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007			5
Unaudited Consolidated Statement of Changes in Partners’ Equity for the nine months ended September 30, 2008			6
Notes to the Unaudited Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3. Quantitative and Qualitative Disclosures about Market Risk			38
Item 4. Recent Financial Results			40
PART II: OTHER INFORMATION			41
SIGNATURES			45
Exhibit 4.18

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		$				$				$				$
						(Restated -								(Restated -
						Note 19)								Note 19)
VOYAGE REVENUES (notes 10 and 11)			78,206				62,917				214,133				200,936
OPERATING EXPENSES (note 10)
Voyage expenses			615				317				1,672				857
Vessel operating expenses			17,500				13,935				56,699				41,686
Depreciation and amortization			19,105				16,501				56,767				48,875
General and administrative			4,167				3,531				14,367				10,808
Total operating expenses			41,387				34,284				129,505				102,226
Income from vessel operations			36,819				28,633				84,628				98,710
OTHER ITEMS
Interest expense (notes 5, 8 and 11)			(76,585	)			(86,130	)			(141,725	)			(83,317	)
Interest income (note 11)			34,680				43,784				71,446				43,719
Foreign currency exchange gain (loss) (note 8)			48,567				(21,555	)			14,647				(32,037	)
Other income (loss) — net (note 9)			485				133				(202	)			(1,412	)
Goodwill impairment (note 6)			(3,648	)			—				(3,648	)			—
Total other items			3,499				(63,768	)			(59,482	)			(73,047	)
Income (loss) before non-controlling interest			40,318				(35,135	)			25,146				25,663
Non-controlling interest			5,571				13,501				10,235				593
Net income (loss)			45,889				(21,634	)			35,381				26,256
Dropdown Predecessor’s interest in net income (note 1)			—				—				894				—
General partner’s interest in net income (loss)			9,854				(433	)			5,031				9,774
Limited partners’ interest: (note 14)
Net income (loss)			36,035				(21,201	)			29,456				16,482
Net income (loss) per:
• Common unit (basic and diluted)			0.81				(0.57	)			0.35				0.61
• Subordinated unit (basic and diluted)			0.81				(0.57	)			0.35				0.30
• Total unit (basic and diluted)			0.81				(0.57	)			0.35				0.48
Weighted-average number of units outstanding:
• Common units (basic and diluted)			33,338,320				22,540,547				28,475,744				21,377,910
• Subordinated units (basic and diluted)			11,050,929				14,734,572				12,933,082				14,734,572
• Total units (basic and diluted)			44,389,249				37,275,119				41,408,826				36,112,482
Cash distributions declared per unit			0.5500				0.5300				1.6100				1.4550

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
		September 30, 2008				December 31, 2007
		$				$
ASSETS
Current
Cash and cash equivalents			59,731				91,891
Restricted cash — current (note 5)			32,195				26,662
Accounts receivable			8,473				10,668
Prepaid expenses			6,344				5,519
Other current assets			1,627				1,294
Current portion of derivative assets (notes 2 and 11)			5,255				4,628
Advances to joint venture (note 10f)			25,273				7,512
Advances to joint venture partner (note 7)			2,098				—
Advances to affiliates (note 10k)			8,039				—
Total current assets			149,035				148,174
Restricted cash — long-term (note 5)			642,626				652,567
Vessels and equipment (note 8)
At cost, less accumulated depreciation of $112,414 (2007 — $82,855)			875,737				890,741
Vessels under capital lease, at cost, less accumulated depreciation of $97,968 (2007 — $66,333) (note 5)			918,702				934,058
Advances on newbuilding contracts (note 12a)			354,512				240,773
Total vessels and equipment			2,148,951				2,065,572
Investment in and advances to joint venture (note 10f)			941,428				685,730
Advances to joint venture partner (note 7)			9,510				9,631
Other assets			31,596				37,762
Derivative assets (notes 2 and 11)			38,337				28,966
Intangible assets — net (note 6)			144,087				150,935
Goodwill (note 6)			35,631				39,279
Total assets			4,141,201				3,818,616
LIABILITIES AND PARTNERS’ EQUITY
Current
Accounts payable			11,339				8,693
Accrued liabilities			22,235				22,390
Unearned revenue			2,510				5,462
Current portion of long-term debt (note 8)			125,887				71,509
Current obligations under capital lease (note 5)			41,067				150,791
Current portion of derivative liabilities (notes 2 and 11)			17,820				7,681
Advances from joint venture partners (note 7)			1,222				615
Advances from affiliates (note 10k)			70,434				268,477
Total current liabilities			292,514				535,618
Long-term debt (note 8)			2,051,192				1,654,202
Long-term obligations under capital lease (note 5)			811,374				706,489
Other long-term liabilities			1,252				—
Derivative liabilities (notes 2 and 11)			94,701				71,637
Total liabilities			3,251,033				2,967,946
Commitments and contingencies (notes 5, 11 and 12)
Non-controlling interest			41,726				141,378
Partners’ equity
Dropdown Predecessor equity (note 10j)			—				1,118
Partners’ equity			848,442				708,174
Total partners’ equity			848,442				709,292
Total liabilities and partners’ equity			4,141,201				3,818,616

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

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

		Nine Months Ended September 30,
		2008				2007
		$				$
						(Restated - Note 19)
Cash and cash equivalents provided by (used for)
OPERATING ACTIVITIES
Net income			35,381				26,256
Non-cash items:
Unrealized loss (gain) on derivative instruments (note 11)			21,231				(28,985	)
Depreciation and amortization			56,797				48,875
Goodwill impairment (note 6)			3,648				—
Deferred income tax expense			(248	)			1,222
Foreign currency exchange loss (gain)			(14,252	)			31,861
Equity based compensation			276				282
Non-controlling interest			(10,235	)			(593	)
Accrued interest and other — net			8,013				(1,372	)
Change in non-cash working capital items related to operating activities			(428	)			5,209
Expenditures for drydocking			(10,883	)			(1,349	)
Net operating cash flow			89,300				81,406
FINANCING ACTIVITIES
Excess of purchase price over the contributed basis of Teekay Nakilat (III) Holdings Corporation (note 10f)			(25,120	)			—
Excess of purchase price over the contributed basis of Teekay Nakilat Holdings Corporation (note 10g)			—				(13,844	)
Distribution to Teekay Corporation for the purchase of Kenai LNG Carriers (note 10j)			(230,000	)			—
Distribution to Teekay Corporation for the purchase of Dania Spirit LLC (note 10h)			—				(18,548	)
Proceeds from long-term debt			819,056				804,468
Capitalized loan costs			(2,248	)			(1,952	)
Scheduled repayments of long-term debt			(32,184	)			(21,904	)
Scheduled repayments of capital lease obligations			(6,766	)			(6,596	)
Prepayments of long-term debt			(321,000	)			(188,000	)
Proceeds from issuance of common units			202,519				86,044
Advances from affiliates			5,736				(415	)
Repayments of advances from affiliates			(1,762	)			—
Advances from joint venture partners			607				44,214
Repayment of joint venture partner advances			—				(21,627	)
Decrease (increase) in restricted cash			2,032				(12,817	)
Cash distributions paid			(70,631	)			(53,564	)
Equity distribution from Teekay Corporation			3,281				—
Net financing cash flow			343,520				595,459
INVESTING ACTIVITIES
Advances to joint venture			(262,721	)			(457,525	)
Return of capital from Teekay BLT Corporation (note 10e)			(19,600	)			—
Receipt of Spanish re-investment tax credit (note 15)			5,431				—
Purchase of Teekay Nakilat (III) Holdings Corporation (note 10f)			(73,070	)			—
Purchase of Teekay Nakilat Holdings Corporation (note 10g)			—				(52,252	)
Expenditures for vessels and equipment			(115,020	)			(155,483	)
Net investing cash flow			(464,980	)			(665,260	)
(Decrease) increase in cash and cash equivalents			(32,160	)			11,605
Cash and cash equivalents, beginning of the period			91,891				29,288
Cash and cash equivalents, end of the period			59,731				40,893

Supplemental cash flow information (note 13)

