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Derivative Instruments
 6 Months Ended
Jun. 30, 2012
Derivative Instruments [Abstract]  
Derivative Instruments
10. Derivative Instruments

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

Foreign Exchange Risk

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

 

                                                         
                                  Fair Value /        
                                  Carrying     Weighted-  
    Principal     Principal     Floating Rate Receivable           Amount of     Average  
    Amount     Amount     Reference           Fixed Rate     Liability     Remaining  
    NOK     $     Rate     Margin     Payable     $     Term (Years)  
      700,000       125,000       NIBOR       5.25 %      6.88 %      (10,220 )      4.8  

Interest Rate Risk

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

 

                                         
              Fair Value /            
              Carrying     Weighted-            
              Amount of     Average     Fixed
    Interest   Principal     Assets     Remaining     Interest
    Rate   Amount     (Liability)     Term     Rate
    Index   $     $     (years)     (%) (1)

LIBOR-Based Debt:

                                       

U.S. Dollar-denominated interest rate swaps (2)

   LIBOR     417,666       (130,811 )      24.6       4.9      

U.S. Dollar-denominated interest rate swaps (2)

   LIBOR     206,696       (60,618 )      6.7       6.2      

U.S. Dollar-denominated interest rate swaps

  LIBOR     90,000       (19,111 )      6.2       4.9      

U.S. Dollar-denominated interest rate swaps

  LIBOR     100,000       (21,414 )      4.5       5.3      

U.S. Dollar-denominated interest rate swaps (3)

   LIBOR     212,500       (59,119 )      16.5       5.2      

LIBOR-Based Restricted Cash Deposit:

                                       

U.S. Dollar-denominated interest rate swaps (2)

   LIBOR     469,666       166,527       24.6       4.8      

EURIBOR-Based Debt:

                                       

Euro-denominated interest rate swaps (4)

   EURIBOR     334,312       (35,156 )      12.0       3.1      
               

 

 

                      
                  (159,702 )                     
               

 

 

                      

 

(1) Excludes the margins the Partnership pays on its floating-rate term loans, which, at June 30, 2012, ranged from 0.30% to 2.75% (see Note 7).
(2) Principal amount reduces quarterly.
(3) Principal amount reduces semi-annually.
(4) Principal amount reduces monthly to 70.1 million Euros ($88.8 million) by the maturity dates of the swap agreements.

 

Credit Risk

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

Other Derivative

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

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

 

                                                 
          Current                 Current        
          portion of                 portion of        
    Accounts     derivative     Derivative     Accrued     derivative     Derivative  
    receivable     assets     assets     liabilities     liabilities     liabilities  

As at June 30, 2012

                                                

Interest rate swap agreements

     4,276       16,180       146,071       (10,672 )      (46,659 )      (268,898 ) 

Cross currency swap agreement

     49       221       —         —         —         (10,490 ) 

Toledo Spirit time-charter derivative

     —         —         —         —         —         (300 ) 
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

As at December 31, 2011

                                                

Interest rate swap agreements

     4,344       15,608       139,651       (11,448 )      (43,973 )      (248,645 ) 

Toledo Spirit time-charter derivative

     —         —         —         —         —         (600 ) 
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

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

 

                                                 
    Three Months Ended June 30,  
    2012     2011  
    Realized     Unrealized           Realized     Unrealized        
    gains     gains           gains     gains        
    (losses)     (losses)     Total     (losses)     (losses)     Total  

Interest rate swap agreements

     (9,284 )      (8,855 )      (18,139 )      (10,046 )      (16,430 )      (26,476 ) 

Toledo Spirit time-charter derivative

     (6 )      —         (6 )      (53 )      (800 )      (853 ) 
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

                                                 
    Six Months Ended June 30,  
    2012     2011  
    Realized     Unrealized           Realized     Unrealized        
    gains     gains           gains     gains        
    (losses)     (losses)     Total     (losses)     (losses)     Total  

Interest rate swap agreements

     (18,363 )      (15,947 )      (34,310 )      (20,283 )      3,376       (16,907 ) 

Toledo Spirit time-charter derivative

     (38 )      300       262       (53 )      400       347  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

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