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

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

		Dropdown				PARTNERS’ EQUITY
		Predecessor’s				Limited Partners																General
		Equity				Common								Subordinated								Partner				Total
		$				Units				$				Units				$				$				$
Balance as at December 31, 2007			1,118				22,540				454,459				14,735				227,133				26,582				709,292
Net income			894				—				20,256				—				9,200				5,031				35,381
Net change in parent’s equity in Dropdown Predecessor (notes 1 and 14)			224,366				—				—				—				—				—				224,366
Cash distributions			—				—				(46,000	)			—				(21,696	)			(2,935	)			(70,631	)
Proceeds from follow-on public offering of units, net of offering costs of $6.2 million (note 3)			—				7,114				198,345				—				—				4,174				202,519
Re-investment tax credit received (note 15)			—				—				3,218				—				2,104				109				5,431
Equity based compensation			—				—				186				—				84				6				276
Conversion of 25% of subordinated units to common (note 14)			—				3,684				46,040				(3,684	)			(46,040	)			—				—
Purchase of Teekay Nakilat (III) Holdings Corporation (note 10f)			—				—				(11,307	)			—				(15,908	)			(977	)			(28,192	)
Purchase of Kenai LNG Carriers from Teekay Corporation (note 10j)			(226,378	)			—				(1,305	)			—				(2,203	)			(114	)			(230,000	)
Balance as at September 30, 2008			—				33,338				663,892				11,051				152,674				31,876				848,442

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. (or Teekay LNG), which is a limited partnership organized under the laws of the Republic of The Marshall Islands, and its wholly owned or controlled subsidiaries and the Dropdown Predecessor, as described below (collectively, the Partnership). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Certain information and footnote disclosures required by GAAP for complete annual financial statements have been omitted and, therefore, these interim financial statements should be read in conjunction with the Partnership’s restated audited consolidated financial statements for the year ended December 31, 2007, which are included in the Partnership’s Form 20-F/A filed on December 2, 2008. In the opinion of management of Teekay GP L.L.C., the general partner of Teekay LNG (or the General Partner), these interim consolidated financial statements reflect all adjustments, 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 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. Certain of the comparative figures have been reclassified to conform to the presentation adopted in the current period.

As required by Statement of Financial Accounting Standards (or SFAS) No. 141, the Partnership accounts for the acquisition of interests in vessels from Teekay Corporation as a transfer of a business between entities under common control. The method of accounting prescribed by SFAS No. 141, Business Combinations, for such transfers is similar to the pooling of interests method of accounting. Under this method, the carrying amount of net assets recognized in the balance sheets of each combining entity are carried forward to the balance sheet of the combined entity, and no other assets or liabilities are recognized as a result of the combination. The excess of the proceeds paid, if any, by the Partnership over Teekay Corporation’s historical cost is accounted for as an equity distribution to Teekay Corporation. In addition, transfers of net assets between entities under common control are accounted for as if the transfer occurred from the date that the Partnership and the acquired vessels were both under the common control of Teekay Corporation and had begun operations. As a result, the Partnership’s financial statements prior to the date the interests in these vessels were actually acquired by the Partnership are retroactively adjusted to include the results of these vessels during the periods they were under common control of Teekay Corporation.

On January 1, 2007, the Partnership acquired interests in a 2000-built liquefied petroleum gas (or LPG) carrier, the Dania Spirit, and the related long-term, fixed-rate charter contract from Teekay Corporation. On April 1, 2008, the Partnership acquired interests in two liquefied natural gas (or LNG) vessels (the Kenai LNG Carriers) from Teekay Corporation and immediately chartered the vessels back to Teekay Corporation. These transactions were deemed to be business acquisitions between entities under common control. As a result, the Partnership’s balance sheet as at December 31, 2007, statements of income (loss) for the nine months ended September 30, 2008, statements of cash flows for the nine months ended September 30, 2008 and 2007, and statement of changes in partners’ equity for the nine months ended September 30, 2008 reflect these three vessels, 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 April 1, 2003 (Dania Spirit), and December 13 and 14, 2007 (the Kenai LNG Carriers). The effect of adjusting the Partnership’s financial statements to account for this common control exchange increased the Partnership’s net income by $0.9 million for the nine months ended September 30, 2008.

The Partnership’s consolidated financial statements reflect 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, if the Dropdown Predecessor was capitalized in part with non-interest bearing loans from Teekay Corporation and its subsidiaries, these intercompany loans 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 the weighted-average interest rate outstanding on Teekay Corporation’s loan facilities that were used to finance these intercompany loans. Management believes these allocations reasonably present the general and administrative expenses and interest expense of the Dropdown Predecessor.

Certain of the accompanying consolidated financial statements have been restated. The nature of the restatements and the effect on the consolidated financial statement line items is discussed in Note 19 of these notes to the consolidated financial statements. In addition, certain disclosures in the following notes have been restated consistent with the consolidated financial statements.

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)

On May 6, 2008, the date the first of four vessels commenced operations, the Partnership acquired Teekay Corporation’s 100% ownership interest in Teekay Nakilat (III) Holdings Corporation (or Teekay Nakilat (III)) in exchange for a non-interest bearing and unsecured promissory note. Teekay Nakilat (III) owns 40% of Teekay Nakilat (III) Corporation (the RasGas 3 Joint Venture), which in turn has a 100% interest relating to four LNG carriers (the RasGas 3 LNG Carriers) (see Note 10f). On the date the first vessel was delivered to the RasGas 3 Joint Venture from the shipyard the Partnership acquired the shares of Teekay Nakilat (III) and therefore, Teekay Nakilat (III) was no longer a variable interest entity and its results form part of the consolidated financial statements (see Note 12a).

On July 28, 2008 Teekay Corporation signed contracts for the purchase of two newbuilding multigas ships from subsidiaries of I.M. Skaugen ASA (or Skaugen). The Partnership agreed to acquire these vessels upon their delivery; pending acquisition by the Partnership, these vessels are considered variable interest entities. As a result, the Partnership’s consolidated financial statements reflect the financial position, results of operations and cash flows of these two newbuilding multigas ships (see Note 12a).

During the nine months ended September 30, 2008, $7.4 million of critical spares inventory was reclassified from other assets to fixed assets and is being depreciated over the remaining life of the assets (thirty-four years) on a straight-line basis.

2. Fair Value Measurements

Effective January 1, 2008, the Partnership adopted SFAS No. 157, Fair Value Measurements. In accordance with Financial Accounting Standards Board Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, the Partnership deferred the adoption of SFAS No. 157 for its nonfinancial assets and nonfinancial liabilities, except those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until January 1, 2009. The adoption of SFAS No. 157 did not have a material impact on the Partnership’s fair value measurements.

SFAS No. 157 clarifies the definition of fair value, prescribes methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value and expands disclosure about the use of fair value measurements. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value as follows:

Level 1. Observable inputs such as quoted prices in active markets;

Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The following table presents the Partnership’s assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy.

		Fair Value at
		September 30,
		2008 Asset /
		(Liability)				Level 1				Level 2				Level 3
		$				$				$				$
Interest rate swap agreements — assets (1)			45,684				—				45,684				—
Interest rate swap agreements — liabilities (1)			(90,530	)			—				(90,530	)			—
Other derivatives (2)			(27,230	)			—				—				(27,230	)

Changes in fair value during the nine months ended September 30, 2008 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, 2007			(15,952	)
Total unrealized losses reflected as a reduction of voyage revenues			(11,278	)
Fair value at September 30, 2008			(27,230	)

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)

3. Public Offering

On April 23, 2008, the Partnership completed a follow-on public offering of 5.0 million common units at a price of $28.75 per unit, for gross proceeds of approximately $143.8 million. On May 8, 2008, the underwriters partially exercised their over-allotment option and purchased an additional 375,000 common units for an additional $10.8 million in gross proceeds to the Partnership.

Concurrently with the public offering, Teekay Corporation acquired 1.7 million common units of the Partnership at the same public offering price for a total cost of $50.0 million. As a result of these equity transactions, the Partnership raised gross equity proceeds of $208.7 million (including the General Partner’s 2% proportionate capital contribution), and Teekay Corporation’s ownership in the Partnership was reduced from 63.7% to 57.7% (including its indirect 2% General Partner interest). The Partnership used the total net proceeds from the equity offerings of approximately $202.5 million to reduce amounts outstanding under the Partnership’s revolving credit facilities that were used to fund the acquisitions of interests in LNG carriers.

4. Segment Reporting

The Partnership has two reportable segments: its liquefied gas segment and its Suezmax tanker segment. The Partnership’s liquefied gas segment consists of LNG carriers and an LPG carrier subject to long-term, fixed-rate time charters to international energy. As at September 30, 2008 and excluding newbuilding vessels, the Partnership’s liquefied gas segment consisted of thirteen LNG carriers (including the four RasGas 3 LNG Carriers that had then been delivered and which are accounted for under the equity method) and one LPG carrier (where the Partnership’s range of ownership in these vessels is between 40% — 100%). The Partnership’s Suezmax tanker segment consists of eight Suezmax-class crude oil tankers operating on long-term, fixed-rate time-charter contracts to international energy companies, where the Partnership has 100% ownership in all Suezmax vessels. 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 restated audited consolidated financial statements for the year ended December 31, 2007.

The following table presents results for these segments for the three and nine months ended September 30, 2008 and 2007:

		Three Months Ended September 30,
		2008												2007
		Liquefied				Suezmax								Liquefied				Suezmax
		Gas				Tanker								Gas				Tanker
		Segment				Segment				Total				Segment				Segment				Total
		$				$				$				$				$				$
																		(restated)				(restated)
Voyage revenues (1)			57,668				20,538				78,206				43,239				19,678				62,917
Voyage expenses			189				426				615				73				244				317
Vessel operating expenses			10,776				6,724				17,500				7,977				5,958				13,935
Depreciation and amortization			14,310				4,795				19,105				11,490				5,011				16,501
General and administrative (2)			2,361				1,806				4,167				1,663				1,868				3,531
Income from vessel operations			30,032				6,787				36,819				22,036				6,597				28,633

		Nine Months Ended September 30,
		2008												2007
		Liquefied				Suezmax								Liquefied				Suezmax
		Gas				Tanker								Gas				Tanker
		Segment				Segment				Total				Segment				Segment				Total
		$				$				$				$				$				$
																		(restated)				(restated)
Voyage revenues (1)			167,297				46,836				214,133				124,807				76,129				200,936
Voyage expenses			791				881				1,672				86				771				857
Vessel operating expenses			35,752				20,947				56,699				24,238				17,448				41,686
Depreciation and amortization			42,740				14,027				56,767				33,855				15,020				48,875
General and administrative (2)			7,871				6,496				14,367				5,322				5,486				10,808
Income from vessel operations			80,143				4,485				84,628				61,306				37,404				98,710

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, except unit and per unit data)

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

		September 30, 2008				December 31, 2007
		$				$
Liquefied gas segment			3,667,156				3,298,495
Suezmax tanker segment			397,870				410,749
Unallocated:
Cash and cash equivalents			59,731				91,891
Accounts receivable, prepaid expenses and other current assets			16,444				17,481
Consolidated total assets			4,141,201				3,818,616

5. Leases and Restricted Cash

Capital Lease Obligations

RasGas II LNG Carriers. As at September 30, 2008, the Partnership owned an indirect 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) that operate under time-charter contracts 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. All amounts below relating to the RasGas II LNG Carriers capital leases include the Partnership’s joint venture partner’s 30% share.

Under the terms of the RasGas II capital lease arrangements, the lessor claims tax depreciation on the capital expenditures it incurred to acquire these vessels. As is typical in these leasing arrangements, tax and change of law risks are assumed by the lessee. Lease payments under the lease arrangements are based on certain tax and financial assumptions at the commencement of the leases. If an assumption proves to be incorrect, the lessor is entitled to increase the lease payments to maintain its agreed after-tax margin. However, Teekay Nakilat may terminate the lease arrangements on a voluntary basis at any time. If the lease arrangements terminate, Teekay Nakilat will be required to pay termination sums to the lessor sufficient to repay the lessor’s investment in the vessels and to compensate it for the tax effect of the terminations, including recapture of any tax depreciation.

At their inception, the weighted-average interest rate implicit in these leases was 5.2%. These capital leases are variable-rate capital leases. As at September 30, 2008, the commitments under these capital leases approximated $1.1 billion, including imputed interest of $609.8 million, repayable as follows:

Year		Commitment
2008		$      6.0 million
2009		$    24.0 million
2010		$    24.0 million
2011		$    24.0 million
2012		$      4.0 million
Thereafter		$  977.1 million

Spanish-Flagged LNG Carrier. As at September 30, 2008, the Partnership was the lessee under a capital lease on one Spanish-flagged LNG carrier (the Madrid Spirit) which is structured as a “Spanish tax lease”. Under the terms of the Spanish tax lease, which includes the Partnership’s contractual right to full operation of the vessel pursuant to a bareboat charter, the Partnership will purchase the vessel at the end of the lease term in 2011. The purchase obligation has been fully funded with restricted cash deposits described below. At its inception, the interest rate implicit in the Spanish tax lease was 5.8%. As at September 30, 2008, the commitments under this capital lease, including the purchase obligation, approximated 141.8 million Euros ($199.8 million), including imputed interest of 16.5 million Euros ($23.3 million), repayable as follows:

Year		Commitment
2008		24.4 million Euros ($34.4 million)
2009		25.7 million Euros ($36.1 million)
2010		26.9 million Euros ($37.9 million)
2011		64.8 million Euros ($91.4 million)

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES
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)

Suezmax Tankers. As at September 30, 2008, the Partnership was a lessee under 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 after the end of their respective lease terms for a fixed price. At their inception, the weighted-average interest rate implicit in these leases was 7.4%. These capital leases are variable-rate capital leases; however, any change in the 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 September 30, 2008, the remaining commitments under these capital leases, including the purchase obligations, approximated $232.9 million, including imputed interest of $26.3 million, repayable as follows:

Year		Commitment
2008		$     6.1 million
2009		$ 134.4 million
2010		$     8.4 million
2011		$   84.0 million

Restricted Cash

Under the terms of the capital leases for the four LNG carriers described above, 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 obligation to purchase the Spanish-flagged LNG carrier at the end of the lease period. These cash deposits are restricted to being used for capital lease payments and have been fully funded primarily with term loans (see Note 8). The interest rates earned on the deposits approximate the interest rates implicit in the leases.

As at September 30, 2008 and December 31, 2007, the amount of restricted cash on deposit for the three RasGas II LNG Carriers was $486.4 million and $492.2 million, respectively. As at September 30, 2008 and December 31, 2007, the weighted-average interest rates earned on the deposits were 2.9% and 5.3%, respectively.

As at September 30, 2008 and December 31, 2007, the amount of restricted cash on deposit for the Spanish-flagged LNG carrier was 127.5 million Euros ($179.7 million) and 122.8 million Euros ($179.2 million), respectively. As at September 30, 2008 and December 31, 2007, the weighted-average interest rate earned on the deposit was 5.0%.

The Partnership also maintains restricted cash deposits relating to certain term loans, which totaled 6.2 million Euros ($8.8 million) and 5.3 million Euros ($7.8 million) as at September 30, 2008 and December 31, 2007, respectively.

6. Intangible Assets and Goodwill

As at September 30, 2008 and December 31, 2007, 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 September 30, 2008 and December 31, 2007 is as follows:

		September 30,				December 31,
		2008				2007
		$				$
Gross carrying amount			182,552				182,552
Accumulated amortization			(38,465	)			(31,617	)
Net carrying amount			144,087				150,935

Amortization expense of intangible assets for the three and nine months ended September 30, 2008 and 2007 were $2.3 million ($2.3 million — 2007) and $6.8 million ($6.9 million — 2007), respectively.

The carrying amount of goodwill as at September 30, 2008 and December 31, 2007 for the Partnership’s reporting segments is as follows:

		September 30,				December 31,
		2008				2007
		$				$
Liquefied Gas Segment			35,631				35,631
Suezmax Tanker Segment			—				3,648
Total			35,631				39,279

Due to the decline in market conditions, the Partnership conducted an interim impairment review of its reporting units during the third quarter of 2008. The fair value of the reporting units was estimated using the expected present value of future cash flows. The fair value of the reporting units were compared to their carrying values at September 30, 2008 and it was determined that the fair value attributable to the Partnership’s Suezmax tanker segment was less than its carrying value. As a result, a goodwill impairment loss of $3.6 million was recognized in the Suezmax tanker reporting unit during the third quarter.

The sharp decline of economic and market conditions during the fourth quarter of 2008, including the significant disruptions in the global credit markets, have affected the estimates used in the valuation of a broad range of assets and liabilities. For the fourth quarter of 2008, the Partnership will assess whether these events have caused any of its assets, including goodwill, to be impaired and if so, the amount of any writedown. Any potential impairment could be material.

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES
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)

7. Advances to and from Joint Venture Partners

		September 30,				December 31,
		2008				2007
		$				$
Advances to QGTC Nakilat (1643-6) Holdings Corporation (see Note 10f)			11,608				9,631
Advances from BLT LNG Tangguh Corporation (see Note 10e)			1,179				615
Advances from Qatar Gas Transport Company Ltd. (Nakilat)			43				—
Total advances from joint venture partners			1,222				615

Advances to and from joint venture partners are non-interest bearing and unsecured. The Partnership did not incur interest income or interest expense from the advances during the three and nine months ended September 30, 2008 and 2007.

8. Long-Term Debt

		September 30,				December 31,
		2008				2007
		$				$
U.S. Dollar-denominated Revolving Credit Facilities due through 2018			155,000				10,000
U.S. Dollar-denominated Term Loan due through 2019			427,747				446,435
U.S. Dollar-denominated Term Loan due through 2020			875,822				—
U.S. Dollar-denominated Term Loan due through 2020(1)			—				600,990
U.S. Dollar-denominated Term Loan due through 2021(1)			280,789				207,148
U.S. Dollar-denominated Unsecured Loan(1)			1,144				1,144
U.S. Dollar-denominated Unsecured Demand Loan			16,007				16,002
Euro-denominated Term Loans due through 2023			420,570				443,992
Total			2,177,079				1,725,711
Less current portion			73,687				36,844
Less current portion (newbuilding vessel financing)(1)			52,200				34,665
Total			2,051,192				1,654,202

As at September 30, 2008, the Partnership had three long-term revolving credit facilities available, which, as at such date, provided for borrowings of up to $599.7 million, of which $444.7 million was undrawn. Interest payments are based on LIBOR plus margins. The amount available under the revolving credit facilities reduces by $10.6 million (fourth quarter of 2008), $31.0 million (2009), $31.6 million (2010), $32.2 million (2011), $32.9 million (2012) and $461.4 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 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 revolving credit facilities are collateralized by first-priority mortgages granted on seven of the Partnership’s vessels, together with other related security, and include a guarantee from the Partnership or its subsidiaries of all outstanding amounts.

The Partnership has a U.S. Dollar-denominated term loan outstanding, which as at September 30, 2008, totaled $427.7 million, of which $259.5 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 million for each of three vessels due at maturity in 2018 and 2019. The term loan is collateralized by first-priority mortgages on the vessels, together with certain other related security and a guarantee from the Partnership.

The Partnership has a U.S. Dollar-denominated term loan outstanding, which, as at September 30, 2008, totaled $875.8 million, of which $435.0 million bears interest at a fixed rate of 5.36% and requires quarterly payments. The remaining $440.8 million bears interest based on LIBOR plus a margin and will require bullet repayments of approximately $110 million for each of four vessels due at maturity in 2020. Following delivery of all four vessels, an additional tranche of approximately $35 million for all four vessels will be advanced under the loan facility in quarterly installments until 2014 and will then be repaid in quarterly payments until maturity in 2020. The $875.8 million term loan represents 100% of the RasGas 3 term loan which was used to fund advances on similar terms and conditions to the joint venture. The term loan is collateralized by first-priority mortgages on the vessels, together with certain other related security and certain undertakings from the Partnership.

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES
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)

Teekay Tangguh Holdings Corporation (or Teekay Tangguh) owns a 70% interest in Teekay BLT Corporation (or the Teekay Tangguh Joint Venture). The Teekay Tangguh Joint Venture owns two LNG newbuilding carriers (or the Tangguh LNG Carriers), which delivered in November 2008 and March 2009, and the related 20-year fixed-rate, time-charter contracts. On November 1, 2006, the Partnership agreed to purchase Teekay Corporation’s 100% interest in Teekay Tangguh, which caused the Partnership to become the primary beneficiary of this variable interest entity (see Note 12a). As at September 30, 2008, the Teekay Tangguh Joint Venture had a loan facility, which, as at such date, provided for borrowings of up to $392.0 million, of which $111.2 million was undrawn. Interest payments on the loan are based on LIBOR plus margins. At September 30, 2008, the margins ranged between 0.30% and 0.80%. Following delivery of the vessels, interest payments on one tranche under the loan facility will be based on LIBOR plus 0.30%, while interest payments on the second tranche will be based on LIBOR plus 0.625%. Commencing three months after delivery of each vessel, one tranche (total value of $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 million bullet payment per vessel at the end of the twelve-year term. This loan facility is collateralized by first-priority mortgages on the vessels to which the loan relates, together with certain other security and is guaranteed by Teekay Corporation. Upon transfer of the ownership of the Teekay Tangguh Joint Venture from Teekay Corporation to the Partnership, the rights and obligations of Teekay Corporation under the guarantee may, upon the fulfillment of certain conditions, be transferred to the Partnership.

The Partnership has a U.S. Dollar-denominated demand loan outstanding owing to Teekay Nakilat’s joint venture partner, which, as at September 30, 2008, totaled $16.0 million, including accrued interest. Interest payments on this loan, which are based on a fixed interest rate of 4.84%, commenced in February 2008. The loan is repayable on demand no earlier than February 27, 2027.

The Partnership has two Euro-denominated term loans outstanding, which, as at September 30, 2008 totaled 298.4 million Euros ($420.6 million). These loans were used to make restricted cash deposits that fully fund payments under capital leases for the LNG carriers the Madrid Spirit and the Catalunya Spirit (see Note 5). Interest payments are based on EURIBOR plus a margin. The term loans have varying maturities through 2023 and monthly payments that reduce over time. The term loans are collateralized by first-priority mortgages on the vessels to which the loans relate, together with certain other related security and guarantees from one of the Partnership’s subsidiaries.

The weighted-average effective interest rate for the Partnership’s long-term debt outstanding at September 30, 2008 and December 31, 2007 was 4.5% and 5.5%, respectively. These rates do not reflect the effect of related interest rate swaps that the Partnership has used to economically hedge certain of its floating-rate debt (see Note 11). At September 30, 2008, the margins on the Partnership’s long-term debt ranged from 0.3% to 0.9%.

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 this revaluation, the Partnership recognized foreign exchange gains (losses) of $48.6 million and $(21.6) million, and $14.6 million and $(32.0) million for the three and nine months ended September 30, 2008 and September 30, 2007, respectively.

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.

9. Other Income (Loss) — Net

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		$				$				$				$
						(restated)								(restated)
Income tax recovery (expense)			336				195				248				(1,222	)
Equity income (loss)			278				(29	)			(1,413	)			(93	)
Miscellaneous			(129	)			(33	)			963				(97	)
Other income (loss) — net			485				133				(202	)			(1,412	)

10. Related Party Transactions

a) 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 with administrative, advisory, technical and strategic consulting services. During the three and nine months ended September 30, 2008 and 2007, the Partnership incurred $1.9 million and $5.5 million, respectively, of these costs, compared to $1.3 million and $4.3 million, respectively, for the same periods last year.

b) The Partnership reimburses the General Partner for all expenses incurred by the General Partner or its affiliates that are necessary or appropriate for the conduct of the Partnership’s business. During the three and nine months ended September 30, 2008 and 2007, the Partnership incurred $0.2 million and $0.6 million, respectively, of these costs, compared to $0.1 million and $0.3 million, respectively, for the same periods last year.

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES
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)

c) The Partnership is a party to an agreement with Teekay Corporation pursuant to which Teekay Corporation provides the Partnership with off-hire insurance for its LNG carriers. During the three and nine months ended September 30, 2008 and 2007, the Partnership incurred $0.6 million and $1.6 million of these costs, respectively, compared to $0.4 million and $1.1 million, respectively, for the same periods last year.

d) In connection with the Partnership’s initial public offering in May 2005, the Partnership entered into an omnibus agreement with Teekay Corporation, the General Partner and other related parties governing, among other things, when the Partnership and Teekay Corporation may compete with each other and certain rights of first offer on LNG carriers and Suezmax tankers.

In December 2006, the omnibus agreement was amended in connection with the initial public offering of Teekay Offshore Partners L.P. (or Teekay Offshore). As amended, the agreement governs, among other things, when the Partnership, Teekay Corporation and Teekay Offshore may compete with each other and certain rights of first offer on LNG carriers, oil tankers, shuttle tankers, floating storage and offtake units and floating production, storage and offloading units.

e) On November 1, 2006, the Partnership agreed to acquire from Teekay Corporation its 70% interest in the Teekay Tangguh Joint Venture, which owns the two newbuilding Tangguh LNG Carriers and the related 20-year, fixed-rate time charters to service the Tangguh LNG project in Indonesia. The purchase is anticipated to occur in May 2009. The estimated purchase price (net of assumed debt) for Teekay Corporation’s 70% interest in the Teekay Tangguh Joint Venture is $85 million, which will depend upon the total construction cost of the vessels. The customer will be The Tangguh Production Sharing Contractors, a consortium led by BP Berau Ltd., a subsidiary of BP plc. Teekay Corporation has contracted to construct the two double-hull Tangguh LNG Carriers of 155,000 cubic meters each at a total estimated delivered cost of approximately $376.9 million, excluding capitalized interest, of which the Partnership will be responsible for 70%. As at September 30, 2008, payments made towards these commitments by the Teekay Tangguh Joint Venture totaled $303.3 million, excluding $38.7 million of capitalized interest and other miscellaneous construction costs, and long-term financing arrangements existed for all of the remaining $73.6 million unpaid estimated cost of the LNG carriers. As at September 30, 2008, the scheduled timing for these remaining payments were $37.6 million in 2008 and $36.1 million in 2009. The vessels delivered in November 2008 and March 2009 and the charters having commenced for the first vessel in December 2008 and the second vessel commencing in May 2009. The Partnership will have operational responsibility for the vessels in this project. The remaining 30% interest in the Teekay Tangguh Joint Venture relating to this project is held by BLT LNG Tangguh Corporation, a subsidiary of PT Berlian Laju Tanker Tbk (see Note 12).

In June 2008, the Teekay Tangguh Joint Venture repaid $19.6 million of its contributed capital to Teekay Corporation as part of normal advance repayments.

f) On November 1, 2006, the Partnership agreed to acquire from Teekay Corporation its 100% interest in Teekay Nakilat (III) which in turn owns 40% of the RasGas 3 Joint Venture. RasGas 3 Joint Venture owns the four RasGas 3 LNG carriers and related 25-year, fixed-rate time charters (with options to extend up to an additional 10 years) to service the expansion of an LNG project in Qatar. The customer is Ras Laffan Liquefied Natural Gas Co. Limited (3), a joint venture company between Qatar Petroleum and a subsidiary of ExxonMobil Corporation. The joint venture contracted to construct the four double-hulled RasGas 3 LNG Carriers of 217,000 cubic meters each at a total delivered cost of approximately $1.0 billion, excluding capitalized interest, of which the Partnership will be responsible for 40%. The four vessels delivered between May and July 2008.

Teekay Nakilat (III) and QGTC Nakilat (1643-6) Holdings Corporation (or QGTC 3) are joint and several borrowers with respect to the RasGas 3 term loan and interest rate swap obligations. As a result, the Partnership has reflected on its balance sheet 100% of the RasGas 3 term loan and interest rate swap obligations rather than only 40% of such amounts. The loan and the joint venture partner’s share of the swap obligations are reflected on the Partnership’s balance sheet as advances to joint venture and advances to joint venture partner, respectively (see Note 17).

On May 6, 2008, the Partnership acquired Teekay Corporation’s 100% ownership interest in Teekay Nakilat (III) in exchange for a non-interest bearing and unsecured promissory note. The estimated purchase price (net of assumed debt) of $110.2 million has been paid by the Partnership ($98.2 million during the second and third quarters of 2008 and the remaining $12.0 million subsequent to September 30, 2008). 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 was accounted for as an equity distribution to Teekay Corporation. The remaining 60% interest in the RasGas 3 Joint Venture is held by QGTC 3. The Partnership will have operational responsibility for the vessels in this project, although QGTC 3 may assume operational responsibility beginning 10 years following delivery of the vessels.

g) On October 31, 2006, the Partnership acquired Teekay Corporation’s 100% ownership interest in Teekay Nakilat Holdings Corporation (or Teekay Nakilat Holdings). Teekay Nakilat Holdings owns 70% of Teekay Nakilat, which in turn has a 100% interest as the lessee under capital leases relating to three LNG carriers that delivered in late 2006 and early 2007 (the RasGas II LNG Carriers). The final purchase price for the 70% interest in Teekay Nakilat was $102.0 million. The Partnership paid $26.9 million of this amount during 2006 and $75.1 million during 2007. 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 was accounted for as an equity distribution to Teekay Corporation. The purchase occurred upon the delivery of the first LNG carrier in October 2006.

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES
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)

h) In January 2007, the Partnership acquired a 2000-built LPG carrier, the Dania Spirit, from Teekay Corporation and the related long-term, fixed-rate time charter for a purchase price of approximately $18.5 million. This transaction was concluded between two entities under common control and, thus, the vessel acquired was recorded at its historical book value. The excess of the book value over the purchase price of the vessel was accounted for as an equity contribution by Teekay Corporation. The purchase was financed with one of the Partnership’s revolving credit facilities. This vessel is chartered to the Norwegian state-owned oil company, Statoil ASA, and has a remaining contract term of eight years.

i) In March 2007, one of our LNG carriers, the Madrid Spirit, sustained damage to its engine boilers. The vessel was off-hire for approximately 86 days during 2007. Since Teekay Corporation provides the Partnership with off-hire insurance for its LNG carriers, the Partnership’s exposure was limited to fourteen days of off-hire, of which seven days was recoverable from a third-party insurer. In July 2007, Teekay Corporation paid approximately $6.0 million to the Partnership for loss-of-hire relating to the vessel.

j) In April 2008, the Partnership acquired two 1993-built LNG vessels (or the Kenai LNG Carriers) from Teekay Corporation for a purchase price of $230.0 million. The Partnership financed the acquisition with borrowings under one of its revolving credit facilities.

The Partnership is chartering the vessels back to Teekay Corporation at a fixed rate for a period of ten years (plus options exercisable by Teekay Corporation to extend up to an additional fifteen years). During the nine months ended September 30, 2008, the Partnership recognized revenues of $29.7 million under this charter.

During the three and nine months ended September 30, 2008, Teekay Corporation incurred nil and $3.1 million, respectively, of interest expenses attributable to the operations of the two Kenai LNG Carriers which has been allocated to the Partnership as part of the Dropdown Predecessor. No such interest expenses were allocated to the Partnership during the three months ended September 30, 2008 or the three or nine months ended September 30, 2007.

k) As at September 30, 2008, non-interest bearing advances to affiliates totaled $8.0 million (December 31, 2007 — nil) and non-interest bearing advances from affiliates totaled $70.4 million (December 31, 2007 — $40.3 million). These advances are unsecured and have no fixed repayment terms.

l) In May 2008, the Partnership agreed to acquire two technically advanced 12,000-cubic meter newbuilding Multigas ships (or the Skaugen Multigas Carriers) capable of carrying LNG, LPG or ethylene for a total cost of approximately $94 million. Teekay Corporation has signed contracts for the purchase of these vessels from subsidiaries of Skaugen on July 28, 2008 and the Partnership agreed to acquire the vessels from Teekay Corporation upon delivery. The vessels are expected to be delivered in the second half of 2010 and will then commence service under 15-year fixed-rate charters to Skaugen.

m) The Partnership’s Suezmax tanker, the Toledo Spirit, which was delivered in July 2005, 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 18 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. During the three and nine months ended September 30, 2008, no payments were owing to Teekay Corporation as a result of this agreement (see Note 12), compared to payments to Teekay Corporation of $0.1 million and $2.0 million, respectively, for the same periods last year.

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.

At September 30, 2008, the fair value of the derivative liability relating to the agreement between the Partnership and Teekay Corporation for the Toledo Spirit time charter contract was $27.2 million (see Notes 2 and 10m). Realized and unrealized gains (losses) relating to this agreement have been reflected in voyage revenues. Unrealized mark-to-market gains (losses) included in voyage revenues related to this agreement for the Toledo Spirit were $0.7 million, $(0.8) million, $(11.3) million, and $13.6 million, respectively, for the three and nine months ended September 30, 2008 and 2007.

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. The Partnership has not, for accounting purposes, designated its interest rate swaps as cash flow hedges of its USD LIBOR-denominated borrowings or restricted cash deposits. The net gain or loss on the Partnership’s interest rate swaps has been reported in interest expense (economic hedges of USD LIBOR-denominated borrowings) and interest income (USD LIBOR-denominated restricted cash deposits) in the unaudited consolidated statements of income (loss). Unrealized gains (losses) related to interest rate swaps included in interest expense were $(39.4) million, $(51.2) million, $(30.4) million, and $19.5 million, respectively, for the three and nine months ended September 30, 2008 and 2007. Unrealized gains (losses) related to interest rate swaps included in interest income were $17.5 million, $20.5 million, $26.7 million, and $(4.1) million, respectively, for the three and nine months ended September 30, 2008 and 2007. The Partnership expects to record a material, non-cash unrealized loss during the fourth quarter of 2008 from the decrease in the fair value of its interest rate swap agreements.

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES
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)

As at September 30, 2008, the Partnership was committed to the following interest rate swap agreements related to its EURIBOR and LIBOR-based debt, whereby certain of the Partnership’s floating-rate debt has been swapped with fixed-rate obligations:

										Fair Value /
										Carrying
										Amount of				Weighted-
		Interest				Principal				Asset				Average				Fixed
		Rate				Amount				(Liability)				Remaining Term				Interest Rate
		Index				$				$				(years)				(%)(1)
LIBOR-Based Debt:
U.S. Dollar-denominated interest rate swaps(2)		LIBOR					485,396				(17,998	)			28.3				4.9
U.S. Dollar-denominated interest rate swaps		LIBOR					227,315				(29,995	)			10.5				6.2
U.S. Dollar-denominated interest rate swaps(3)		LIBOR					400,000				(21,518	)			7.4				5.0
U.S. Dollar-denominated interest rate swaps(4)		LIBOR					350,000				(21,019	)			16.7				5.2
LIBOR-Based Restricted Cash Deposit:
U.S. Dollar-denominated interest rate swaps(2)		LIBOR					478,077				19,083				28.3				4.8
EURIBOR-Based Debt:
Euro-denominated interest rate swaps(5)		EURIBOR					420,570				26,601				15.7				3.8

The Partnership is exposed to credit loss in the event of non-performance by the counterparties to the interest rate swap agreement. 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 Aa3 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.

12. Commitments and Contingencies

(a) On November 1, 2006, the Partnership entered into an agreement with Teekay Corporation to purchase its 100% interest in Teekay Tangguh, which owns a 70% interest in the Teekay Tangguh Joint Venture (see Note 10e). The Teekay Tangguh Joint Venture owns the two newbuilding Tangguh LNG Carriers and the related 20-year time charters. The Partnership’s purchase price for this project, which depends upon the total construction costs of the vessels, is estimated to be $85 million for the 70% interest in the Teekay Tangguh Joint Venture.

The Partnership is seeking to purchase Teekay Corporation’s interest in the Teekay Tangguh Joint Venture in May 2009; however, the Partnership is also seeking to structure the project in a tax efficient manner and has requested a private letter ruling from the U.S. Internal Revenue Service related to the type of structure we would use for this project. The Partnership does not intend to complete the purchase until a favorable ruling is obtained, which is anticipated to be received in the coming months. If the Partnership does not receive a favorable ruling, the Partnership would (i) seek to restructure the project, which may provide the Partnership less benefit than was originally anticipated or (ii) require certain tax elections to be made by unitholders in order to avoid adverse tax consequences. If any of these alternatives are not satisfactory to the Partnership, the Partnership may not acquire Teekay Corporation’s interest in the carriers. If the possibility of the Partnership not acquiring the interests in the Tangguh LNG Joint Venture becomes more than remote, the Partnership may no longer account for the entity as a variable interest entity as described below in this Note 12a), and the Partnership may need to reconsider its current accounting of the entity.

In May 2008, the Partnership agreed to acquire two technically advanced 12,000-cubic meter newbuilding Multigas ships (or the Skaugen Multigas Carriers) capable of carrying LNG, LPG or ethylene for a total cost of approximately $94 million. Teekay Corporation has signed contracts for the purchase of these vessels from subsidiaries of Skaugen on July 28, 2008 and the Partnership agreed to acquire the vessels from Teekay Corporation upon delivery. The vessels are expected to be delivered in the second half of 2010 and will then commence service under 15-year fixed-rate charters to Skaugen.

In December 2003, the Financial Accounting Standards Board (or FASB) issued FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (or FIN 46(R)). In general, a variable interest entity (or VIE) is a corporation, partnership, limited-liability company, trust or any other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations. 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(R) requires that this party consolidate the VIE.

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES
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 Partnership consolidated Teekay Tangguh and Teekay Nakilat (III) in its consolidated financial statements effective November 1, 2006, as both entities became VIEs and the Partnership became their primary beneficiary on that date upon the Partnership’s agreement to acquire all of Teekay Corporation’s interests in these entities. The Partnership has also consolidated the Skaugen Multigas Carriers that it has agreed to acquire from Teekay Corporation as the Skaugen Multigas Carriers became VIEs and the Partnership became a primary beneficiary when Teekay Corporation purchased the newbuildings on July 28, 2008. Upon the Partnership’s acquisition of Teekay Nakilat (III) on May 6, 2008, Teekay Nakilat (III) no longer constituted a VIE. The assets and liabilities of Teekay Tangguh and Skaugen Multigas Carriers are reflected in the Partnership’s financial statements at historical cost as the Partnership and the VIE are under common control.

The following table summarizes the balance sheet of Teekay Tangguh and Skaugen Multigas Carriers as at September 30, 2008 and the combined balance sheets of Teekay Tangguh and Teekay Nakilat (III) as at December 31, 2007:

		September 30,				December 31,
		2008				2007
		$				$
ASSETS
Cash and cash equivalents			21,355				54,711
Advances on newbuilding contracts			354,512				240,773
Investment in and advances to joint venture			—				693,242
Advances to joint venture partner			—				9,631
Other assets			6,541				9,465
Total assets			382,408				1,007,822
LIABILITIES AND SHAREHOLDER’S EQUITY
Accounts payable			55				173
Accrued liabilities			3,579				4,799
Advances from affiliates and joint venture partners			37,444				23,961
Long-term debt relating to newbuilding vessels to be delivered			281,933				809,282
Other long-term liabilities			17,671				28,211
Total liabilities			340,682				866,426
Non-controlling interest			18,615				20,364
Total shareholder’s equity			23,111				121,032
Total liabilities and shareholder’s equity			382,408				1,007,822

The Partnership’s maximum exposure to loss at September 30, 2008, as a result of its commitment to purchase Teekay Corporation’s interests in Teekay Tangguh and Skaugen Multigas Carriers, is limited to the purchase price of such interests, which is estimated to be $179 million.

(b) In December 2006, the Partnership announced that it has agreed to acquire three LPG carriers from Skaugen, which engages in the marine transportation of petrochemical gases and LPG and the lightering of crude oil, for approximately $33.7 million per vessel. The purchase price may be adjusted if the deliveries are delayed. The vessels are currently under construction and are expected to be delivered between early 2009 and mid-2010. The Partnership will acquire the vessels upon their deliveries and will finance their acquisition through existing or incremental debt, surplus cash balances, proceeds from the issuance of additional common units or combinations thereof. Upon delivery, the vessels will be chartered to Skaugen at fixed rates for a period of 15 years.

13. Supplemental Cash Flow Information

a) Upon delivery of the last two RasGas II Carriers in the first quarter of 2007, the remaining vessel costs and related lease obligations amounting to $15.3 million were recorded. These transactions were treated as non-cash transactions in the Partnership’s consolidated statements of cash flows for the nine months ended September 30, 2007.

b) Net change in parent’s equity in the Dropdown Predecessor includes the equity of the Dropdown Predecessor when initially pooled for accounting purposes and any subsequent non-cash equity transactions of the Dropdown Predecessor.

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES
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)

14. Partners’ Capital and Net Income (Loss) Per Unit

Partners’ Capital

At September 30, 2008, of our total units outstanding, 42% were held by the public and the remaining units were held by a subsidiary of Teekay Corporation.

Limited Partners’ Rights

Significant rights of the limited partners include the following:

	•		Right to receive distribution of available cash within approximately 45 days after the end of each quarter.
	•		No limited partner shall have any management power over the Partnership’s business and affairs; the General Partner shall conduct, direct and manage our activities.
	•		The General Partner may be removed if such removal is approved by unitholders holding at least 66-2/3% of the outstanding units voting as a single class, including units held by our General Partner and its affiliates.

Subordinated Units

All of the Partnership’s subordinated units are held by a subsidiary of Teekay Corporation. Under the partnership agreement, during the subordination period applicable to the Partnership’s subordinated units, 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. Distribution arrearages do not accrue on the subordinated units. The purpose of the subordinated units is to increase the likelihood that during the subordination period there will be available cash to be distributed on the common units.

During the three months ended June 30, 2008, 25% of the subordinated units (3.7 million units) were converted into common units on a one-for-one basis as provided for under the terms of the partnership agreement began participating pro rata with the other common units in distributions of available cash commencing with the August 2008 distribution. The price of the Partnership’s units at the time of conversion was $29.07 on May 19, 2008.

During the quarters ended September 30, 2008 and 2007, net income exceeded the minimum quarterly distribution of $0.4125 per unit and, consequently, the assumed distribution of net income did not result in an unequal distribution of net income between the subordinated unit holders and common unit holders for the purposes of the net income (loss) per unit calculation as defined below.

Incentive Distribution Rights

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 shown below:

Quarterly Distribution Target Amount (per unit)		Unitholders				General Partner
Minimum quarterly distribution of $0.4125			98	%			2	%
Up to $0.4625			98	%			2	%
Above $0.4625 up to $0.5375			85	%			15	%
Above $0.5375 up to $0.65			75	%			25	%
Above $0.65			50	%			50	%

During the quarter ended September 30, 2008, the Partnership’s net income exceeded $0.4625 per unit and, consequently, the assumed distribution of net income resulted in the use of the increasing percentages to calculate the General Partner’s interest in net income for the purposes of the net income (loss) per unit calculation. During the quarter ended September 30, 2007, the Partnership incurred a net loss and, consequently, the assumed distributions of net loss resulted in equal distributions of net loss between the subordinated unit holders and common unit holders.

Net Income (Loss) Per Unit

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

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 unitholders’ and subordinated unitholder’s interests in net income are calculated as if all net 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 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, 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
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)

Pursuant to the partnership agreement, income allocations are made on a quarterly basis; therefore earnings per limited partner unit for the nine months ended September 30, 2008 and 2007 is calculated as the sum of the quarterly earnings per limited partner unit for each of the first three quarters of the year.

15. Income Taxes

As of December 31, 2007, the Partnership had unrecognized tax benefits of 3.4 million Euros (approximately $5.4 million) relating to a re-investment tax credit related to a 2005 annual tax filing. During the nine months ended September 30, 2008, the Partnership received the refund on the re-investment tax credit and met the more-likely-than-not recognition threshold during the period. As a result, the Partnership has reflected this refund as a credit to equity as the original vessel sale transaction was a related party transaction reflected in equity.

16. Other Information

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, which is being developed by subsidiaries of Chevron Corporation, Sociedade Nacional de Combustiveis de Angola EP, BP Plc, Total S.A. and Eni SpA. The vessels will be chartered at fixed rates, with inflation adjustments, commencing in 2011. Mitsui & Co., Ltd. and NYK Bulkship (Europe) have 34% and 33% ownership interests in the consortium, respectively. In accordance with an existing agreement, Teekay Corporation is required to offer to the Partnership its 33% ownership interest in these vessels and related charter contracts not later than 180 days before delivery of the vessels.

17. Subsequent Events

a) On October 7, 2008, the Partnership borrowed $60 million on one of its revolving credit facilities to fund a portion of the Partnership’s acquisition of Teekay Nakilat (III) and the proposed acquisition of Teekay Tangguh (see Note 12a).

b) On December 31, 2008 Teekay Nakilat (III) and QGTC 3 novated the RasGas 3 term loan and their interest rate swap agreements to the RasGas 3 Joint Venture for no consideration. As a result, the RasGas 3 Joint Venture has assumed all the rights, liabilities and obligations of Teekay Nakilat (III) and QGTC 3 under the terms of the RasGas 3 term loan and the interest rate swap agreements. However, Teekay Nakilat (III) has guaranteed 40% of the RasGas 3 Joint Ventures obligations under these interest rate swap agreements. The Partnership owns a 40% interest in the RasGas 3 Joint Venture and accounts for it under the equity method.

18. Recent Accounting Pronouncement

In October 2008, FASB issued Statement of Financial Accounting Standards (or SFAS) No. 157-3, Determining the Fair Value of a Financial Asset in a Market That Is Not Active, which clarifies the application of SFAS 157 when the market for a financial asset is inactive. Specifically, SFAS No. 157-3 clarifies how (1) management’s internal assumptions should be considered in measuring fair value when observable data are not present, (2) observable market information from an inactive market should be taken into account, and (3) the use of broker quotes or pricing services should be considered in assessing the relevance of observable and unobservable data to measure fair value. The guidance in SFAS No. 157-3 is effective immediately but does not have any impact on the Partnership’s consolidated financial statements.

19. Restatement of Previously Issued Financial Statements

a. Derivative Instruments

In August 2008, the Partnership commenced a review of its application of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. Based on its review the Partnership concluded that its derivative instruments did not qualify for hedge accounting treatment under SFAS No. 133 for the three and nine months ended September 30, 2007. The Partnership’s findings were as follows:

	•		One of the requirements of SFAS No. 133 is that hedge accounting is appropriate only for those hedging relationships that a company expects will be highly effective in achieving offsetting changes in fair value or cash flows attributable to the risk being hedged. To determine whether transactions satisfy this requirement, entities must periodically assess the effectiveness of hedging relationships both prospectively and retroactively. Based on the Partnership’s review, the Partnership concluded that the prospective hedge effectiveness assessment that was conducted for certain of its interest rate swaps on the date of designation was not sufficient to conclude that the interest rate swaps would be highly effective, in accordance with the technical requirements of SFAS No. 133, in achieving offsetting changes in cash flows attributable to the risk being hedged.
	•		To conclude that hedge accounting is appropriate, another requirement of SFAS No. 133 is that hedge documentation should specify the method that will be used to assess, retroactively and prospectively, the hedging instrument’s effectiveness, and the method that will be used to measure hedge ineffectiveness. Documentation for certain of the Partnership’s interest rate swaps did not clearly specify the method to be used to measure hedge ineffectiveness.

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES
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)

	•		Certain of the Partnership’s derivative instruments were designated as hedges when the derivative instruments had a non-zero fair value. However, this designation was not appropriate as the Partnership used certain methods of measuring ineffectiveness that are not allowed in the case of non-zero fair value derivatives.
	•		One of the Partnerhip’s Suezmax tankers, the Toledo Spirit, 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 had 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 from the charterer as a result of spot rates being in excess of the fixed rate. Prior to April 2007, this agreement with Teekay Corporation was not accounted for as a derivative agreement subject to the provisions of SFAS No. 133, and after April 2007, the agreement did not meet the criteria to be accounted for as a cash flow hedge.

Accordingly, for accounting purposes the Partnership should have reflected the change in fair value of these derivatives as increases or decreases to its net income (loss) on its consolidated statements of income (loss), instead of being reflected as increases or decreases to accumulated other comprehensive income, a component of partners’ equity on the consolidated balance sheets and statements of changes in partners’ equity.

The change in accounting for these transactions did not affect the economics of the derivative transactions or the Partnership’s cash flows, liquidity, or cash distribution to partners.

b. Vessels Acquired from Teekay Corporation

In connection with the Partnership assessing the potential impact of SFAS No. 141(R), which replaces SFAS No. 141 Business Combinations, and is effective for fiscal years beginning after December 15, 2008, the Partnership re-assessed its accounting treatment of interests in vessels it purchased from Teekay Corporation subsequent to the Partnership’s initial public offering in May 2005. The Partnership has historically treated the acquisition of interests in these vessels as asset acquisitions, not business acquisitions. If the acquisitions were deemed to be business acquisitions, the acquisitions would have been accounted for in a manner similar to the pooling of interest method whereby the Partnership’s consolidated financial statements prior to the date the interests in these vessels were acquired by the Partnership would be retroactively adjusted to include the results of these acquired vessels (referred to herein as the Dropdown Predecessor) from the date that the Partnership and the acquired vessels were under common control of Teekay Corporation and had begun operations. Although substantially all of the value relating to these transactions is attributable to the vessels and associated contracts, the Partnership now has determined that the acquisitions should have been accounted for as business acquisitions under GAAP.

The impact of the retroactive Dropdown Predecessor adjustments did not affect the limited partners’ interest in net income, earnings per unit, or cash distributions to partners.

On January 1, 2007, the Partnership acquired from Teekay Corporation interests in a 2000-built LPG carrier, the Dania Spirit, and the related long-term, fixed rate charter contract. This transaction was deemed to be business acquisition between entities under common control. As a result, the Partnership’s statement of cash flows for the nine months ended September 30, 2007 reflects this vessel as if the Partnership had acquired it when the vessel began operations under the ownership of Teekay Corporation on April 1, 2003.

c. Gross-up Presentation of RasGas 3 Joint Venture and Other

Subsequent to the release of its preliminary second quarter financial results, the Partnership reviewed and revised its financial statement presentation of debt and interest rate swap agreements related to its joint venture interest in the RasGas 3 LNG carriers. As a result, certain of the Partnership’s assets and liabilities have been grossed up for accounting presentation purposes. These adjustments did not affect the Partnership’s net income, cash flow, liquidity, cash distributions or partners’ equity in any period.

Through a wholly-owned subsidiary, the Partnership owns a 40 percent interest in the four RasGas 3 LNG Carriers (see Note 10f). QGTC3, a wholly-owned subsidiary of Qatar Gas Transport Company, owns the remaining 60 percent interest. Both wholly-owned subsidiaries are joint and several co-borrowers with respect to the RasGas 3 term loan and related interest rate swap agreements. Previously, the Partnership recorded 40 percent of the RasGas 3 term loan and interest rate swap obligations in its financial statements. The Partnership has made adjustments to its balance sheet to reflect 100 percent of the RasGas 3 term loan and interest rate swap obligations, as well as offsetting increases in assets, for the fourth quarter of 2006 through the first quarter of 2008. The Partnership has also made adjustments to its statements of income (loss) to reflect 100 percent of the interest expense (three and nine months ended September 30, 2007 — $4.6 million and $11.5 million, respectively) on the RasGas 3 term loan with an offsetting amount to interest income from its advances to the joint venture. These RasGas 3 balance sheet adjustments do not result in any increase to the Partnership’s net exposure in this joint venture. The Partnership has also restated certain other items primarily related to accounting for the non-controlling interest in the Partnership’s joint venture and VIEs (see Note 12a).

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES
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)

As a result of the conclusions described above in this Note 19, the Partnership is restating herein its historical statements of income (loss) for the three and nine months ended September 30, 2007 and its cash flows for the nine months ended September 30, 2007. Certain of the previously reported figures have been reclassified to conform to the presentation adopted for the restatements.

The following table sets forth a reconciliation of previously reported and restated net income (loss) and partners’/Dropdown Predecessor’s equity as of the date and for the periods shown (in thousands of US dollars):

		Net Income (Loss)								Partners’/Dropdown
		Three Months Ended				Nine Months Ended				Predecessor’s Equity At
		September 30,				September 30,				December 31,
		2007				2007				2006
		$				$				$
As Previously Reported			(12,779	)			(8,916	)			718,497
Adjustments:
Derivative Instruments			(8,372	)			36,844				(30,088	)
Dropdown Predecessor (1)			—				—				19,740
Other			(483	)			(1,672	)			(4,959	)
As Restated			(21,634	)			26,256				703,190

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES
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 table presents the effect of the restatement on the Partnership’s Unaudited Consolidated Statement of Income (Loss) for the nine months ended September 30, 2007 (in thousands of U.S. dollars, except unit and per unit amounts):

		Nine Months Ended September 30, 2007
						Adjustments
										Gross-up
						Derivative				Presentation
		As Reported				Instruments				and Other				As Restated
		$				$				$				$
VOYAGE REVENUES			187,327				13,609				—				200,936
OPERATING EXPENSES
Voyage expenses			857				—				—				857
Vessel operating expenses			41,686				—				—				41,686
Depreciation and amortization			48,875				—				—				48,875
General and administrative			10,808				—				—				10,808
Total operating expenses			102,226				—				—				102,226
Income from vessel operations			85,101				13,609				—				98,710
OTHER ITEMS
Interest (expense) gain			(98,817	)			27,019				(11,519	)			(83,317	)
Interest income (loss)			36,336				(4,136	)			11,519				43,719
Foreign currency exchange loss			(32,037	)			—				—				(32,037	)
Other loss — net			(761	)			(651	)			—				(1,412	)
Total other items			(95,279	)			22,232				—				(73,047	)
(Loss) income before non-controlling interest			(10,178	)			35,841				—				25,663
Non-controlling interest			1,262				1,003				(1,672	)			593
Net (loss) income			(8,916	)			36,844				(1,672	)			26,256
General partner’s interest in net (loss) income			(179	)											9,774
Limited partners’ interest:
Net (loss) income			(8,737	)											16,482
Net (loss) income per:
• Common unit (basic and diluted)			(0.16	)											0.61
• Subordinated unit (basic and diluted)			(0.34	)											0.30
• Total unit (basic and diluted)			(0.23	)											0.48
Weighted-average number of units outstanding:
• Common units (basic and diluted)			21,377,910												21,377,910
• Subordinated units (basic and diluted)			14,734,572												14,734,572
• Total units (basic and diluted)			36,112,482												36,112,482
Cash distributions declared per unit			1.4550												1.4550

TEEKAY LNG PARTNERS L.P. AND SUBSIDIARIES
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 table presents the effect of the restatement on the Partnership’s Unaudited Consolidated Statement of Loss for the three months ended September 30, 2007 (in thousands of U.S. dollars, except unit and per unit amounts):

		Three Months Ended September 30, 2007
						Adjustments
										Gross-up
						Derivative				Presentation
		As Reported				Instruments				and Other				As Restated
		$				$				$				$
VOYAGE REVENUES			63,716				(799	)			—				62,917
OPERATING EXPENSES
Voyage expenses			317				—				—				317
Vessel operating expenses			13,935				—				—				13,935
Depreciation and amortization			16,501				—				—				16,501
General and administrative			3,531				—				—				3,531
Total operating expenses			34,284				—				—				34,284
Income from vessel operations			29,432				(799	)			—				28,633
OTHER ITEMS
Interest expense			(32,651	)			(48,886	)			(4,593	)			(86,130	)
Interest income			12,219				26,972				4,593				43,784
Foreign currency exchange loss			(21,555	)			—				—				(21,555	)
Other income — net			30				103				—				133
Total other items			(41,957	)			(21,811	)			—				(63,768	)
Loss before non-controlling interest			(12,525	)			(22,610	)			—				(35,135	)
Non-controlling interest			(254	)			14,238				(483	)			13,501
Net loss			(12,779	)			(8,372	)			(483	)			(21,634	)
General partner’s interest in net loss			(256	)											(433	)
Limited partners’ interest:
Net loss			(12,523	)											(21,201	)
Net loss per:
• Common unit (basic and diluted)			(0.34	)											(0.57	)
• Subordinated unit (basic and diluted)			(0.34	)											(0.57	)
• Total unit (basic and diluted)			(0.34	)											(0.57	)
Weighted-average number of units outstanding:
• Common units (basic and diluted)			22,540,547												22,540,547
• Subordinated units (basic and diluted)			14,734,572												14,734,572
• Total units (basic and diluted)			37,275,119												37,275,119
Cash distributions declared per unit			0.5300												0.5300